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
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
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
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
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
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
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
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
Republished with permission