Maximizing Efficiency with HR Outsourcing: An Overview

Human resources can be a tricky aspect of operations for many businesses today. HR has become more complicated and regulated over the last few decades, causing companies to reassess how they approach this critical business area. One of the biggest outcomes has been companies moving to an HR outsourcing strategy. This is one of many areas that companies may outsource to external providers, instead of handling it internally. 

So what exactly is HR outsourcing, and how do you know when it’s right for you? We’ll be covering this today to help you decide for your organization, including the following: 

• Define outsourcing and HR outsourcing
• Some common examples of HR outsourcing
• The benefits and disadvantages of HR outsourcing
• How to decide if HR outsourcing is right for you

First let’s define outsourcing in its general sense, to give us context on the more specific type of outsourcing we’ll be covering today. 

Outsourcing is when a company or organization subcontracts part of their operations or value-chain to external companies who specialize in those functions, with an arrangement to perform these specific tasks on behalf of (and usually under the name of) the first company. Companies often take this route when their current internal staff feels stretched thin managing critical areas of the business, and decide they could use some additional support. 

Some examples of commonly outsourced functions include IT, legal, accounting, customer support, manufacturing, and–as we’ll be discussing today–human resources. These outsourcing services are specifically designed to help streamline business functions, reduce expenses, and help companies meet their operational goals.

It can be a tough call to decide whether to insource or outsource each of these business areas. Let’s dive into this debate for human resources outsourcing, including what it is, and when it can be beneficial or detrimental to a company’s operations. 

Now that we understand the purpose of outsourcing in general, let’s talk about human resource outsourcing (also known as HR outsourcing or HRO). HR outsourcing can be an effective strategy for organizations that may lack the necessary resources to properly administer all or part of their HR operations.

Similar to general outsourcing, HR outsourcing occurs when such an organization decides to hire an external company or contractor to take on the responsibility of certain HR functions and perform them on behalf of said organization. 

This could mean the organization’s entire HR department, or only some of the HR functions and tasks that prove to be the most time-consuming for the organization’s resources. Outsourcing these can save the organization significant time and money, while allowing the internal staff to focus on other areas where they can be more effective and strategic.

It’s also important to understand what outsourcing is not. Despite its many benefits, HR outsourcing is still an often misunderstood business practice that can be incorrectly equated with “offshoring.” 

Offshoring, by comparison, is actually when a company sends some of their jobs overseas and eliminates internal staff as a result. This is different from HR outsourcing, wherein a company hires an external vendor to provide additional HR services that support their existing internal staff without reducing said internal staff. It’s important to understand this distinction when determining what type of external HR support your organization needs. 

As we mentioned above, HR outsourcing can cover a broad spectrum of HR services, from the entire HR department to only specific HR functions. These can range from day-to-day administrative HR tasks to more long-term, strategic initiatives. 

There are a wide variety of external companies that can provide any combination of HR outsourcing services that an organization may need help with. So let’s go over some of the most common functions within HR that companies choose to outsource. 

In the lifecycle of an organization’s human resources, the first–and often most time-consuming–step is recruiting. This can be a very helpful part of HR to outsource, allowing your external partner to fully focus on building a pipeline of experienced talent and helping you hire team members who will provide long-term benefits for your organization. A recruiting services provider will proactively manage any or all aspects of your hiring process including actively sourcing candidates, posting job openings, tracking applicants, vetting, interviewing, and hiring.

These external recruiting providers often boast a more specialized team, as well as access to more advanced recruiting methods and technologies, which can streamline your organization’s recruitment process more efficiently and cost-effectively. Outsourcing your recruiting also frees up your internal resources to focus on other aspects of the employee lifecycle after recruiting is complete, such as onboarding, training, and employee relations. 

Another common HR function that companies may outsource is their payroll services. Depending on the size of the organization, managing the business’ payroll tasks can be a full-time job. This could easily take up too much of an internal HR professional’s day, minimizing their ability to manage all the other aspects of HR on their plate and possibly overwhelming them with too many varying tasks to juggle at once. 

Outsourcing payroll allows your internal HR staff to delegate these payroll tasks to a more efficient and focused external support team that can manage all the moving parts of payroll, including time-tracking, payroll cycles, benefits management and deductions, tax filing, reporting, and more. Your internal HR staff can then be free to focus on other HR tasks, including more strategic business strategy. 

At the other end of the employee lifecycle, many companies outsource HR functions accompanying the termination of employees, whether due to a layoff, furlough, or reduction in force (RIF) event. 

When this happens, one of the services frequently offered to outgoing employees is outplacement services. This is usually a good idea to outsource, instead of offering outplacement services in-house, given how widely outplacement services and their costs can vary depending on what a company is looking for. 

Outsourcing your organization’s outplacement services to the right external firm can help you offer outplacement support that’s tailored to your specific situation and takes advantage of numerous benefits–such as legal protection, improved morale, and enhanced corporate image–at a more cost-effective price than if you managed this in-house. Once again, this also allows your internal HR staff to focus more on workplace planning and other strategic business needs.

In addition to outplacement services, another part of the employee termination process that companies may decide to outsource is offboarding and the handling of exit interviews. Given how valuable–and yet time-consuming–conducting exit interviews can be, this is an important task to ensure you are handling as thoroughly and efficiently as possible. 

Outsourcing these exit interviews to a company specializing in this topic can help ease the workload for your internal HR staff and make sure the offboarding process goes as smoothly as possible for your outgoing employees. 

We mentioned earlier how HR regulations and processes have dramatically changed, especially over the last few decades. As HR laws have grown more and more complex, organizations have been put under greater pressure to stay compliant. This is another area where HR outsourcing can be of assistance.

Most HR outsourcing companies offer their clients access to risk management and compliance experts. These individuals help their clients meet all their HR compliance requirements, and plan for future changes that might have to be made as laws and regulations change. Being compliant is a must for companies of all sizes, and is crucial to business growth.

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Not only does outsourcing allow businesses to effectively manage their HR needs, but it also provides leaders the opportunity to focus all their effort and attention on growing the business. This is why HR outsourcing is particularly popular amongst small businesses. Though, as you’ll see shortly, small businesses aren’t the only ones who can benefit from outsourcing parts of their human resources services. 

Let’s look more closely at HR outsourcing and how it can benefit a business. 

Running an HR department is an expensive undertaking, especially for small and mid-sized companies. This is why outsourcing is a common strategy for these companies and their leaders. Believe it or not, outsourcing can save you money on your HR costs. 

You can choose to outsource all of your human resources to a more cost-effective provider, thus saving on the cost of that entire department all at once. Or you can save costs on the specific HR services you need help with by outsourcing only those functions to more cost-effective providers, which will also save your internal HR staff on their time spent resolving issues and answering those HR-related employee questions. As a result, your internal staff will have more time to focus on strategic goals such as employee retention and growing your business.

These benefits also extend to savings on compliance fees and penalties. Companies can help reduce their potential risk for these HR costs by outsourcing their HR compliance and regulations to an external company that can provide dedicated support with employment laws and regulations, workplace safety, payroll, tax, and more.

This is one of the main reasons why many companies choose to outsource their HR services as opposed to keeping them in-house. It also allows smaller companies who intend on growing their business to continue saving more money as they become larger. 

In addition to saving costs for a company’s existing internal HR team, HR outsourcing can also help them save considerable costs by avoiding the need to hire additional HR personnel for the functions they’ve chosen to outsource instead. 

A specialized external HR provider can often offer more affordable costs for the same services, rather than hiring more internal staff who would likely also require additional onboarding and training costs. 

As smaller companies grow, they may eventually decide to move those functions in-house as it becomes financially smart to do so. But the option to outsource some of the more expensive or personnel-heavy HR functions can be extremely valuable for smaller companies who may not have as many HR staff in-house to handle everything.

Many smaller employers struggle to offer their current and prospective employees competitive benefits. This is especially true with rising healthcare costs in the United States. One of the biggest and perhaps most important benefits of HR outsourcing is that it gives small and mid-sized businesses access to large group benefits.

The benefits this provides to smaller businesses cannot be understated. Competitive recruiting is routinely cited as a major concern for SMBs, so the ability to offer the same quality benefits as larger companies can greatly aid their talent acquisition. In addition, giving current employees better benefits helps to build happiness and engagement, which can greatly reduce turnover and improve long-term company growth. 

A common misconception is that only small and mid-sized businesses outsource their HR. While this may have been true years ago, today companies of all sizes choose outsourcing as part of their business strategy. Even larger organizations find many benefits to outsourcing some of their HR needs, if not all of them. This trend is only continuing to grow as the landscape of the HR industry becomes more regulated and uncertain. 

Organizations of every size, from small businesses to Fortune 500 companies, can find value in the myriad of benefits that HR outsourcing provides. This is true whether they choose to outsource their entire HR department, as is more common with smaller businesses, or outsource only certain HR functions and tasks, as larger companies are often more inclined to do. 

While HR outsourcing may often be the smarter strategy, there are certain situations in which it might be better to keep HR services in-house. There are always certain risks that come with outsourcing any business functions to an external provider. 

Some of the possible HR outsourcing problems could include having less hands-on control over the outsourced HR tasks and the team performing them, less sense of internal ownership and customization of these tasks, and possible communication issues as a result. If not kept in check, there’s a risk of these potential problems escalating to a breakdown in productivity, communication, and/or trust within your organization. 

What’s more, there’s always a chance that outsourcing your chosen HR services could end up costing you more instead of less. That’s why it is always good to carefully evaluate your options and weigh all the pros and cons before you make a decision. 

As we’ve explained here, there are many benefits and potential disadvantages to outsourcing all or part of your organization’s human resources. Ultimately, the decision about whether the pros outweigh the cons–or vice versa–comes down to you and your specific needs. 

It’s important that you have a good method for evaluating your outsourcing criteria, doing your due diligence into any potential external providers, and training your staff on what your HR outsourcing strategy might look like and how they can help most effectively implement it for your organization.

Then, if and when you’re ready to take the plunge and hire an outside company for any of your HR outsourcing needs, make sure you have first consulted with your legal counsel to put together a clear and thorough contract that will protect your organization and ensure the most productive outcome for all involved.

Companies today, especially small and mid-sized businesses, face many human resources challenges. HR outsourcing might not be able to address every issue and isn’t always the right choice for all situations. However, organizations that do find it to be a good fit can achieve growth and success with the right HR outsourcing partnership.

Having a better understanding of HR outsourcing and the companies that offer these services–such as professional employer organizations (PEOs)–will help business leaders determine whether it is a viable option for their business. You never know when HR outsourcing could be the perfect missing piece of the puzzle for you

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Rebecca Ahn

Rebecca is a writer, editor, and business consultant with over 10 years of experience launching, managing, and coaching small to midsize companies on their business, marketing, and HR operations. She is a passionate people advocate who believes in building strong people, teams, and companies with empowering culture, content, and communication that facilitates meaningful results at every level and touchpoint. In her spare time, Rebecca is an avid traveler and nomad who also enjoys writing about travel safety and savvy. Learn more on her LinkedIn page.