One of the many features that distinguish a small to medium business (SMB) from a large enterprise is its number of employees. A business that is considered small employs less than 100 people; a medium size business is one having between 100 and 999 employees. A large enterprise, including all of its subsidiaries, has over 1,000 employees using numerous application systems.

Naturally then, SMBs have vastly different human resources (HR) needs compared to large multinational corporations. HR, in a nutshell, encompasses such areas as payroll, benefits, performance evaluation, candidate screening and recruiting, employee termination, and retirement packages. It’s important for SMBs to purchase HR solutions that are scalable to their functionality needs. In addition, to remain competitive with large enterprises, SMBs must rely on vendors to price their software according to a smaller IT budget and to cater to SMB requirements.

An SMB has the same options to choose from that a large enterprise has when it comes to the type of HR system to implement. For example, one SMB may select an all-in-one (or integrated) solution to use in conjunction with its other processes and systems. Another SMB might decide to go with a modular model, one with which it can pick and choose the software features and functions it most often uses, and outsource the rest of its HR operations to a third party vendor.

In today’s market, SMBs are looking for HR systems that offer a lot flexibility and a variety of options to fit their needs. Among their choices are hosted and non-hosted solutions, as well as outsourcing options. This article will briefly discuss the pros and the cons of each of these options.

The Hosted Solution and its Benefits

A hosted solution is a web-native software application developed by a vendor that hosts and operates the application (either independently or through a third party) for use by its customers over the Internet.

There are many benefits to using hosted solutions. Hosted solutions are easier and faster to implement because they are web-based applications, and therefore it is not necessary to install any software. All data can be accessed from any computer—anywhere in the world—that has a network connection. Generally speaking, in the short term, hosted applications have a much lower setup cost, since an operating system license is not being purchased for each workstation. Hosted applications are billed as a recurring service, either in monthly, quarterly, or yearly billing cycles. The payment cycle is dependent on the pricing policies of the individual vendor.

Disadvantages of a Hosted Solution

One of the major concerns when choosing a hosted model is that the software functionality options may be somewhat limited. These limitations are dependent on the third party vendor’s policies and on the level of security the vendor deems necessary, since the data resides on an external server not owned by the organization.

Since a hosted solution is a pay-as-you-go service, users do not own the rights to the software. Rather, the software is leased out to the client, and ultimately (over a period of years), at a higher cost because of its convenience and ease of use.

The Non-hosted Solution and its Benefits

A non-hosted application is one the SMB purchases outright and that resides in house. The SMB’s internal IT department administers and maintains all software and hardware upgrades, and performs all actions pertaining to coverage.

Non-hosted HR systems allow network administrators to fully customize the application. Internally hosted applications maintain data within the organization’s network, giving users increased control over who has access to the data, and thereby increasing the data’s security. This functionality allows the software to be very user-friendly for employees, yet it locks down the system to protect sensitive data. Non-hosted applications can be run on dedicated servers through high-speed communications, and they generally provide faster performance than hosted models do.

Disadvantages of a Non-hosted Solution

Non-hosted applications carry a higher price tag up front, with support and maintenance fees incurred annually. This is because customers are essentially purchasing a software license for each computer terminal.

The internal IT staff must perform all equipment and software maintenance. The IT staff is also responsible for providing such support and system maintenance as daily backups, security scans, and patches (software upgrades).

Non-hosted applications are not necessarily safer in terms of data security; it all depends on the security precautions enabled by the internal IT staff. It is possible that the organization’s network administrators may not set a sufficiently high level of security, potentially leaving sensitive data exposed. The key is having the right IT staff in place.

The misconception that non-hosted solutions are always more secure than hosted solutions is widespread, as this is often the sole reason why organizations do not consider implementing a hosted model.

Outsourcing and Its Advantages

Outsourcing is the practice of using outside firms to handle work normally performed within a company.

HR plays a major role in any organization, but lets face it—the HR department is a cost center that does not deliver a tangible return on investment (ROI). However, it’s a necessary component of every organization; the key to increasing the HR department’s value is to purchase software that meets the company’s needs and enhances its capabilities while at the same time keeping costs down. This can be achieved by purchasing only the functionality that is needed.

Making the decision to outsource HR processes is a major step for an SMB, yet these companies routinely outsource their HR and accounting processes because they can't afford to match the in-house support services that large enterprises can, since they are working with smaller budgets. By outsourcing these processes, costs can be reduced, and these savings can be allocated to employee services. This reallocation of funds benefits an SMB in that it is better able to pay for skilled manpower, such as payroll and compensation professionals and lawyers.

Disadvantages of Outsourcing

Outsourcing is not for every SMB; not all companies are comfortable having a third party vendor handle its HR functions and run its day-to-day operational protocols relating to personnel management. By outsourcing any business process, a company gives up a significant amount of control over that process.

Secondly, the third party vendor assumes and manages all the risk for the SMB company. It is therefore essential for the business to ensure that the third party vendor is aware of compliance issues and regulations the company must meet, and that the vendor abides by the company’s security and privacy policies. This is especially true when dealing with sensitive data, such as bank information and employees’ social security numbers.

So, Which Type of HR Solution Is Best for Your Organization?

Often, non-hosted HR applications are too costly, time-consuming, and resource-intensive for most SMBs to implement and manage. Hosted solutions can provide SMBs with a more workable option to service their HR needs, but at a premium cost. Full-service HR outsourcing is often too expensive as well, and it requires SMBs to give up a fair amount of visibility and control.

The bottom line is this: when deciding whether to lease or purchase HR software, or if outsourcing HR processes is the way to go, there are hurdles that must be cleared. SMBs will overcome these challenges in time by becoming more familiar with the software and its processes. SMBs need to remember that whichever route they take, their choice must be cost-effective, efficient, and dependable, and most importantly, it must meets the company’s needs.

By Jeff Spitzer

Analyst, Technology Evaluation Centers

Republished with permission