Human Resources Outsourcing

How HR Departments Can Do More by Doing Less

Woman with sticky notes of to dos posted all over herself and the wall
Sometimes HR Managers Have Too Much Work To Do In-house. Jessica Peterson/Getty Images

Generally speaking, Human Resources (HR) deals with anything and everything that has to do with people in a company. Unfortunately, this mindset can result in the HR department managing a lot of tasks that take time and energy away from the HR activities that provide the most strategic value to the company.

For instance, an HR function like talent development is critical for a company to identify and groom its future leaders.

However, payroll is a more process-driven task that can be outsourced effectively, thereby freeing up HR’s time for the company’s mission-critical HR needs.

It’s a matter of identifying which tasks HR should focus on to most effectively advance the company’s mission and delegating the rest to responsible outside service providers.

The outsourcing of HR has accelerated over the last decade and will continue to do so, according to Lisa Rowan, research vice president for HR and talent management services at market research firm IDC, as quoted in the New York Times.

Outsourcing allows companies to offload work that isn't part of their core business and it also saves money, she said. While some companies may entrust their HR needs to a single outside firm, it’s more common to parcel out functions to a range of outside providers, she said.

So how do you decide what to outsource and what to keep in-house?

Here’s an easy to follow six-step process.

Step One: Identify Key HR Initiatives

First, it’s important for HR to let go of the idea that it can be all things to all people. Define HR’s strategic role in your company. Go back to the basics and write up some good old-fashioned job responsibilities for HR.

Focus on how HR drives the company’s overall mission. Decide what HR tasks are special to your company and important to the culture.

Step Two: Consider Which Functions can be Outsourced

Any roles HR is currently managing that fall outside of the sweet spot you have identified should be considered for outsourcing. There are good outsourcing firms that can efficiently handle activities like relocation, temporary staffing, background checks, and drug screening. While these processes are very important to the operation of the company, they do not drive the strategic mission of the organization.

Even a critical function like regulatory compliance should be considered for outsourcing. HR compliance requires constant attention to stay up to date on the latest regulations and legal decisions. Most HR departments don’t have that kind of expertise on staff.

Outsourcing to a specialist can provide added insurance against the financial penalties and bad publicity that result from compliance gaffes like failure to properly classify independent contractors, for example.

Step Three: Create a Team of Internal and External Specialists

A company that enlists outside specialists to supplement on-staff talent is cultivating a strong team of HR professionals. In this era of lean management, most HR departments are not going to be able to have an on-staff expert to manage every HR issue.

Step Four: Find a Trusted Partner – or Partners

Concerned that you’ll compromise quality if you outsource certain HR functions? You can maintain control of important HR functions and help HR become a more efficient and effective player, but you need to find trusted partners. Do your homework.

Compare benefits, the associated costs and approaches of different firms. Conduct background checks to ensure the outsourcing firm’s reputation is solid. Be sure the firm is accredited by the Better Business Bureau, and talk to other companies that have used the firm. Read all proposals carefully. Make sure you understand the value you will receive in doing business with a particular vendor.

Step Five: Explore a Plug-and-Play Solution

One outsourcing option that works for some companies is to contract with a group purchasing organization (GPO). A GPO provides access to qualified, prior negotiated contracts with staffing firms, managed service providers and others. This arrangement can be a convenient, efficient and cost-effective one-stop shop for a range of HR outsourced services.

Companies avoid the time and effort required for negotiating and managing multiple contracts. The GPO vets the best suppliers, leverages relationships to secure competitive contracts, and helps a company secure the resources it needs.

The majority of the GPO market in the United States is focused on healthcare procurement. The major GPOs in this space are making purchases in excess of $200 billion annually for their hospital and related industry clients.

There are no reliable statistics on the size of the corporate GPO market, which is newer, smaller and more fragmented, and in general more focused on procurement than HR outsourcing. According to a 2011 study by the procurement media site Spend Matters, 15-20% of Fortune 1000 companies are now using a GPO and 85% of those companies reported savings of 10% or more.

Step Six: Consider a Complete Outsourcing of HR

For certain companies, it may make sense to consider a professional employer organization (PEO). A PEO takes over all of a company’s HR functions by literally hiring the company's employees and becoming their employer of record for tax and insurance purposes. The practice is known as co-employment or joint employment.

Through a PEO, the employees of small businesses gain access to employee benefits such as: 401(k) plans; health, dental, life, and other insurance; dependent care, and other benefits typically provided by large companies. According to the National Association of Professional Employer Organizations (NAPEO), approximately 250,000 businesses use PEOs.

Outsource This - Not That

There is no playbook for HR outsourcing. What functions stay in house and which are outsourced to an outside specialist depends on the type of company, its strategic priorities, and the role HR plays in realizing those priorities.

Here are the HR functions that are most commonly outsourced.

  • High-volume recruiting
  • Temporary staffing
  • Background checks and drug screening
  • Relocation
  • Payroll
  • Benefits administration
  • Coaching
  • Creating/updating employee handbooks and policy manuals
  • Compensation program development/implementation
  • Writing and updating affirmative action plans
  • Providing sexual harassment training
  • Independent contractor compliance

These HR initiatives tend to stay in-house

  • Employee relations
  • Compensation design and delivery
  • Talent development
  • Capital strategy planning
  • Succession planning
  • HR strategy
  • Performance management
  • Organization development
  • Recruiting
  • HR department management

Outsourcing some, or even all, HR functions is a proven and widely practiced concept among companies of all sizes. Outsourcing enables a company to focus on HR activities with the most strategic value while saving money and benefiting from the specialized expertise of outside firms.

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