HR Outsourcing

What is HR outsourcing or HRO?

Human resources outsourcing or HRO is the process of engaging an external entity to handle an organization’s HR functions and duties. Typically, the third-party provider takes over the management and responsibility for all or specific HR tasks on behalf of the employer.

Outsourcing HR allows the company to concentrate on strategic HR matters affecting corporate performance and shareholder value. Whereas, functions like recruitment, payroll management, staff training, employee benefits, and job evaluation can be outsourced to save time and cost.

The following sections shed light on which HR functions are more suitable for outsourcing and the advantages it brings to the company. Also learn about the various types of HR outsourcing (HRO), such as PEOs, BPOs, and ASPs, and evaluate whether outsourcing is a viable solution for the growth of small businesses.

What human resources functions are commonly outsourced?

Here are the seven human resources most commonly outsourced HR functions:

1. Administration

HR professionals already have numerous administrative tasks on their plate from creating policies to hiring and nurturing employee development. Outsourcing these functions can be a game-changer, allowing HR teams to focus on strategic initiatives.

2. Payroll management

Navigating the complications of payroll, including tax filing, automated deductions, and time tracking, requires precision to avoid potential legal troubles. Hence, companies choose to outsource payroll management to ensure accuracy and compliance.

3. Compliance and risk management

Staying compliant with ever-evolving industry regulations and codes of ethics is a constant challenge. Outsourcing this function to dedicated HR experts ensures access to up-to-date expertise.

Furthermore, it involves the creation of comprehensive employee handbooks and efficient management of documentation, allowing HR to proactively address compliance issues.

4. Recruitment services

Talent acquisition is a critical function for HR, and outsourcing this process can significantly enhance efficiency. With extensive databases and refined processes, outsourcing partners excel in tasks such as

  • Crafting job descriptions
  • Job posting
  • Sourcing good talent
  • Reviewing resumes
  • Scheduling interviews

5. Benefits administration

Tailoring employee benefits packages to meet the diverse needs of employees requires careful consideration. Outsourced HR services specialize in administering healthcare, retirement plans, childcare support, and employee assistance programs. This ensures that the workforce receives personalized benefits, contributing to higher employee satisfaction and overall employee well-being.

6. Recognition and rewards programs

Recognition and rewards programs, including annual performance bonuses and incentivized sales initiatives, play a crucial role. Employers outsource these functions to efficiently organize and administer these initiatives to keep the workforce motivated and engaged.

7. Performance management

Outsourcing performance management not only ensures a structured approach but also brings in external expertise to create effective performance appraisal systems. This collaborative effort contributes to fostering a culture of continuous improvement within the organization.

While outsourcing HR functions offers efficiency and expertise, it’s crucial to value control and ownership. Many companies prefer in-house HR for privacy, safety, and autonomy. An HRMS (Human Resource Management System) provides a powerful solution. It allows seamless management of functions while retaining full control over processes and sensitive data.

The best part? It’s user-friendly and requires no extra expertise, offering a perfect balance between efficiency and control for businesses.

What are the types of HR outsourcing?

The following are the main types of options available for HR outsourcing:

1. Professional Employer Organizations (PEOs)

PEOs (Professional Employer Organizations) partner with businesses to take charge of HR administration, sharing legal responsibilities for employees. This allows the business to focus on other aspects while the PEO handles all things HR.

2. Business Process Outsourcing (BPOs)

In HR, BPOs (Business Process Outsourcing) ensure your HR system stays up-to-date with the latest technology. They offer features like self-access and HR data warehousing to streamline operations.

3. Application Service Providers (ASPs)

ASPs host software on the web, renting it to users. They offer both standard and customized solutions for tasks like payroll and benefits management.

4. E-Services

E-Services refer to web-based HR solutions. Both BPOs and ASPs are often categorized as E-Services, encompassing a range of HR functions accessible online for enhanced efficiency and convenience.

commonly outsourced hr functions


What are the benefits of HR outsourcing?

Here are the five key benefits of outsourcing HR:

benefits of hr outsourcing

1. Maximizes cost savings

Outsourcing HR functions significantly cuts overhead costs linked to maintaining an in-house HR department. Small businesses are often constrained by budget limitations. Hence, they find it cost-effective to outsource, eliminating the need for extra office space and specialized staff.

2. Sources global talent

Outsourcing to Professional Employer Organizations (PEOs) grants access to a global pool of top-tier HR professionals. This expands perspectives and ensures HR services are executed by the best talent worldwide, bringing diverse expertise to the table.

3. Streamlines efficiency

Managers are to focus less on paperwork and more on optimizing workforce efficiency when HR tasks are outsourced. Advanced HR technology employed by outsourcing providers makes crucial functions like payroll, administration, and compliance management more efficient.

4. Drives employee development

HR outsourcing facilitates the implementation of performance management plans. It ensures that employees align with company policies and contribute effectively to achieving business goals. This helps create a culture of continuous employee development.

5. Ensures compliance

Keeping up with evolving laws and compliance can be challenging for startups and small businesses. HR outsourcing can play a significant role here by aiding compliance with such laws. HRO mitigates the risk of serious financial consequences associated with non-compliance.

What challenges do companies face when outsourcing HR?

Here are five common challenges companies face when they outsource HR:

  1. Less flexibility: Difficulty in accommodating special requests or emergencies for employees.
  2. Problems take longer to resolve: Delays in correcting errors, especially in payroll or leave management, when relying on third-party HR services.
  3. Lack of control: Outsourcing may lead to reduced awareness of day-to-day workplace dynamics, resulting in a potential loss of control.
  4. Issues with privacy and security: Potential vulnerability of employee data to security threats and privacy concerns when using web-hosted HR software.
  5. Costly affair: Outsourcing costs may increase over time, posing a risk despite initial cost savings.

Can small businesses benefit from HR outsourcing?

Yes, small businesses can indeed benefit quite a lot from HR outsourcing. It enables them to get access to experienced individuals as well as market experts. Outsourcing helps small businesses manage essential HR functions more efficiently. These providers stay updated on the latest best practices, technologies, and compliance requirements, saving business owners time and resources.

Even though outsourcing offers valuable support, small businesses can leverage HRMS (Human Resource Management Systems) greatly to their advantage.

What makes HRMS & other HR software particularly beneficial is its user-friendly interface and accessibility. They make it easy for small business owners and their teams to navigate. With features like automated processes and centralized data storage, HRMS streamlines operations and reduces administrative burdens.

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