HR outsourcing offers many benefits – namely, the opportunity to save money, time, and resources so you can focus on your long-term goals and business growth. But there are also plenty of drawbacks to shutting down (or forgoing) an in-house HR department and relying on an outside vendor to handle your company's HR duties.
Talk to any veteran HR rep, and they'll no doubt tell you how messy and complicated working with employees can be. A good HR person knows how to navigate the tricky waters of an organization and can steer around potential landmines toward calmer shores. While an offsite third party can handle many basic HR functions, the people-to-people communication may require someone embedded in the organization who can read situations and respond appropriately.
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How does HR outsourcing work?
HR outsourcing works by your business hiring an outside company to handle some or all of your human resources tasks, such as payroll processing, employee recruitment or employee benefits administration. Businesses choose to outsource job functions when they need assistance with tasks outside of their internal team's expertise or capabilities. For example, they may not have an internal employee or team with the bandwidth or know-how to perform a specific function, so they must enlist an external person, product, or organization to do it for them.
Outsourcing is common with HR functions. Although it's sometimes essential, businesses may turn to outsourcing simply to help them run more smoothly.
Challenges of outsourcing HR
Before you decide if HR outsourcing is right for you, it is important to understand not only the benefits, but also the challenges associated with outsourcing HR functions.
1. Disconnection with staff
The word "human" isn't part of "human resources" for nothing. HR representatives are critical to help employees feel like they have a voice and value in the company. Transferring these duties to computer software or to an offsite third party can lead to staff feeling disconnected from their employers – and employers not fully understanding their teams' needs.
2. Less flexibility
In small businesses especially, HR reps and managers can help employees out in a pinch – paying out unused vacation days in an emergency or letting them dip into next year's leave early, for example. When HR is automated and/or outsourced, these types of accommodations for loyal workers are difficult if not impossible.
3. Culture changes
Outsourcing your HR functions can change the culture of your organization as well. No one knows your company culture better than you and your staff, and it can be hard for a third party to identify and perpetuate that culture. When you outsource HR, team members may become insecure, less engaged and even less productive. An internal HR representative who works on the floor with your employees can be key to keeping your company culture alive and well.
4. Problems taking longer to fix
In situations where an error has been made – say with payroll or with the number of vacation days an employee has – going through a third-party HR service can mean a long wait before the error is fixed, leaving the employee angry or frustrated. In addition, when an employee quits and the business is using an outside recruiter, the hiring and training process might take longer than it would with an in-house HR department, which can be more proactive about hiring and training employees before positions even open up.
5. Limited choices
Companies using a professional employer organization (PEO) to handle everything from hiring and firing to payroll and insurance might have fewer choices for employee benefits. By handing off control of certain functions to a third party, you're limiting your company to whatever packages that PEO has to offer.
6. Lack of control
Giving another organization control over some of your internal processes could leave you somewhat uninformed about your workforce. Although you can work closely with the HR outsourcing organization to ensure you are on the same page, you likely won't be informed on day-to-day processes. If you lose sight of your workplace dynamics, you might be left with unhappy employees without even knowing. This reduction in knowledge can transform into a lack of control.
7. Privacy and security issues
HR outsourcing can leave your employee data vulnerable to security threats if the company's software isn't secure. Many service providers use web-hosted software to handle HR functions, leaving sensitive employee information potentially vulnerable to security threats and crashes. The last thing you want is to have your employees' personal banking or medical information released to the public and break HIPAA laws.
8. Cost
One of the biggest concerns for many small businesses considering outsourced HR is the cost, since HR outsourcing costs can vary a great deal. It might seem tempting to simply hire an internal HR professional to take care of all your HR needs, but they might also be expensive or unable to cover the many functions HR entails. The good thing about HR outsourcing is that you can choose which functions you want to outsource. This means you can start small and then add on more HR functions as your needs grow. For example, maybe you want to keep your employee benefits in-house, but outsource your HR compliance needs.
How to overcome these challenges
A satisfied, hardworking staff is the biggest competitive advantage a business can have, and you can create a company culture that values employees and their contributions by making sure their voices are heard. As you can see from the list above, one of the biggest challenges of outsourced HR is not having someone who can troubleshoot the workaday problems, frustrations and miscommunications that are inevitable in any work environment.
Fortunately for companies considering outsourcing, the best HR outsourcing services let you pick and choose which functions to hand over to them, so you can keep personnel on hand to handle those important interpersonal relationships and to act as a liaison between employees and your HR vendors. While some vendors have an all-or-nothing policy regarding your HR functions (they either want to handle all your HR processes or you can't use them at all), many offer an a la carte option, allowing you to decide which functions you'd like to keep in the building and which can be performed elsewhere.
These are the most common services HR outsourcing companies offer:
- Payroll services (paying employees, handling taxes, and tracking sick time and vacation)
- Employee benefits (health and life insurance, retirement plans, etc.)
- HR management (recruiting, hiring, firing, exit interviews, annual reviews)
- Risk management (employee compensation, safety training, regulatory compliance, conflict resolution, office policies)
While outsourcing any one of these services would save your business time and money, it might be wise to keep people-centric jobs (think hiring, firing and performance reviews) on the premises. In addition, allowing your employees to air their frustrations and concerns about the outsourced services will help you assess what's working and what isn't to find the best solution for your business.
Recommended HR outsourcing services
There are countless great HR outsourcing services on the market, but that doesn't mean they will all be a perfect fit for your business. As we mentioned above, some services come in bundled HR packages, whereas others offer a la carte HR outsourcing. Additionally, while plenty of businesses can get by just fine with standard outsourcing services, some services can be tailored to certain industries or focus on specific HR functions.
The level of detail you need in your HR service depends on your business size, type and culture. To help you narrow down your search, we spent countless hours analyzing and researching the best HR outsourcing services to find some ideal choices.
Here are a few options to get you started.
- ADP: An HR powerhouse, ADP offers comprehensive HR outsourcing services. It's an especially good choice for businesses looking for great employee benefit administration. It has in-house payroll, virtual and onsite employee training, and more than 550 integrations. Read our review of ADP to see if it's a good fit for you.
- Paychex: Businesses looking for a service that can scale with them as they grow should check out Paychex. The company offers comprehensive HR services and an intuitive dashboard with self-service features. It can help you proactively monitor employment laws and maintain legal compliance. Check out our review of Paychex to learn more about its HR services.
- TriNet: Smaller teams with at least five employees may want to consider TriNet. This full-service HR outsourcing company specializes in industries like architecture, consulting, education, e-commerce, financial services, life sciences, manufacturing, retail and technology. It offers 24/7 support, which can be especially helpful for small businesses that are just learning the ropes of HR. Check out our TriNet review to learn more.