Outsourcing human resources: what does it mean?

A company that outsources human resources uses a second-party to manage some — or all — functions of their HR department. In terms of HR, these functions can include sourcing, recruiting, talent acquisition, onboarding, training, legal expertise, the administration of health benefits, workers’ compensation and retirement plans. Many smaller companies choose to outsource HR-related functions such as payroll, employment taxes and risk management.

Read more: What is Talent Acquisition?

3 approaches to outsourcing human resources

Below are three common approaches to outsourcing HR functions:

• Business processes: An external HR service manages payroll administration, recruitment and other HR-related processes.
• Shared services: Some tasks are outsourced to a provider, such as administrative, transactional or discrete work.
• Application and facilities services: External HR providers handle technological or facilities support for an internal HR department.

Should your company outsource HR?

Choosing whether or not to outsource human resources at your company depends on several factors. In the end, outsourcing HR functions should make sense for the business, so follow these steps to help you decide which HR tasks might be best to outsource:

1. Determine if outsourcing HR aligns with company objectives

Which areas of your business are most responsible for meeting your company’s objectives? Here’s a good common practice: If you see lags in performance, either in how your HR department handles certain responsibilities or functions, consider outsourcing those tasks.

Not only will this help streamline your HR department’s duties so they can focus on what they do well, but if you’re expanding, it might be that your current HR team needs additional headcount. Outsourcing can also get you through a growth phase or redefine your business model. Many companies, for example, outsource recruiting functions to free up managers and HR personnel for other work.

2. Ask your employees

Your employees know what’s working well with your in-house HR team and what could use improvement. Use anonymous surveys for candid feedback on benefits, training and onboarding. Be specific when you write the survey to pinpoint shortcomings. Employees might report back, for example, that benefit options aren’t explained well due to the complex nature of insurance policies. In this case, you might outsource the benefits task.

Read more: Creating a Positive Feedback Loop in Your Business

3. Consider new laws and challenges

Human resources is a constantly changing and expanding field. Healthcare, fair employment practices, retirement plan requirements and various federal and state laws and regulations make this a profession requiring specialties and deep expertise. For example, if a smaller HR department is having a difficult time staying current with changing requirements and laws, the company may choose to outsource human resources to not only be as efficient as possible, but also shield themselves from liabilities.

4. Explore your options

Once you better understand company needs, it’s time to consult with HR services firms. Investigate what services they provide — and the type of services they specialize in (e.g., full service, payroll, insurance, bookkeeping). Make sure to share your objectives and concerns to help them to determine which services are right for your company. These consulting firms are generally experts and can offer advice to guide you in the right direction.

Benefits of outsourcing human resources

From creating a better candidate experience to saving company resources, outsourcing HR tasks offers a number of advantages, including:

• Improved hiring process: Outsourcing human resource functions like sourcing, recruiting, pre-employment screenings and background checks can streamline your hiring process, reducing the time it can take to make a hire.
• Better compliance: Outsourcing HR services ensures that your practices are lawful.
• Reduced costs: Outsourcing services typically negotiate better benefits and other rates. They also help you avoid noncompliance penalties.
• Prevents issues with turnover: HR firms are usually well-equipped to handle employee/employer relations and mediate more effectively, helping you retain employees.

Read more: How to Reduce Employee Turnover

Disadvantages of outsourcing human resources

On the other hand, there are a few potential drawbacks to outsourcing HR functions that you might want to consider, including:

• Reduced control: Human resources manages many important tasks that have to do with your employees, and you may lose some of your control when you outsource.
• Negative impact on the employer-employee relationship: Employees may feel disconnected from the company they work for if all training, benefits and employee correspondence is handled by outsourced human resources.
• Loss of flexibility: Your business may have to comply with the rules, regulations and policies dictated by the outsourcing firm, which leaves less room for flexibility and the ability for your company to make some of its own decisions.
  

However, the pros of outsourcing HR can certainly outweigh these cons. Here’s a tip if you choose to outsource: Ensure that all lines of communication are open and check in regularly with employees to evaluate their experience.

The bottom line on human resource outsourcing

Outsourcing human resources may not be right for every company, however, there are many benefits for small and mid-sized companies. Most companies choose to outsource because it enables them to:

• Reduce operating expenses
• Control risk and improve compliance
• Gain or enhance HR expertise
• Streamline HR functions
• Obtain services the business doesn’t provide

If you choose to outsource, use HR outsourcing to further your objectives, streamline operations and better serve employees. The right HR firm will tailor its products and services according to your needs.

Outsourcing human resources FAQs

Will I lose control of my business if I outsource human resources?

Your ownership, employees and daily operations of your business are still under your control. Outsourcing services merely take the responsibilities of managing the HR functions. Just remember to manage the relationship well to ensure oversight and get feedback from your employees regularly.

Who is responsible for compliance with employment laws and regulations when I outsource HR functions?

The HR service provider should assume responsibility for employment laws and regulations, including federal, state and local laws.