In the relentless pursuit of improved operational efficiency and careful cost optimization, the landscape of employment models has significantly changed, while businesses have undergone a major transformation in their approach to workforce management. Businesses, particularly small and medium-sized companies that focused on technological innovation and the fortification of their software, found themselves in a position of increasing opportunities for cost reduction.
This technology adoption prompted innovative organizations to explore increasingly economical business models, from cost-effective to even more budget-conscious alternatives, to meet the demand for a substantial talent pool. Thus commenced a roller coaster journey marked by relentless experimentation with diverse employment frameworks, culminating in the identification and adoption of the most fitting model at any given juncture.
This blog aims to meticulously dissect and unravel the evolution of employment models through the lens of cost, inspecting the financial implications associated with traditional onsite approaches, contract hiring, outsourcing, contracting, and ultimately the economically astute realm of Employer of Record (EOR) which is the current favorite of all business owners for building teams.
Evolution of employment models
Let’s delve into the diverse array of employment models that have been prevailing for the last two decades and examine each of their unique trajectories for gaining prominence during their respective eras.
In the traditional onsite employment models, employees closely collaborated with clients at their physical location. Hiring of unique skills was continuous due to the adoption of new technologies, the emergence of automation processes, and the initiation of multiple new projects. However, this approach incurred various expenses related to quality control, service level, team recruitment and management, thorough audits, compliance measures, legal requirements, and industry standards.
It also involved expenses regarding performance measurement for monitoring Key Performance Indicators (KPIs) and disseminating reports, along with ongoing enhancement expenses for process improvements based on employee performance data. Despite the advantages of direct oversight and enhanced performance, the high costs of infrastructure and logistical challenges led to a shift towards leaner and cost-effective alternatives, giving rise to the concept of contract hire.
The contract hiring model emerged as a response to the need for specialized skills and team expansion beyond geographical constraints. This involved outsourcing specific skill sets or individuals from any geographical region for a particular project, catering to immediate needs without a long-term commitment. While flexible, it faced challenges with recruitment costs, legal compliance, and project demands. One of the major issues that came up with this model was dependency risks. The dependence on a single outsourcing partner,
often resulted in a lack of flexibility and negotiating power, potentially leading to higher costs in the long run. Additionally, transitioning to a new outsourcing partner or bringing operations back in-house incurred significant transition costs. Thus the concerns about cost-effectiveness prompted a reevaluation of engagement strategies which gave rise to the outsourcing model.
The advent of the outsourcing model transformed the employer-employee relationship, as organizations delegated entire business processes to external service providers. Simultaneously, the offsite model emerged in global software development, utilizing international talent for cost savings and project acceleration.
However, outsourcing contractors incurred costs for training and knowledge transfer, including tailored programs, hiring trainers, providing infrastructure, documentation, and onboarding. Addressing productivity losses, investing in tools, and evaluations, and handling cultural differences added to expenses. Seeking a balanced approach, companies explored the contracting model, integrating efficiency and financial prudence.
The surge of the gig economy saw a notable rise in the popularity of remote work culture. Companies actively promoted the formation of remote teams and the expansion of their workforce across international borders. During this period, influential business leaders adopted the contracting model, involving freelancers and temporary workers for specialized roles and projects.
However, a significant drawback of this model was the impact of currency fluctuations. Such fluctuations had a considerable effect on the costs associated with outsourcing contracts, leading to variations in the base contract value and pricing models due to changes in exchange rates. The overall expenses were adversely affected as labor costs, encompassing salaries, wages, and benefits for overseas contractors, were vulnerable to currency movements. Operational expenses, including the costs of goods and services, infrastructure, and vendor relationships, could also be influenced by currency fluctuations.
The financial transaction costs, such as currency conversion fees and hedging expenses, further contributed to the overall expenditure on outsourcing. Additionally, there were associated costs related to renegotiating contracts, ensuring compliance with financial reporting and tax regulations, and implementing risk mitigation strategies. Despite offering flexibility, managing a diverse and geographically dispersed talent pool resulted in administrative challenges and coordination costs, impacting the perceived cost-effectiveness of this strategy. This led to the emergence of the most recent and successful model of all time, the Employer of Record (EOR).
Emergence of Employer of Record (EOR)
As business owners began to spot the shortcomings inherent in existing models, the gradual erosion of their efficacy became apparent over time. This necessitated the rise of a more resilient framework capable of closing all the loopholes of the previous models and ushering in a new era of smooth operations.
Thus emerged the Employer of Record (EOR) concept, armed with its own acumen and potency, and took the business industry by storm. Here we’ll discuss how
Employer of Record (EOR) services hand-holded organizations in each business hiccup and guides them toward success.
Globalization and expansion:
- Businesses, in their global expansion, encountered intricate challenges regarding compliance with diverse labor laws, tax regulations, and employment practices across various countries.
- The EOR model emerged as a valuable solution, streamlining international expansion by offering a centralized approach to managing employment-related tasks in multiple locations.
- EOR services are actively forming strategic partnerships and expanding global networks, augmenting their capabilities. This, in turn, enables businesses to access a comprehensive suite of services and support across different regions.
Compliance and risk mitigation:
- Divergent local labor laws and regulations pose a substantial challenge globally. Violations may result in legal ramifications, fines, and reputational harm for companies.
- Amidst the persistent complexity of global compliance, an EOR company plays a crucial role in navigating diverse tax codes, employment laws, and regulatory frameworks across countries.
- Moreover, EOR services exhibit adaptability to evolving labor laws and regulations in different countries, ensuring businesses proactively comply with the latest legal requirements.
Flexibility and agility:
- Businesses require swift market entry and the ability to adjust workforce size in response to market conditions.
- Employer of Record (EOR) services provide the necessary flexibility, enabling companies to recruit and oversee employees without the administrative complexities associated with establishing legal entities in each new location. This agility is paramount for navigating evolving business landscapes.
- EOR services are increasingly delivering tailored solutions, addressing the unique needs of businesses. This involves customizing services according to industry demands, workforce size, and geographical locations.
- Establishing legal entities in multiple countries incurs substantial costs and administrative overhead. Leveraging Employer of Record (EOR) services enables businesses to circumvent these expenses, optimizing global workforce management.
- The EOR model proves to be a more economical alternative to the traditional approach of establishing and maintaining separate entities for every international location.
Focus on core activities:
- Tackling HR, payroll, and compliance demands significant time, drawing focus away from a company’s fundamental business operations.
- Employer of Record (EOR) services handle administrative tasks, enabling business owners to concentrate on their core objectives and strategic goals.
Employee benefits and retention:
- Employer of Record (EOR) services play a pivotal role in elevating the overall employment experience by efficiently administering employee benefits, thereby fostering enhanced retention and satisfaction among workers.
- The significance of employee experience is growing, even on a global scale. EOR services not only streamline benefits administration but also extend their purview to managing payroll and other elements crucial for a positive employee experience.
- Businesses leveraging EOR services gain the advantage of providing consistent benefits packages across diverse locations, fostering a cohesive company culture that contributes to employee satisfaction and retention.
- The Employer of Record (EOR) model stands out as a flexible and dynamic solution in the realm of workforce management. This approach enables companies to delegate the administrative responsibilities of hiring, payroll, and compliance to a third-party entity while retaining full control over their employees’ day-to-day tasks.
- The flexibility of the EOR model is particularly advantageous in the constantly evolving business environment, allowing organizations to quickly adapt to varying workforce needs, scale their operations efficiently, and navigate complex legal and regulatory landscapes seamlessly. By leveraging an Employer of Record, businesses can concentrate on their core functions, secure in the knowledge that their workforce management processes are handled with expertise and adaptability.
Easy to set up your own entity:
- Employer of Record (EOR) services offer a streamlined and flexible solution for businesses looking to establish subsidiaries in new markets. One of the key advantages is the ability to form a subsidiary at any time with minimal administrative burden. EOR providers help companies explore and get used to all the legal and regulatory landscapes and ensure that they are familiarized with the business trends of the new land. By leveraging an EOR, businesses can swiftly navigate the intricacies of setting up a subsidiary, ensuring rapid market entry without the need for an extensive in-house infrastructure at first.
- This approach not only accelerates the expansion process but also provides dedicated time to the companies to survive through the untested waters of a new business market. In essence, the Employer of Record model provides a scalable and efficient mechanism for companies to establish subsidiaries, enabling them to adapt to changing market conditions with agility and ease.
Therefore, it can be objectively asserted that the Employer of Record (EOR) concept is a proven, widely adopted, and highly optimized method in contemporary times. While it possesses almost all the perks of other models, it has an extra point in its bag and that is flexibility by all means. It revolutionizes employment models, providing businesses with a compelling solution for operational control and cost-effectiveness. EOR providers act as intermediaries, managing diverse responsibilities such as employment, payroll, and compliance. This strategic alternative enables organizations to streamline employment functions, ensuring compliance, financial efficiency, and adept workforce management for an enhanced organizational framework.