What is HR Outsourcing?

What is HR Outsourcing?

HR Outsourcing (HRO) refers to the practice of contracting third-party service providers to handle various human resource (HR) functions instead of managing them internally. This strategy allows businesses to reduce operational costs, improve efficiency, and access specialized HR expertise.

HR Outsourcing is when a company delegates part or all of its HR responsibilities to external agencies or vendors. These providers specialize in HR management, offering solutions that range from basic administrative tasks (e.g., payroll processing) to strategic HR services (e.g., talent acquisition, employee training, and performance management).

Definition

Outsourcing: It is the process of assigning the contract of performing tasks or activities to the external competent service vendor.

Vendor: The supplier selected for outsourcing.

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Need for HR Outsourcing

Outsourcing is a decision taken at strategic management level to give a task or activity to an independent contractor who determines how best to do the task or activity. The concept of HR outsourcing is simple. By moving most or all HR processes to a single outside vendor, an organisation can cut costs, improve services and help HR personnel shift their attention from pensions and payroll to business-critical strategies.

These days, the most commonly outsourced HR functions include payroll, benefits, employee-data management, information systems and contact centres.

Organisations prefer outsourcing because of the following major reasons:

HR work system is designed with two major components:

• The work components (activities) which cannot be outsourced.
• The work components (activities) which can be outsourced.

This decision most of the time depends on the nature of the organisation, core business of the organisation, budget and degree of need of support functions like HR, finance, administration, etc.

The work components which can be outsourced will further be scrutinised for risk analysis and mitigation plans before finalising it for outsourcing. The outsourcing can be done to wither the independent contractors or contractual employees (vendor based), temporary employees or consultants available in the market. The process of contracting should be in place to follow while contracts are done with these vendors.

Following are some of the major reasons to address the need for HR outsourcing:

To cut the cost

When an employee is recruited on organisation payroll, he/she must be given all the benefits and facilities, which, in turn will increase the cost to organisation and he/she, in a way, becomes the liability of the organisation and in a result, payroll cost will be high if there are some more employees recruited for the same function.

Here, substantial cost is reduced when an organisation hands over such HR functions to a third-party provider and transfer an employee from the client organisation to the service provider to reduce headcount without sacrificing talent altogether. Another factor to consider when using outsourcing to cut costs is maintaining realistic expectations.

Here is an example. If an organisation recruits housekeeping staff for cleanliness of the office premises, the staff becomes employee of the organisation where he/ she must be given all the compensation and benefits according to the policies of the organisation. If there is more number of employees of this profile, the payroll cost of the organisation will be very high. This cost can be substantially reduced when the housekeeping contract is given to their party with one contract cost per year or month.

Making your core business a primary focus

Some organisations do have their primary focus on business development. They treat the HR functions as their support and secondary focus. No wonder these organisations opt to outsource in order to help HR staff shift focus from routine tasks to mission-critical strategies.

But before you offload an HR department’s paperwork onto an outsourcer, one has to ensure that you have the right mix of in-house personnel to tackle important functions such as recruitment and retention, performance appraisals, compensation and benefits, etc.

For example, if the organisation’s primary focus is on manufacturing then resources will be primarily managed by head of manufacturing function. He might need some support from HR practitioners. Now these HR practitioners may not be the employees of the organisation. This support activity can be outsourced to some competent vendor who will work as business partner and consulting cost is paid to that vendor as compensation towards his service.

Hassle-free compliance

These days, HR departments have their hands full developing programmes and policies to ensure compliance with everything from the Fair Labour Standards Act (FLSA) to sexual harassment laws. It’s all the more reason to seek the compliance expertise of an outsourcer. Here, an organisation may not be able keep full-time staff to handle such legal matters. So outsourcing here will really be advisable.

If, for example, an organisation’s management finds an employee is breaching the organisational policies while working on the projects, a legal advisory committee consisting of some competent consultants could be appointed to resolve the matter where you may need any full-time management looking after it as frequency is found to be very less for such matters.

Access to cutting-edge best practices

For many HR departments, it’s easy to get into a routine process framework, issuing the same forms and abiding by the same policies year after year. Now, here the problem is, the current practices need to be upgraded according to the time. The current skills of existing staff might have been obsolete.

The upgrading all of them could be a costly affair due their rigidity in the work and reluctance to change. On the other hand, outsourcers have this wealth and breadth of experience and so looking to them for suggestions on how to improve processes is a very smart thing to do. Appointing external consultants and vendors who have been in the same field since long, would really be advisable for developing the business.

If, for example, an organisation has 15-year experience project managers on board, but no one has upgraded their project management’s knowledge to utilise latest technology in managing the projects in the organisation as current competition and age insist on it to retain them in the existing market.

These senior project managers cannot train newly hired project managers as they are not up to the mark of current trends and technology to be used in project management. An external training vendor who has lot of skilled and upgraded project management professionals can be appointed to train these project managers and make them use those learnt skills in their projects.

Employee satisfaction

Whether it’s the anonymity they grant employees or the access to survey tools they offer to clients, outsourcers often boost employee satisfaction levels by helping companies improve management practices, lift morale and raise retention rates also.

For example, external satisfaction surveys are generally conducted by external vendor to bring the effectiveness through unbiased feedback.

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Advantages of HR Outsourcing

As the organisation evaluates the outsourcing options and decisions in outsourcing different components of their operations, they will need to consider the advantages of outsourcing. When outsourcing is done for the right reasons, it will certainly help organisation grow and cut the unnecessary costs and save money.

Apart from monetary gains, organisations leverage following major advantages from practice of outsourcing.

Emphasis on Major Business Activities

In recent development periods, the operations of back office of an organisation will also get expanded. This expansion may lead to consume human resources at the cost of the major or core activities which will make an organisation more successful. Outsourcing such activities will allow refocusing on those business activities which are important without compromising on quality of service in the back office.

Saving on Cost and Efficiency

Functions of back office are complex in nature, but the size of an organisation prevents in performing it at a consistent and reasonable cost. This is one more advantage of outsourcing in the organisation.

Decreased Overhead

The costs of performing a particular back-office function are extremely high which can be an overhead on the business. An outsourcing those functions will reduce the costs very easily.

Controlled Operations

The operations, on which costs are running out of budget, should be outsourced. Departments or functions or business units which might have been identified over a period of time into uncontrolled and poorly managed areas are major considerations for outsourcing. In addition, a service provider’s contract can bring quality management skills to an organisation than what would otherwise be available.

Flexible Staffing

Outsourcing will help to have flexible staffing which is required to meet the seasonal or cyclical demands. It brings in some additional resources when the organisation needs them and releases them when the work is over.

Business Continuity and Risk Management

During the time of increased employee turnover, the situation will add uncertainty and inconsistency to the operations. Outsourcing will provide a level of business continuity while reducing the risk which a second-rate level of operation would bring to the organisation.

Develop Internal Staff

When a company undertakes a large project which needs some particular skills and internal employees do not possess them, onsite outsourcing of the project will bring people with the skills required. The regular staff can work alongside of them to acquire the new skill set.

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Payroll System

There’s more to managing small business payroll than writing cheques and handing them out to employees on time. You need to keep accurate records, calculate and pay payroll taxes and communicate effectively with employees. Many small business owners are finding that they can simplify the process by using an outsourced payroll provider to manage the entire process cost-effectively and efficiently.

Outsourcing your payroll can provide your small business with a number of important benefits:

Save time

Using an outsourced payroll solution is typically more efficient for a small business than processing payroll internally. Leaving payroll to experts frees up hours that you can devote to other important parts of your business. Whether it is your time, staff time or a combination, chances are the hours could be better spent winning more business, improving customer service, fine-tuning business operations or launching a new product line.

Among the areas where outsourcing will save time are:

• Processing payroll
• Cutting and distributing pay cheques
• Calculating and paying withholding and employment taxes
• Preparing and distributing W-2s and 1099s at year-end
• Handling employee payroll inquiries

Many business owners underestimate the cost of processing payroll internally by failing to account for all hours spent and resources allocated to pay employees and maintain payroll paperwork. A thorough cost assessment usually proves that a small business saves money by outsourcing the processing, tracking and filing of payroll documents.

To assess your own internal payroll costs, consider:

• How much time spent is actually worth-consider the cost of your
  
  
• time and the time of anyone who processes or “touches” payroll. Often, many people in a small organisation are involved in the various parts of payroll processing.
  
  
• What savings would outsourcing provide − since an outside provider
  
  
• can handle all the responsibilities involved in managing payroll and answering employee questions, a small business can often eliminate or reallocate an internal payroll resource.

Avoid penalties

Calculating federal, state and local employment taxes and filing payroll-related tax paperwork can be more than just a hassle. If it’s done incorrectly, your small business may face penalties and even interest on money owed since the mistake was made.

Outsourcing payroll does away with the risk of many of these costs and hassles because:

• An outsourced payroll provider calculates payroll taxes based on its
• expertise and close tracking of regulation changes.
• Monthly or quarterly employment tax reports are managed by the
• payroll service, ensuring they are submitted correctly and on time.
• Payroll providers may assume penalties that come as a result of
• incorrect tax calculations.
• End-of-year paperwork — such as Form-16, Forms 12, etc. — are
• handled directly by the payroll provider, so they are sent out on time.