Small businesses that outsource their HR grow faster than those that don’t. The 7 to 9 percent growth advantage is also associated with lower employee turnover. Outsourcing HR has to be worth considering for any business interested in improving performance.
Human resources outsourcing can reduce the fixed cost of managing employees, but is it worth it? Read on to find out more.
Human Resource Outsourcing
Outsourcing non-core business processes is a very common activity. Businesses often partner with other businesses for services when it makes commercial sense to do so. Think about cleaning services, legal advice or catering.
Human Resources is a non-core activity for many businesses. Outsourcing HR is a natural thing to consider. Combine this with a whole range of other benefits and outsourcing could make sense for your business.
What is HR Outsourcing?
HR can be outsourced in several ways. There are three common ways to do it. These are application services, HR processes, and shared services.
Application services are the external provision of the technology HR use to deliver their service. This can include payroll, human resource records, learning and recruitment applications. In this scenario, outsourcing is limited to software provision and support.
Outsourcing HR processes is when external HR expertise is contracted to provide one or more specific HR processes. These processes include recruitment, training, payroll, administration, and counseling. They may also extend to strategic HR advice.
“Shared services” describes an approach to HR. An interface is inserted between the users of the HR service and a central specialist service provision. Often the people who fulfill this interface role are called business partners.
This business partner role can be outsourced, or the central shared service can be outsourced or indeed both can be outsourced.
The Role of Human Resources
It’s worth considering what HR does for an organization. For most organizations, HR is not only an administrative function. Despite the controversy over chief executives’ use of the “greatest asset” label, people are important to an organization’s success.
The key to effective HR management is aligning HR policies and practices with the strategic aims of the business. The various elements of the HR agenda should be supporting the delivery of those aims. For example, if the company aims to provide amazing customer service, HR should be recruiting, training, rewarding and performance managing people in line with that aim.
The key to effective HR management is aligning HR policies and practices with the strategic aims of the business. The various elements of the HR agenda should be supporting the delivery of those aims. If customer service is an aim, HR should be recruiting, training, and performance managing people in line with that aim.
The minimum administrative aspects of HR are ones that can be equally delivered in-house or by an outsourced service. It’s a matter of weighing up the benefits and risks.
The strategic aspects of HR are less obviously outsourced but this doesn’t mean that there isn’t a case to be made for it.
These back office support companies are often a great option for organizations that want the benefits of the latest IT solutions but don’t have the internal expertise to design and deliver them. In the same way, strategic HR advice is a realistic option to complement effective business strategic management.
Benefits of Outsourcing HR
The first consideration of many companies when considering outsourcing is the cost. Establishing an internal HR function is expensive. Maintaining the function, retaining the human resource employees and keeping their expertise up to date is an ongoing expense.
Outsourcing HR services means accessing a ready-made HR function. The ongoing management of the people and their learning and development is owned by the outsourced HR provider. It’s, therefore, a very efficient way of acquiring an HR service.
The latest best practice in human resources is difficult to keep up with even in a large in-house HR function. Outsourced HR providers make it their business to compete on the basis of understanding what’s new. They keep up with the latest research in HR practices and update themselves with new regulations and technology.
A small or medium-sized business can often find it difficult to capture and process HR management information. It takes certain economies of scale to be able to get a return on investment in the systems that can support this useful information. Outsourcing HR services can mean you can benefit from the pooling of users of these systems when the provider provides them to a number of clients.
Being able to turn to an expert in their field on the few occasions you need them is a key advantage of outsourcing HR. It wouldn’t be worthwhile to employ an expert but accessing these services as part of an outsourced service is affordable.
A ready-made service makes for a speedy and flexible response to your needs. This means you can respond to opportunities and react to problems quickly. Very importantly your HR response is consistent because you can cope with changes in demand so much better than if you relied on an in-house team.
Managing risks is an important role of top managers in a business. HR can be a risk that is managed effectively by outsourcing it. Importantly, you can prioritize your core business activity rather than be distracted by HR issues.
Risks of Outsourcing HR
While the benefits are many, there are also some risks associated with outsourcing HR services. It’s possible to lose some control whenever you outsource a service.
Failing to understand the importance of HR can lead to HR issues becoming a hinderance to business progress. Whether you have an in-house HR service or an outsourced one, be aware that aligning HR with the business strategy is important.
It’s poor contractual terms that fail to be clear about what you need from your outsourced HR provider that can undermine the benefits. Be clear about what you need and set them out in your supplier agreement.
Even if you have clear terms and they are well thought through, poor supplier performance management can mean they are not delivered. Review performance. Have consequences for poor supplier performance.
There is a risk that the unique culture and style of your organization are lost in a bland standard service from an outsourced HR provider. This is a risk that can be reduced by good research and supplier selection.
It’s Your Call
The balance of benefits and risks is different in every organization’s case. Where the balance lies is your call. Give human resources outsourcing some thought and you may find it’s right for you.
Browse our blog for more great business tips.