What Is HR Outsourcing? (With Advantages, Types And Tips)

By Indeed Editorial Team

Published 20 July 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Businesses of all sizes require a cost-effective human resources (HR) team to carry out various administrative tasks and ensure the well-being of employees. Outsourcing HR functions to an external services provider can help businesses save time, resources and money spent on routine HR functions. Understanding the process of HR outsourcing can help professionals assist employers in making the right decisions while outsourcing HR functions. In this article, we explain "What is HR outsourcing?" discuss its benefits and types and share tips for successful implementation.

What Is HR Outsourcing?

Knowing the answer to "What is HR outsourcing?" can help HR professionals decide whether outsourcing would benefit their employer. HR outsourcing is a contract between a business and a services provider via which the business transfers all or part of its HR responsibilities to an external vendor. Some companies outsource all their HR requirements, while others transfer only complicated tasks to the services provider and handle the remaining HR functions internally using an in-house HR team. For instance, a business can outsource the following HR functions to external service providers:

  • Applicant tracking

  • Background screening, drug tests and reference checks

  • Benefits administration

  • Counselling

  • Law compliance

  • Payroll processing

  • Performance management

  • Recruitment and onboarding

  • Retirement planning

  • Safety management

  • Talent acquisition

  • Training and upskilling

  • Workplace risk management

Related: Why Is Human Resources Important To Every Organisation?

10 Advantages Of HR Outsourcing

Here are the top benefits businesses enjoy by outsourcing HR requirements:

1. Gives access to HR expertise

HR teams handle tasks that impact the end-to-end lifecycle of employees. Their primary responsibilities include recruitment, compensation and benefits, employee relations, payroll and tax administration, performance management and employee learning and development. Each of these tasks requires HR professionals with specific skills and knowledge. With HR outsourcing, companies can employ subject matter experts who specialise in particular HR domains. This helps businesses improve the functioning of their HR department by having access to experts with niche experience and updated expertise.

Related: What Is HR Consulting? Definition, Skills And Career Guide

2. Improves compliance

Non-compliance with legal requirements can cause huge penalties and reputation damage for companies. Monitoring and updating the business to frequently changing legislation is challenging. By outsourcing HR requirements, companies can enjoy peace of mind, knowing that the outsourced HR partner is compliant and handles all legislative issues.

Related: Governance, Risk And Compliance Tools (With Benefits)

3. Minimises workplace risks

Besides non-compliance, workplace risks can also damage the reputation of a business. For example, an employer discriminating against another team member can damage the company's public image. Experienced HR outsourcing partners have extensive experience handling complicated workplace issues. They can help businesses minimise workplace risks while improving the business' reputation among the public.

Related: What Is Risk Management? (Crucial Steps And Strategies)

4. Helps reduce cost

Operating a full-fledged HR team can be expensive, especially for small and mid-sized businesses with limited budgets. Outsourcing partners support businesses in lowering their operational costs by offering an efficient recruitment strategy that helps reduce the cost of talent acquisition. It also eliminates the costs of purchasing, implementing and deploying expensive HR tools and minimises the risk of compliance fines, helping small businesses focus their budget on their core products and services.

5. Increases workplace efficiency

Outsourcing helps streamline various HR processes like payroll processing, employee training and compliance management and reducing the time spent on routine administrative work. Outsourcing providers help in improving the workplace productivity of their clients by offering access to the latest HR tools and technologies that eliminate inefficient processes. As a result, teams can focus more on core business practices, improving the organisation's overall productivity.

Related: Top 10 Management Challenges And How To Overcome Them

6. Helps attract and retain talent

Recruiting is a significant challenge for small businesses and startups that do not have the branding of bigger corporations. By outsourcing the HR functions to experts, companies can build a seamless workplace culture that helps attract the right talent. Besides recruiting top talent, an organised HR process improves employee satisfaction, assisting businesses in reducing employee turnover.

Related: What Is Talent Hunting? With Skills Of A Talent Hunter

7. Gives access to the latest HR tools and technologies

HR tools and technologies are rapidly evolving, making it difficult for businesses to implement the latest software at cost-effective prices. By outsourcing HR functions, enterprises gain access to the latest tools and technologies that help employees stay productive and engaged at work. These tools also help improve the efficacy of other HR functions, like performance management, employee time tracking and payroll.

8. Improves employee efficiency

HR outsourcing providers offer multiple employee training programs, helping them to increase their professional skills and knowledge. For example, HR outsourcing companies provide diversity training, cultural sensitivity, workplace accident prevention and other latest training programmes. Access to high-quality training and a supportive work environment allows employees to remain engaged and competitive in the workplace.

9. Offers more flexibility

Outsourcing HR functions make it easy for businesses to scale up or down the size of their HR team per requirements. Most HR outsourcing service providers offer flexible packages that provide companies with on-demand access to critical HR tools, resources and services. This helps businesses remain agile without being burdened with an expensive in-house HR team.

10. Focuses on core business practices

While HR is a crucial function, it is not a revenue-generating activity. Outsourcing HR functions to an expert allows businesses to free up time and resources. This helps them focus more on core business processes, increasing revenues.

Related: 13 Important HR Manager Roles (With Job Duties And Tips)

Types Of HR Outsourcing Models

Here are some of the popular HR outsourcing models that businesses use when outsourcing their HR requirements to external vendors:

Professional employer organisation (PEO) outsourcing

In PEO outsourcing, a business signs a contract with a third-party firm to enter a co-employment relationship. Here, the services provider becomes the employer of record and pays wages and handles workplace taxes, while the business handles recruitment, terminations and other employee operational tasks. The company reimburses the expenses of the PEO and also pays an additional fee for the services of the PEO.

Administrative services organisation (ASO) outsourcing

In the ASO model, the outsourcing partner manages all the HR functions of the business as a third-party vendor. Unlike the PEO model, the company retains its employer of record status under this model, and the outsourcing partner is only a vendor, not a co-employer. Choosing the ASO model of HR outsourcing helps businesses maintain more direct connections with their employees while enjoying the expertise of an external HR services provider.

Human resources organisation (HRO) outsourcing

HROs provide their clients with flexible packages they can customise based on their requirements. For example, a company might hire an HRO to provide periodic skills training for employees while handling other HR functions, like payroll and tracking employee performance internally. HRO outsourcing works best for large corporations with the resources and capacity to handle most HR functions internally.

Software-as-a-Service (SaaS) HR outsourcing

In this model, a business uses a software program to automate and manage essential HR functions. A third-party vendor or service provider offers the HR software. This option is an excellent choice for businesses seeking greater flexibility and cost savings while keeping HR services in-house. Some common examples of SaaS HR outsourcing include payroll and benefits management, employee training and performance tracking and applicant tracking systems (ATS).

Business process (BPO) HR outsourcing

In this model, a business outsources a single HR function to a third-party vendor. Unlike SaaS HR outsourcing, in BPO HR outsourcing, the external service provider offers personalised support and expert knowledge in specific areas. It is an ideal choice for companies looking to outsource complex HR functions like employee recruitment and benefits administration.

Single-source HR outsourcing

In this model, a business outsources all of its HR needs to a single external services provider. The service provider offers support for the entire employee lifecycle, such as talent acquisition, payroll and benefits administration, attendance tracking, performance management, employee termination, training and upskilling and all other HR functions. The biggest benefit of this model is that it helps businesses build a long-term relationship with the HR services provider. Some service providers also offer other services, like bookkeeping and accounting, to help small businesses with other non-core business processes.

Related: The Functions And Departments Of HR: A Complete Guide

Tips For Implementing HR Outsourcing

If you are an HR professional or business manager, you can follow these tips to implement HR outsourcing successfully:

  • Appoint a spokesperson to lead the initiative. Choose a senior or mid-level manager with expert business knowledge to act as a point of contact between the vendor and the company. Look for managers with excellent communication skills as they can better address the concerns of all stakeholders.

  • Identify the services to outsource. Discuss with senior managers and team leaders to identify the list of services that are challenging for the business. Next, work with all stakeholders to identify the right type of HR outsourcing model that best fits business requirements.

  • Encourage employees to cooperate with external HR professionals. A collaborative relationship between employees and external HR professionals is essential for the partnership's success. Explain the reason behind outsourcing and encourage employees to cooperate with the external vendors.

  • Monitor the process. Ensure that the spokesperson regularly monitors and tracks the collaboration to ensure that it is proceeding as per initial plans and is on the right path to achieve the desired objectives.

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