Outsourcing HR: Pros, Cons, And 5 Key Tips For Success

Outsourcing HR: Pros, Cons, And 5 Key Tips For Success

Exploring the potential of HR outsourcing - uncover benefits, drawbacks, and tips for maximizing efficiency and cost-effectiveness in your business strategy.

Outsourcing HR functions can be appealing if you're seeking ways to enhance efficiency and cost-effectiveness within your business. However, like any other business strategy, it has potential benefits and drawbacks that your business should consider. 

In this guide, we'll explore the ins and outs of HR outsourcing, understand its pros and cons, and provide some practical tips on making outsourcing work best for your organization.

A team meeting


1. What is HR outsourcing?

HR outsourcing refers to delegating specific human resources tasks or functions to external agencies or consultants. The concept is rooted in the belief that specialist agencies can handle these matters more effectively and efficiently or can aid existing HR staff. 

2. What types of HR functions can you outsource?

HR outsourcing companies will typically utilize one of three models: single-function outsourcing, partial outsourcing, or complete outsourcing. Once your model is selected, you can select your relationship by choosing software-as-a-service, single-source outsourcing, shared services, business process outsourcing, or professional employer organizations (PEOs). 

Many companies will work with PEOs like Stratus HR because they specialize in only HR functions. They combine employees from multiple client organizations, acting as co-employer. They can operate as an entire HR department or fill in department gaps.

Still, either way, an outsourced HR department can help any business in any industry grow at any stage. No matter which outsourcing model you choose, you typically outsource the following:

  • Background checks and drugs screening
  • Creating company policy manuals and employee handbooks
  • Development and administration of benefits programs
  • Employee relations and freelancer compliance
  • Total payroll processing and report generation
  • Organizational development
  • Recruitment and retention strategies
  • Unemployment claims
  • Training and development
  • Human resources compliance

Most businesses will keep control over business succession planning, internal HR department management, performance management, organizational development, and talent development.

3. What are the pros of outsourcing HR?

Outsourcing your HR team is often a great idea, especially if you don't have an active HR team and you're growing. Here are six reasons why you should outsource your team right away.

1) It's a Great Investment (If Done Correctly)

Outsourcing HR can be an excellent financial play if executed wisely. Businesses can save by reducing costs tied to maintaining an in-house HR department, such as wages, benefits, and continual training. Additional costs saved may include space and supply expenses.

2) Receive the Functional Capabilities of an Entire Team

When you outsource HR operations, you're not just hiring a single person but gaining access to a whole team of professionals working on your behalf. This means you get specialist knowledge across various aspects of HR without having to train or employ multiple personnel.

3) Access to the Latest Human Resources Technology

HR outsourcing firms likely possess the most advanced technology in the human resources field. Your company doesn't have to spend time, money, and effort learning about, buying, and implementing its systems for tasks like payroll or ATS.

4) Ability to Offer a Wide Range of Employee Benefits

Partnering with an HR outsourcing company often enables smaller businesses to offer benefits they ordinarily struggle to provide. For instance, many outsourced HR providers have pre-negotiated insurance rates and benefit packages, which can be more cost-effective.

5) Gain Access to Proactive Risk Management Strategies

Outsourced HR professionals are experts in risk assessment and management strategies relating to employee relations, conflict resolution, and regulatory compliance matters. Their expertise enables them to mitigate business risks before potential problems occur.

6) Outsourced Employees are Experienced Experts

HR consultants are highly skilled individuals specializing in their field, bringing vast expertise and experience from diverse sectors and companies into your business environment. This could translate into improved business outcomes for you by increasing overall productivity.

4. What are the cons of outsourcing HR?

Like any decision, there are negatives to outsourcing your HR department. Fortunately, you can minimize or eliminate most of these cons by being proactive and savvy.

1) It can be a bad investment (If done poorly)

If you hire the wrong company or switch from an on-site HR team to an outsourcing agency incorrectly, any significant investment could turn sour. A poor outsourcing company could put your data at risk, delay future internal development, or be inconsiderate of your company culture.

To prevent this from happening, you need to research each company thoroughly and have a good idea of why you want to outsource in the first place. After all, a great team could be wrong for you if they've never worked in your niche or cannot meet your business needs.

2) Limited on-site access to your HR representative 

When working with an external agency, your business may not have the immediate accessibility and face-to-face interaction you usually get with an in-house team. This could lead to communication lags or miscommunication issues from the start.

As a result, some businesses might feel detached from their outsourced HR team and struggle to forge meaningful relationships. Having said this, many firms overcome these challenges by maintaining regular digital communication and scheduling routine on-site visits when necessary.

3) The thought of "giving up control" of your company

Entrusting someone else with delicate, internal matters related to your employees might feel concerning, and there's good reason to be worried. You might worry about how well the HR firm will understand and reflect your company culture, values, and goals in their tasks.

Nevertheless, these fears can be well-managed and minimized by setting clear expectations and maintaining regular communication with your HR outsourcing provider. Finding an outsourcing provider that works directly with you and your business is in your best interest.

5. How can you outsource your HR department correctly?

There's a right and a wrong way to outsource your HR department, and the wrong move could spell disaster. But with the following tips, you'll ensure that your investment remains sound.

Tip 1: Decide if you need an HR expert

Not every business needs to outsource its HR needs, but they typically need to after you've reached your 10th to 15th hire. This is because most entrepreneurs should focus on other things at this point, and they're unlikely to be able to keep up with their employees' needs.

Still not convinced? Then ask yourself the following questions: 

  • Is your company experiencing a high turnover rate? Do you have an effective recruiting, interviewing, candidate tracking, and onboarding process if and when you need to hire?
  • Do you have a hard time attracting and maintaining top talent? Do you have strong HR policies and an employee handbook that covers in-office and remote employees?
  • Are supervisors able to handle performance reviews and discipline other employees? Is the culture where it needs to be, and if not, what can you do to get there?

Little things like payroll errors, poor technology, and decreased engagement can put your company at risk. So before you decide to scale, you'll need to get an HR team on board. 

Tip 2: Identify what you're outsourcing

Whether it's payroll, recruitment, training, development, or benefits administration, it's essential to be clear and specific about your needs. This clarity will help you select the right outsourcing company and allow seamless transitions between your team and new partners. 

To do this properly, ask yourself what your needs and growth goals are and the pain points found in your current system. For example, if you want to hire new programmers, you'll need an outsourcing team to boost your recruitment, onboarding, and training.

You may also need improved benefits allocation and engagement strategies.

Tip 3: Identify a plan to move each need

Consider the best way to transition your HR responsibilities without disrupting current operations or employee morale. This might involve phased transitions, pilot programs for new procedures, or detailed communication plans to keep all parties informed and engaged. 

Keep in mind that PEOs will partner with you to make the transition as smooth as possible, whereas non-PEOs will ask you to do this step on your own. The "do-it-yourself" transition may be more expensive than it's worth, so consider hiring a PEO if you have the available funds.

Tip 4: Get to know your notice requirements

Many service contracts have specific requirements regarding notification periods for changes or termination, and it's essential to be aware of these in advance. Typically, these notice periods are 30 days, but always read and understand the terms of your outsourcing contract thoroughly. 

Knowing your notice requirements will ensure a smoother transition and avoid any disruptions or penalties if you decide to change providers or bring the outsourced functions back in-house. 

Tip 5: Ensure your timing is optimal

It's vital to ensure the switchover doesn't coincide with crucial business periods where potential disruptions could be detrimental. For example, changing payroll systems right at the year-end might not be the best idea due to tax implications or the possibility of an audit. 

Similarly, transitioning recruitment functions in the middle of a massive hiring push might cause considerable delays or confusion, affecting your ability to maintain talent. Planning optimal timing can help reduce stress and ensure continuity and efficiency throughout the transition process.

In Conclusion

As you navigate the journey toward HR outsourcing, remember that each organization is unique. What works for one may not work for another, and a poor implementation strategy could be costly. Be open and adaptable, but focus on your specific needs and goals!

Optimally serve your employees' interests, who are your company's heart. If you decide that HR outsourcing suits your organization, use the tips to enhance your success. 

Sam Makad is a business consultant. He helps small & medium enterprises to grow their businesses and overall ROI. You can follow Sam on Twitter, Facebook, and Linkedin.

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