Pros and Cons of HR Outsourcing

In business, getting caught in the weeds can interfere with big picture thinking. Just handling payroll and taxes eats up a lot of time.

That’s why many businesses use outsourcing firms and software to handle everything from payroll and resume screening to benefits enrollment and compliance issues, says Barbara Mitchell, co-author of “The Big Book of HR.”

This hybrid model of outsourcing administrative tasks to allow more time for building the business works well for many companies, says Sabrina Baker, founder of Acacia HR Solutions. The key to getting it right is knowing where outsourcing can add value without losing the human touch.

Pros of HR outsourcing:

Saves money. Small companies and start-ups usually can’t justify the expense of hiring a full-time HR employee. Large companies also frequently rely on outsourced experts to bolster their staff. The biggest gains come from outsourcing somewhat repetitive tasks that require a lot of time, but don’t necessarily need a lot of training, guidance, or personalized knowledge. Good examples are large-volume recruiting, payroll, independent contractor compliance, and background checks.

Allows staff to be more strategic. Today, HR staff play a role in recruiting, hiring, training, morale-building, policy-making, risk management, and more. That’s a lot for one department, much less one person, to handle. Outsourcing some of these functions frees up the internal HR team to be more strategic rather than tactical, Mitchell says. “They can have more impact on the business through succession management, coaching, and counseling.”

Vertical expertise. Outsourcing can be a good option when you may just not have the relevant expertise in-house. Jobs like legal compliance begin to get much more complicated as a company grows.  

For example, at the 50-employee mark, regulations around the Affordable Care Act and the Family Medical Leave Act kick in. Smaller companies may have had a non-expert handling some of those HR duties, and may now find themselves unable to keep up with the rules and regulations surrounding areas like taxes. At this point, outsourcing this job to an HR specialist who understands the legal vertical can be hugely beneficial.

Cons of HR outsourcing:

Reduced human touch. Some of the biggest, most challenging, and most emotional experiences in an office involve HR. HR works with employees and their families on very personal matters like health, life insurance, and so on. Thus, the risk in excessive outsourcing is the loss of connection between company management and its employees. “It can feel a bit disconnected when someone handling HR or HR tasks is off-site and not part of the everyday team,” Baker says. “Good outsourcers know how to overcome that.”

Loss of in-house expertise. When companies outsource HR functions, they still need to keep a toe in the HR waters. You should still name someone on staff as a point person to check on those outsourced tasks, otherwise you lose the risk of your company and HR team being on totally different pages. Plus, HR should share the company’s culture, given their close work with employees.

Less availability. There’s a good chance a response won’t be as quick from an external company as it would be from an in-house HR person. Mitchell strongly recommends including a performance clause in contracts for outsourced HR activities. “Contracts should be reviewed annually to see whether the outsourcing is benefiting the organization and the employees, and if not, it shouldn’t be renewed,” she says.


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