Outsourcing Your Business HR Function: Pros and Cons You Can't Ignore

HR outsourcing is the practice of partnering with a third party to manage one or more human resources function for your business as opposed to doing it in-house.

Human resources outsourcing allows businesses to delegate specific HR functions to external providers, improving efficiencies and cost-effectiveness while allowing internal teams to focus on core operations.

HR outsourcing services can range from HR management, employee benefits administration, risk management, payroll and tax administration, and so on.

In an HR outsourcing agreement, the outsourcing company provides certified HR experts to manage everyday HR tasks and provide their industry expertise. However, outsourcing HR services does come with its challenges, so it is important to understand both the benefits and drawbacks before deciding if HR outsourcing is the right choice for your company.

Why do companies outsource HR?

There are numerous reasons why you may choose to outsource your HR to a third party. Business process outsourcing, particularly in HR, can improve your efficiency and reduce costs by leveraging various models such as single-function and full-service options.

When companies outsource HR functions to the right outsourcing partner, they often experience increased efficiency and profitability. This is due to gaining access to specialized HR experts and the freed-up time from transactional HR tasks now handled by the vendor, allowing them to focus on their core business activities.

It is crucial to weigh the pros and cons though, as the wrong outsourcing partner may lead to legal compliance issues, communication problems, a poor workplace culture fit, gaps in industry knowledge, and a loss of control.

What are the pros of outsourcing HR?

HR outsourcing services can offer businesses like yours several advantages that will ultimately make your team more productive and your company more profitable.

1. Access to state-of-the-art HR technology and software

Take advantage of the latest technology and tools without having to invest in them yourself. Research shows that the average cost of HR software can be as high as $1,239 per month, while more advanced HR systems that enable more users or employees is anywhere from $688 to over $3,500 per month. 

When you outsource HR, you gain access to the latest technology and tools that your outsourcing provider uses to manage HR functions. This may include an applicant tracking system, paperless onboarding, benefits enrollment, culture board, mobile app, an employee self-service portal, and more. This integrated suite of technology will save your business the cost and hassle of investing in HR technology while still having access to it. 

2. Greater focus on core business operations

Outsourcing HR functions allows you to free up time and resources that would otherwise be spent on managing HR processes.

By partnering with an outsourced HR partner, you focus on core operations while the provider handles specialized HR services tailored to your needs. This way, you have more time to focus on core functions that improve profitability and productivity.

In fact, studies have shown that businesses that partner with a PEO (Professional Employer Organization) for outsourcing HR grow faster than those that do not outsource. They also have a higher rate of business survival.

3. Increased HR compliance and risk management

As your company grows, so does your level of risk. HR outsourcing agencies typically have specialized expertise in compliance and risk management to help you protect your business from legal and financial liabilities.

Compliance and risk management typically include staying up-to-date on labor laws and regulations, managing workers’ compensation claims, and handling issues related to compliance 

4. Reduction in employee turnover and absenteeism

Outsourcing your HR functions can lead to improved employee satisfaction, higher employee engagement, and increased retention. All of these benefits help reduce employee turnover and absenteeism.

Why would outsourcing be more advantageous than an in-house HR team? Primarily because outsourcing providers often have programs in place like employee training and development, recognition and rewards programs, employee engagement surveys, and other tactics for keeping morale high. 

5. Access to a wider pool of HR talent and expertise

When you outsource your HR functions, you gain access to an entire team of HR professionals with diverse backgrounds and expertise. HR professionals can provide you with a wider range of perspectives and ideas when it comes to managing your workforce.

6. Streamlined HR processes and procedures

Outsourcing HR will help you standardize and streamline your HR functions, processes, and procedures, which can lead to greater efficiencies and further cost savings over time. 

7. Reduction in HR administrative tasks and paperwork

You can reduce the time and resources required to manage HR administrative tasks and paperwork by outsourcing HR to a professional. Doing this will help free up your HR staff to focus on more strategic initiatives, such as talent management and employee engagement.

What are the cons of outsourcing HR?

Like everything, there may be cons of outsourcing HR, too. 

1. Feeling a loss of company control

Outsourcing HR can feel like a loss of control because you are bringing in another company to help with your HR processes. It can be difficult for an external provider to fully understand and represent your organization.

Companies with an in-house HR department may also find it challenging to get used to the concept of using an external HR provider.

With a PEO, however, you maintain full direction and control over your employees. What you no longer have is 100% of the liability or burden of administrative tasks. 

For example, in a co-employment relationship, a PEO will take on full responsibility for administrative tasks like paying workers and handling employment taxes. You reduce your liability in those areas but preserve your control for staff changes, daily operations, and anything else that involves your employees. 

2. Difficulty in finding a provider that understands the unique needs of the business

Finding an HR outsourcing provider that understands the unique needs of your business can be difficult. Each company has its own unique culture, values, and requirements that you do not want to be lost to an HR outsourcing company. 

The best PEOs will understand your unique needs and align with your culture while they assist you with HR responsibilities. This ensures a positive HR and admin experience. 

3. Lack of in-house HR expertise and knowledge transfer

Depending on the provider you choose, outsourcing HR operations can lead to a lack of in-house HR expertise and knowledge transfer. This could make it difficult to build HR capabilities within your own organization. 

To avoid these challenges, consider outsourcing your HR tasks to a PEO like Stratus HR.

Your company will have access to a team of HR experts that provide assistance with employee management, payroll processing, HR policies and procedures, employee benefits administration, and more. In the long run, your in-house team will learn from certified HR experts that guide them along the way.

Which HR functions can be outsourced?

Outsourcing human resources can help your business streamline operations, improve compliance, and reduce costs. 

The most common outsourced HR services include:

• Payroll processing
• Benefits administration
• HR consulting
• Compliance and risk management
• Training and development
• Performance management
• HR tech and data management

How can I determine if outsourcing HR functions is right for my business?

If you are considering outsourcing your business's HR, it is important that you carefully evaluate your company’s needs and resources to determine whether or not it is the right choice. 

To decide if outsourcing parts or all of your HR department is right for your business, consider the following factors.

Cost of HR outsourcing

Carefully consider the costs of outsourcing your business's HR compared to the costs of managing HR in-house. It is important to ensure that whichever HR outsourcing provider you are considering will fit into your business’s budget. 

The costs of outsourcing can vary depending on the size of the business, the scope of HR services required, and the level of expertise needed. One study by the Harvard Business Review found that outsourcing can help reduce almost 20-30% of your annual in-house HR costs.

In general, outsourcing is more cost-effective for small and medium-sized businesses, as it allows them to access necessary HR expertise and technology without needing to invest in expensive software or hire dedicated HR staff.

Your HR needs

Evaluate your HR needs to determine which functions could benefit from outsourcing. Perhaps you need to outsource all your HR functions, or maybe you just need help with payroll. 

Either way, it is important to know what you need before you start looking. You should also evaluate whether your in-house HR team has the expertise and resources to manage HR effectively. 

Size of Business

Consider the size of your business and whether outsourcing your HR department would be more efficient and effective. 

While outsourcing HR functions provides cost savings for small and medium-sized businesses, larger organizations with established HR departments may find it more cost-effective to manage HR functions in-house since they already have the necessary resources and infrastructure in place.

I am ready to start outsourcing HR functions; how do I do it?

Now that you are ready to start your HR outsourcing journey, it is important that you make the right decisions for your business. 

Consider taking the following steps when selecting an HR partner: 

1. Research potential HR outsourcing providers

When deciding to outsource HR, it is important to do your homework.

Research potential HR outsourcing providers to find the best fit for your business. Picking the wrong HR outsourcing partner could be a costly mistake that may eventually damage your business’s reputation.

2. Evaluate HR firms

You should always ask for references and evaluate each HR outsourcing provider's experience, expertise, and reputation to ensure that it aligns with your business’s goals, mission, and vision. 

3. Meet (or learn about) the third party HR service

Most HR outsourcing companies believe in the power of human interaction in HR to understand who they serve. To experience this, you should be able to meet the team who will be dedicated to serving your account and ask any questions.

4. Monitor the relationship

It is important to regularly evaluate the outsourcing relationship with your HR outsourcing provider to make sure that they meet your needs and deliver results as expected. 

At the end of the day, outsourcing your HR  has both pros and cons. That is why it is important to carefully evaluate your business needs and resources before making a decision.

With the right HR outsourcing solution, you can streamline your HR processes, reduce costs, and free up resources to focus on growing your business.

Stratus can help you achieve success with HR outsourcing

If you are considering human resources outsourcing, Stratus HR can help.

With the richest offerings on the market, Stratus offers competitive benefits, expert guidance for everyday and sticky HR situations, workers' compensation, payroll services, a 401(k) plan, and a Human Resources Information and Management System. We also offer property and casualty insurance offerings through our sister company, Stratus Agency.

We built our company from the ground up to make sure you have access to everything your business needs to succeed. Book a consultation and learn more about our services and how we can support your business.