HR outsourcing: Everything you need to know

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Curious about HR outsourcing?

Your human resources department plays an essential role in your company’s success, and there are two options to manage your organization’s HR function. You could either hire in-house HR staff for the job or outsource it to an external entity. 

While the former might be the go-to for most business owners, HR outsourcing can also offer a competitive advantage in some cases. 

So what is HR outsourcing? 

And more importantly, should you outsource your HR tasks?

In this article, we’ll answer these questions and also cover everything you need to know about HR outsourcing, including its benefits and limitations and the best HRO companies in 2021.

This article contains:

(Click on the links to jump to a specific section)

• What Is HR Outsourcing?
• Which HR Functions Can be Outsourced?
• 5 Key Benefits Of HR Outsourcing
• 3 Main Drawbacks Of HR Outsourcing
• When Should You Go For HR Outsourcing?
• Top 3 HRO Companies of 2021

Let’s dive right in.

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What is HR outsourcing?

In human resource outsourcing or HRO, you transfer the responsibilities of specific HR tasks to an external service provider. These HR functions or tasks can include any activity that deals with an employee, such as recruitment, managing payroll or even offboarding employees.

Who can you outsource your HR tasks to?

In HRO, you can outsource your human resource activities to:

• Independent HR consultants: they’re experts who can help you with recruitment, HR policies and other decision-making services. 
• HR consulting agencies: usually hired on a contractual basis; the function of a full-service HR outsourcing company is similar to that of an HR consultant. However, HR agencies provide cost-effective, standardized services while consultants provide tailored HR solutions (best for small companies).

Who can outsource their HR functions?

Generally, SMBs (10–500 employees) outsource most of their HR functions to an HR consulting firm. Most large companies (500+ employees) outsource certain HR functions until their in-house HR team becomes large enough to deal with them on their own.

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Which HR functions can be outsourced?

Human resource management is a complicated process that involves tons of different tasks. And while outsourcing all your HR activities can take a considerable load off your shoulders, you shouldn’t opt for that all-inclusive approach.

Why?

Some HR administration tasks are best done in-house. These tasks usually determine the future of your business and your relationship with your employees.

For example, if you run a small business, your current employees are likely to become your company’s foundation. While outsourcing initial onboarding is viable, it’s best to guide/train them personally. 

This will ensure that every employee is trained hands-on and familiar with the company’s culture.

So which HR tasks are best suited for outsourcing?

Here are four HR activities that are commonly outsourced:

A. Talent acquisition

One of the primary responsibilities of any HR department is to find and hire new talent. But it’s also one of the most time-consuming tasks. 

The hiring process usually involves four steps:

• Posting job descriptions on job boards.
• Screening applications and performing background checks.
• Interviewing shortlisted applicants.
• Introducing the new hires to the company.

As performing all these activities in-house can take the focus away from your core competencies, outsourcing talent acquisition tasks to external service providers makes sense.

B. Performance management

Employee performance management involves regular analysis of your employees’ efficiency and ensuring that their individual goals align with that of the organization. 

It’s an in-depth study of the capabilities, achievements and responsibilities of every employee. It also includes various decision-making tasks like dismissals, appraisals, position changes and bonuses.

As this requires a lot of time-intensive analysis, it’s best to seek the help of external HR professionals for this. However, the business owner or manager needs to take the last call on any decision involving an employee, such as a promotion based on performance.

C. Payroll management

Creating and managing employee payroll is a crucial activity in any business. However, managing payroll gets more tedious as your workforce grows.

Payroll management involves several steps like:

• Determining allowances (like house rent and travel allowances) and salary components (like variable pay and net pay).
• Gathering and verifying extra expenses incurred by the employees, along with the deductions from their salaries.
• Accounting and processing payouts.

Having an in-house payroll team or using an advanced HR software application designed for payroll processing can be quite costly.

That’s why most business owners prefer outsourcing employee payroll management to an external entity like a PEO( Professional Employer Organization). They’ll have the right HR software and HR compliance system to perform payroll services efficiently.

D. Compensation and benefits administration

Compensation is what you pay your employees for their work, while incentives and benefits motivate an employee to work harder. For better employee retention, you need to update both according to the latest industry standards regularly.  

However, to do this, you need to conduct tons of research. For example, you need to check up on the latest market standards of workers’ compensation and then measure that against the output of each employee in your organization.

Outsourcing employee benefit and compensation management can be beneficial as:

• You don’t need these services throughout the year — so employing someone full-time makes no sense.
• It’s time-consuming to manually evaluate every employee and crosscheck with the data of other companies.

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5 key benefits of HR outsourcing

You now must have an idea of which HR tasks you should be outsourcing.

But how can outsourcing those tasks help you with your HR needs?

Here’s how:

1. Cost savings

Let’s start with some statistics here.

The average salary of an HR manager in the US starts around $90,000 plus benefits. You’ll also have to pay for overhead costs and salaries/incentives to other employees in your HR department. 

However, outsourcing human resource services saves you from all these extra costs involved in hiring, training and maintaining your HR staff. 

You just have to pay the service provider a fixed cost (based on the payroll of your company) or on a per-employee per-month (PEPM) basis. Additionally, thanks to pre-decided pricing, you can estimate your business expenses better through human resource outsourcing.

Outsourcing to developing nations with a lower cost of living, like India and the Philippines, can further reduce the cost of an HR service. 

2. Increases efficiency

Several HR tasks, like establishing employee policies and creating a payroll, require special knowledge. Some functions, like screening and recruiting talents, also require years of experience. 

When doing these tasks yourself or assign the duties to an inexperienced in-house HR team, you’re prone to making mistakes. And a single mistake might run you into a lawsuit or a wrong hire, which translates to thousands of dollars in penalties or lost revenue.

Instead, why not outsource your HR tasks to an experienced service provider?

An HR outsourcing firm has highly experienced HR staff to handle these tasks efficiently. They’ll also have advanced HR technology to perform the job. This increases the precision, quality and execution speed of your HR activities.

3. Assures compliance

Continually updating your employment policies and employee benefits to match the industry standards is both tedious and crucial.

You’ve to check compliance with not just federal employment laws but also state and local laws, to avoid fines, penalties and lawsuits. 

For example, in the US, you have to abide by several laws like:

• Anti-discrimination laws
• Minimum wage and work hours laws
• Family and Medical leave laws
• Immigration laws
• Laws on employee benefits
• Safety laws
• Union laws

Ensuring that your daily tasks are within your country’s legal scope is complex and requires hours of research. 

Seeking professional help with HR regulations not only takes the burden off your shoulders but also helps save your business in case of an audit. Moreover, an HR service provider can notify you of deadlines for liabilities(like payroll taxes). 

4. Focus on your core competencies

As your business develops, you should focus on evolving your business strategies, increasing your outreach and maximizing your profits. 

But you’ll find less time to do all these tasks if you have to take care of HR activities, like administrative tasks and employee relations as well. 

Outsourcing your HR activities helps you focus on your core competencies — on what you do best.

This way, by outsourcing your HR functions, you’ll be free to work full-time on growing your business while the outsourcing firm manages your HR tasks. 

5. Get better hires from a larger talent pool

Human resources outsourcing helps you streamline the recruitment process.

HR agencies are usually better connected to professional portals and job search platforms. They’ll also be familiar with the latest market standards regarding compensations, benefits and allowances. 

So the two advantages of outsourcing recruitment activities to an HR firm are:

• You get access to a larger and more qualified pool of talents. This means you choose from a larger selection of experienced individuals whose skills align with the job. 
• You can ensure that the hires aren’t underpaid or overpaid. This not only improves employee retention but also prevents you from paying them more than you should.

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The 3 main drawbacks of HR outsourcing

Sure, there are tons of benefits to HR outsourcing, but what about the drawbacks?

Here are the three prominent drawbacks of HR outsourcing:

1. Increased risks

When outsourcing any activity of your company, including HR tasks, you could be exposed to increased risks. 

Events like server failures, data leaks, and, in the worst case, the dissolution of the HR agency can affect your business. 

Outsourcing also puts your employees’ sensitive information, like their bank account numbers and social security numbers, at risk. In case of any outsourced HR mishap, not only will you suffer losses, but also your company’s image may get tarnished.

As a part of your risk management strategy, you should be outsourcing only to HIPAA-compliant service providers. They should also have a stellar track record and overwhelmingly positive testimonials or reviews.

2. Reduced contact

Human resources outsourcing can drive the wedge between you and your employees by creating a communication gap. The main reason is that the outsourced HR experts won’t be personally available to provide HR support or settle the issues of every employee. 

Additionally, communication through emails, calls or chats may cause a delay in resolving an issue – leading to increased employee dissatisfaction.

3. Limited customizability

While HR experts can help you with new recruits and policies, they can’t personalize the process as well as you can. This happens mostly because they lack the same understanding of your company culture as an in-house HR manager would.

This can limit how company-centric your policies and hiring procedures are. Instead of creating unique company-specific plans, you might be forced to go for more generalized hiring plans.

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When should you go for HR outsourcing?

Are you still not sure if you should go for HR outsourcing services?

Here are two situations when HR outsourcing can be especially beneficial:

1. When HR management feels costly

Remember, HR outsourcing is ideal for SMBs. So if you run a business with less than 500 employees, you’re better off outsourcing HR functions. 

However, outsourcing is more like a temporary solution to your HR challenges. Sooner or later, you’ll have to establish an HR department if you want to have an engaged, efficient workforce.

2. When you don’t plan on recruiting proactively

Recruitment doesn’t have to be a continuous process. 

Instead of recruiting, you may want to focus your resources on business development and employee training.

In such cases, outsourcing specific HR responsibilities like hiring is the better option. With outsourcing, you pay for what you want, when you want, helping you limit your expenses.

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Top 3 HRO companies of 2021

Here are some of the best HR outsourcing companies in 2021:

1. ADP

Apart from being one of the best payroll service providers, ADP also offers a robust customer support system and customizable HR plans for both large and small businesses.

Key HR services:

• Payroll management services.
• Employee benefits administration.
• Recruitment and onboarding facilities.
• Retirement and insurance policies.

2. G&A Partners

G&A Partners is best known for its employee management solutions. Unlike most HRO enterprises, G&A Partners offers personalized one-on-one support to its clients and is ideal for small business owners.

Key HR services:

• Recruitment and training services.
• Payroll and tax management.
• Employee benefits administration.
• Compliance and risk management.

3. Insperity

Apart from offering a host of HR services, Insperity also features an advanced and intuitive online platform that provides detailed information over various HR activities.

 Key HR services:

• Recruitment and onboarding tools.
• HR consulting.
• Performance management services.
• Employee benefits administration.

Wrapping up

So should outsourcing be a part of your HR strategy? 

The answer depends on three crucial factors — the number of employees, your current business goals and your HR needs.

Go through the tips we’ve mentioned here to better understand if HR outsourcing is suitable for you, especially if you’re a small business owner. 

If you feel that the benefits outweigh the drawbacks, all you need to do is find the best HR outsourcing service provider for your budget. 

Have more questions regarding HR outsourcing?

Let us know in the comments section below.