A Comprehensive Guide to HR Outsourcing

Last updated on 

November 26, 2021

by

The VA Reviewer
A Comprehensive Guide to HR Outsourcing

Human resources outsourcing entails hiring companies to manage personnel functions such as health benefits, retirement plans, and workers’ compensation insurance. It includes hiring, training, evaluation, and overseeing the legal matters on employment. 

The organization benefits from a consistent supply of skilled and competent workers. Overseeing the hiring and recruitment of sought-after talents can be a time-consuming task. But it cannot be neglected as people are what most organizations consider as assets. 

Leading companies around the world are taking a more strategic approach to human resource management. They don’t want to neglect HR but don’t want to focus so much energy on it instead of spending more hours on more pressing matters.

For this reason, they outsource day-to-day human resource functions to third-party providers that can focus on strategic human resource issues that affect the company’s performance and its revenue-generating activities.

As your company expands, so will your human resources responsibilities. 

Human resource functions are among the services companies are most likely to outsource for various reasons. It includes cost savings and their expertise in executing strategic human resource policies that could not be possible internally. 

Thus, developing and streamlining your HR processes will enable you to better care for your employees, increase efficiencies, connect with top-tier talent, stay on top of rules and regulations, and improve your bottom line. 

In a nutshell:

  • Outsourcing human resources is a significant strategic HR initiative.
  • It enables organizations to focus their internal resources on what they do best while also controlling their bottom lines.
  • HR outsourcing assists an organization in gaining cost and time efficiencies, providing a competitive advantage in human resource strategies, and improving employee services. 
  • Human resource is an essential element in the development and execution of the organizational system.

In-depth Definition of HR Outsourcing

Human Resource Outsourcing is how a company hires a third party to handle its human resource functions. A company may outsource its HR-related activities to a single or a group of service providers in inshore or offshore locations. 

In general, businesses outsource mostly non-critical and non-confidential HR functions. It includes recruitment and selection, payroll and compensation management, staff training, employee benefits and service, and job evaluation. 

If you notice, these are mainly people and effort-intensive routine activities that a third-party specialist can efficiently fulfill. With their experience and expertise, you’ll expect excellent results and high cost and effort savings. Plus, the specialist can provide the service at an incredible speed thanks to the standardization of processes.

Simultaneously, organizations need to continue playing transformational HR roles, such as attracting and retaining talent, implementing strategic change in collaboration with line managers, championing employee concerns, etc. HR is primarily viewed in boardrooms and business schools as a powerful tool for attracting and retaining talent, developing workforce capabilities, handling grievances, and bringing out the best in people.

Motivations in HR Outsourcing

Here are some of the reasons motivating companies and organizations to outsource their HR management:

  • To allow businesses to concentrate on core operations
  • Save money – whether direct or indirect and improve the financial bottom line
  • Contribute to the development of stable and cost-effective operations
  • To shift the resources and energy from internal processes to the achievement of business objectives
  • Investment in HR transformation and IT systems are more expensive and capital intensive
  • Get the expertise of an HR service provider to ensure compliance with legal, regulatory, and best practice requirements

Types of HR Outsourcing

Application Service Provider (ASP)

Many companies provide hardware and software applications to support large organizations, including application vendors such as PeopleSoft, Oracle, and others that have developed application packages (PeopleSoft HRMS, Oracle HRMS) to support human resource activities in an organization.

They install, customize, and support the use of these applications. The primary disadvantage of ASPs is the cost of application software. Second, the ASPs do not ensure the successful implementation of the software they’re selling.

Business Process Outsourcing (BPO)

The primary distinction between BPO and ASP is that in BPO, the client has direct contact with the employees via call centers or support centers. Multi-national companies (MNCs) typically choose BPO because they operate in multiple countries and employ many people. While some businesses prefer to retain control over their human resources, others delegate that authority to BPO service providers.

Total HR Outsourcing

The service provider manages the entire HR function in this type of outsourcing. The organization does not have a separate HR department. Only senior HR professionals who are also HR strategists work for the client organization. The service provider handles a variety of non-strategic functions and employee contact.

HR Outsourcing Services

When your company contracts a third party to manage some or all its human resources functions, you outsource HR. Outsourcing can encompass various services, ranging from day-to-day HR tasks to long-term, strategic projects. 

Among these services are:

Recruitment

Outsourcing your company’s recruiting activities can help you develop a pipeline of experienced people, allowing you to hire team members that will benefit your firm in the long run. 

Payroll Administration

Taking care of tasks on your business’ payroll checklist is a full-time job in and of itself. Outsourcing to an HR support team that manages all the moving parts—including time-tracking, benefit deductions, payroll tax filing, reporting, and more—frees up time for you to focus on business strategy.

Taking care of tasks on your business’ payroll checklist is a full-time job in and of itself. Outsourcing to an HR support team that manages all the moving parts—including time-tracking, benefit deductions, payroll tax filing, reporting, and more—frees up time for you to focus on business strategy.

Benefits Procurement and Administration

An HR outsourcing firm can provide you with access to high-quality, low-cost benefits, allowing you to compete for top talent while also providing employees with the health and financial benefits they require. Once you’ve decided on the benefits you want, it can help you manage your employee benefits program, which requires specialized knowledge and a keen eye for detail.

Performance Management

Outsourcing your company’s training and performance-management programs can help you develop your employee talent base more proactively while increasing job satisfaction and engagement.

Risk Management and Workplace Safety

Providing a secure working environment for your employees is a top priority. When you work with a human resource outsourcing firm, you can help prevent workplace accidents and combat employee fatigue.

Employment and Labor Law Compliance

The amount and degree of regulations in the United States are ever-changing, with Congress enacting new laws from time to time. It is also the same case in other jurisdictions like Australia, Canada, the UK, and New Zealand. Your company will remain compliant with all federal, state, and local workplace regulations with the help of a quality HR outsourcing provider with extensive regulatory experience.

Advantages of HR Outsourcing

Hiring HR firms save small businesses money and time. It allows them to enjoy a broader range of benefits that includes the following:

Reduce Your Expenses

Your employees are entitled to high-quality human resource support, but many small and medium-sized businesses cannot justify the cost of maintaining an entire HR department. According to industry research, companies that outsource their HR services to professional employer organizations (PEOs) or an HR outsourcing firm save approximately $450 per employee in administrative costs.

Increase Employee Morale

Payroll, benefits, and career development, among other things, are critical to maintaining and improving employee morale and productivity. HR outsourcing provides you with access to human resources experts who will assist you in caring for your current employees to reduce employee turnover and recruit new members to the team. An HR support team can also negotiate a better benefits package for your company than you can, saving you as an employer and your employees’ money on their premiums.

Improve Business Efficiencies

When you and your employees are preoccupied with day-to-day HR processes and tasks, it can be challenging to focus on long-term business strategy. With HR outsourcing, you can delegate daily tasks such as payroll, check processing, insurance claims review, and benefit administration, allowing you to focus on the big picture of your business.

Recruit and Retain Competent Workforce

By actively sourcing and vetting candidates and managing your hiring processes, an HR outsourcing firm can assist your company in taking a more proactive and targeted approach to recruiting. Building a solid talent pipeline provides numerous long-term benefits, such as lower recruiting costs, a solid experience base, and a more robust company culture.

Disadvantages of HR Outsourcing

Here are some of the downsides of HR outsourcing that we’ve heard from past consulting engagements and concerns raised by companies:

Poor Communication

The most significant disadvantage of outsourcing HR functions is poor internal communication because the outsourcing company is not on-site and has no understanding of the company’s culture. Employees cannot simply walk into the HR office to air their concerns or grievances. As a result, they may feel marginalized.

Loss of Confidentiality

A poorly managed outsourcing firm could cause disasters by inadvertently leaking sensitive company information, failing to deliver adequate services, or going bankrupt, leaving a client without HR services.

Why Consider HR Outsourcing?

Outsourcing human resources is a significant strategic HR initiative. It enables organizations to focus their internal resources on what they do best while also controlling their bottom line. 

HR outsourcing assists an organization in gaining cost and time efficiencies, providing a competitive advantage in human resource strategies, and improving employee services. HR is an essential partner in the effective and efficient running of any organization.

As discussed above, human resources are assets critical to the operation of any organization. HR responsibilities include all related functions that contribute to employee well-being, such as payroll, benefits, hiring, firing and adhering to pertinent tax laws.

If you’re exploring HR outsourcing in the Philippines and you want some guidance, we offer consultancy services to ensure your success. If you’re interested, please feel free to contact us or check our VA Finder page

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