In-House HR vs. Outsourcing HR: Which One Is Better?

Human resources (HR) management plays a crucial role in shaping an organization's success. 

When it comes to managing HR functions, businesses typically have two options: in-house HR or outsourcing HR. 

Disclaimer: We recognize some businesses might choose to only outsource one or a few HR tasks and keep the rest in-house. Nonetheless, this article should help you understand the differences between the two. 

In-house HR involves establishing an internal HR team within the organization to handle all HR functions, while HR outsourcing entails partnering with an external service provider to manage HR tasks on behalf of the organization.  

Here’s everything you need to know about in-house HR vs. outsourcing HR to make the best choice for your business. 

What is In-House HR?

In-house HR is the practice of having a dedicated internal HR team that handles all the essential functions related to human resources within an organization. This approach entails recruiting skilled HR professionals who are employed directly by the company.

What are the Advantages of an In-House HR Department?

An in-house HR department provides five main advantages, depending on your company’s needs:

1. Better understanding of company culture and values: In-house HR professionals are immersed in the company's culture and values, enabling them to align HR strategies with the organization's unique needs as a full-time member of the organization. 
2. Immediate in-person response to employee needs and concerns: In-house HR teams can promptly address employee queries, issues, and concerns in-person, fostering a positive work environment. 
3. Enhanced employee engagement and morale: In-house HR professionals can more easily engage with employees in-person, fostering strong relationships and boosting employee morale. 

Note: The advantage here is that HR is at your disposal; you are responsible for hiring and maintaining your internal HR team, as they are full-time members on your payroll. 

What are the Potential Challenges of In-House HR?

While there are many advantages of in-house HR, there are also several challenges to consider: 

1. Higher costs associated with recruiting, training, and maintaining an HR team: Building and maintaining an in-house HR team can be cost-intensive, especially for smaller businesses with limited resources.
2. Limited expertise and resources in specialized HR areas: In-house HR teams may lack specialized knowledge in certain HR domains, such as payroll management or benefits administration.
3. Increased administrative burden for the organization: Managing HR functions internally adds administrative tasks to the workload of existing employees, potentially reducing productivity in other areas.
4. Risk of compliance issues and legal liabilities: In-house HR teams need to ensure businesses stay compliant, which can be challenging. Compliance comes into play with everyday tasks such as recruiting, onboarding, communication, timecards, payroll, taxes, etc. 
5. Difficulty keeping up with evolving HR regulations and practices: HR regulations and practices continually evolve, and staying up to date can be a significant challenge for in-house HR teams.

When is In-House HR the Best Choice?

In-house HR is beneficial for: 

• Organizations who prefer to stick with the conventional ways of working and running a business. They want to keep an in-house team because it’s what they know works. They have a “why fix something that doesn’t need fixing?” mindset. 
• Businesses in industries with strict data privacy and security requirements to ensure sensitive information is managed internally. 
• Large companies with big budgets that can afford to hire, train, and maintain a full-scale HR department.

What is HR Outsourcing?

HR outsourcing is the practice of delegating various HR functions to external service providers. By partnering with HR outsourcing providers, businesses can leverage specialized HR expertise and industry best practices to manage their HR needs, or share some of the HR responsibilities. 

This approach offers cost savings and reduced overhead, as organizations can avoid the expenses associated with maintaining an internal HR team. HR outsourcing also provides scalability, allowing businesses to adapt their HR services based on changing needs, while enabling them to focus on core business functions and strategic initiatives. 

What are the Advantages of HR Outsourcing?

There are five key advantages of HR outsourcing for businesses of any size: 

1. Access to specialized HR expertise and industry best practices: Outsourcing HR functions provides access to professionals who specialize in different areas of HR, ensuring compliance and optimal HR practices.
2. Cost savings and reduced overhead: By outsourcing HR, businesses can avoid the costs associated with staffing and maintaining a full-time HR department, including salaries, benefits, office equipment, and training.
3. Scalability to meet changing HR needs: HR outsourcing offers flexibility, allowing organizations to scale their HR services up or down based on their changing business requirements.
4. Focus on core business functions while leaving HR tasks to experts: Outsourcing HR frees up internal resources and enables the organization to concentrate on its core competencies and strategic initiatives.
5. Increased efficiency and productivity through streamlined HR processes: HR outsourcing providers leverage technology and best practices to streamline HR processes, resulting in increased efficiency and productivity.

Learn more about Why Your Company Should Outsource HR Functions.

What are the Challenges of HR Outsourcing?

Challenges are to be expected regardless of whether you’re outsourcing HR or hiring an in-house team. Here are some challenges to consider for HR outsourcing: 

1. Potential communication and coordination issues with an external service provider: Effective communication and coordination between the organization and the outsourcing provider are vital to ensure smooth HR operations.
2. Concerns about data security and confidentiality: Entrusting sensitive employee data to an external provider can raise concerns about data security and confidentiality.
3. Risk of service quality and responsiveness variations: The quality and responsiveness of the outsourcing provider's services may vary. 
4. Cultural alignment and integration challenges with the outsourcing provider: Differences in organizational culture and values between the organization and the outsourcing provider can pose integration challenges.
5. Integrating systems: Companies that have customized their own software or tools to adjust for their specific HR needs may have a difficult time integrating with an HR outsourcing partner.

Regardless, if you choose the right HR outsourcing provider and have an agreement in place, you should not experience any of these presented challenges.

When is HR Outsourcing the Best Choice?

Because of the ability to scale, HR outsourcing provides advantages to companies of all sizes, which vary based on the company’s needs. 

Because startups and small businesses typically have limited HR resources and expertise, these companies benefit from accessing specialized HR services without the need to build an internal HR team. They also gain access to HR technology and competitive employee benefits they wouldn’t otherwise offer.

While midsize businesses also benefit from HR technology and employee benefits, they typically have an in-house HR contact that handles HR tasks and employee issues. However, this individual’s time, knowledge, and capabilities are limited, so offloading administrative tasks and gaining access to an HR expert to contact for guidance provides a huge advantage.

Large organizations that outsource HR gain the advantage of reducing administrative tasks, which helps their in-house HR team allocate resources more efficiently and focus on strategic initiatives. Most companies this size also take advantage of the variety of employee benefits available, as well as the fully-integrated HR technology, as they often have one-off HR applications that do not integrate well.

HR outsourcing is particularly valuable for:

• Organizations experiencing rapid growth or undergoing restructuring as it provides scalability and flexibility to meet changing HR needs.
• Companies in need of specialized HR services to gain access to expertise, or technology solutions that may not be available in-house. 

Learn more about the Pros and Cons of HR Outsourcing here. 

In-House vs. Outsourcing HR: How Do I Determine Which Option is Best For My Business?

In-house HR is often the preferred choice for large businesses that have ample resources to meet their employees’ needs. These companies offer great employee benefits and have sufficient budget to afford a fully-staffed HR department, complete with all the tools needed to make their HR processes efficient (applicant tracking, paperless onboarding, online benefits enrollment, HRIS/HRMS, etc.).

On the other hand, HR outsourcing is beneficial for small to midsize businesses with limited HR resources and expertise, as it enables access to specialized HR services without the need to build an internal HR team. This option grants access to expertise and tools that may not be available in-house. It also provides scalability and flexibility for organizations experiencing rapid growth or undergoing restructuring.

Factors to Consider When Choosing Between In-House HR and HR Outsourcing

By carefully assessing these factors and aligning them with your specific business goals, you can determine whether in-house HR or HR outsourcing is the most suitable option to meet your HR management needs. 

• Company size and structure: Assess whether the size and structure of your organization can support an in-house HR team or if outsourcing would be a more suitable option.
• Company goals and strategies: Evaluate how HR aligns with your business goals and strategies. Determine if in-house HR or outsourcing better supports your long-term objectives.
• HR services needs: Identify the specific HR functions and services required by your organization. Determine if you have the internal resources to meet these needs or if outsourcing would provide the necessary expertise.
• Cost: Evaluate the cost implications of in-house HR versus HR outsourcing. Consider factors such as salaries, benefits, training, and the fees associated with outsourcing to make a cost-effective decision.

According to the Bureau of Labor and Statistics, the median pay for an HR Manager in 2021 was $126,230 per year, or $60.69 per hour. Most HR outsourcing solutions will cost far less and, in return, will provide you with a team of experts dedicated to your staff, as well as access to fully-integrated HR technology that otherwise would be additional investments for your company. Overall, the ROI of outsourcing to a PEO like Stratus HR is 27.2%!

How Can I Shift My HR Functions From In-House to Outsourcing?

To shift HR functions from in-house to outsourcing, follow these steps:

1. Assess current HR processes and identify areas for outsourcing. Evaluate your existing HR functions and identify areas that can be effectively outsourced.
2. Research and select a reputable HR outsourcing provider. Conduct thorough research to find a reliable and experienced HR outsourcing provider that aligns with your business needs.
3. Communicate the transition plan to employees and stakeholders. Clearly communicate the reasons behind the decision to outsource HR and involve employees and stakeholders in the transition process.
4. Collaborate closely with the outsourcing provider during the transition phase. Establish a strong working relationship with the outsourcing provider, ensuring a smooth transition of HR functions.

See more in our blog: How to Outsource HR in 6 Steps.

Learn more about the different types of HR outsourcing options, which include Professional Employer Organizations (PEOs), Administrative Services Organizations (ASOs), and Business Process Outsourcing (BPOs).

Making the Right HR Choice For Your Business 

Choosing between in-house HR and outsourced HR is a critical decision that impacts the efficiency and effectiveness of your HR management. Assessing your organization's specific needs, resources, and long-term goals is essential in making the right choice. 

In-house HR offers a deeper understanding of company culture, as you will be required to train and maintain your in-house department, which will be liable and responsible for all HR duties, while HR outsourcing allows you to share those HR duties and liabilities while giving you access to specialized expertise, cost savings, and scalability.

Remember, there is no one-size-fits-all solution. The choice between in-house HR and HR outsourcing depends on your unique business requirements. 

Stratus HR: A PEO for Your HR Outsourcing Needs

As a leading PEO, Stratus HR is committed to being your preferred HR outsourcing partner, prioritizing a shared responsibility approach that ensures you retain control while we relieve you from administrative headaches. We value your best interests and view our collaboration as a true partnership, where your concerns and priorities are of utmost importance to us. 

From the outset, we invest time in establishing effective communication, fostering collaboration, and implementing robust security measures. Our focus is on delivering the highest quality services tailored to your specific HR needs. With Stratus, you can count on comprehensive support across all aspects of HR management.

To learn more about how our team can help you make the right HR decision for your business, book your free consultation with us today.