Human Resources Outsourcing: A Guide for HR Professionals

What is Human Resource Outsourcing?

Human resources outsourcing allows companies to manage their HR functions externally instead of in-house. In the outsourcing model, a company hires a third-party HR to manage all or some of its HR functions. The outsourcing model has been popularized in the last decade by the HR outsourcing industry, which is made up of HR outsourcing companies such as ADP, Accenture, and Capita. These companies provide HR functions such as payroll, benefits, and HR consulting on a contract basis. The specific activity of HR outsourcing is defined as placing responsibility for various elements of the HR function with a third-party provider (Turnbull, 2002).

HR outsourcing can be a good solution for small businesses that don't have the time, money, or expertise to invest in their HR functions. Outsourcing allows you to focus on your core business without worrying about HR administration. It also allows you to access HR expertise without hiring additional full-time staff. By outsourcing your HR functions, you can also reduce your HR costs and access higher quality HR services than those you could provide in-house.

The primary benefit of outsourcing your HR is that it gives you more time to focus on other aspects of running your business. It can also help to reduce costs, improve HR service quality, and increase HR compliance. You can also save time by outsourcing routine HR tasks such as payroll and benefits administration.

Why is HR outsourcing important?

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The benefits of outsourcing are often cited as a way to reduce costs. At the same time, the advantages of in-house HR are usually listed as the ability to maintain control and direct relationships with the people who work for the company.

Hiring, training, and managing employees are all critical to a company's success, but managing human resources can be time-consuming and difficult. The cost and time needed to manage employees in-house have led to the rise of human resources outsourcing or outsourcing human resources functions to third-party providers.

Today, the market for human resources outsourcing is enormous, with providers available in all parts of the world specializing in a wide range of services and tailoring their offerings to the needs of their clients. The goal of human resources outsourcing is to make managing employees easier and more cost-effective for organizations while providing the best possible service and support to their clients.

While many companies outsource their HR functions, others are starting their outsourcing journey for the first time and need help outsourcing HR. As such, new and experienced outsourcing customers need to understand what motivates and drives their suppliers and what they should expect from their relationship.

Companies have a long history of outsourcing discretionary HR functions because they do not have the necessary in-house knowledge and believe it would be too expensive to create and sustain these functions in-house. Although there is evidence that HR outsourcing has experienced tremendous growth over the past decade, several writers maintain a cautious outlook regarding the industry's potential for future expansion.

The decision-making process as to whether to make or buy or supply or buy has been conceptualized by Williamson's (1985) transaction-cost economic model. According to this model, the decision to provide goods and services internally or to outsource rests upon the relative costs of production and transaction.

It is believed that outsourcing is a method that will enable human resources professionals working for the client organization to take on a more consultative and strategic role, such as designing and implementing programs that aim to increase workforce retention and performance.

Which areas to outsource

A poll was conducted in 1999 on 3,964 businesses across Europe, each of which had more than 200 employees at the time. It concentrated on four distinct facets of HR outsourcing: training and development, recruiting and selection, compensation and benefits, and workplace outplacement and reduction. While the usage of external providers was maintained by fifty percent of the firms studied, just forty to thirty-two percent of the organizations in the United Kingdom used external providers for pay and benefits.

Organizations are more likely to benefit from outsourcing than by offering in-house training, according to the IPA model, because outsourcing tends to cost less than administering in-house training. Outside training service providers are more likely to have up-to-date technology. Another attraction of going outside for training is that firms with training as their core function usually employ more training experts than do their client companies.

No doubt outsourcing human resources creates risk for the organization. The major risk is that the organization can ultimately lose the advantage of key strategic HR capabilities if they largely depend on vendors for key human resources activities.

Trends in HR Outsourcing

It was estimated that around 2020, the HR outsourcing industry grossed revenues of approximately 21.7 billion. This is pointing to a growing trend. It is projected that the trend will continue. The HR departments of the future are projected to focus on strategic human resources operations while all the administrative and less value-adding activities are outsourced through human resources outsourcing. Despite this trend, a Compensation Executive at Southwest Airlines once commented, once you do that, you are abdicating your role as an employer to lead your people.

Over a decade ago, Adams (1991) argued: Personnel as a function is subject to increasing encroachment from external consultancies which are poaching their day-to-day activities . . . [but] there is no evidence that externalization is the overwhelming trend even for particular activities of personnel functions such as graduate recruitment, training and development, or counselling. (p. 40).

According to the Cranet Survey (Vernon et al, 2000), 40% of the surveyed companies failed to report any increase in the use of external providers for HR over the past three years. It appears that the overriding trend is for companies to outsource only part of their HR functions to a third party rather than handing over control of the entire department.

Considerable variations exist among organizations in their use of HR outsourcing. More important, these variations seem to bear little relationship to the size, cost, or productivity of the function (Greer et al, 1999; Vernon et al, 2000), Klaas et al (2001) found that idiosyncratic HR practices, firm size, and cost pressures affected both the degree of outsourcing and the perceived benefits.

From 2009 to 2013, the percentage of companies that outsourced their human resources operations climbed from 30.0 percent to 36.5 percent, and in 2018, 44.4 percent of businesses outsourced their HRM.

According to this study, The key reasons for outsourcing human resources are expertise and simplification. Cost is third. Large corporations outsource HR more than small firms. Companies that outsource human resources have happier managers than those that don't. Outsourcing has limited influence on employment in SMEs; 3% lay off personnel and 6% transfer staff to vendors.

Human resources outsourcing: When to outsource and when not

Human resources outsourcing has many advantages. The main one is that it frees the human resources professionals to focus on more strategic activities. A survey carried out on 125 medium to large organizations shows that the major reasons organizations are not willing to go the outsourcing route are; higher costs and poor quality of service. The major reason cited was the fear of losing control of key human resources levers of the business operation.

In another study in 2001, poor quality of service than promised and high costs were cited as major reasons why organizations were not opting for human resources outsourcing. The other reason cited in the same study was vendors with insufficient knowledge about the client organization leading to poor service delivery.

Research on outsourcing human resources shows that six factors should be considered when deciding to outsource HR.

Dependency Risk - There is likely to be an organization's risk, over depending on the supplier. Disruptions in the supplier business can spill over to the client business disrupting business in the process.

Spillover risk – the major risk here is the vendor failing to handle confidential client information. This information could end up in the public domain or with the client's competitors. Imagine things like salaries if they leak.

Trust – whether an organization will go the outsourcing route or not will largely depend on the level of trust between the client and the vendor. This level of trust will help the client to manage spillover risk.

Relative proficiency – when deciding to outsource human resources activities, it may help to benefit from economies of scale. This, in most cases, results in low costs incurred by the client organization.

Strategic capabilities – One of the key things to consider before outsourcing your human resources is the strategic nature of the activities to be outsourced. Do not outsource any HR activities that give you a competitive advantage.

Commitment versus flexibility – Even in cases where you think you have the competencies and commitment to drive value from HR activities, it may pay off to be flexible in pursuing options that may have long-term value for the business. This should then inform your decision to outsource or not.

Effectiveness of human resources outsourcing

The effectiveness of HR outsourcing as a management strategy has rarely been explored, especially with work that involves in-depth, firm-specific knowledge and great autonomy. What occurs is an organization-specific response rather than any real professional good practice or shared learning.

Even if the in-house HR department takes on a more strategic role, several issues will be raised regarding how it can develop and manage the complex relationships with the outsourcing service provider and the rest of the organization. Given that HR outsourcing has important consequences for the quality and cost of HR, the HR profession (Ulrich, 1996), and the strategic position of the in-house HR function, we must assess the implication of HR outsourcing for the role of the HR function and the people concerned.

While some companies choose to outsource their HR functions to third-party providers, others, like Burger King, manage HR operations in-house, focusing on employee engagement and retention strategies within the fast-food industry. Burger King’s human resource policies provide an example of effective in-house HR management in a large organization.

Human Resources outsourcing: Implementation guidelines

The first step in outsourcing your HR is to assess what functions you want to outsource and how much you want to outsource. You should also consider what you want your HR outsourcing provider to do for you and how you want them to do it. For example, you might wish your HR outsourcing provider to provide HR administration, training, and hiring of new employees.

Next, you should find an outsourcing provider that is a good fit for your business. You should take some time to research different HR outsourcing providers and speak to a few to find the best fit for your business. For example, you could talk to local HR outsourcing providers, national HR outsourcing providers, and HR outsourcing providers that specialize in providing HR for small businesses.

Conclusion

Theoretically, outsourcing HR could be a competitive strategy, however, there is insufficient empirical evidence to know whether it is in practice. There is evidence to imply that businesses' decisions about outsourcing are not necessarily reasonable (Vernon et al, 2000). Neither is their procedure successful nor is the end effective.