How to determine which companies have the credentials to serve your outsourcing needs Featured

1:59pm EDT February 1, 2012
How to determine which companies have the credentials to serve your outsourcing needs

How do you know which companies have the credentials to serve your business needs?

In a variety of industries there are standards that can be used as a benchmark.  The average consumer may not understand the behind-the-scene factors that go into setting the standard; however, the consumer does understand the meaning and intent of the third-party oversight of a specific segment. This is well established in consumer products and medicine, but the service industry is another matter, says William F. Hutter, CEO of Sequent Inc.

“Can anyone be an attorney? No, there are licensing rules,” says Hutter. “Would you do business with a bank that is not insured by the FDIC? Hopefully not. How many legitimate health care providers do not have Joint Commission Certification? None, because the standard is a requirement of doing business. Would you use a non-FDA approved medication? Of course not, because it could be dangerous.”

Yet, well-intentioned companies with smart leadership tend to forge ahead with an outsourcing decision without understanding what standards they can use to measure the credibility of an outsourcing company. Too often, the price seems attractive, but it might be too good to be true. This emerging industry of HR outsourcing is full of minefields for the casual consumer. This is really the ultimate example of getting what you pay for.

Smart Business spoke with Hutter about understanding the standards of outsourcing.

What is driving outsourcing, and what is the liability of doing so?

Ever-increasing government compliance demands are causing companies to consider outsourcing their noncore functions such as human resources, payroll processing and 401(k) administration.  These functions do not drive revenue or growth, but are part of the required infrastructure for almost any business with employees. These backroom functions consume dollars and time, while exposing business owners, managers and HR people to extraordinary personal liabilities.

Outsourcing is understandable and makes sense, because it can reduce your costs by saving time and headaches. But what about the liability associated with managing the business of being an employer? If there is secondary liability for the actions of a third-party outsourcer, what due diligence should a company conduct before outsourcing certain fiduciary functions?

What questions should a company be asking of a potential outsourcing partner?

Fortunately, there is a standard set of due diligence questions that can be asked of any company providing the service. One of the most common types of outsourcing is payroll. Another concept can provide a comprehensive package of HR services to small and mid-sized businesses for reasonable pricing. Professional Employer Organizations can vary greatly in expertise and philosophical approach; therefore, it is difficult to know how to select the best fit for your company.

Getting the answers to the questions below can help any company that is considering outsourcing its HR functions to a PEO.

* Have you visited the PEO offices to look under the covers?

* What are the professional affiliations of the company?

* Is the PEO a member of NAPEO?

* Does the PEO offer employment practices liability insurance, which covers its clients and managers?

* Is the PEO self-insured for workers’ compensation? If yes, how does it reserve for future liabilities?

* Is the PEO a member of the Certification Institute for Workers’ Compensation Best Practices?

* Is it accredited by the Employer Service Assurance Corp.? (

* Does the PEO protect you from secondary tax liability?

* Does the company audit financial statements?

* Is the PEO able to secure fiduciary liability insurance coverage to protect trusted money such as retirement plan funds?

* Who is the plan sponsor for health insurance?

* What protections does the PEO have against one of its customers not making payroll?

* How does it protect confidential data?

* What are the back-up systems for technology?

* Does the PEO have senior HR staff to assist you in a time of need?

* What is its staff-to-customer ratio?

* Does it provide defense coverage in case of an employment-related legal action?

Are there third-party standards that a business should take into consideration?

Yes, there are standards established by third parties for the emerging HR outsourcing industry that can be relied on. One of the most important is Employer Service Assurance Corp. ESAC is an independent, nonprofit organization that administers an accreditation program for the PEO industry to verify compliance with government regulations and industry standards.

The performance of key employer responsibilities by accredited PEOs is backed by bonds, providing financial assurance for clients, worksite employees, insurers and regulatory authorities.

ESAC-accredited PEOs submit audited financial statements and quarterly independent CPA verification of payment of taxes, benefit contributions and insurance premiums. Assurance is provided through $1 million surety bonds held on behalf of each ESAC-accredited PEO, plus a $10 million excess bond covering all program participants.

The key to establishing a successful HR outsourcing relationship is built on a few fundamental considerations.

* Find the best fit for your company.

* Price is important but should not be the determining factor.

* Trust and confidence in your service provider are very important.

* Verify the company credentials.

* Visit the service provider’s local office to look under the covers.

William F. Hutter is CEO of Sequent Inc. Reach him at (888) 456-3627 or