Introduction
Businesses today are spoilt for choice.
When it comes to team building, companies have several options. Three popular methods are hiring through an Employer of Record (EoR), outsourcing, and hiring internally. Each approach has its advantages and drawbacks, depending on your business needs, budget, and long-term goals. There’s also the influence of company culture. Some high-trust roles (in healthcare research, for example) have different priorities from simple service- or product-based ventures.
Understanding the difference between each of these methods is the first step towards making an informed choice about which of these would suit you best. Each method has its pros and cons; we have to look at all of them before making such a critical decision.
In this article, we’ll explore these three methods, helping you decide which is the best choice for your company.
What Is an Employer of Record (EoR)?
Let’s define EoR.
An Employer of Record (EoR) serves as the legal employer for small and large businesses and performs all employee-related duties for them. The business need not set up a physical entity in the location. All employment-related responsibilities (including payroll, taxes, benefits, and compliance with local labor laws) are handled by them. This allows companies to hire employees in different locations without setting up a legal entity in each region.
Benefits of Using an EoR
Global Reach without Physical Presence
An EoR allows your company to expand globally without the hassle of setting up a physical presence in each country. This saves time and money while ensuring compliance with local laws.
Compliance and Risk Management
EoRs are experts in local labor laws, reducing the risk of non-compliance. This is a huge plus for companies entering new markets or exploring especially risky industries.
Cost-Effective Expansion
Using an EoR can be more cost-effective than setting up a legal entity or hiring legal and HR professionals in each country. Legal expertise is expensive in most countries, and this can be complex. EoRs make it simple.
Drawbacks of Using an EoR
Limited Control
When you use an EoR, you might give up some control over employment practices. The EoR handles payroll, benefits, and compliance, which may limit your flexibility in managing these areas.
Service Expenses
While EoRs save a substantial amount of money, they do charge a fee for their services. This can add up to a sizable number for companies employing many people.
Employee Comfort
Engaging a third party might not sit well with every employee. It always risks creating a feeling of disconnect, although good service providers have processes in place to prevent this. But if this situation isn’t taken into account or dealt with (if it arises), it can impact their engagement and loyalty.
What Is Outsourcing?
Let’s understand what outsourcing is.
Contracting a third-party company to handle specific tasks or projects is called outsourcing. These projects can be in domains ranging from customer support and IT services to manufacturing and marketing. It has become increasingly popular since the early 2000s because it lets you access specialized skills and resources without hiring full-time employees.
Benefits of Outsourcing
Access to Expertise
This is primarily the reason outsourcing was even begun by large-size enterprises. Access to tech, healthcare, and customer service experts at a reasonable price was, and still is, an offer most businesses couldn’t refuse. Google, LinkedIn, and Pfizer owe their massive success to outsourcing.
Scalability
Outsourcing allows you to contract services as needed without the long-term commitment of hiring staff. For example, Wells Fargo outsources portions of its customer service work, payroll responsibilities, and financial accounting needs to focus on innovation. Outsourcing frees up your core resources.
Savings
Businesses save costs because they do not need to invest in office space, equipment, and full-time salaries. You pay only for the services you use.
Drawbacks of Outsourcing
Less Control
Just like EoR, you will be handing the reins over to a third party. Outsourcing means relinquishing some control over how tasks are completed. This can lead to differences in quality or service standards compared to in-house work. Some differences in expectation setting are to be expected. This is not a roadblock, and should not be treated as such.
Communication Issues
Working with third-party providers, especially those in different time zones, can lead to communication issues. Misunderstandings can slow down projects and lead to mistakes. If there are language gaps, those need to be addressed too. But most outsourced projects are cushioned against these pitfalls by a careful selection of culturally aligned candidates and ensuring that everyone in the project speaks one common language well.
Security Risks
There are security risks to outsourcing, especially if sensitive data is involved. Data breaches do happen, even if they’re not deliberate. Third-party providers should have strong security measures in place. Clients should also know about these risks before sharing sensitive information with a third party. All-round vigilance is the only solution.
What Does It Mean to Hire Internally?
Hiring internally means recruiting full-time employees to join your company. These employees work directly for your business, and you manage all aspects of their employment, including payroll, benefits, and compliance. This is still the most widely practiced method. For many businesses, this makes sense for legal purposes. If you are located in one region only, you do not need to engage an EoR or opt for outsourcing.
Benefits of Hiring Internally
Full Control
When you hire internally, you have complete control over your employees and their work. This allows for better alignment with company culture and goals. Complete control also increases the amount of visibility you have into their work.
No Investment in Culture Fit
Internal hires already understand your company values and culture. They are invested in your mission. Chances of cultural mismatches are very low. They might also fit into the bigger team more seamlessly.
Consistency
Full-time employees might be more invested in the company’s success. Their work is likely to be consistently good, and they might be more likely to stay with the company long-term. Hiring and selecting the whole team might also create a sense of uniformity among company leadership, who will be interested in promoting the welfare and development of employees they have handpicked.
Drawbacks of Hiring Internally
Higher Investment of Time and Costs
Hiring full-time employees can be expensive. You need to provide salaries, benefits, office space, and equipment. There are also costs associated with recruitment and training. They will need support every step of the way, and the resources for that will need to be allocated accordingly.
Longer Hiring Process
The internal hiring process can be time-consuming, especially if you’re looking for highly specialized skills. Finding the right candidate may take weeks or even months. If you do not have hiring experts, the process can stretch even further.
Limited Flexibility
Hiring internally can limit your flexibility. If business needs change, it can be difficult to scale down without layoffs. This can be costly and impact company morale.
Comparing EoR, Outsourcing, and Hiring Internally
Cost Considerations
EoRs are the most cost-effective solution for small- and medium-sized businesses. You have a chance to globally expand at a limited cost. The service fee incurred is not back-breaking in most cases. This is perfect for smaller teams or businesses trying to assess their chances by conducting a market entry. Outsourcing, however, is the least expensive option for specific tasks, as you pay only for what you use. No long-term commitments are necessary and your projects are completed on time. The most expensive option due to salaries, benefits, and overhead costs is hiring internally. Because of this, it should be reserved for roles critical to the company’s core operations.
Control and Flexibility
EoRs balance control and flexibility, so you can manage employees while relying on the EoR for compliance. Outsourcing is flexible in scaling but sacrifices control over how certain tasks are completed. You get the maximum amount of control in internal hiring, but there is almost no flexibility, especially in scaling operations up or down.
Compliance and Risk
There is zero risk when using an EoR. You get a high level of compliance with local laws, eliminating risk, especially in international markets. Outsourcing has a slightly increased amount of risk related to quality control and data security, but vetted third-party providers are as trustworthy as they come. While hiring internally, you carry full responsibility for compliance, which can be challenging and costly, especially in multiple jurisdictions.
When to Choose an Employer of Record
International Expansion. For everyone looking to capitalize on global work without making a dent in their purses, EoRs is a cost-effective, risk-free option. If you’re expanding into new markets and want to hire local talent without setting up a legal entity, an EoR is the best choice. It simplifies compliance and reduces risk.
An EoR is also a flexible solution for short-term projects or temporary roles. You can hire employees quickly and terminate contracts without the complications of internal hiring.
When to Choose Outsourcing
If you need access to specialized skills or technology for a specific project with a definite start and end date, outsourcing is your best choice, especially for IT, marketing, or customer service tasks. You can contract services as needed without the long-term commitment of hiring full-time staff. And since you only pay for the services you use, this ends up being cost-efficient as well. It is also beneficial for startups.
When to Choose Hiring Internally
If you’re looking to fill a long-term position, internal hiring offers the most stability. Additionally, when you want more visibility over your company’s core ops, hiring internally is a good idea. If company culture is a priority, internal hiring allows you to shape and maintain that culture. Full-time employees are more likely to contribute positively to the work environment.
Conclusion
Your choice should be guided by a careful consideration of your company’s immediate needs, long-term goals, and resources. Each option has its strengths and weaknesses, and the right choice will take cost, control, compliance, and company culture into account.
For businesses looking to expand internationally with minimal hassle, an EoR offers a flexible and compliant solution. If cost savings and access to specialized skills are a priority, outsourcing might be the best fit. Hiring internally is best for control and visibility into processes.
All of the drawbacks defined here can be offset by self-aware planning. None of the potential cons are serious enough to dissuade you from trying to make the most of the pros.
Ultimately the decision has to be made by weighing the risks against the immense gains of each strategy.
