Advantages and Disadvantages of Outsourcing HR Functions?

The question of whether to outsource HR is one most small businesses face at some point in their growth. There are pros and cons to outsourcing, but which ones apply depend on which functions you are outsourcing and what type of outsourcing partner you choose.

ROI, in particular, can vary tremendously. The ROI of a professional employer organization averages 27.2%, while payroll processing can easily end up with a negative ROI. 

You should look at the advantages and disadvantages to make the right choice for your company.

Advantages

Reduce Costs

Instead of paying an extra HR team member, you can outsource to HR experts. This also gives you access to expertise you might not have in house. Outsourcing allows you to pay only for the time and expertise you need.

Additionally, if you go with a PEO, you can gain access to a more competitive benefits package for a lower cost. This increases employee retention and further reduces costs.

Focus on Core Competencies

Outsourcing routine HR tasks allows your in-house team to focus on what really counts: improving employee relations and developing a strong company culture. They can focus on strategic tasks such as hiring the right people, providing the right training, and improving diversity.

Additionally, when HR is overworked, the most mundane tasks often get farmed out to other people in the company. If your office manager is handling payroll, then they are not doing more important parts of their job. Worst case scenario, the owner ends up taking on these tasks themselves.

Ensure Compliance

Compliance errors can be extremely costly. For example, a fine dining restaurant in Seattle ended up paying $600,000 to settle a class-action lawsuit. According to the aggrieved employees, the restaurant was not paying overtime or paying for rest and meal breaks. 

Compliance can be very complicated, especially in the current environment where you might have remote workers in multiple states. Outsourcing HR gives you access to people who know the regulations inside and out and whose job it is to keep up with them; smaller companies simply cannot spare the time to ensure they are up to date on everything.

However, there are also potential disadvantages to outsourcing HR.

Disadvantages

Adjustment Period

Most companies that move to outsourcing HR have been doing DIY HR or have a single HR person. This still results in a change from doing everything in-house to dealing with a partner.

This can result in change anxiety for employees (and for the owner), which creates a temporary adjustment period in which productivity may drop and stress levels may rise. People need time to get used to the switch. This can be mitigated with good communication.

Introducing employees to the outsourcing partner can also help, by starting the process of building trust in them and helping employees better understand what is going on and how it will benefit not just the company, but them and their families.

Misguided Fears

Your HR person may be afraid that they are going to be replaced. It's common for in-house teams not to understand that proper outsourcing is meant to complement and support them, not replace them.

Owners often also have fears. One fear is losing control of aspects of your company and the way you handle employees. Co-employment is often mistaken for the use of a staffing agency, where you might be sent a temp chosen by the agency who ultimately answers for them.

The PEO is not responsible for choosing employees, setting terms of work, etc; rather they are just taking on the responsibility to process and remit employment taxes. They may also handle benefits administration. While they can take over the mundane paperwork, they are not telling you who to hire.

Other employees may be concerned about handing over their personal information to the outsourcing partner. They may need information about the partner's privacy and cybersecurity policies to reassure them that their data is, in many cases, more secure in the hands of an experienced PEO.

Change in Culture

While outsourcing HR generally leads to improvements in company culture, people are inclined to be anxious about change. Hesitancy about adopting something new is natural.

Employees may also feel as if the culture is changing away from them and as if they are losing touch with the organization. Good communication between management and employees can rectify that. It is especially the job of your in-house HR team to ensure that employees can keep up with the changes and do not feel as if they are being "left behind."

Ultimately, the disadvantages of outsourcing HR can all be mitigated by good communication and culture-building; the very things a good in-house HR team can handle once they no longer have to worry about spending hours handling administrative burdens. This makes outsourcing to a PEO a clear winner for small- and medium-sized businesses.