Human Resources Outsourcing and Its Effect on the U.S. Economy

Pros and Cons

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Human resources outsourcing is when businesses hire companies to manage personnel functions. That includes the 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. The average size of a company that uses HR outsourcing is 19 employees. 

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. 

U.S. HR outsourcing companies generate $136 billion to $156 billion in revenue. They serve from 156,000 to 180,000 businesses that employed from 2.7 million to 3.4 million people.

Advantages

HR outsourcing reduces the fixed cost of managing employees. These human resources firms are more efficient than hiring new workers. 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. These include as Health Maintenance Organizations, Preferred Provider Organization, and 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 of them outsource everything. They usually keep HR staff to communicate with employees in core business areas.

A 2012 study found that businesses that outsourced grew 7-9 percent faster than firms that didn't. But that could also be because fast-growing companies are more likely to need HR outsourcing. They also had 10-14 percent lower employee turnover and were 50 percent less likely to go out of business. Their administrative costs were $450 lower per employee.

One study showed that companies saved from 24-32 percent the cost of hiring the HR staff in-house. Shell Oil cut their HR budget by 40 percent in four years. It combined outsourcing with other strategies to lower departmental costs. A 2011 report revealed a 32 percent savings from HR outsourcing.

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

Disadvantages

The most significant drawback is poor internal 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. 

Human resource departments facilitate organizational learning. They provide a continuing thread that supports corporate identity. When employees feel like they are an essential part of the whole, they are more likely to share knowledge. Organizations must adapt quickly to changes in today's technology-oriented business world. Outsourcing the human resources function could retard organizational learning

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

If employees liked the old HR department, they would resent the new company. But if they didn't like the old department, they might transfer those feelings to the new firm.

A poorly-run outsourcing company could create disasters. It could accidentally 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.

An unethical firm could betray sensitive information. Human resources departments hold many secrets about the company's personnel and strategies. If the firm has other clients who are competitors, it might use the information to gain more business. 

If an 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 the company is sold. The new owners might demand a higher return to cover their acquisition costs.

How HR Outsourcing Affects the U.S. Economy

Human resource outsourcing has a positive effect on the U.S. economy for three reasons. First, it helps small businesses compete. It allows them to take advantage of sophisticated HR firms instead of building that expertise in-house. They can focus on their core businesses and maintain their competitive advantage. The company's leaders don't have to get distracted by HR issues.

Second, it lowers business costs for all corporations. They can use lower costs to drop their prices, helping consumers. It also makes them more profitable, benefiting stockholders.

Third, higher profitability allows firms to increase skilled positions in their core competencies. Although many HR jobs could be lost to overseas companies, they could be offset by the jobs added by fast-growing firms.