Outsourcing HR: Benefits, Strategies, And Considerations

Outsourcing HR is popular amongst businesses, especially smaller ones, for good reason.

As managing the technical function of human resources becomes more complex and time-consuming—especially if workforces grow internationally—it pays to bring in professionals that can offer flexibility or a specific area of expertise that you do not have internally.

In this article I’ll take you through:

• What Is HR Outsourcing?
• The Functions That HR Outsourcing Can Assist With
• The Benefits Of Outsourcing HR
• Challenges and Disadvantages
• Which HR Functions Can You Outsource?
• Cost of HR Outsourcing

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.

It's often the perfect middle ground between having no HR department and an in-house HR team. This is evidenced by the increased hiring of Fractional HR roles and the growth of Employers of Record who can help manage teams across the globe.

HR outsourcing providers offer services to help with a variety of HR functions, including:

• Recruitment
• Payroll administration
• Benefits administration
• Time tracking
• Insurance
• Training
• Performance management
• Employee relations
• Employee transition services

How Does HR Outsourcing Work?

Businesses need to evaluate potential HR outsourcing firms based on their expertise, reputation, and the range of services they offer. This process often involves:

1. Needs Assessment: Determine which HR functions to outsource and shop for service providers whose strengths match your need.
2. Research and Selection: Review the offerings of HR outsourcing firms, request proposals, and compare them.
3. Contract Negotiation: Define the scope of services, pricing, and terms of the contract to ensure clarity and alignment between both parties.
4. Implementation Plan: Develop a detailed implementation plan outlining how the HR functions will be transitioned to the provider, including timelines, responsibilities, and key milestones.
5. Integration: Integrate the provider's services into your business operations. This may involve data migration, training for your internal team, and establishing communication protocols.

Service Delivery

HR services are delivered through a combination of technology and remote support. Outsourcing providers use advanced HR software and platforms to manage various functions efficiently. 

Key aspects of service delivery include:

1. Technology utilization: Providers implement HR management systems (HRMS) and other software solutions to automate processes like payroll, benefits administration, and performance tracking. 
2. Remote support: HR outsourcing firms offer remote support through dedicated HR representatives who handle employee inquiries, manage compliance issues, and provide strategic HR guidance. 
3. Continuous monitoring and reporting: Providers continuously monitor HR activities and generate reports to keep businesses informed about key metrics, compliance status, and overall HR performance. 

When Should You Outsource HR?

Certain indicators suggest that a business might benefit from HR outsourcing. These signs include:

1. Rapid growth: When a company experiences rapid growth, managing HR functions internally can become overwhelming. Outsourcing helps scale HR operations to meet the increased demand efficiently.
2. Compliance challenges: Navigating complex employment laws and regulations can be daunting. If a business struggles with compliance issues, outsourcing HR ensures adherence to legal requirements and reduces the risk of penalties.
3. Need for specialized HR expertise: Small businesses or startups may lack the resources to hire full-time HR professionals with specialized expertise. Outsourcing provides access to experienced HR experts who can handle diverse HR functions effectively.

Example Scenarios

HR outsourcing is particularly beneficial in various scenarios, such as:

1. Startups: Startups often operate with limited resources and need to focus on core business activities. Outsourcing HR functions allows them to manage HR tasks professionally without the burden of hiring an in-house team.
2. Small businesses: Small businesses may find it challenging to maintain comprehensive HR services internally. Outsourcing provides them with access to advanced HR technology and expertise, helping them compete with larger companies.

Companies undergoing restructuring: During periods of restructuring or organizational change, businesses may need to streamline operations and reduce costs. Outsourcing HR functions can help manage these transitions smoothly, ensuring continuity and compliance.

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10 Benefits Of Outsourcing HR

1. Outsourcing HR helps to improve your processes

Working with an HR outsourcing service means that you have an expert to:

• Prepare your employee handbook
• Create policies that are suited to your organization
• Handle employee disciplinary actions
• Implement new HR software tools.

2. The ROI in time and money

Outsourcing HR allows organizations to focus their efforts on sales, business development, marketing, operations and other aspects of the business that demand their time.  

Financial savings from outsourcing HR comes from reduction in errors and lower salary expenses in the HR department.

3. Better risk management 

Outsourcing HR reduces the burden of compliance and keeping up with employment law changes.

Other areas of risk that are reduced include:

• Data privacy and security
• Worker's safety and worker's compensation
• Employee disputes and grievances
• Auditing current practices as the organization evolves
• Policy development and implementation.

4. Access to advanced technology

HR outsourcing providers often implement the latest HR software and technology, which might be too expensive for smaller businesses to adopt. This technology can streamline various HR functions, improve data management, and enhance overall efficiency. 

5. Scalability

Outsourcing HR allows businesses to scale their HR services up or down based on their current needs without the hassle of hiring or laying off HR staff. This flexibility is particularly valuable for businesses experiencing growth spurts or seasonal fluctuations. 

6. Improved employee enefits

HR outsourcing firms can often negotiate better benefits packages for employees due to their large client base. 

These providers have more bargaining power with insurance companies and other benefits providers, which can result in more competitive and comprehensive benefits for your employees. This not only helps attract and retain top talent but also enhances employee satisfaction and loyalty.

7. Reduced administrative burden

Managing HR tasks such as payroll processing, benefits administration, and compliance reporting can be incredibly time-consuming. By outsourcing these tasks, businesses allow internal staff to focus on core business activities and strategic initiatives. 

Moreover, HR outsourcing providers are often more adept at handling these functions efficiently and accurately, reducing the risk of errors and compliance issues.

8. Enhanced recruitment processes

HR outsourcing firms possess the expertise and resources to streamline recruitment processes, making it easier for businesses to attract and retain top talent. 

They can also offer valuable insights into industry trends and best practices, helping businesses refine their recruitment strategies and build a stronger, more capable workforce.

9. Performance management and training

HR outsourcing firms offer services such as employee training and development programs, performance management systems, and continuous improvement initiatives. These services can help businesses develop their workforce, improve employee performance, and foster a culture of continuous learning and development. 

Structured training programs and performance management tools also aid in identifying skill gaps and addressing them promptly.

10. Access to a broader talent pool

HR outsourcing providers often have extensive networks and databases, giving businesses access to a broader talent pool. This can be particularly beneficial for finding specialized skills and expertise that may be hard to locate through traditional recruitment channels.

Challenges and Disadvantages to Outsourcing HR

While outsourcing can be a smart HR solution for a growing business, it’s not without its challenges.

Loss of control

Both employees and managers sometimes have issues with moving human resource functions offsite. HR has its finger on the pulse of the company, and so moving internal HR functions offsite for a business owner can be counterintuitive at times.  It’s important to consider which functions will support the business but not hurt the culture.

Team members may be used to having confidential conversations with an HR representative they had built a relationship with, and so it can be difficult for both managers and employees to form those close trusted bonds with someone not on the team directly.

If your company never had HR on the team, but you internally built processes and expectations over time that now need to change, it may be a hard transition.

You may not have the flexibility to treat each situation independently and need to follow a process per the external partner, especially when working with a professional employer organization or employer of record.

Outsourced staff turnover

Staff turnover is usually a challenge for employers, but can be a challenge for an entire company when their outsourced HR provider is training someone new. 

A company may be assigned a representative from their HR provider who effectively acts as their offsite HR generalist.

If this person changes teams within their own organization or leaves suddenly, employers are faced with having to work with a new hire who does not know their business.

Keep Your Options Open

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..

Dependence on providers

Relying heavily on an external HR provider can create a dependency that poses risks to the business. If the provider fails to deliver, changes their service offerings, or goes out of business, it can leave the company scrambling to fill the gap.

This dependence can also limit the company’s ability to respond quickly to internal changes or crises, as they must rely on the external provider's processes and timelines.

Data security

Outsourcing HR functions involves sharing sensitive employee information with an external provider, which can raise data security concerns.

Despite any data protection measures a provider may take, there remains an inherent risk when sensitive data is handled outside the organization, potentially exposing the company to legal and financial repercussions if a data breach occurs.

Do Your Due Diligence

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.

Which HR Functions Can You Outsource?

Outsourcing can satisfy a variety of HR needs, but the following are the most common choices for small to midsize businesses.

Payroll Administration

Outsourcing payroll is administration is a strategic decision that can help businesses deal with challenges related to scalability, compliance, reducing errors and enhancing security.

Tasks ripe for outsourcing include:

• Payroll setup
• Payroll tax obligations and filing
• Online payroll submission
• Payroll reporting
• Termination compliance at the local level
• Hourly worker time tracking and overtime calculations
• Vacation and sick leave tracking.

Do a Tech Check

Perform an analysis of any potential partner’s tools and technology to ensure they’re compatible with yours, especially if you are including time tracking. This integration is key for maintaining data consistency, improving your workflow and ensuring timely and efficient payroll management. Work with the potential partner to understand where they are and are not able to 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.

Benefits Administration

Benefits can be time consuming to research and difficult to structure. Outsourcing reduces administrative burden, improves the employee experience and removes the onus for staying up to date with the latest benefit trends from the employer.

Advantages include:

• Better buying power for employee benefits such as health care, dental, vision care, disability, etc.
• Answering employees’ questions about the benefits plan.
• Processing enrollment into the benefits program.
• Removing employees who leave the company from the benefits program and managing COBRA enrollment.

Something to Remember

Outsourcing benefits can expand your access to a variety of benefit packages. Choose an HR outsourcing company, like a PEO, that offers customizable benefits packages. While there may not be a lot of customization you can do with the benefit plans, you can choose plans that best fit the needs of your team. You can then add in supplemental benefits through other partners such as wellness, financial or other perks that will provide value to your team.

Recruitment

Outsourcing recruitment can offer several benefits to organizations, particularly in enhancing efficiency, accessing specialized recruiters, and hiring international employees. This gives the company flexibility to ramp up and down hiring as needed and improving the quality of hires.

Key advantages:

• Creating and posting job descriptions that will attract the right talent
• Proactive sourcing and review of inbound resumes.
• Conducting initial interviews and candidate screening.
• Assisting with reference checks
• Compliance with local laws.

Effective collaboration with a talent acquisition partner is based on mutual understanding of your business needs, culture and the specific requirements of the roles you're looking to fill. Create a feedback loop and agree on KPIs that you'll use to measure the partner's effectiveness. 

Identify Needs

Evaluate the kind of partner you are looking for based on your needs. There are several ways to partner with a recruiter, 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 timeframe of the hiring needs.

Performance Management

Outsourcing performance management can support the creation of tailored developed plans for your employees and enhance objectivity in assessments.

• Training employees on policies and procedures
• Implementing and managing formal employee performance review
• Handling ongoing performance feedback
• Implementing extended training on topics such as harassment, DEI, management skills, etc.
• Partnering on employee relations issues or escalated performance concerns
• Handling employee records.

It's a UX Universe

Your primary concern in outsourcing 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. This is one place where a Fractional HR professional will often be willing to partner with you on every level of performance management, while a PEO or HR Consulting Platform may only be able to give you the legal answer rather than more nuanced advice.

How Much is HR Outsourcing?

HR outsourcing providers offer various pricing models to accommodate different business needs and budgets. The most common models include:

1. 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.
2. 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.
3. 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:

1. Company Size: Larger companies typically incur higher costs due to the increased complexity and volume of HR tasks.
2. Services Required: The range and depth of services needed, such as payroll processing, benefits administration, compliance management, and recruitment, affect the overall cost.
3. Industry: Some industries have specific HR requirements or regulations that can increase the complexity and cost of outsourcing services.
4. 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.

FAQs

How do I choose the right HR outsourcing provider?

What are the main differences between PEOs and HR outsourcing firms?

Can I outsource only specific HR functions, or do I have to outsource everything?

What are the potential risks of HR outsourcing, and how can they be managed?

How quickly can I expect to see the benefits of outsourcing HR?

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