Managing human resources functions like hiring, payroll, training, and benefits in-house can get super expensive for companies these days. You need dedicated HR staff, software, equipment, and a ton of expertise in employment law, compensation, and other complex areas. Because of these high costs, many organizations are exploring outsourcing some or all of their HR activities to external specialists.

On the plus side, outsourcing can save money, give you access to specialized skills, improve efficiency, and let your team focus on core business activities. But there are definitely some downsides too, like losing control over critical people management tasks and hurting company culture.

This post will dive deep into the key upsides and downsides of HR outsourcing to help you decide if it’s the right move for your organization. I’ll also share some pro tips to maximize the benefits and avoid the pitfalls if you do decide to outsource. Let’s get started!

Why Outsourcing HR Can Be a Win

Slashing Costs

One of the biggest reasons companies outsource is to save some serious cash. In-house HR requires paying for your own staff, training, software, equipment and other overhead. Outsourcing transfers those expenses to the service provider. HR outsourcing firms can also use economies of scale and offer the same services way more efficiently.

Outsourcing converts fixed costs into flexible variable expenses based on actual usage, giving you more cost control. Overall HR costs can be reduced by quite a bit.

Getting Access to Specialized Skills

HR requires expertise in complex areas like employment law, compensation planning, talent management, and more. Building up all those capabilities internally can be tough, especially for small and mid-sized companies.

Outsourcing gives you easy access to experienced professionals with those specialized skill sets. The best vendors accumulate expertise by working with tons of different clients across multiple industries – something hard to replicate in-house.

Improved Efficiency and Productivity

Instead of handling administrative HR tasks like payroll processing internally, outsourcing frees up staff to focus on more strategic, value-adding HR activities. Service providers can also bring technology, automation and superior processes that improve productivity and efficiency in transactional and repetitive HR tasks.

This allows the internal HR team to focus on functions like employee engagement, talent development and workforce planning that have a bigger impact on business performance.

Focus on Core Business 

Managing non-core back-office functions like HR distracts resources and focus from the core business. HR outsourcing allows companies to redirect resources towards strengthening their primary business operations and competitive advantage rather than having to manage support functions.

Senior leadership can focus more on strategic business activities while routine HR functions are delegated to external experts. This enables better business performance.

Access to Latest Technology

HR service providers invest heavily in developing and implementing the latest HR technology platforms, tools and software to optimize their operations. By outsourcing HR activities, companies can leverage these advanced systems and capabilities without having to commit their own capital and resources. 

This gives access to innovations in HR information systems (HRIS), applicant tracking systems like iSmartRecruit, performance management software, employee self-service portals and more without large development costs. Advanced analytics and reporting are also usually available.

Cons of Outsourcing HR Functions

While outsourcing HR can provide many benefits, there are also notable drawbacks and risks to consider:

Loss of Control

One major concern with outsourcing HR is the loss of control over essential people management activities outside the organization. Confidential employee data must be shared with vendors whose priorities may not align fully with the company’s interests.

Poor performance or delays by the vendor can disrupt critical HR services like payroll, recruiting and benefits management which impact employees directly. Bringing outsourced activities back in-house or switching vendors can also be challenging.

Reduced Employee Morale 

Having an external third-party manage vital HR functions like payroll and benefits can create perceived distance between employees and the organization. Workers interacting with outsourced call centers for HR services may feel less connected to the company and dissatisfied with the experience.

This can lower employee morale, engagement and productivity levels. There is also a risk of miscommunication without internal HR partners understanding the organization’s culture and needs intimately.

Compromised Data Security  

HR systems contain highly sensitive personal data on employees including salaries, health information, social security numbers and more. Outsourcing can increase risks of data breaches, information loss or non-compliance with data protection laws.

Vendors must be evaluated closely for their cybersecurity infrastructure, data governance policies and access controls to help mitigate these risks.

Communication and Coordination Issues

Outsourced HR providers may not have the level of context, on-the-ground insight or alignment with internal stakeholders as an in-house team. Smooth communication and coordination between the external provider, the internal HR team and the rest of the organization requires effort.

Role clarity must be established and processes put in place for handoffs, reporting, feedback and troubleshooting. Without this, issues like delays, misalignment with company goals and friction can arise.

Hidden Costs

While HR outsourcing provides cost advantages over in-house HR in terms of savings on overhead and personnel, there can also be hidden costs. Contracts with multiple vendors can get complex. Transition costs, vendor management time, customizations, and inflexible contracts can diminish cost benefits to varying degrees.

If the outsourcing arrangement does not work out, the time, effort and cost required to bring HR activities back in-house or switch vendors also need to be considered.

Tips for Successful HR Outsourcing

If outsourcing seems like the right choice after weighing the pros and cons, the following tips can help maximize the likelihood of a successful implementation:

– Retain core HR competencies internally – Don’t outsource everything. Keep key strategic and culture-aligned functions in-house.

– Conduct due diligence on providers – Thoroughly evaluate vendor expertise, processes, technology, security and costs. Get references.

– Start with non-critical functions first – Outsource transactional activities initially before strategic ones.

– Define comprehensive service level agreements (SLAs) – Detail contractor performance metrics and obligations clearly in contracts.

– Develop strong governance procedures – Maintain control via performance monitoring, continuous feedback, rigorous benchmarking.

– Ensure regular communication between in-house HR and vendor teams – Align closely on priorities and issues.

– Focus in-house HR staff on value-added activities – Free them up from administration to focus on strategic people management. 

– Evaluate technology integration needs – Ensure HR systems sync up smoothly across the organization.

– Give employees visibility into process changes – Communicate timelines, impacts, key contacts and FAQs.

– Leverage provider expertise to improve HR performance – Seek their best practices and ideas.

Conclusion

Outsourcing HR functions provides compelling advantages around cost, efficiency, technology access and focus on strategic business needs. However, handing over control of vital people management activities to external partners also comes with considerable risks. Organizations must weigh the pros and cons carefully based on their specific HR needs, culture and capabilities to determine if outsourcing is the right move. With meticulous vendor selection, contract terms, governance and communication, outsourcing can elevate HR effectiveness and flexibility significantly while mitigating associated risks.