HR outsourcing (HRO)

HR outsourcing (also known as HRO) is the process of sub-contracting human resources functions to an external supplier.

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. Many types of HR outsourcing options are available to employers. The options can be as specific as outsourcing one particular aspect of one HR function—such as applicant tracking for affirmative action purposes—or as broad as outsourcing the entire human resource department.

There are many ways in which outsourcing human resources can be done:

Business process HR outsourcing (also known as BPO), where an external supplier manages discrete HR activities, such as payroll administration or recruitment, or perhaps the whole human resources function.

Shared service HR outsourcing, where only the transaction or administrative elements of HR’s activities are subcontracted to an external supplier. This may include the personal interface with employees.

Application (and facilities) service HR outsourcing, where external providers look after the technological (and physical) infrastructure to support human resources activities.

Outsourcing human resources or some of its processes to an external provider is a major business decision as, while it may be cost-effective, it introduces new elements of risk, including:

• Loss of control
• Impact on the employer/employee relationship
• Loss of flexibility
• Failure to deliver cost benefits
• Legal or regulatory requirements
• Industrial relations issues

The operation of any HR outsourcing arrangement should be governed by a service level agreement. This will define the required standards of performance by both parties and any penalties for non-compliance. A service level agreement is a crucial document and must be negotiated with great care to mitigate the above risks.

People management plays a crucial role in delivering organizational performance. In today’s modern, knowledge economy this is truer than ever before. The decision to outsource human resources is therefore not to be taken lightly.

There are many circumstances in which outsourcing HR services can deliver tangible benefits to the organisation, for example by freeing HR professionals to devote more time to a strategic role supporting organisational performance.

 

Advantages and disadvantages of HR outsourcing

• Potential benefits of HR outsourcing
• Reduced cost
• Increased efficiency
• Access to improved HR IT systems
•  Improved management information (including human capital metrics)
• Access to HR expertise not available internally
• Increased flexibility and speed of response
• Philosophical reasons (for example the organisation is outsourcing a number of its support functions, of which HR is just one part)
• Reduced risk
• To free HR resources to operate more strategically.

Potential pitfalls of HR outsourcing

·        Don’t outsource what you don’t understand. The HR outsource provider will only have to subsequently solve the problem (at a cost) and the provider’s solution might not be most suitable from your organisation’s perspective

·         HR outsourcing does not absolve the organisation of good people management practices nor of overall responsibility for the provision of HR services

·   Increasingly, HR outsourcing arrangements are often long term (five to 10 year contracts are not unusual). An understanding of the organisation’s current and future business strategy and potential changing business (and hence risk) profile is important before entering into any contractual arrangement. This helps to avoid being tied into unfavorable contractual arrangements

·         Loss of local knowledge and processes which instead reside with the outsource provider

·         Standardization of processes in line with outsource provider not organisational preferences.

What HR Functions May Be Outsourced?

One of the main advantages of outsourcing your HR functions is that you can outsource all the different elements of HR rather than having to outsource some and keep others in house. While you may feel like you have the resources to keep some HR functions in house, it rarely makes sense to do so, and outsourcing all of it can save you the time and money you need to focus on growing your business. Here are some of the HR functions that outsourcing can help you remove from your plate:

• EMPLOYEE RELATIONS & COMPLIANCE
• PAYROLL SERVICES
• WORKERS’ COMPENSATION
• EMPLOYEE BENEFITS
• STAFFING & RECRUITMENT
• EMPLOYEE SCREENING & BACKGROUND CHECKS
• PRE-EMPLOYMENT SKILLS TESTING
• SEXUAL HARASSMENT TRAINING

To Whom May You Outsource Your HR Functions?

If you do decide to outsource some of your HR functions, the question becomes, who do you outsource them to? Different types of organizations exist where you can outsource your HR functions:

• HUMAN RESOURCES ORGANIZATIONS (HROS)
• PROFESSIONAL EMPLOYER ORGANIZATIONS (PEOS)
• ADMINISTRATIVE SERVICES ORGANIZATIONS (ASOS)
• STAFFING & RECRUITING AGENCIES

 

Focus on Your Core Business, Your Passion

HR plays an enormously important role in the success of your company. Considering all of the functions HR is responsible for, don’t cut corners with your HR management. However, establishing an HR department within your company and scaling it as your company grows can cause a significant strain on your resources. As most businesses grow, they will eventually begin to outsource some of their HR functions -- if not all of them. It is more cost-effective and will result in more efficient and effective HR management overall.

By outsourcing many of the tasks that HR is responsible for, you can focus more of your time and resources on matters that directly relate to the growth of your business.

 Reference

Nystrom M (2011). 6 Benefits Of Outsourcing HR Functions. o2employmentservices [Online]. Available at https://blog.o2employmentservices.com/6-benefits-of-outsourcing-hr-functions. Accessed on 29^th April 2021..

Chiang, Y.-H., & Shih, H.-A. (2011). Exploring the effectiveness of outsourcing recruiting and training activities, and the prospector strategy’s moderating effect. The International Journal of Human Resource Management, 22, 163-180.

SHRM Org. (2011).Outsourcing The HR Functions. Resources and tools[Online]. Available at https://www.shrm.org/resourcesandtools/tools-ansamples/toolkits/pages/outsourcingthehrfunction.aspx. Accessed on 29^th April 2021..