HR Outsourcing Advantages and Disadvantages

HR Outsourcing Advantages and Disadvantages

What are the advantages and disadvantages of outsourcing HR functions? There are certainly positives and negatives to consider before HR outsourcing. On the positive side, HR outsourcing helps a growing business address blind spots and areas of potential with greater cost-efficiency. On the negative, that effort can take a lot of communication, and might leave the business with different blind spots and growing pains down the road without the right partner.

In this piece, we’ll examine the overall benefits and risks of outsourcing, before moving on to the specific rewards, challenges, and business impacts of HR outsourcing.

Outsourcing Benefits and Risks

Outsourcing is one way that businesses of all sizes and specialties reduce complexity and gain expertise in their operations. More than one-third of small businesses surveyed in 2019 outsourced at least one business process. The most common reasons for outsourcing were to increase efficiency and receive assistance from an expert. There are three main ways these improvements in efficiency and expertise manifest for businesses:

What are 3 Advantages of Outsourcing?

Specialty Functions are Outsourced: When operations get more complex for a business, there are costs to managing that complexity. One advantage of outsourcing is that businesses can get specialty support for less cost than making a hire and internalizing the efforts. Training existing employees in new processes also takes time and money, especially when many new skills play a part in vital human resources roles like compliance. When established experts can take on tasks like documentation, recordkeeping, or planning employee engagement and training programs, those operations can be carried out with more efficiency and effectiveness, amplifying the impact of the investment and reducing the cost vs using in-house employees.

Access to Cutting Edge Skills and Tech: An additional advantage of outsourcing is that businesses can benefit from the most cutting-edge tech solutions without concerns about training, IT maintenance, or security. Outsourcing means gaining a partner to help carry out business functions better, including through the potential of technology and emerging best practices. Working with an outsourced service provider means the opportunity to have the best tools, and expertise to use those tools,  driving decisions and processes.

Business Focus on Core Competency: A final advantage of outsourcing is that it allows businesses to grow more complex without taking on an operational burden. This allows the business to focus its investment and attention on growing in line with its own core competency, while feeling confident their outsourcing partner is doing the same. That’s not to say some elements of operations won’t stay internal, but just that a good outsourcing partner can fill in the gaps where businesses need support during growth.

What are 3 Risks of Outsourcing?

Loss of Internal Business Knowledge: When functions like compliance, payroll, and employee recordkeeping are transferred out-of-house, that means a knowledge of those processes may not be maintained at the business. This lack of internal knowledge can complicate bringing those functions back in-house at certain stages of business growth. It’s important to work with an outsourced business services provider that will collaborate and prioritize transparency so essential information can still be accessed at any time. 

Internal Employee Frustration: Partnering with the wrong outsourcing firm could  lead to frustration for internal employees. For example, working with an outside third party that offshores a lot of work can make it very difficult for internal employees to effectively communicate with the firm. It’s ideal to partner with a vendor that can tailor their solutions and approach to the needs of each business, allowing the company to  keep some functions in-house if desired. It’s also important to work with a vendor whose employees are excited to show up for work every day and eager to drive outcomes for clients and are adept at communicating deadlines and deliverables. 

Data Security and Information Management: Employee benefit and compensation data is some of the most sensitive data a business stores. An outsourced accounting partner that uses the latest technology and has best practices for data management can actually improve the safety of your data. Unfortunately, the reverse is also true. It’s not just important to assess the cybersecurity of the outsourced service provider itself, but also the third-party software and vendors that the new partner works with and may share data with.  

Download our human resources outsourcing PDF to review these advantages and risks.

Pros and Cons of Outsourcing HR Functions   

Outsourcing human resources functions has unique advantages for small and mid-sized businesses. With HR outsourcing, owners and leaders are free to focus on their expertise. But these benefits do come with implications for the direction of the business and the daily life of its employees. From payroll management to employee hiring and onboarding, HR functions have a close and real impact on the safety, security, and growth of a business. Let’s dig deeper into what are some advantages and disadvantages of outsourcing HR activities.

Advantages of Outsourcing HR Functions

Outsourcing Day-to-Day HR Administration

Day-to-day human resources functions include recordkeeping and compliance like I-9 postings, labor law compliance, employee handbooks and file maintenance, and policy creation and review. Outsourcing these duties often only requires a few hours a month of support from an expert but adds up to an 18% savings of both time and money for a business. This exponential benefit is achieved through efficiencies in payroll administration, benefits management, time clock and attendance tracking, and more.

Outsourcing Compensation and Benefits Benchmarking

One basic outsourced HR service for small and mid-sized businesses is the process of salary and benefits benchmarking. This analysis will reveal how the compensation and growth opportunities offered by a business are driving both short-term growth and long-term retention goals. An HR outsourcing partner should be able to consult with leadership and facilitate conversations with employees about the goals and changes that can keep the business competitive. An Outsourced HR firm can also help benchmark compensation against competitors so the business leaders can make informed compensation decisions and remain competitive for talent.

Outsourcing Recruitment, Hiring, and Onboarding

Growing companies often need help in the recruitment, hiring, and onboarding of employees. Outsourced HR handles strategy and execution around general recruitment efforts and job postings. In addition, outsourced HR can help craft an onboarding strategy that helps new employees acclimate to company culture and become as productive as possible as quickly as possible. 

Outsourcing Performance Management and Employee Engagement

The ideal approaches to giving and receiving feedback and recognition are distinct to each organization. The great benefit of an outsourced employee engagement and/or performance management consultant is gaining a third-party and expert perspective on custom solutions for each team. A thoughtful approach to gathering, leveraging, and sharing insights can be a transformative differentiator when it comes to employee satisfaction and a culture that sustains growth and success.

Cons of Human Resource Outsourcing

Need to Collaborate and Communicate

There is a lot of information to share with a new HR outsourcing partner, and there are boundaries to negotiate as well.  As employees adapt to the change and learn to work effectively, it can be very beneficial to work with a an HR outsourcing provider that has effective and transparent communication. 

Potential Loss of Control and Insight

Some Outsourced HR companies send your work overseas. This can become complicated when a business loses access to certain information and insights in a timely manner. For example, even when administrative functions are outsourced, an internal manager should still be able to view employee PTO or overtime and answer questions. Human resources outsourcing works best when the vendor takes the time to learn how information is being leveraged already at the business. Then, they can find ways to support and improve processes simultaneously.

Long-Term or Limiting Commitments

Lastly, a concern of any outsourcing agreement is the terms for exiting the contract if the arrangement just isn’t working. Every business wants the ability  to be flexible  and seek a new solution to their needs if the business needs change. In addition to how the contract can be terminated, it’s important to understand and define what will happen to essential information that has been shared with the vendor. Would the business still own and have access to certain software licenses? How would ownership of information be transferred? The best HR service providers bring a contract to the table that is easy to understand and doesn’t potentially limit the future of the business.

Download our human resources outsourcing PPT to share the pros and cons of HR outsourcing with others in your organization.

Business Impact of Outsourcing HR Functions

Human resources outsourcing is able to  impact a business through initiatives that focus on finding, retaining, and training top talent. Outsourced HR will typically  greatly increase the competence of HR.

 Just because HR services are essential to the future of a business doesn’t mean they must be handled internally. Most small to midsize businesses do not need to hire HR leadership or supplemental employees.  Instead, a business owner can use HR services outsourcing to access top-tier expertise  and talent required to support their business as it grows. This allows the business to advance its own core competencies thanks to the time and resource-saving effects of HR outsourcing. At the same time, the business and employees gain new benefits from the strengths of outsourced human resources experts. Overall, the right HR outsourcing strategy means a dual positive business impact.

Another impact of outsourcing HR functions is reduction in the risk of lawsuits and legal action due to noncompliance with employment law. One 2017 survey by the ADP Research Institute found that 40% of midsized businesses had experienced fines, penalties, or lawsuits for being out of compliance with regulations in the last 12 months. Outsourcing HR functions protects a business from these risks and may even include the vendor in the liability for compliance being maintained.

Does Outsourcing Affect HR Planning?

It depends. Communication and transparency are critical to a successful outsourced HR relationship. If business leaders and employees can’t gain timely access to HR information, outsourced HR can negatively impact HR planning and cause frustration amongst employees and slow down decision making.

On the other hand, a good HR outsourcing partner that allows the company to access their HR information in real time with the latest tools can radically speed up decision making and relieve frustration amongst employees. In addition, some companies can provide strategic HR consulting that will aid business leaders as they make HR planning decisions. This can be especially powerful if the outsourced HR business that is providing the strategic planning advice is that same company that is helping with the basic HR processes of the business. 

Milestone: HR Outsourcing with Meaning

Outsourcing human resources functions and performance isn’t a decision to be taken lightly. But with the right vendor, it can be a decision a business makes with confidence. At Milestone, our outsourced HR services are tailored to provide the foundation of strong organizational culture and next-level employee experience. Because we don’t work on long-term contracts, we show up each day prepared to keep winning a company’s business through reliable service and refreshingly forward strategies. We’re a team created by entrepreneurs, for entrepreneurs, committed to helping each client succeed in their journey by continuing to love the work along the way. Unleashing the power of the back office is sometimes as simple as asking for help and seeing what there is to learn. If you are looking to partner with an HR outsourced services provider that truly cares about and wants to improve the future of your business, call on Milestone. Because every business deserves access to strategy and expertise.