Is HR Outsourcing Right For Your Org? Learn the Pros and Cons

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57% of business executives currently outsource HR functions in their businesses. While the primary driver of this outsourcing is cost savings, companies also outsource to fill skills gaps, bolster workforces, and reach performance outcomes (such as increased efficiency) they would not otherwise be able to.

However, outsourcing human resources only works well when choosing an option suited to your needs. HR is one of the most important functions in any business, so the wrong outsourcing method can seriously affect employee satisfaction, increase compliance risk exposure, and become more of an administrative burden than expected.

In this post, we’ll go through the different options for outsourcing HR. We’ll also walk you through the main benefits and disadvantages of keeping HR in-house and of outsourcing it, so you can make the best choice for your business and your people.

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What Is HR Outsourcing?

Human resources outsourcing means offloading some or all of your HR functions to an independent third-party provider. Your HR department can outsource any tasks, from payroll processing and benefits administration to talent acquisition and compliance.

What and how often a company decides to outsource will depend on their team’s current size and competencies. Companies may decide to outsource human resources for any number of reasons, such as:

HR Services: Know Your Options

Whether to insource or outsource your HR tasks is an important decision. If you decide to outsource, you have several options to consider, depending on company size, industry type, scaling needs, and budget.

What Is a PEO?

A professional employer organization (PEO) is a third-party company that acts as your co-employer. This means the organization becomes the employer of record for all employees, taking on the risks and responsibilities of HR tasks.

Startups often use PEOs to avoid the risk and expense of in-house hiring, leverage expert HR advice, and negotiate better rates for insurance premiums. Many seasonal employers contract with PEOs to handle hiring, benefits, and payroll for temporary staff. Multinational corporations can use PEOs to help with compliance in unfamiliar jurisdictions.

What Is an HRO?

A human resource outsourcing (HRO) company offers businesses HR services à la carte. There's no co-employer agreement; you simply pay a company for services rendered.

With an HRO, companies can pick and choose what to offload and what to take care of in-house. Smaller companies without HR teams may use an HRO company to fill skills gaps until there is more room in the budget to hire a full-time team. Larger corporations often use HROs to free up time for the HR team to focus on more strategic goals.

What Is an HRIS?

A human resources information system (HRIS) is a computer application that helps you manage employee records, time off, recruiting and onboarding, performance, and more. It stores important information such as names, addresses, and Social Security numbers, but it also gives you tools for things like tracking time, hiring and onboarding new people, and running payroll.

An HRIS helps reduce redundancies, administrative errors, and saves time for HR teams by automating many of the day-to-day tasks and reporting they rely on.

For example, instead of the HR pro manually typing in employee elections during open enrollment, the HRIS could offer a self-service enrollment tool that then syncs directly with carriers.

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In-House vs. Outsourced HR

In-house HR refers to an internal manager or team that handles all HR-related functions within the organization. Outsourced human resources involves paying a third party for these skills and capabilities. Each solution has its advantages and drawbacks.

Benefits of an In-House HR Solution

In-house HR solutions benefit from having employees aligned with the mission, culture, and values of the company handling all HR functions. Your company also enjoys immediate response to employee issues and concerns, and a more personal relationship that increases employee morale and satisfaction.

Employees who are happy and satisfied at work are 12% more productive, and when HR is completely in-house, they can help build workplaces with strong cultures that prioritize:

Look for this solution if your company has the long-term financial outlook to support hiring and training a full-time staff. It’s also a good idea for industries with tight data security regulations to avoid sensitive data exposure by keeping HR functions in house.

Cons of an In-House HR Solution

With the median salary of an HR manager at $130,000 per year, many business leaders assume it’s more expensive to hire directly than to outsource, though outsourcing costs can add up, as we’ll discuss below.

HR professionals also come with their own level of experience and expertise. For example, if you have a large or international workforce, it might be challenging to find HR people with all the right qualifications to serve your needs.

Benefits of Outsourcing HR

Outsourcing HR functions gives you immediate access to specialized knowledge, reduces overhead costs, offers the flexibility of scaling based on business needs, and increases productivity through streamlined HR processes and tasks.

When selecting an outsourcing organization, consider its reputation and cost of services. Experience in your industry is also important. Additionally, consider whether the level of service fits your needs and expectations.

Cons of Outsourcing HR

Outsourcing human resources can be expensive. For PEOs, for example, estimates range from 2% to 4% of payroll or $1,000 to $1,500 per employee per year depending on the pricing structure.

There may also be concerns about data security. This is because allowing a third party to access sensitive employee data increases your vulnerability to attacks and puts you at the mercy of the provider’s security measures, which could be less than stellar.

In a survey on third-party data security, just 40% of businesses said their third-party providers had the right systems in place to keep breaches at bay. Only 34% said they’re confident they’d get notified of a breach involving their company data.

Before contracting with an outsourcing partner, make sure you know the security measures they have in place to prevent breaches and notify you of a breach. You’ll also need to have someone in charge of managing the relationship and monitoring how they handle your sensitive data.

Choose the Best HR Services for Your Needs

Much consideration goes into selecting the right HR solution for your company’s unique needs. It’s crucial to take time to weigh the pros and cons before making a selection. Your company’s compliance status, access to benefits, and relationship with your staff could depend on it.

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