This article serves as a roadmap for HR professionals involved in the HR outsourcing process. It explains the types of arrangements prevalent in HR outsourcing, states the business case for HR outsourcing and discusses HR's role in the process. It then examines various HR functions suitable for outsourcing: compensation, workforce administration, external recruitment, relocation, employee rewards and recognition, and benefits administration.
The article outlines special considerations for developing an outsourcing agreement and transitioning from in-house to third-party administration of select HR functions. It concludes with the discussion of successful vendor relationship management. 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.
The terms and types of arrangements prevalent in HR outsourcing are outlined below. Software-as-a-service SAAS is a software licensing and delivery model in which software applications are hosted remotely by a vendor or service provider and made available to customers via a Web browser.
This model of software delivery creates greater organizational agility and provides an opportunity for cost savings. In the HR realm, employers most commonly pay for access to talent management e. In a business-process outsourcing BPO arrangement, an employer contracts a single business task, such as payroll, to a third-party service provider.
A common BPO arrangement is the outsourcing of benefits administration, which removes the administratively burdensome and specialized functions for benefits auditing, processing and reporting to a third-party.
Under this outsourcing arrangement, also called single sourcing, HR professionals access one solution to meet their needs, from welcoming new hires to managing turnover, and all the tracking in between; a single supplier covers the full employee life cycle.
This type of human capital management technology starts at talent acquisition, includes time and labor management and payroll, covers talent management, picks up benefits administration, and supports the separation-of-employment process. These terms refer to consolidation of a business function within an enterprise to a highly skilled internal department or group.
Shared services may also be provided to third parties. When the services offered by the shared services team are combined into a central operation, they are often referred to as shared-services centers. Broadly defined, shared services are marked by the consolidation of administration or support functions for several departments.
Among HR processes that may be folded into a shared-services plan are payroll, procurement, accounts payable and receivable, travel expenses, health benefits enrollment, and pension administration. Under the shared-services model, the administrative functions can be handled in-house or outsourced. Technological advances and increasingly sophisticated use of Internet communications have played a major rule in spurring shared-services arrangements in recent years.
A professional employer organization, or PEO, is an organization that provides—via a co-employer relationship or employee leasing arrangement—HR management and benefits to an employers' employees. Employment responsibilities are typically shared between the PEO and the employer; the employer retains management control over the work performed by the employees, whereas the PEO assumes co-responsibility for benefits, taxes and payroll.
As co-employer, the PEO pays the wages and employment taxes for worksite employees out of its own account, collects and reports taxes to state and federal jurisdictions, maintains a long-term relationship with worksite employees, and in theory retains the right to hire, terminate and reassign employees. The employer reimburses the PEO for these expenses and pays a monthly administration fee based on the number of employees employed.
Although some PEOs offer services to larger clients, the majority of PEO business is conducted with companies with 50 or fewer employees. PEOs are increasingly becoming the service model of choice for smaller organizations. See What is a PEO? What are its advantages and disadvantages?
Outsourcing has become increasingly important as HR professionals seek ways to reduce time and resources spent on transactions and administration, so they can concentrate on more strategic activities. This reduction in time and resources also translates to savings for the business. When HR departments decide which functions to retain and which to outsource, many hold on to talent management, recruiting and succession planning, while handing off payroll, benefits administration and other routine tasks to third-party vendors.
Besides giving in-house HR professionals more opportunity to focus on strategy, outsourcing can:. In addition, there can be technology benefits. For example, through the use of a SAAS provider that provides and maintains software, employers gain the benefits of advanced software systems and avoid possible technical hassles of managing programs onsite.
The process of deciding whether to outsource HR functions begins with consideration of how outsourcing could help an organization and includes how well positioned HR would be to help the organization manage a transition to outsourcing. It is important to analyze how the company is currently delivering HR and to identify whatever gaps may exist between the organization's HR needs and HR functions. Employers should also research the outsourcing industry and its trends and analyze how industry trends could affect their organizations.
A key consideration is whether the time is right for the organization to outsource HR functions. Outside advisors can help with that question by analyzing data, financial projections and proposed contract terms. For example, even if outsourcing would ultimately save money for the organization, lost productivity during the transition results in initial costs—costs that must be factored into any financial projections.
When deciding whether to outsource, an organization should be able to answer questions designed to analyze its HR needs, its current HR processes, its business plan and its outsourcing options such as the following:.
In addition, it is important to know the ways in which an outsourcing arrangement can fall short of expectations and to mitigate such risks. The main areas of concern are listed below. It is necessary to determine exactly what compliance services the outsourcing vendor will provide and whether the vendor's services will completely satisfy an employer's legal obligations.
This concern is most common when a state requirement is more stringent than a comparable federal requirement. Confusion can arise if a vendor provides a service at a level below or above the level of service performed in-house. There must be full understanding of the services to be provided. In many instances, outsourcing providers carry out tasks in ways that differ from the methods most familiar to the organization.
The client business must understand the vendor's processes fully and must know how the organization may play a role in those processes. Selective outsourcing—as opposed to relying exclusively on a single provider—generally means outsourcing routine, transaction-oriented processes and is popular because it can be tailored to meet an organization's exact needs.
Following are major areas of HR expertise and the ways in which they can be outsourced. The compensation functions commonly outsourced are payroll, job evaluation systems, salary surveys, executive compensation design and expatriate compensation.
Outsourcing to third-party administrators for payroll and related tax duties helps employers meet filing deadlines and deposit requirements. The reasons for outsourcing may include cost savings, a need to improve customer service, the decision not to develop internal expertise, the ability to take advantage of technology not available in-house, or a desire for the HR department to work more strategically and less transactionally.
Third-party services and systems have historically been used to provide or support complex aspects of compensation administration, including job evaluation systems, salary surveys and executive compensation design, whereas actual administration remained an internal function in large organizations.
As outsourcing continues to evolve, marketplace options for truly outsourcing compensation administration are becoming available, including point solutions, single-process outsourcing and integrated HR outsourcing.
Point solutions. In this approach, the vendor provides hosted software to support the compensation administration process, and sometimes also provides a degree of call center support. However, the client retains responsibility for the overall success of the compensation administration function and for any aspects of the administration not performed by the vendor. Point solutions for compensation administration are limited in scope and are usually associated with the adoption of an external portal for employee self-service.
Single-process outsourcing. In this approach the organization selects one vendor to perform all of its compensation administration. Integrated HR outsourcing. Under this approach—currently the most commonly used—compensation administration is outsourced in conjunction with a larger outsourcing arrangement that includes workforce administration.
In fact, compensation administration can be a natural extension of the outsourcing of workforce administration. Most workforce administration vendors have at least salary and bonus administration capabilities that are linked to their employee and manager self-service capabilities. Those tools make them well positioned to take over many of the more routine tasks associated with compensation administration. Organizations with specific needs in compensation administration should search for more tactical, subprocess outsourcing arrangements to supplement or enhance their current services.
An example of this approach would be to outsource expatriate administration, which is a subprocess specialty within compensation administration and has an established vendor community.
The term workforce administration refers to the following set of HR functions and activities:. Outsourcing workforce administration is often considered the foundation for the outsourcing of many other functional areas.
In fact, many functional areas within HR, such as compensation administration and performance management, are typically outsourced only in conjunction with workforce administration.
Here are just a few common functions that HR outsourcing can be good for:. One of the biggest challenges for HR is the process of running accurate, on-time payroll. Some outsourced HR companies provide online solutions that help you with the ins and outs of payroll, like automating direct deposits, paying hourly employees, managing paid time off, and record-keeping.
It can be a full-time job ensuring your employees know about their benefits options and understand them. Outsourcing HR companies help administer health coverage and other fringe benefits, like k , commuter benefits, and more. Not only that, outsourcing HR companies can provide businesses with access to high-quality benefits that often only enterprise-level companies can afford.
By offering access to Employee Assistance Programs EAPs and counseling, outsourced HR companies can get your team the support they need to be happy and healthy. But since each business is unique, one way to simplify the conversation around outsourcing HR or keeping it in-house is to consider the growth stage of your business. Your focus should be on growing and managing your team, not whether they are getting their paycheck on time.
At this stage, it often makes sense to outsource many HR functions. There are many companies and software platforms available to help you manage the majority of the tasks mentioned above. Companies at this stage often consider a professional employer organization PEO , like Justworks.
Justworks automates many aspects of payroll and employment-related compliance, and makes it more affordable for small companies to offer their employees access to benefits.
Justworks also offers a variety of HR tools and services, including certified HR consultants who can answer many questions that come up around managing your team. Your business is humming along and growing every day. At this stage, staying compliant becomes more of a concern, with more people needing to be paid, and lots of hiring to do. Staying compliant becomes more of a concern, with more people needing to be paid, and lots of hiring to do.
Companies of this size are big enough that they likely have an office or HR manager, and might be considering whether to add more people to that team. Although hiring a second employee might sound tempting, at this stage it's still worth considering an outsourcing option that empowers your HR employee. Businesses in this size range have raised a much larger funding round and might plan to scale much faster, maybe growing from 50 employees all the way up to employees.
Recruiting is likely a top priority as you scale, and you might be running into new headaches when it comes to expansion and compliance — particularly if you begin to hire remote workers in other states.
While you might feel an itch to bring everything in-house, payroll experts are costly and often unnecessary. At this point, you probably need an in-house HR team. These include initiatives to keep employees healthy , training programs to ensure that they are acquiring new skills, and creation of that much-needed employee handbook an important piece of material for smaller companies, too. These are requirements that are better filled in-house, since they are so specific to your company.
But there's still a role to be played by HR outsourcing. Outsourcing payroll, or getting software to do it, might save you money and time that will allow your busy HR department to focus on hiring and strategic projects. Again, a PEO might be a great fit. These types of companies are not too dissimilar to medium-stage companies. The difference here is that many larger companies bring many HR functions back in-house because they consider it a competitive advantage.
But even for large companies, many of the administrative HR tasks can remain outsourced. Why bog down your in-house team? Keep your HR department focused on finding quality talent, tackling strategic projects, and being the liaison to the rest of your team. Communicating with other organisations who currently use the outsourcing providers to establish how satisfied they are with the service. Staying involved in the contracting process.
Particularly in some larger organisations there might be a procurement function that normally takes responsibility for all contracts. Identifying metrics, including benchmarks of acceptable and unacceptable ranges, to be included as part of any service level agreement.
Defining a clear governance process, so that the impact on the outsourced service is considered when any internal decisions are made and there is a clear decision making process with the outsourcer where required. Managing the transition from in-house to third-party service will need similar considerations to managing any large-scale organisational change. Clarity over who is accountable for resolving problems during the transition is also key - is it the outsource provider or the outsourcing organisation?
An open dialogue is needed between the outsourcing company and the provider. This could involve re-deploying certain staff as well as providing additional training to many others. Recognising that these processes take time to introduce needs to be factored into any change programme. Open and ongoing communication to staff about the whole process is vital for success. Brighton: Institute for Employment Studies. Executive briefing. London: Chartered Institute of Personnel and Development.
Human Resource Management Journal. Vol 24, No 2, April. People Management online. Human Resource Management. CIPD members can use our online journals to find articles from over journal titles relevant to HR. Members and People Management subscribers can see articles on the People Management website. Steve joined the CIPD in , bringing his wide experience and expertise in developing online learning programmes. He works across the HR portfolio on managing and developing content for our qualifications, short courses and publications.
Understand the principles of shared services, how they work, and the benefits they can bring to an organisation. A collection of thought pieces from lead thinkers, academics, practitioners and consultants on the future of the HR function. Alternatives to HR outsourcing Benefits and challenges of HR outsourcing Selecting a provider and managing the transition Further reading Explore our related content. Introduction Outsourcing any activity to an external provider can offer benefits, such as increased efficiency and access to expertise.
What is HR outsourcing? Offshoring Offshoring may sometimes relate to outsourcing, and the two terms are often, but incorrectly, used interchangeably. Self-service systems Increasingly, some organisations are using technology to introduce comprehensive HR self-service systems that allow employees and managers to carry out some HR-related activities themselves via a portal or intranet. Buying in consultancy services TExternal consultants might be used to advise on specific HR issues or on implementing particular HR processes for example, the introduction of flexible benefits.
Benefits and challenges of HR outsourcing Creating a business case for HR outsourcing is an important initial step for any organisation considering such a move.
A number of potential benefits and challenges are associated with HR outsourcing.
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