How to Outsource Human Resources: A Comprehensive Guide

Between insourcing and outsourcing human resource functions, we see more businesses choosing the latter or a combination of both. Given what we stand to gain from HR outsourcing (HRO), including how to outsource human resources effectively, there is no wondering why.

43% of leaders today intend to outsource HR administration tasks within the year to make businesses more competitive. Leaders tap into HR outsourcing for process streamlining, maximizing cost-efficiency, and improving talent management and employee satisfaction ratings.

This article will discuss some nuances of HR outsourcing, including factors to consider when choosing HR outsourcing services and a sample cost-benefit analysis to guide your decision-making. We have also included insights from experts who have successfully used HR outsourcing to grow their respective organizations.

Understanding HR outsourcing

HR outsourcing involves delegating various human resources functions to external HR outsourcing providers. Their services give you access to their expertise in facilitating various HR administrative tasks with precision and care.

HR outsourcing partners provide payroll processing, recruitment, talent management, training, and compliance. Often, these tasks extend across the entire employee lifecycle – from recruitment to offboarding. Hence, you should ideally work with one partner that offers the whole suite of services at competitive rates for cost-efficiency and ease of coordination.

While HR outsourcing reduces costs, it might be more prudent for businesses to outsource just one or a handful of specific HR services and administrative tasks. However, businesses outsource HR as a more reasonable approach to running their talent management or HR administration. A recent study shows that 32% of organizations in the US outsource at least one HR activity. 

Most business leaders express satisfaction with their selected HR outsourcing services, whether utilized for administrative tasks or engaged through an HR outsourcing company. Moreover, with technological advancements, globalization, and workplace changes driving growth in the HRO services market,  outsourcing HR functions are expected to become more robust and in demand.

Types of HR Outsourcing

Businesses have various human resource requirements, from employment laws that need to be followed to HR administration tasks that need constant oversight and facilitation. Consequently, different types of HRO services exist to accommodate those.

Some of the most prolific types are:

Administrative HR Outsourcing

For instance outsourcing HR administrative tasks is a widespread practice today, helping free up time for teams and leaders allowing them to focus on other strategic activities. HR tasks under this umbrella cover routine and time-consuming tasks like payroll processing, benefits administration, and employee record maintenance. Additionally, one of the big benefits of administration outsourcing is that businesses can accomplish these tasks efficiently and accurately.

Recruitment Process Outsourcing (RPO)

These providers help you manage your entire recruitment process. With an experienced HR partner, you can delegate job postings, candidate sourcing, screening, and interviewing to them and trust that you will hire more A-class talents. Through this service, you can streamline HR tasks such as hiring processes, access broader talent pools, and improve time-to-hire metrics, all while reducing recruitment costs.

Professional Employer Organizations (PEOs)

These function as your co-employers, as they assume responsibility for HR-related legal compliance and employee relations. This type of outsourcing lets us delegate risk mitigation tasks and other HR needs to providers with focused expertise in the area, ensuring accurate accomplishment.

HR Consulting

Ideal for those seeking strategic guidance and support in specific HR areas such as laws and regulations, employee benefits, and even HR management. It connects business leaders with external experts who offer counsel regarding organizational development, performance management, change management, and other specialized practices. 

Technology Outsourcing

If your company uses HR technologies like human resource information systems (HRIS) for its HR needs, you can also delegate their maintenance to HRO partners. Whether it’s payroll software or applicant tracking systems, they ensure your technology is functional, updated, and compliant with various data privacy standards.

The Process of Outsourcing HR

While outsourcing HR services for DesignRush, I had no idea what I was doing. This predicament was troubling because I knew that if I made a mistake in choosing, it could severely cripple my business operations.

There were numerous HR outsourcing options available, but it was paramount that I sought the advice of experts. With the expertise provided by the right outsourcing solutions, I found the ideal partner for growing my business. I have distilled their insights and my experiences into a simple checklist I am sharing with you below.

Identifying HR Functions for Outsourcing

This is a foundational step before making a decision. At this stage, your goal is to thoroughly assess your organizational needs, from payroll services to how to manage employee benefits. 

Did you need HR support? Help with implementing employment laws and regulations? Risk management? Payroll processing? To address these needs, as business owners, you must examine your current systems and processes, the needs of your HR teams, and your strategic business objectives to understand how a third-party provider might be able to help.

Simon Bacher, the founder of Ling, explains that you must be scrupulous in our assessment so that you don’t overlook critical improvement areas. Ling combines quantitative (analytics) and qualitative data (team member anecdotes) to uncover the gaps HRO partners must fill.

He explains, “On top of looking at employee satisfaction and other workforce-related metrics, we made sure to ask our people what their exact needs are. As leaders, we so often fall into the trap of nitpicking the numbers, even as they lack context, thus leading us to make subpar decisions. Talking to [your] people is essential to layer in that rich context – to tell you the real story behind the numbers.”

For Simon, doing this helps him develop a detailed, organized, and, above all, people-centric plan for HR outsourcing.

“Because we took the time to assess the business and our people’s needs, everything – from the selection, down to team cooperation during the transition – was met without resistance.”

Guidelines for Outsourcing HR tasks to a provider

If you’re considering outsourcing HR tasks to a provider, here are some recommended steps to follow:

• Conduct a needs assessment. Evaluate your requirements to consider factors like workforce size, industry regulations, strategic objectives, and growth projections. You should also simultaneously interview your internal stakeholders to identify their pain points. HR compliance is one of the most delicate aspects of running and scaling a business and understanding pain points is essential to ensure seamless implementation. Doing so helps you gather anecdotal reports on workflow inefficiencies, knowledge, skills gaps, and other opportunity areas where HR support and external experts could add value.

• Ensure strategic alignment. Simultaneously with your assessment, you must ensure strategic alignment between the outsourced HR functions and your long-term objectives and strategy. Focus on tasks that directly contribute to core competencies and competitive advantages while considering the potential impact on employee experience and organizational culture.
  
• Assess cost-benefit analysis. This analysis is vital in determining the financial implications of HR outsourcing versus handling them internally. In doing so, you must consider your upfront investment, ongoing service fees, potential cost savings, and returns from time, resources, and risk mitigation investments.

Below, I will demonstrate a sample cost-benefit analysis.

• Evaluate service providers. Research and evaluate a shortlist of potential HRO partners based on expertise, track record, service offerings, scalability, and cultural fit. Subsequently, better grasp how they can add value to your business, ensure that you request proposals, conduct interviews, and cross-reference their expertise with previous clients.
  
• Develop a transition plan. Detail your transition plan by outlining timelines, milestones, responsibilities, and communication protocols or, in short, plot out a roadmap for integration. Here, clearly defining roles and expectations for internal and external stakeholders is critical so the transition goes smoothly.

Selecting the right HR outsourcing partner

The next thing on our to-do list is to select the appropriate HR outsourcing partner. Allowing your assessment findings to guide your decisions, you should be able to choose a partner that can deliver your expected results.

In this step, we consult Dominic Monn, founder of MentorCruise, who cautions against selecting out of blind faith. He asserts the importance of attending presentations and exploratory calls to probe service providers further.

“I’m a firm believer that we must always trust our data and verify them through external methods. Hence, following our assessments, exploratory calls…gives us more decisive evidence on how good of a fit they are for our businesses,” explains Dominic.

These calls function like an interview with an applicant. Having your list of criteria and your script of questions on hand is just as important. Remember, you will assign important aspects of your internal operations to an outsourced team–from payroll administration to workplace safety and strategic planning. Take time to run all your questions by each potential service provider so you capture information that is not apparent from quantitative data, such as their values and the degree to which they align with yours. These, ultimately, are better gauged through conversations. 

Key criteria and questions during interviews or presentations

Below is a list of pertinent criteria and questions you can ask during these interviews or presentations. 

• Expertise and experience. Are a service provider’s human resource expertise and experience a good match for our specific needs? Have they worked with clients in the same vertical as us? Are these clients structurally similar to your organizations?
  
• Service quality and reliability. Another thing you can check for when setting up presentations or exploratory calls is their reliability. Their ability to show up for you at this stage is one of your first clues into how they will present for you and deliver the results you expect in the long run. You can also use this opportunity to verify the responses from references, testimonials, and case studies from existing and previous clients.
  
• Cultural fit and alignment. Most importantly, take the opportunity to sit down and talk with every provider on your shortlist to verify if their HR services are a good fit for your culture. As Dominic mentioned, tons of information must be apparent from the data you gather through internal sources. And part of this is the values that your candidates uphold.
  
• Communication styles and collaboration practices. Apart from values, assessing communication styles and work culture is vital to ensuring compatibility and collaboration. Look for partners who understand your unique challenges, goals, and values and have a good track record of the most commonly outsourced HR functions. Most importantly, they must commit to building a collaborative and mutually beneficial relationship. Effective communication, trust, and shared goals are essential when outsourcing HR services to foster a successful long-term partnership with your outsourcing provider.

Transitioning HR Functions to an External Provider

Finally, we get to the more challenging part: executing the transition of HR functions from internal to external experts. Outsourced HR services are inherently a change management process, and I cannot tell you that it will not be painstaking.

Manage this as best as possible with careful planning and empathic coordination with stakeholders. This helps ensure that the transition happens smoothly. Remember, the best HR outsourcing services will have minimal business disruptions.

“Any kind of change management task demands careful planning and, most importantly, coordination to ensure not just a smooth transition, but also effective integration from HR professionals,” shares David Bitton, chief marketing officer of Doorloop.

He shares that, in many ways, change management implemented by an HR team hinges on communication efforts and asserts that appropriate coordination is the key to engaging and involving your key stakeholders during the transition. “It’s like you’re marketing the transition, but internally. Your goal is to get as many people on board with the change as possible, so everyone is keeping each other informed and accountable,” says David. 

Essential Tasks for a Smooth Transition

Apart from communication, some other things you’ll need to get done during the transition are:

• Establish your goals and roadmap. Clear objectives, timelines, and milestones for the transition process ensure that you stay on track. Meanwhile, outlining specific tasks, responsibilities, and deadlines makes it clear to stakeholders that you are on top of the transition and that it will not lead to dangerous business disruptions.
  
• Communicate transparently and proactively. During the transition process, it is crucial to maintain open and transparent communication with all your stakeholders, including your internal HR managers and outsourced HR team. This ensures that everyone is aligned with the transition deliverables, and issues that could potentially cause more difficult problems can be assessed immediately. Provide regular updates–both good and bad. Your HR partner should address concerns and questions promptly and solicit feedback to foster trust, collaboration, and buy-in.
  
• Conduct comprehensive training and knowledge transfer. Show your internal staff and outsource providers that they are supported during the entire transition process. They must fully understand their roles, responsibilities, and expectations and possess the knowledge and skills required to execute their tasks effectively. 
  
• Testing and validating systems and processes. Before fully transitioning HR functions to the external provider, test and validate how optimal your systems, processes, and data migration are. Business owners should note that if they are not optimal, they have to iterate better ones by proactively addressing any issues, errors, and friction.
  
• Monitoring progress and performance. Lastly, if you want to outsource HR functions, continuously monitor progress and performance throughout the transition process. This helps you verify whether the transition is benefiting your company or not. Determine key metrics you need to track per the goals and objectives you initially set for outsourcing your HR functions. 

Costs Associated with HR Outsourcing

Like every investment in your company, certain costs accompany your HR outsourcing efforts. But at the end of the day, if your in-house HR team cannot keep up with the demands of a growing team, the ROI of outsourced HR services is invaluable. This is why, as we mentioned above, assessing your needs is vital. You don’t want to just spend money on an effort that you never needed in the first place.

Understanding these costs will also guide you in negotiating with HRO partners. By being aware of the costs certain aspects of the service entail, you can negotiate for discounts and/or tailored packages that better suit your needs and your capacity.

Here’s an estimated breakdown of the costs that HRO entails:

Service Fees
Monthly retainers	The fixed-rate paid to a service provider for executing the specified HR administrative tasks outlined in an agreement. This can cover a range of HR functions, such as payroll processing, benefits administration, compliance management, etc.
Pre-transaction fees	These fees are required to execute one specific HR function at a time. The amount may vary depending on the volume and complexity of transactions.
Setup Expenses
Consultation fees	Initial consultations with outsourcing providers may incur fees for assessments of business needs, initial recommendations for solutions, and development of implementation plans.
Software implementation costs	This is a cost specifically for technology outsourcing if your service provider includes technology management as part of the package.
Training fees	New systems will require staff training after deployment. This ensures that your internal teams have the knowledge and skills to navigate these tools and integrate them smoothly into your processes.
Ongoing Maintenance Charges
System maintenance	This may include software updates, bug fixes, and technical support the outsourcing provider provides to ensure the smooth functioning of HR systems and processes.
Compliance monitoring	These are paid to service providers hired specifically to monitor compliance and adherence to labor laws, regulations, and standards.

Sample Cost-Benefit Analysis for HR Outsourcin

Now that you understand the costs that HR outsourcing entails, it’s time to weigh it against the benefits. For this, you must conduct a cost-benefit analysis for one month of partnership with an HRO partner.

This will help you determine whether or not you will truly benefit from these efforts. Next, follow along the template below, and try to compute the costs you anticipate paying:

COST-BENEFIT ANALYSIS FOR XYZ COMPANY
COSTS
Service Fees	Price	Payment
Monthly Retainer Estimated time savings of 20 hours per month in HR administrative tasks, valued at $25 per hour	$2,000	monthly
Per-transaction Fees ($10 per payroll transaction, estimated at 50 transactions per month)	$500	monthly
Total Service Expenses	$2,500	monthly
SETUP EXPENSES
Initial consultation fee	$500	one-time
HRIS implementation costs	$3,000	one-time
Training fees	$1,000	one-time
Total Setup Expenses (one-time cost)	$4,500	one-time
ONGOING MAINTENANCE CHARGES
System Maintenance	$200	monthly
Compliance Monitoring	$300	monthly
Total Ongoing Maintenance Charges	$500	monthly
ADDITIONAL EXPENSES
Transition costs	$2,000	one-time
Communication expenses	$100	monthly
Contingency budget	$1,000	one-time
Total Additional Expenses (one-time cost + $100 per month)	$3,100	monthly
TOTAL EXPENSES
Total Monthly Expenses	$9,200
Total One-time Expenses	$12,000
TOTAL COSTS (monthly + one-time expenses)	$21,200

Weighing the Costs Against the Benefits

The net monthly impact of your efforts is the determinant of your cost-benefit analysis. We will use this figure to compute your return on investment (ROI) by comparing the initial cost of your investment with its final value.

A negative ROI indicates that the costs outweigh the benefits

That said, your calculation should be as follows:

1. Net Monthly Impact = Total Benefits minus Total Costs

$800 – $21,200 =  -$20,400

2. ROI = Net Returns / Cost of Investment

$-20,400 / $21,200

Even if outsourcing HR services mostly results in efficiency gains, our example above demonstrates that sometimes, outsourcing costs can cause you to waste an investment. That’s why it’s also important to carefully evaluate your needs and how you can best maximize your investment in HRO.

Benefits of HR Outsourcing

While our example showed a negative ROI result, many companies consider an HR outsourcing service because it presents several benefits. According to recent surveys, the top reported benefits of outsourcing HR functions to third-party vendors are more accurate processes, improved compliance, and better analytics reporting. 

Other business-critical benefits of HR outsourcing for us also include:

1. Cost savings. HRO enables businesses to scale their operations flexibly, adapting to fluctuations in staffing requirements and business demands without incurring significant overhead costs.
   
2. Access to expertise. Professionals operating within HROs are equipped with specialized knowledge and experience, ensuring compliance with complex regulations and industry best practices.
   
3. Enhanced efficiency. Delegating time-consuming administrative tasks to external service providers also enhances operational efficiency. By freeing up internal resources, businesses can focus on core competencies and strategic initiatives.

Potential Drawbacks of HR Outsourcing

While the advantages of an HR outsourcing provider are well-documented, businesses should equally acknowledge and understand the potential drawbacks associated with this strategic approach. 

In this section, we explore some key challenges and pitfalls businesses may encounter when outsourcing HR functions, providing insights and recommendations to navigate these potential drawbacks effectively.

1. Loss of control. Trusting external providers with HR tasks may reduce transparency, responsiveness, and alignment with organizational objectives. 
   
2. Confidentiality concerns. Outsourcing HR services risks exposing sensitive employee information to partners. This may put the business at risk for data breaches. Moreover, compliance with data protection regulations, such as GDPR or HIPAA, becomes challenging when data is managed externally.
   
3. Quality of HR outsourcing provider. It’s not uncommon for businesses to encounter discrepancies in service delivery standards compared to in-house operations. Due to a lack of familiarity with company culture, industry nuances, and specific organizational needs, some service providers may deliver subpar results and waste resources. 

Conclusion

Outsourcing specific business functions, including HR technology and functions, is a common practice in modern businesses. Thanks to widespread digitalization, business horizons broaden as they gain access to a global talent pool.

For small businesses that cannot hire in-house talent due to time and budget constraints, HRO is a prime solution to scaling effectively and quickly. Considering that more leaders are seeing the gains outweigh the losses from HR outsourcing companies, it is safe to say that considering it for yours may be worth the investment.