Outsourcing HR: Benefits, Strategies, And Considerations
Outsourcing HR is popular amongst businesses, especially smaller ones, for good reason.
As managing human resources functions becomes more complex and time-consuming—especially if workforces grow internationally—it pays to bring in professionals who can offer knowledge and flexibility that you do not have internally.
Use this guide to understand the benefits and what HR outsourcing services are available.
What Is HR Outsourcing?
HR outsourcing is the process of contracting with a third party, typically a skilled individual or specialized business, to perform some or all of your company’s human resource functions.
Many companies are turning to RPO companies to complement their outsourced HR functions, particularly for recruitment management. It's often the perfect middle ground between having no HR department and an in-house HR team.
Types Of HR Outsourcing
Organizations can choose to outsource either some or all of their HR functions:
Professional employer organization (PEO)
A PEO partners with a company to provide comprehensive HR services, such as payroll, benefits administration, compliance, and employee management.
The PEO acts as a co-employer, meaning both the company and the PEO share certain legal responsibilities for employees.
For more, check out our pick of the best PEOs.
Employer of record (EOR)
An EOR is a third-party organization that takes on full legal responsibility for employees, including payroll, taxes, and compliance with labor laws.
Unlike a PEO, an EOR becomes the official employer in legal terms, which is often used for hiring in foreign markets.
For more, check out our pick of the best EORs.
Staffing agencies
Focused on temporary or contract workers, staffing agencies handle the recruitment, onboarding, and payroll for short-term positions. They can be used to fill gaps quickly without hiring permanent staff.
Recruitment agencies
Specialists in finding and placing talent, these recruiting firms handle the hiring process for permanent roles, including sourcing candidates, conducting interviews, and sometimes managing parts of the onboarding process.
There are several ways to partner to outsource recruitment, including contingent staffing agencies, contractors that work on commission based on hires, and contractors that work on a set retainer based on the roles open and the timeframe of the hiring needs.
For more, check out our article on the best recruitment process outsourcing companies.
Fractional HR
Hiring an experienced HR professional, typically on a part-time or as-needed basis, to manage specific HR functions for your organization.
Instead of outsourcing HR to a full-service provider, you essentially "rent" a portion of an HR expert's time, making it a potentially more flexible and cost-effective solution for small to mid-sized companies that do not need full-time HR staff.
Managed service providers (MSP)
Typically used for contingent workforce management, MSPs handle the recruitment, management, and oversight of temporary workers and contractors across various locations or projects. They’re particularly useful for high-volume recruitment.
Consulting firms
HR consulting firms offer expertise in specialized areas like compliance, leadership development, organizational design, and change management.
They provide strategic advice or handle specific projects rather than day-to-day HR functions.
Fore more, check out our shortlist of the best HR consulting firms or best HR consulting firms UK.
Payroll providers
Companies specializing in payroll processing and compliance including payroll tax filings and deductions.
Learning and development firms
These companies provide training programs, leadership development, and employee skill-building. Outsourcing to a dedicated provider can ensure trams have access to consistent, high-quality, training.
Benefits administration companies
These firms focus on managing employee benefits, including health insurance, retirement plans, and wellness initiatives, often providing better access to benefits due to economies of scale.
Background check providers
Companies that specialize in background screening services can assist with pre-employment checks, such as criminal record searches, employment verification, and credit checks.
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Which Businesses Need HR Outsourcing?
Outsourcing HR can be a strategic decision in various situations. Here are some common scenarios where it might be beneficial:
- Limited internal resources: If your company is small or lacks an internal HR team, outsourcing can handle essential HR functions like payroll, benefits administration, and compliance.
- Scaling rapidly: During periods of rapid growth or expansion into new markets, managing HR tasks internally might become overwhelming. Outsourcing helps handle recruitment, onboarding, and compliance more efficiently (especially useful in new markets).
- Navigating complex compliance: When operating in multiple countries or industries with strict regulations, outsourcing to an HR partner familiar with local laws can minimize compliance risks.
- Cost efficiency: For smaller organizations, the costs of building an HR department may outweigh the benefits. Outsourcing can be more cost-effective, providing access to experienced professionals without the overhead.
- Focus on core business activities: If HR tasks are consuming too much time and resources, outsourcing allows your team to focus on strategic initiatives rather than administrative tasks.
- Access to expertise: Outsourcing HR functions like employee relations, performance management, or benefits can provide access to specialized knowledge and best practices that may not be available in-house.
- Temporary or seasonal needs: During peak seasons or for short-term projects, outsourcing HR can help manage temporary workforce hiring and administration efficiently.
- Improving HR processes: If internal HR processes are outdated or inefficient, outsourcing can introduce modern tools, technology, and processes that enhance productivity.
Which Functions Can HR Outsourcing Help With?
HR outsourcing providers offer services to help with a variety of HR functions, including:
- Recruitment
- Payroll administration
- Benefits administration
- Time tracking
- Insurance
- Training
- Learning and development
- Performance management
- Employee relations
- Employee transition services
- Background screening and reference checks
- Drug testing
- Employee counseling (EAPs, mental health support).
HR Outsourcing Pros And Cons
Like most things in business and life, HR outsourcing has its pros and cons.
Pros of HR outsourcing
- Cost savings: Outsourcing HR functions can reduce overhead costs, such as salaries for in-house HR staff, access to advanced systems, or avoiding penalties or fines.
- Access to expertise: Offers access to experienced HR professionals with specialized knowledge in areas like recruitment, learning and development, compensation management, and employee relations.
- Improved compliance: HR outsourcing firms are well-versed in employment laws and regulations, helping reduce the risk of non-compliance and associated penalties.
- Focus on core business: Frees up internal resources, allowing your team to focus on strategic activities that directly contribute to business growth.
- Enhanced efficiency: Outsourcing firms use advanced HR technologies and processes, streamlining functions like payroll, benefits, and performance management.
- Scalability: Easily adjust HR services based on the organization's changing needs, especially useful during periods of rapid growth or downsizing.
- Employee benefits: Outsourcing can provide access to better and more cost-effective employee benefits due to the outsourcing firm’s ability to negotiate with benefits providers.
Cons of HR outsourcing
- Loss of Control: Outsourcing means relinquishing some control over HR processes. A potential concern here is that using an external provider may not be as agile in addressing immediate HR concerns as an in-house team.
- Less personalized service: External providers might not fully understand the company culture or specific employee needs, leading to more generic HR solutions.
- Security and confidentiality risks: Sharing sensitive employee data with a third-party provider can pose risks to data security and privacy if not managed carefully.
- Potential communication gaps: Working with an external provider can introduce communication delays, especially if the provider is in a different time zone or has a high volume of clients.
- Hidden costs: While outsourcing can be cost-effective, some services may incur extra charges, making it essential to review contracts thoroughly to avoid unexpected expenses.
- Dependence on provider: Your organization may become reliant on the outsourcing partner, making it difficult to transition back to an internal HR team if needed.
HR Outsourcing Best Practices
With the above in mind, I thought I’d share some best practices to help you effectively approach HR outsourcing and avoid pitfalls.
1. Clearly define objectives and scope
Before outsourcing, identify which HR functions you want to outsource and why. Clarify the specific objectives you aim to achieve (e.g., cost reduction, improved compliance, access to expertise).
For example: You might realize the pros of outsourcing payroll are worth it, but decide to keep other HR functionality in-house.
2. Shop around
Shop around before signing any contracts. Speak with references provided by the company and even make inquiries with other clients to make sure you receive the level of service and commitment that you expect from this relationship and that they fit your culture and team as best as possible.
3. Check data protection
Employers should review a provider’s data protection measures before signing a contract. Review their data security protocols, privacy policies, data access and controls, data breach response plans, and employee data privacy training.
3. Set clear service-level agreements (SLAs)
Establish SLAs that define expectations for performance, response times, data security, and service quality. Ensure there are clearly defined penalties for non-compliance.
4. Do a tech check
Perform an analysis of any potential partner’s tools and technology to ensure they’re compatible with yours. What staffing software do they use? What about HRMS? Payroll? Benefits admin?
This is especially important when outsourcing payroll, especially if you are including time tracking.
Integrations are key for maintaining data consistency, improving your workflows, and ensuring timely and efficient payroll management, for example.
Work with the potential partner to understand where they can and can’t support the team.
For example, calculations of bonuses and commissions often still have to be done in-house, with the payroll provider just entering in the final payout for processing.
5. Check for cultural fit
Your primary concern when outsourcing functions such as performance management is ensuring your partner aligns with your culture and goals.
Look for a provider that is heavily focused on user experience so that your people remain the central focus of the partner’s efforts.
Ask the partner how they will work with you when you have questions or concerns that come up about performance, for example.
6. Check for insurance
If contracting with a PEO and entering a co-employment relationship, then ensure your company has the right liability insurance in place and confirm that the PEO also carries adequate insurance coverage.
You can also consider adding Employment Practices Liability Insurance (EPLI) to protect against claims such as wrongful termination, discrimination, or harassment.
While most PEOs typically have sufficient coverage, it’s important to verify this, not just for liability insurance but also for health insurance.
How Much is HR Outsourcing?
HR outsourcing providers offer various pricing models to accommodate different business needs and budgets. The most common models include:
- Flat fees: A fixed monthly or annual fee for a predefined set of services. This model provides predictable costs and is often used for comprehensive HR solutions.
- Per-employee fees: Charges are based on the number of employees in the company. This model scales with the size of the business, making it suitable for growing companies.
- Percentage of payroll: Fees are calculated as a percentage of the total payroll. This model aligns costs with the business's payroll expenses, ensuring that HR outsourcing costs are proportionate to the size of the workforce.
Cost factors
Several factors influence the cost of HR outsourcing, including:
- Company size: Larger companies typically incur higher costs due to the increased complexity and volume of HR tasks.
- Services required: The range and depth of services needed, such as payroll processing, benefits administration, compliance management, and recruitment, affect the overall cost.
- Industry: Some industries have specific HR requirements or regulations that can increase the complexity and cost of outsourcing services.
- Service provider expertise: Providers with extensive experience and specialized knowledge may charge higher fees for their premium services.
Average Costs
The cost of HR outsourcing can vary widely depending on the factors mentioned above. However, here are some average cost ranges for different types of HR outsourcing services:
- Basic HR Services: $50 to $150 per employee per month. This typically includes payroll processing, basic benefits administration, and compliance support.
- Comprehensive HR Services: $150 to $500 per employee per month. This includes a full suite of HR functions such as recruitment, performance management, employee training, and strategic HR support.
- Percentage of Payroll: 2% to 8% of total payroll. This model covers a broad range of HR services and aligns costs with payroll expenses.
10 Best HR Outsourcing Services Shortlist
Here's my pick of the 10 best software from the 10 tools reviewed.
Outsourcing Services by Country
Are you interested in hiring talent within a specific country? If so, these employer of record services for the following countries are worth considering as your outsourcing partner:
- Australia's best EOR services
- Brazil's best EOR services
- Canada's best EOR services
- China's best EOR services
- Colombia's best EOR services
- France's best EOR services
- Germany's best EOR services
- India's best EOR services
- Italy's best EOR services
- Japan's best EOR services
- Netherland's best EOR services
- Philippines' best EOR services
- Portugal's best EOR services
- Singapore's best EOR services
- Spain's best EOR services
- Turkey's best EOR services
- UAE's best EOR services
- United Kingdom's best EOR services
Need expert help selecting the right tool?
With one-on-one help, we guide you to your top software options. Narrow down your software search & make a confident choice.
