Human Resources Outsourcing: Effect on Economy

Pros and Cons

health care worker
Outsourcing can give small companies better health care benefits. Photo: Getty Images

Definition: Human resources outsourcing is when businesses hire companies to manage personnel functions. That includes administration of health benefits plans, retirement plans, and workers’ compensation insurance. It also includes hiring, training, and legal expertise.

Smaller companies hire them to administer payroll, pay employment taxes, and manage risk. In fact, the average size of a company that uses HR outsourcing is 19 employees.

(Source: "A Guide to HR Outsourcing and Employee Leasing in 2015," Business News Daily, July 7, 2015)

The outsourcing firm pools thousands of businesses together. The economy of scale lowers the cost of these HR services. The recession increased the rate of this type of outsourcing. 

Advantages

HR outsourcing reduces the fixed cost of managing employees. These human resources firms are more efficient. That's because the talent and infrastructure are already in place. Small businesses save money and time by hiring HR firms.

That's a great advantage to small businesses. They can offer a wider range of these following benefits.

  • Health insurance options, such as HMOs, PPOs and HSAs (Health Savings Accounts).
  • Dental, vision, and health insurance plans.
  • 401(k), retirement plans and credit unions.
  • Voluntary benefits, such as cancer, travel, and long-term disability plans.

Small businesses are more likely to outsource other human resource functions.

These include payroll administration and recruitment. Few companies outsource everything. Most keep some human resource staff to focus on communication with employees in areas more related to their core business.

Studies show that 85% of companies that outsourced human resources saved as much as they spent.

Another 25% saved double the cost. The savings went toward operational performance and innovation. (Source: CPEhr "HR Outsourcing – Research Brief")

Companies that expand overseas look for HR firms with global expertise. Many of them are U.S.-based, such as Accenture, IBM Global Business Services, and Hewitt. A large overseas firm is Tata Consultancy in India.

Disadvantages

The biggest disadvantage is poor communication. The outsourcing company doesn't have a good sense of the company's culture. Employees can't just drop into the HR office if it's off campus. As a result, they may feel disenfranchised. 

Employees may start to mistrust management. Other departments may wonder if they, too, will be outsourced.

Workers would resent the new company if the old HR department were well-liked. On the other hand, if the old department wasn't liked, employees will just transfer old feelings to the new firm.

A poorly-run outsourcing company could create disasters. It could accidently leak sensitive company information. It may not deliver adequate services. Worse of all, it could go bankrupt and leave the client without any HR services.

If outsourcing firm became too powerful, it could hold the client hostage.

For example, it might demand a much higher fee during future contract negotiations. This risk increases if it's sold and the new owners demand a higher return. (Source: "The Disadvantages of Outsourcing Human Resources," Chron. "Advantages and Disadvantages of HR Outsourcing," HR.BLR.com )

How HR Outsourcing Affects the U.S. Economy

Overall, human resource outsourcing has a positive effect on the U.S. economy. It lowers business costs, allows access to sophisticated benefits, and provides expertise in international markets for global corporations.

Since 2010, the HR outsourcing industry has grown dramatically.

As of 2012, it received $92 billion in gross revenues. (That includes clients' payrolls as well as the fees charged.) That's 12% higher than in 2011. 

Small businesses may grow faster than average thanks to the HR outsourcing. Since 2010, their employment growth has been 4% higher than the U.S. economy average. That may not be due to HR outsourcing. It could be because fast-growing firms are more likely to need HR outsourcing.  (Source: "What Is a PEO?" National Association of Professional Employer Organizations)