Is Outsourcing Human Resources a Good or a Bad Idea?

Hermione at Pangea.ai
Michelle Newblom
Published: 17.10.2022

Human resources are essential to any business, large or small. While some companies prefer to keep their HR in-house, others find greater advantages by outsourcing certain services. There’s no right or wrong answer, but we can help you explore which option is better suited for your business and your needs by going over the pros and cons of outsourcing HR.

When you outsource HR, you trust a third-party vendor to help you with your business’s HR functions. HR duties can be overwhelming, which is why many companies elect to subcontract someone else to help with all, or some, of their tasks.

If you’re ever looking to outsource other services — such as software or mobile app development — we’ve got you covered. Let us know what your requirements are and we can connect you, for free, with up to 5 companies that match your needs.


A woman stands at a board, leading a business meeting, while her colleagues sit at a long table and listen.

What Functions Do an HR Outsource Team Provide?

Outsourcing is becoming an increasingly popular option for businesses looking to expand their search when looking for new talent.

Businesses opt to subcontract their HR for a number of reasons. You can outsource as many — or as few — services as you like, but the main four are payroll processing, employee relations, recruitment, and compliance.

Payroll Processing

Payroll processing takes time, and a lot of specific knowledge, to ensure you’re meeting all regulations and withholding the proper amounts. You can outsource payroll processing and let a third party handle all tasks associated with paycheck distribution, reporting requirements, benefit premiums and more. Any errors in this area can lead to trouble with the IRS, so it’s definitely a service you want to make sure is done correctly.

Recruitment

A dedicated, external HR team is extremely helpful when it comes to recruitment and talent acquisition. Rather than go through applications, set up interviews, conduct background checks, and onboard yourself, you can pass the workload onto professionals who do this all the time. This also frees up time from any in-house employees who would have to take on these matters otherwise.

Employee Relations

As much as you’d like to avoid conflict in the workplace, it can’t always be done. When issues arise between employees, an outsourced HR team can mediate these problems and even help you update your company policies where it’s necessary.

Compliance

If you’re a small business especially, you may feel overwhelmed by all the regulations and compliance requirements you have to meet just to keep your company running. 69% of small businesses are “overwhelmed by regulations, rules, and mandates,” which makes outsourcing HR for compliance reasons a very enticing option.

4 Pros of HR Outsourcing

There are many reasons your company may decide to outsource HR. From reduced costs to saving time, there are many positives worth considering if you’re straddling the fence on whether or not to subcontract HR.

Cut Costs

Many businesses opt to outsource their HR department because it can be extremely cost-effective. Depending on the services you require, you can save a lot more money this way. Through outsourcing, you can add and remove services as you need, saving money when you need to. Human resource managers, on average, have an annual salary of $126,000, making HR outsourcing a much more cost-effective alternative.

Increase Professional Development

Training is an essential, yet sometimes time-consuming, component to employees’ professional development and compliance. You can outsource these services to professionals who do this regularly, rather than conduct and plan training yourself.

Save Time

HR tasks are often unrelated to the day-to-day running of your business. This means you can focus on essential daily functions that keep your company afloat, and rely on HR outsource professionals to handle the administrative work. This doesn’t take any time away from your internal team, allowing you more time to handle other business needs.

Ensure Compliance

You can avoid administrative hassle and legal complexities by outsourcing certain services to HR professionals who are well-versed in this sphere. From Equal Employment Opportunity laws to the Fair Labor Standards Act, there’s a lot of legality HR professionals must be knowledgeable about to ensure compliance. When things are handled internally, certain mistakes can occur if other members of the team are delegated tasks. You can trust outsourced professionals to stay up-to-date with any changes, rather than trying to stay on top of them yourself.

4 Cons of HR Outsourcing

As great as HR outsourcing sounds, it’s still vital to be aware of any cons associated with subcontracting. Whether you’re outsourcing HR or different components of the software development process, you need to pay close attention to the cons, not just the pros.

Since you’re working with a third party performing HR needs, they’ll have access to sensitive information, they’ll contribute to your company culture, and it may take longer to contact them.

Cultural Shifts

Sometimes, dealing with a third party can feel rather impersonal, rather than an on-site employee who is part of the team. HR has a heavy influence on a company’s work culture, which can make or break the environment. You want your employees to be happy and motivated to come to work, so if you do decide on outsourcing, you’ll need to ensure that employees are still satisfied with how things are managed.

More Turnover

When you work with an outsourced vendor for your HR needs, you expect them to have a thorough understanding of your company, your goals, and your needs. There’s always the chance that the person you’re directly working with will move on to another opportunity, and someone new will be transferred to handle your account.

Tasks Can Take Longer

This may seem contradictory to the “save time” pro, but yes, certain tasks can take longer with a subcontracted HR outsource team. Though you’ll be freed up to dedicate more of your spare time to functions that keep your business running, some administrative HR functions can take longer. If you need to contact your outsourced HR, they may take longer to respond than an in-house HR since they have additional clients. To combat this, just make sure you have solid communication standards in place.

Data Security Issues

Data insecurity is a very valid concern since you’re trusting an external party with your sensitive data and information. It never hurts to be protective, and you should always vet any outside team that will have access to your personal information. This goes for any external party doing business with your company. If you’re in need of software development for example, we can connect you, for free, with up to 5 companies within 72h that match your needs and keep your sensitive information secure.

Two women sit side-by-side and go over administrative paperwork together.

Is HR Outsourcing the Right Fit For Your Company?

Not every business needs to outsource HR services, but for some it can free up enough company time to be worthwhile. The question of whether to outsource or insource can only be answered by you, so take the time to ask yourself the following:

  • How large is your business? Does it make sense to have a dedicated in-house HR team?
  • How much time are you spending on HR tasks versus daily business functions?
  • Are you relying on several employees to help out with HR tasks?
  • Would you save money by outsourcing some HR services?

If you’re primarily answering “yes,” then a third-party HR professional might alleviate some of your pain points. Even if you don’t think you need a dedicated external HR team, it may be worth it to outsource even some tedious tasks, such as payroll processing.

Whenever you’re working with an external vendor, data security should be your top priority. Take the time to properly vet anyone you’re trusting with sensitive information, or go through a service that does the vetting for you.

FAQs:

Q1. Is HR outsourcing a good idea?

HR outsourcing is a good idea for many businesses, especially smaller ones who can easily get overwhelmed with trying to meet legal regulations while simultaneously keeping their company running.

The main pros that are associated with choosing an HR outsource team are fewer costs, increased security, more time for other business tasks, and an increase in professional development for your employees. However, you should always weigh the pros and the cons to make an informed decision.

Q2. What are the 2 main benefits of outsourcing HR?

The 2 main benefits of outsourcing HR are that your business can save valuable time by allocating certain services to the HR outsource team, and save money by only paying for the services you need. Often, outsourcing HR is a cheaper alternative to having a full-time HR manager in-house. You can always add on services you want to outsource and stay within your budget more easily.

Outsourcing also saves you time. Since you’re trusting someone else to take over some, or all, HR responsibilities, you can focus on daily business operations. This allows you to put more time into growing your business and executing on strategic matters, rather than trying to keep up with HR functions.

Q3. How does HR outsourcing work?

When you outsource HR, you trust a third-party vendor to assist your company with specific HR services. How many services you need help with is up to you. Some small businesses choose to go with Professional Employer Organization services, which is a type of full-service HR outsourcing that can save you up to 27% in HR costs a year. They assist with essential HR duties such as administrative tasks and compliance to give you an all-inclusive package of help.

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