Outsourcing HR Functions: Everything You Need to Know

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Unlike a couple of decades ago, the employee-employer relationship has evolved into a two-way street. Where once all the expectations were put forth by the employer, times have changed. Today, there is cutthroat competition among big and small businesses to attract top talent; brands are racing to exceed the expectations of their employees.

From a range of benefits to providing a revolutionized work environment, brands are fast realizing the importance of keeping their employees happy. As a result of this evolution, the role of human resources is becoming increasingly complex and, in many cases, time-consuming. Even despite this, many large organizations choose to operate their HR functions in-house.

However, smaller businesses don’t have the luxury of time or money to hire a team of HR experts. As a result, many turn to outsource in order to remain competitive. Not surprisingly, this trend has proven itself beneficial to small businesses. Consider these stats:

Businesses that partner with a professional employer organization grow at a rate of 7%-9% annually. At the same time, they are reducing their employee turnover by 12%-14%.
Businesses that use a professional employer organization drive a 27% ROI on their investment. This is solely based on the savings made by outsourcing.

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Outsourcing HR functions:

While HR software like CakeHR takes care of a number of time-consuming HR functions, such as time tracking, shift scheduling, and attendance (among many others), there are still areas that require the human touch.

Outsourcing these functions may seem like the right choice. But, business decisions are rarely black and white. PEOs are great for smaller businesses. As your business grows, you will want control of some of the core HR functions that have direct influence over your businesses’ growth.

In other words, just because HR outsourcing has worked for others, there is no guarantee that your business will benefit from the same. Before you dive into researching an HR outsourcing partner, require due diligence.

Consider these pros and cons of HR outsourcing:

Pros of outsourcing HR functions:

As mentioned earlier, there are some great benefits to outsourcing HR functions. Some of these are:

Cost-efficiency has to be one of the foremost advantages of outsourcing any function of the business. HR is no exception. Not having to hire (and retain) a specialized team of HR experts can translate into significant savings, especially for smaller businesses.
Access to expertise that an organization may lack within their team is another major advantage of outsourcing HR. From legal expertise to efficient and accurate payroll processing, HR outsourcing can take the most painstaking and crucial tasks of the HR process off your plate.
Access to state-of-the-art HR technology is a similar benefit to outsourcing HR functions.
Better allocation of in-house resources is another noteworthy advantage of outsourcing certain HR functions. After all, you don’t want your expensive and highly qualified HR resources working on preparing sexual harassment training courses when there are corporate training companies that can get the task done faster and at a lower cost.
Outsourcing allows for a more efficient resolution of conflicts. The reason is that these in-office conflicts are taken to an outside third party that can resolve the conflict without any sort of bias.

While these benefits of outsourcing hold significant weight, you need to make other considerations.

Cons of outsourcing HR functions:

Outsourcing functions that deal with the lives of your employees to a third-party is bound to have some negative repercussions. Most common ones are:

Disruption in fostering the corporate culture is one obvious disadvantage of outsourcing HR functions. HR outsourcing companies deal with payroll, employee benefits, conflict resolution, and talent acquisition processes for a number of businesses. In most cases, they have their own set procedures to carry out these tasks. Their manner of tackling situations relevant to these tasks can be drastically different from how your organization functions.
Communication gaps are more of an unexpected advantage of outsourcing HR functions. Most businesses expect speedy delivery of tasks and results from their outsourcing partners. However, many forget to factor in the time to send out a communication to their outsourcing partner and the time taken to get a reply. This poses the most pressing problems in the case of conflict resolution. If you have an in-house HR department, an employee can simply walk up to them to discuss their problems and work on sorting them out. However, in the case of an outsourcing partner, it is logical to expect some delay. This delay can cause problems to escalate.
Loss of control is another known disadvantage of outsourcing. Not getting involved in decisions and processes might not be a problem with the right partner. But, it does cause some sort of discomfort to many business owners.
Maintaining data integrity also becomes a challenge in the case of HR outsourcing. While most outsourcing agreements have a confidentiality clause, human beings are unpredictable, and giving access to your employee’s protected data can still potentially backfire.

Knowing these potential pitfalls of outsourcing HR functions in mind, it becomes clear that outsourcing the entirety of your HR department is not a good idea.

Most commonly outsourced HR functions:

Even if you ignore these disadvantages we just discussed, outsourcing an entire department has other repercussions. For starters, outsourcing the department will probably mean that many current resources will have to be laid off. This can potentially create a negative environment in your office, with employees from different departments wondering if their job is also at risk.

Keeping this in mind, let’s talk about the most commonly outsourced HR functions:

Mass Hiring: Hiring the right talent is a painstaking process involving several steps. Doing it on a larger scale can turn out to be an even bigger administrative nightmare, and leave your resources with no time to focus on strategic tasks.
Payroll Processing is another HR function that is outsourced very commonly, even among larger organizations that employ a number of HR resources. The reason is that payroll is a time-consuming task and at the same time, errors in payroll processing can potentially be very expensive for any business. Thankfully, with the upcoming trends in the payroll industry, such problems are expected to eventually vanish.
Benefits Administration is another time-consuming task that is critical for smooth functioning multiple departments within an organization.

Other areas of HR that are commonly outsourced at temporary staffing and background screening.

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HR functions that most businesses keep in-house:

Now let’s talk about the most HR functions those are commonly kept in-house:

Talent Development tends to be an in-house initiative for most organizations, regardless of their size. The reason behind this is quite straightforward, business owners invest in their employees and help them develop skills that are most relevant to the growth of their organization. While most of these skills have universal applications, they are developed keeping the brand’s interests and the company’s processes in mind. Hence, to make sure this kind of alignment is achieved, it is important that the training is delivered by someone that has in-depth knowledge of the organizational goals and processes.
HR Strategy is another aspect of the HR department that is mostly kept in-house, and the reason is obvious. Long-term and short-term HR strategies need to be absolutely aligned with business goals and hence, HR strategy can only work efficiently when it is done in-house.
Change management is often partially outsourced but the ultimate implementation is confined within the organization. Most businesses that outsource this aspect of HR only hire consultants to develop a change management strategy. The final implementation of the strategy, however, requires consistent interaction of HR managers and managers in operating departments. In order to facilitate smooth communication, change management is usually conducted with the help of in-house resources.
HR Advisory functions are also mostly kept in-house, owing to the need for quick and smooth communication. Moreover, in order to execute advisory duties with efficiency, the resource needs to have an in-depth understanding of the organizational goals and how the HR system will facilitate the achievement of these goals. This level of understanding is rarely found in external partners.

Understand which HR functions are “critical” for your organization:

Now that we know the pros and cons of outsourcing HR functions, and about the functions that are most commonly outsourced, it must have become clear that the HR functions that are actually outsourced vary among different organizations.

With that said, there are a few common steps that organizations must take, in order to ensure a smooth outsourcing partnership that brings about a positive ROI.

As mentioned earlier, these vary from organization to organization. You need to consider the HR functions that deal with sensitive data of your employees, along with functions that will influence the day-to-day operations at your workplace.

Think about your company’s short-term and long-term goals. Think about how HR will help you achieve these goals. This way, you will know which of the functions you need to have under your direct control in order to drive strategic results.

Develop a list of HR functions you want to outsource:

Once you do the previous step correctly, this step is almost automatically done. All you need to do now is to list out important HR functions that were not listed in the previous step.

Don’t hesitate to edit the previous list when you build the “functions to outsource” list. Remember, many businesses outsource critical business functions such as recruitment and HR compliance. The decision to outsource doesn’t just depend on the considerations of cost and control. Consider the expertise you have on your team. Anything your in-house team cannot handle is a potential item of the “functions to outsource” list.

Find technology solutions:

Before you research on outsourcing partnerships, pause and look for technological solutions that can solve at least some of your outsourcing needs. For instance, in the case of smaller organizations, payroll processing can be done efficiently with the help of a software.

Similarly, CakeHR offers features like time tracking, attendance management, and shift scheduling. All of these are critical HR tasks that require substantial time and resources.

Apart from being more pocket friendly than an outsourcing partner, depending on technology also reduces the margin of human error.

Dive deep into researching outsourcing partners:

Technology solutions cannot possibly take care of all your HR outsourcing needs. This is where HR outsourcing partners come in.

Every organization has its own understanding of the compatibility criteria for outsourcing partners. These criteria hold crucial importance in the case of HR outsourcing.

The reason for this is that it is not advisable to switch between HR outsourcing companies often. In fact, when searching for an outsourcing partner, your objective should be to find one that you can work with for years to come.

Understand that HR deals with your employees. Over time, they will get acquainted with the representatives of your outsourcing partner and become comfortable with them. This comfort is crucial for the HR department in order to carry out its functions smoothly.

Another reason for finding a dependable outsourcing partner and fostering a long-term relationship with them is that doing so will help them develop an understanding of your business, and how you expect the HR functions to facilitate growth. Frequently switching outsourcing vendors will only delay the inputs you need from an expert HR team to fuel your company’s growth.

Build a team of HR coordinators:

Outsourcing is sure going to take a significant load off your shoulders. But, there is still a need for some level of supervision. You need an in-house resource that can coordinate with the outsourcing vendor and make sure there are no communication gaps.

In case you have decided to outsource only certain functions, it is time to decide which resources of your existing HR team will be responsible for smooth and confusion-free coordination with your outsourcing partners.

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Conclusion

Outsourcing is never an easy decision for any business. It requires due-time and diligence in order to be viable. With that said, in the case of HR, the right outsourcing strategy can reduce your workload while giving you a positive ROI. It also can actually accelerate the growth of your business.

This article is written by Costa Lamprou. Costa is the head of PPC at The Elearning Industry Network. With experience in everything ranging from product development and sales to training and PPC, Costa helps eLearning businesses reach their full lead gen potential. When he isn’t helping clients succeed, Costa likes to expand his marketing horizons with the help of eLearning courses.