The Pros and Cons of Outsourcing HR

July 07, 2019

A signpost indicating a choice between outsourcing HR or staying in-house.
Kip Soteres

Wondering about the pros and cons of outsourcing human resources? HR outsourcing decisions depend on company size and location(s), workforce demographics, industry, public or private ownership model and other factors.

Questions to Consider

Determining the pros and cons of outsourcing HR functions starts with assessing each of your key HR functions, including recruiting, training, benefits, pay, employee relations and more. For each of these functions, determining the value of HR outsourcing depends on your answer to a series of questions:

  • Are the solutions to challenges in this space hard to standardize?
  • Is success in this function dependent on specialized expertise and knowledge?
  • Does this function provide differentiated value to the organization?
  • Are there unique cultural factors that complicate the success of this function?

To the extent that you can answer yes, you may find it harder to use HR outsourcing in cost-effective ways that continue to meet the baseline needs of your organization. In contrast, answering yes to the next set questions can indicate opportunities for HR outsourcing:

  • Would an increased scale or pools of knowledge experts greatly improve the performance of this function?
  • Would outsourcing create a buffer that could protect the organization from a degree of liability?
  • All other things being equal, are there cost savings year over year associated with outsourcing?

So what are some of the pros and cons of outsourcing HR functions?

Pros of Outsourcing

Outsourcing organizations usually have substantial resources to deal with complicated issues. For example, healthcare offerings and wellness incentives are subject to annual changes. A single court finding can have serious implications for next year's benefits. Outsourced HR expertise is focused on staying on top of issues like these.

Outsourcing can also offer substantial cost savings, especially when it comes to standardized needs. You spend less on salaries and reduced costs for benefits. If your organization is growing rapidly or acquires frequently, it is often easier for outsourced HR functions to keep up with those changes and their associated challenges.

If you lose your outsourced HR point of contact, the company will have relatively deep rosters of experienced experts who can fulfill the baseline requirements of the function. They can usually ramp up their next expert almost immediately.

Outsourced HR functions often take on the liability for errors related to HR administrative functions, which can get expensive depending on changing employment laws and various regulations.

When organizations outsource rote, manual or standardized processes, they free in-house HR experts to focus on business challenges. Research indicates that business leaders — including HR leaders — spend only about 30 percent of their time on business functions. The rest of their time is spent on administrative tasks that do not contribute to the effectiveness of the business.

Cons of Outsourcing

Outsourced functions are likely to feel removed from the business. They are not subject to the same performance or bonus structure and may therefore be less motivated to maintain a high level of quality. Poor performance from outsourced functions may nonetheless damage the brand of the in-house HR team.

Employees may have formed strong relationships with in-house HR professionals. When the roles of those HR employees change, it can trigger resistance and resentment. This can be especially true at companies with long-tenured employees. Combine that with the potential for decreased quality, and HR outsourcing can quickly upset and distract your workforce.

Many business cultures depend on employees getting a deeper sense of how things really get done. Understanding those unspoken, unwritten rules is often one key element of onboarding, and it's something that outsourced resources almost never get exposed to. If getting work done at your organization depends heavily on those unspoken rules and political sensitivities, you will need a focused strategy to support any outsourcing you plan to introduce.

Outsourcing can lead to workforce reductions and early retirements that can remove institutional knowledge from your workforce. Outsourced costs can start to accumulate rapidly as you become more dependent on the resource and lose the employees who used to do the work for you.

Weighing Your Options

Weighing the pros and cons of outsourcing HR functions is a serious endeavor. The potential cost savings and scalability often make HR outsourcing attractive. Make sure you are evaluating short- and long-term consequences of these decisions. Build in clear metrics to define and sustain the level of quality, and establish a worst-case contingency plan to ensure you can maintain core HR functions if the outsourcing does not work out for any reason

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