Why companies outsource HR (and why you shouldn’t)

When it comes to managing a business, there are many functions to handle and HR is one of them. When you don't have the time or capability to operate HR tasks, you outsource.

In some cases, it makes perfect sense, and in some cases, outsourcing HR isn’t the ideal approach. Some companies will function more effectively with an in-house HR team on board. So, how do you know what decision works best for your company? We have evaluated both options, and this article will help you decide whether or not to outsource HR.

What is HR outsourcing?

Outsourcing is the act of hiring a professional that is not included in your company’s workforce to take up certain tasks. The employer gets into a contractual agreement with an external provider who performs the HR functions assigned to them.

HR outsourcing usually involves an external third-party provider, which could be a person or another organization. Outsourcing HR could come in different ways to yield better results.

General Recruiting

Companies can also hire a professional recruiter or firm to handle all their recruiting needs,  with no restrictions or limitations to a particular industry. General recruiters have a little bit of connection with several industries, which pretty much increases their quality. Just like with the headhunter’s mode of payment, the company pays them as agents and not the candidate.

Developmental Services

You can also entrust the development of your HR team to Developmental Services agencies. These agencies focus on expanding the scope and strengthening the current capabilities of your team. They set policies and procedures that help your business gain maximum value. Outsourcing this function is best, as they have proven tools and strategies for positive results. 

• Performance Management

Performance evaluations in corporate organizations can be measured at three different levels; the overall organizational level, group/departmental level, and the individual employee level. Some areas of performance evaluation at the total organizational and departmental level could be implicit and require a lot of personal data to be done effectively. These parts can be outsourced, leaving the subjective and qualitative analysis of this evaluation to in-house HR.

• Compensation and Benefit Management

With the compensation structure being of great importance to employee retention, hiring an external designer that’ll create a more functional system than an in-house employee is mandatory. These outsourced experts adopt a compensation system that is in line with current market practices.

Once the final decision for a compensation formula has been made. The software program is used as the reference point for calculating all employee compensation. The system administrator in charge of this calculation could be an outsourced employee. They don’t necessarily have to work in the company. All that matters is that they possess the right technical skills and a recent and functional IT infrastructure.

• Management of Employee Relations for Low-level jobs

A new form of outsourced HR has emerged and it is more all-encompassing than hiring general recruiters. In this new form, a company gives another company permission to oversee its operations by inviting its employees into its company to act as supervisors and offer guidance.

This practice is common in manufacturing or service companies, where a large number of employees are hired to provide services that are not directly related to the core operations of the business. Employees in these departments are usually supervised by the managers in charge of core operations who have no interest in supervising low-level departments. So, this managerial function is outsourced to contractors who have vast knowledge in these departments and see a future on that path. 

And there are other types.

When outsourced HR is good

Outsourced HR is unarguably the best option for small businesses and startups. Due to the delicate nature of the HR profession, outsourcing certain functions to companies with a higher level of expertise is good for business. Companies without an expert HR team usually fail to recruit and retain the right talent, manage diversity, and create quality employee experience, which is detrimental to business growth. 

Also, if your company is working on a low budget, hiring a full-time HR staff isn’t cost-effective. Hence, outsourcing HR is a great way to save money, as they don’t have many employees that require thorough management.

Another case is that your company is from another country. Then it is advised that you should hire a local HR outsourcing team. Operating HR with little knowledge of local regulations could put your business at risk of violating the laws.

When outsourced HR is bad

Entrusting the growth of your business in the hands of someone who doesn’t share the same mission and goals with your company is not the best idea. Their interest in your company is not driven by passion but by their paycheck. So, they most likely attempt to do the bare minimum, and may never go the extra mile to yield better results.

Outsourcing HR functions will make it impossible to develop a unique company culture. Unlike in-house HR employees who are intentional about the work environment they create, outsourced HRs care less. They work with several clients at once and won’t go beyond their comfort zone to meet the demands of your company.

Confidentiality is also key in selecting an HR professional to work at your company. Trusting external HRs to handle private information could put the company at a high risk of exposing personal practices and operations.

What you need to know if you choose outsourced HR

After properly assessing your company’s compatibility with this approach, you need to know a couple of things when adopting HR outsourcing:

• Get your external HR familiar with the company

If your employees work at the office, get the outsourced HR to perform a physical evaluation exercise. They need to see the team they manage and the work environment that influences their productivity. A visual representation of the facilities and workspace will help them make better decisions and take actions within your company’s capability.

Evaluate the cost

HR outsourcing is a cost-effective method by default. Spending more than you would on an in-house HR employee kills its essence. You can minimize costs by hiring just one professional HR a year. Any more could exceed your company’s budget.

Communicate your expectations

Outsourced HRs are expected to be experts in this profession, and they can function with minimal supervision. However, you shouldn’t expect them to understand your requirements instantly. Instead, take time out to discuss their duties and the available resources to achieve a positive outcome.

Remain accessible at all times

For the first couple of months, expect a lot of questions and reports from your outsourced HR. As they gradually adjust to the mode of operation, you’ll need to be there to see them through the whole process. So, keep your work devices closer than ever and respond as quickly as you can.

Coordinate your onboarding process

Onboarding is usually the job of in-house HRs. Since they’re unavailable to execute this function, you’ll need to take action into your hands. Ensure that all paperwork is signed with an onboarding checklist and conduct an insightful orientation program for your new hires.

Benefits of in-house HR

Whether you're starting up or expanding, you might consider bringing the whole thing in-house – the technology is there to help and simplify all your HR functions.

Companies can now implement HR software to automate certain functions, which reduces the need to hire more HR professionals and saves you a lot of operations costs.

When comparing your HR options, the benefits of hiring in-house HR employees exceed that of outsourced HR. Here are some reasons why:

Better company culture

In-house HRs have insights into the daily operations of the company. They work with other employees and genuinely want to improve the work environment. They also take pleasure in keeping team members happy at work.

Making independent decisions at zero cost

With in-house HRs, you can organize programs and events to improve employee engagement with no additional costs. Outsourced HRs, on the other hand, will demand extra pay or contract renegotiation.

Forecast business potentials

After a close study of the daily operations at your company, in-house HRs can predict ‘the next big thing’ for your company and implement strategies that support this cause.

Leverage internal strengths

No one knows the abilities of each employee more than in-house HRs. After several assessments, they can easily identify the strengths of every employee on their team. So, when the company needs a new employee to perform certain duties, they can identify an employee who can take up that task instead.