What are the Advantages and Disadvantages of Outsourcing HR Functions?

What are the Advantages and Disadvantages of Outsourcing HR Functions?


Human resources outsourcing is defined by the Chartered Institute of Personnel and Development as purchasing one or more HR business services from a third party. Over the years, outsourcing has increased in popularity in human resources management. In this article, we will explore the potential gains and drawbacks of outsourcing HR functions you can consider before choosing to take this course of action.


What services can you get from an HR outsourcing company?

Many firms outsource all or a portion of their HR functions since they can not hire talent for part-time or full-time positions in every business area, (Greer, Youngblood, & Gray, 1999). One research found that 79% of businesses had already outsourced one or more HR-related tasks, demonstrating how common the service has become and explaining its explosive expansion. It also revealed that businesses often do not like delegating strategic or fundamental tasks to outsiders.


The following are the most outsourced HR functions according to research by Society for Human Resource Management


Payroll processing is the most commonly outsourced HR function, with over 60% of companies outsourcing their payroll. HR outsourcing companies use payroll software to ensure accurate and timely payroll processing.


Benefits administration includes tasks such as enrolling employees in benefits plans, processing claims, and managing compliance. About 40% of companies outsource their benefits administration. 


Recruitment includes sourcing candidates, screening resumes, conducting interviews, and making hiring decisions. About 30% of companies outsource their recruitment.


Onboarding includes tasks such as orienting new employees to the company, and providing them with the necessary paperwork. About 25% of companies outsource their onboarding. 

Compliance involves ensuring that the company complies with employment laws, such as those related to discrimination, wage and hour, and safety. About 20% of companies outsource their compliance. 


So, what are the advantages and disadvantages of outsourcing HR functions, and what should businesses consider? 



What are the advantages of outsourcing HR functions?

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Knowledgeable HR professionals


According to research by the Society for Human Resource Management (SHRM), 29% of HR leaders believe outsourcing HR functions allows better access to skilled professionals. Setting up an HR department with specialized responsibilities is challenging and costly. HR specialists, on the other hand, are well-versed in the human resources industry. As a result, the business can consult experts and gain from the HR outsourcing company's options, suggestions, and opinions. Utilizing a specialized outside source will allow you to collaborate with the professionals and get better results. An outsourced HR provider will have specialists in each of the various fields of human resources management who can help your company with any HR issues that may come up.


Saves money


The average salary of an HR manager in 2023 was $116,792 in the USA. Often, small businesses cannot afford to pay a full-time HR employee. To strengthen their team, large organizations frequently turn to outsourced professionals. According to a report by the Hackett Group businesses that subcontract these services spend 26% less money and employ 32% fewer people. The biggest gains come from outsourcing time-consuming, largely repetitive jobs that don't necessarily require a lot of training, direction, or specialized knowledge. Background checks, payroll, independent contractor compliance, and high-volume hiring are a few examples that come to mind.


Remain in compliance with legal obligations.

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According to an ADP Research Institute study, 40% of mid-sized businesses receive fines or penalties for failing to comply with governmental rules. Making sure that your daily activities adhere to the laws of your nation is difficult and time-consuming. The strain of complying with HR standards can be relieved by hiring a specialist who can also help protect your company in the event of an audit. Outsourced HR specialists are experts in the constantly evolving rules governing HR, and they can ensure your business stays compliant.


Additional time for core business functions


According to Deloitte, 72% of businesses cite the flexibility to focus on other responsibilities as the key advantage of outsourcing the service. Payroll, benefits, and other HR services take time. Despite their importance in business, they do not directly affect your company's profits. Outsourcing HR allows business owners and managers to devote more time to the profitable core business operations.


Objectivity and focus


A study by the Aberdeen Group showed that companies that outsource HR functions report a 10% increase in productivity. When you have an in-house HR team, convincing the team to maintain objectivity and always concentrate on what is best for the company might be challenging. An internal HR team will likely have ties with their co-workers, making it very challenging when it's time to discipline or fire someone. An outsourced HR provider will continue to prioritize what is best for the company as a whole, even if that necessitates making unfavourable choices for specific individuals.


Improved recruitment and selection


Compared to a busy internal employee juggling everything, an experienced HR team with excellent resources is significantly more likely to hire the ideal individuals for your company. Through recruitment process outsourcing, organizations can acquire intellectual capital, concentrate on their core capabilities, speed up the delivery cycle, and significantly lower expenses (J. Cocuľová,2011). The experts will have the time and knowledge necessary to find applicants, screen them according to your selected standards, and offer any necessary guidance about the hiring process.


Advantages and Disadvantages of Outsourcing HR Functions


What are the disadvantages of outsourcing HR functions?


Giving up control


It might be challenging for small business owners accustomed to controlling every aspect of their enterprise to give up full authority over their employees. If they have an internal HR advisor, they can maintain relationships with their employees and speak with them frequently to learn exactly how things are going. In a survey by the Society for Human Resource Management, 42% of respondents said losing control over HR decisions was a major disadvantage of outsourcing HR. When choosing this course of action, it is a common worry that you will lose some control of your HR by giving it to a third party.


Increased risks


The Identity Theft Resource Center estimates that over 10,000 data breaches involving HR data occurred in 2021. Any outsourced HR error could result in losses for you and damage your company's reputation. You may run higher risks if you outsource business operations, including HR-related services. Your company may be impacted by server outages, data breaches, and—in the worst-case scenario—the dissolution of the HR agency. Additionally, outsourcing puts in danger the private data of your employees, including their social security and bank account numbers.


Lack of a personal approach


According to a study by Michael Page, a lack of flexibility, which can arise from outsourcing HR tasks to outside suppliers, causes employee demotivation. Internal staff members may become demotivated when an outsider gives instructions on what to accomplish and how to do it. Because the support may be provided remotely rather than on-site, your employees will likely feel like the outsourced approach to HR takes some of the "human" out of human resources. By creating a communication gap, human resources outsourcing can cause a wedge between you and your staff. However, what is lost in proximity is more than made up for in knowledge, guidance, and the simplicity of reaching swift and equitable resolutions.


Culture changes


Employees may choose to work at a company solely based on its culture. It is no wonder that 88% of job seekers say that a healthy culture at work is vital for success (TeamStage). The dynamics may change, and your established tone may be lost when someone else oversees this section of the business. As the HR outsourcing company might not feel or have that kind of belongingness or connection with the organization, a lack of bonding could become a disadvantage when outsourcing HR tasks.


For many businesses, outsourcing HR functions can be essential to the business strategy. Outsourcing HR functions is viewed by many businesses as a wonderful method to save money. In this article, we explored the question: What are the advantages and disadvantages of outsourcing HR functions? The workload is reduced, money is saved, time is saved, and better HR services are provided when outsourcing HR responsibilities to an HR service provider, as we've observed. If you believe that the benefits outweigh the drawbacks of your current setup, all you need to do is find the best HR outsourcing service provider that suits your budget.


Chido Madzogo
Consultant
This article was written by Chido a Consultant at Industrial Psychology Consultants (Pvt) Ltd

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