Your human resources department plays a vital role in your company’s success, and there are two main ways to manage this function: hiring in-house HR staff or outsourcing to a third party.
While many business owners opt for the first option, outsourcing HR can offer a competitive edge in certain situations.
What exactly is HR outsourcing? And more importantly, should you outsource your HR functions?
In this article, we’ll answer these questions and cover everything you need to know about HR outsourcing, including its pros and cons, as well as the top HR outsourcing companies in 2024.
What is Human Resources Outsourcing?
Human resources outsourcing (HRO) involves transferring specific HR tasks to an external service provider. These tasks can include anything related to employee management, such as recruitment, payroll processing, or even offboarding.
Who Can Handle Your HR Outsourcing?
You can outsource HR tasks to:
- Independent HR consultants: Experts who can help with hiring, policy development, and strategic HR decision-making.
- HR consulting firms: Typically contracted for full-service HR support, they handle tasks similar to independent consultants. Consulting firms offer standardised, cost-effective services, while independent consultants provide customised solutions—often ideal for small businesses.
Who Should Consider Outsourcing HR?
Small to medium-sized businesses (10-500 employees) often outsource their HR functions to consulting agencies. Larger companies (500+ employees) typically outsource specific HR tasks until their internal HR team is equipped to manage them independently.
Which HR Tasks Can Be Outsourced?
HR management is complex and includes many responsibilities. While outsourcing all HR functions might reduce stress, it’s not always advisable.
Why?
Some key HR functions, especially those that shape your company’s future and internal relationships, are better managed in-house.
For instance, in small companies, your current employees often form the backbone of the organisation. Although you can outsource initial onboarding, providing personal guidance and training helps integrate new hires more effectively. This ensures that each employee receives hands-on training and gains familiarity with your company culture.
So, which HR responsibilities are best suited for outsourcing to professionals?
Here are four common HR tasks often outsourced:
1. Talent Recruitment
Hiring new talent is crucial for any HR department but can be a highly time-consuming process. Recruitment typically involves four key steps:
- Posting job descriptions on various platforms
- Conducting background checks and screening candidates
- Interviewing shortlisted candidates
- Onboarding new employees
Outsourcing talent acquisition to experts, such as SOURCEitHR Payroll & HR Outsourcing Partner, allows you to focus on your core business, as managing these processes in-house can be a major distraction.
2. Performance Management
Managing employee performance requires ongoing evaluations to ensure that employee goals align with the organisation’s objectives. This process involves a detailed review of skills, achievements, and responsibilities, as well as decisions about assessments, promotions, and bonuses.
Since performance management requires substantial time and analysis, outsourcing this function to HR professionals can be advantageous. However, key decisions, such as promotions or dismissals, should still be made by the company’s leadership.
3. Payroll Administration
Payroll is a critical function for any business, but as your team grows, managing it becomes increasingly complex. Payroll administration involves:
- Calculating salary components, such as allowances and net pay
- Validating employee expenses and deductions
- Processing payouts and managing payroll accounting
Instead of investing in an in-house payroll team or expensive HR software, many businesses outsource payroll to a Professional Employer Organization (PEO). PEOs have the right tools and systems to efficiently manage payroll and ensure compliance with HR regulations.
4. Compensation and Benefits Management
Employee compensation and benefits are essential for motivating and retaining staff. However, keeping up with industry standards and regularly updating your compensation packages can be a time-consuming task.
Outsourcing compensation and benefits management is beneficial because:
- You don’t need full-time staff for this year-round.
- It takes considerable time to manually assess individual performance and compare it to market data.
By outsourcing, you can ensure your compensation and benefits remain competitive without the burden of handling the details internally.
5 Key Benefits of HR Outsourcing
Now that you have a clearer idea of which HR responsibilities to outsource, let’s explore how outsourcing can help you meet your HR needs.
1. Cost Reduction
Let’s start with some figures. The average starting salary for an HR manager in the U.S. is around $90,000, plus benefits. Add in the costs of overhead and compensation for other HR personnel, and the expenses pile up quickly.
By outsourcing HR functions, you eliminate the costs of recruiting, training, and maintaining an in-house HR team. Instead, you pay a service provider a fixed fee or a per-employee, per-month (PEPM) rate, allowing you to predict your HR expenses more easily. Additionally, outsourcing to countries with lower living costs, like India or the Philippines, can further reduce your HR expenses.
2. Improved Productivity
Certain HR tasks—such as managing payroll or talent acquisition—require specialized skills and experience. Without these, mistakes can occur, leading to costly errors like hiring the wrong candidate or failing to comply with regulations.
Outsourcing your HR tasks to a professional firm ensures that experienced experts handle these functions, reducing the risk of errors. Plus, outsourcing firms often use advanced HR technology, increasing the accuracy and efficiency of your HR processes.
3. Ensured Compliance
Staying compliant with labor laws and employment regulations can be a complex and time-consuming task. From anti-discrimination laws to wage regulations and safety standards, businesses must adhere to numerous rules to avoid penalties or lawsuits.
Outsourcing HR ensures you stay compliant with federal, state, and local laws. HR professionals monitor legal requirements and can notify you about important deadlines, protecting your business from costly legal issues.
4. Focus on Core Competencies
As your company grows, your focus should be on refining business strategies, expanding market reach, and increasing revenue. However, managing HR tasks like payroll and employee relations can take time away from these critical activities.
By outsourcing HR, you free up valuable time to focus on your core competencies. The outsourcing firm will handle administrative HR tasks, allowing you to concentrate on growing your business.
5. Access to a Broader Talent Pool
Outsourcing HR also enhances your recruitment process. HR agencies often have better access to job boards and industry networks, and they’re up-to-date on current salary trends and benefits packages.
This offers two main benefits:
- You’ll gain access to a larger pool of qualified candidates with the right skills for the job.
- You’ll ensure that your compensation packages are competitive, increasing employee retention while avoiding overpayment.
By outsourcing recruitment, you can streamline the hiring process and secure top talent more efficiently.
The 3 Biggest Pitfalls of HR Outsourcing
While HR outsourcing offers many benefits, it also has some drawbacks. Here are three key disadvantages:
1. Increased Risk
Outsourcing any part of your business, including HR functions, can expose you to additional risks. These include server outages, data breaches, or even the unexpected closure of the HR agency.
Sensitive employee information, such as bank account details and social security numbers, can be vulnerable when outsourced. If an HR outsourcing mistake occurs, not only could it cost your company financially, but it could also damage your reputation.
To mitigate risks, ensure you only work with HIPAA-compliant providers that have a solid track record and excellent reviews.
2. Reduced Communication
Outsourcing HR can create a communication gap between you and your employees. External HR professionals won’t be as accessible to handle employee issues or offer support as an in-house team would be.
Additionally, relying on emails, phone calls, or messaging systems may delay issue resolution, potentially increasing employee dissatisfaction.
3. Limited Customization
While outsourced HR professionals can assist with processes like hiring, they may lack the deep understanding of your company culture that an in-house HR manager would have. As a result, they may not be able to tailor procedures and policies to suit your organization’s specific needs.
This can lead to more generalized practices that don’t align perfectly with your company’s values or objectives.
When Should You Consider HR Outsourcing?
Here are two situations where outsourcing HR can be especially beneficial:
1. When HR Management Becomes Costly
HR outsourcing is often ideal for small businesses. If your organization has fewer than 500 employees, outsourcing HR functions can be a cost-effective solution. However, while outsourcing can serve as a temporary fix, building an internal HR department may be necessary for long-term employee engagement and productivity.
2. When Recruitment Isn’t a Major Focus
Recruitment doesn’t always have to be ongoing. If your focus is on business growth and employee development rather than constant hiring, outsourcing HR functions like recruitment is a smart choice. With HR outsourcing, you pay for services as needed, helping you control costs.
Conclusion
HR outsourcing comes with both advantages and disadvantages, but when done correctly, the benefits often outweigh the drawbacks. If you’re thinking about outsourcing HR for your business, do thorough research and select a reputable agency that you can trust.
