HR Function

How outsourcing has changed the HR department: the pros and cons

Payroll team discussing payroll software

In his column in the New York Times, business writer and reporter Phyllis Korkki asked a rather odd question:

Whatever happened to the human resources department?

It was once hard to imagine an organisation without its own in-house HR department. Human resources were one of the core functions that no business could live without.

‘Was’ is the operative term.

Today, it’s not uncommon to see businesses outsourcing their human resources needs to agencies and independent HR professionals who work remotely. As organisations strive to be more efficient, the direction is to unburden the company from unprofitable departments, and HR is one of them.

In fact, according to a study, approximately 50% of big businesses outsource their HR needs, either in part or in full.

In-house HR teams are getting smaller, and as with any other changes affecting the workplace, there are always two sides — those who are for it and those who are against it.

Making the business case for HR outsourcing: the pros

Outsourcing in general, not just in human resources, delivers positive results if properly and strategically implemented. In the case of HR outsourcing, businesses can reap the following benefits:

1. More time and resources to focus on core competencies. It was mentioned above that HR is an unprofitable department. What does this mean? At the end of the day, HR does not create products or services and does not contribute to the bottom line of a business. Big HR operations require investing a lot of time, money, and resources.

By outsourcing HR to an outside agency, association, or remote professional, many businesses (especially SMEs and startups who are working with limited resources) can focus on the core competencies of their business.

2. It allows organizations to hire the best HR professionals for less. The best HR experts require serious investments to retain in-house in terms of wages and salaries, something that many organisations cannot afford.

Outsourcing HR functions to a third-party provider enables even cash-strapped businesses to hire the services of highly experienced HR professionals. Doing so is significantly cheaper compared to the cost of hiring an in-house HR manager with the same calibre of expertise.

3. Increases compliance with employment laws. Several employment regulation changes are made every year, including several pertinent issues such as healthcare, taxes, classification of employees, safety violations, wrongful termination, and even sexual harassment. Non-compliance with these laws often results in costly fines, not to mention the headache and the hassle of dealing with a lawsuit.

A dedicated HR specialist staying on top of these changes ensures that organisations comply with the ever-changing labour laws and regulations.

4. It improves recruitment. Convincing the best talent to choose to work for a certain organisation over another offer is an art and science. Outsourcing recruitment to HR professionals who specialise in this area can improve the quality of talent acquisition for a company.

5. Gives access to the most recent tools, technologies, and best practices. Although it’s worth every penny of what they’re going to pay for, very few companies invest in the most cutting-edge HR software available today. To some extent, independent HR consultants and third-party HR agencies have no choice but to invest in these tools in order for them to stay relevant and up-to-date.

That said, tapping into these HR service providers gives businesses access to the technologies they otherwise wouldn’t budget for.

The demand to bring back HR in-house: the cons of HR outsourcing

In the same article where she posited the question “Whatever happened to the human resources department?”, Phyllis Korkki wrote: “Outsourcing allows companies to offload work that isn’t part of their core business. It also saves money. But some HR experts are concerned that the trend has gone too far, to the point that employees are suffering in areas like training and career development, and that employers are losing crucial business opportunities.”

Specifically, a number of HR experts brought up the following concerns about HR outsourcing:

1. Possible conflicting agenda between the company and the HR service provider. While third-party HR service providers work to meet the demands of their clients, they have their own set of business agendas that might conflict with the agenda of the companies they service.

In-house HR teams would have goals that are aligned with the company they work for. They would genuinely be concerned about talent management and development. Third-party providers could provide poor service and may not even care about important, non-tangible things such as culture and morale.

2. HR hours potentially not delivered. When companies have HR experts in-house, they are working on the clock and dedicated to serving the organisation they belong to.

As with any other external service providers, HR agencies and contractors handle several clients, multitasking to meet the different needs of each one. It is highly likely that some terms of a contract between a company and an HR service provider are not delivered. This includes the number of hours that were stipulated in the agreement.

It now becomes important for businesses to be able to monitor, track, and measure the hours logged by their remote HR consultants in executing the agreed-upon scope of work. This should be done in a manner that data is recorded accurately and truthfully, and be readily available to empower businesses to make smart HR decisions.

3. Negative impact on company culture. Great in-house HR teams act as champions/advocates for employees. They resolve internal conflicts, look out after their career and personal development, and bridge communication gaps between staff and management.

Outsourced HR teams may not care as much about these things, thereby negatively affecting overall workplace morale and culture.

To outsource or not to outsource? That is the question

By now, it is quite apparent that outsourcing is a double-edged sword — it can be one business’ arsenal for success and another’s the path to failure.

HR outsourcing is a tricky and complex issue as it deals with employees who have real feelings and diverse workplace needs.

The key to successful HR outsourcing is for leaders to really think it through. Have a sense of foresight, a level of savviness, and a clear understanding of what outsourcing an important function such as human resources would mean to the entire business. This includes having the due diligence to partner with an HR third-party service provider with whom the company can build a relationship based on mutual trust and respect.

Author Bio

Dean Mathews is the founder and CEO of OnTheClock, an online employee time-tracking app that helps over 8,000 companies all around the world track time. Dean has over 20 years of experience designing and developing business apps. You can find Dean on LinkedIn.