HR Outsourcing

 

HR Outsourcing

What is outsourcing?

Outsourcing is a business practice in which services or job functions are farmed out to a third party. HR outsourcing is a contractual agreement between an employer and an external third-party provider whereby the employer transfers the management of, and responsibility for, certain HR functions to the external provider.

Outsourcing benefits and costs

The business case for outsourcing varies by situation, but the benefits of outsourcing often include one or more of the following:

•                Lower costs (due to economies of scale or lower labor rates)
•                 Increased efficiency
• ·             Variable capacity
•                Increased focus on strategy/core competencies
•              Access to skills or resources
•              Increased flexibility to meet changing business and commercial conditions
•             Accelerated time to market
•             Lower ongoing investment in internal infrastructure
•         Access to innovation, intellectual property, and thought leadership
• ·        Possible cash influx resulting from transfer of assets to the new provider 

 

Some of the risks of outsourcing include:

•             Slower turnaround time
•            Lack of business or domain knowledge
•            Language and cultural barriers
•           Time zone differences
•           Lack of control
•     Among the most significant additional expenses associated with outsourcing are:
•         The cost of benchmarking and analysis to determine whether outsourcing is the right choice
•       The cost of investigating and selecting a vendor
•        The cost of transitioning work and knowledge to the outsourcer
•         Costs resulting from possible layoffs and their associated HR issues
•         Costs of ongoing staffing and management of the outsourcing relationship

It’s important to consider these hidden costs when making a business case for outsourcing.

Business Case

Outsourcing has become increasingly important as HR professionals seek ways to reduce time and resources spent on transactions and administration, so they can concentrate on more strategic activities. This reduction in time and resources also translates to savings for the business.

Besides giving in-house HR professionals more opportunity to focus on strategy, outsourcing can:

• Provide companies access to specialized HR expertise.
• Help with regulatory compliance.
• Speed up response times on transactional HR functions such as benefits enrollment and payroll.

HR's Role

The process of deciding whether to outsource HR functions begins with consideration of how outsourcing could help an organization and includes how well positioned HR would be to help the organization manage a transition to outsourcing. When deciding whether to outsource, an organization should be able to answer questions designed to analyze its HR needs, its current HR processes, its business plan and its outsourcing options such as the following:

• Can HR handle outsourcing without disrupting the current operation?
• Do HR staff members have the time and experience to deal with outsourcing?
• Is the HR department sufficiently staffed to manage the outsourcing relationship?
• Is HR providing excellent service with existing staff and processes? Is HR meeting all the organization's needs?
• Most importantly, will the CEO and top management team support and pay for an outside vendor?
• Does the company have a clear mission and vision? Have company values been established?
• Does the situation merit outsourcing?
• If so, what type of outsourcing solutions would best fit the situation?

In addition, it is important to know the ways in which an outsourcing arrangement can fall short of expectations and to mitigate such risks. The main areas of concern are listed below.

 How to select a service provider

Selecting a service provider is a difficult decision. But start by realizing that no one outsourcer is going to be an exact fit for your needs. Trade-offs will be necessary.

To make an informed decision, articulate what you want from the outsourcing relationship to extract the most important criteria you seek in a service provider. It’s important to figure this out before soliciting any outsourcers, as they will undoubtedly come in with their own ideas of what’s best for your organization, based largely on their own capabilities and strengths.

Compliance

It is necessary to determine exactly what compliance services the outsourcing vendor will provide and whether the vendor's services will completely satisfy an employer's legal obligations. This concern is most common when a state requirement is more stringent than a comparable federal requirement.

Service levels

Confusion can arise if a vendor provides a service at a level below or above the level of service performed in-house. There must be full understanding of the services to be provided.

Conclusion

Outsourcing HR functions can involve significant costs but outsourcing to a skilled vendor and using that vendor correctly can save an organization money in the long run. The key is to manage the relationship well. This involves establishing a collaborative way of working with vendors that builds trust and open communication. It can be accomplished by setting forth all expected benefits in a written business case that includes quantitative and qualitative targets, and by using practices that have been shown to produce successful outcomes.

References

IDG communication (2021) Outsourcing best practices, challenges and advice

(online).Available at https://www.cio.com/article/2439495/outsourcing-outsourcing-definition-and-solutions.html.Accessed on 01st May 2021.