What are the Advantages and Disadvantages of Outsourcing HR Functions?

The Milestone Team April 20, 2022
what are the advantages and disadvantages of outsourcing hr functions?

If you’re considering outsourcing your HR functions, you’re probably wondering what the benefits and risks are. After all—HR is an essential element of any business, so choosing to outsource is a big decision. The good news is, finding the right firm can actually save you time and money. One recent study found that companies who outsource functions like payroll and benefits spend about 18% less than companies who keep it internal. While cost savings is only one of the objectives of HR outsourcing, it’s a major factor for many companies.

But before you go searching for an outsourced firm, let’s review the advantages and disadvantages of HR outsourcing with examples and common HR outsourcing strategies so you can be as prepared as possible to find the right solution for you.

What are the Benefits and Risks of Outsourcing?

There are myriad pros and cons of outsourcing HR functions. Here are some of the most common benefits and risks to help you envision how it might play out within your company.

Advantages of Outsourcing HR

  • Potential cost savings: Small and mid-sized companies likely don’t have the budget for a full-time HR hire. However, outsourcing can provide all the expertise that comes with an HR specialist, often for a fraction of the cost. For example, while an HR specialist may cost nearly $52,000 a year in salary, outsourced HR services can be as low as $500-1,000 a month.
  • Access to expert advice: Have you ever had to face a complex HR situation like terminating an employee or issuing a performance improvement plan? There’s no telling what kinds of HR situations you’re going to encounter. Having an expert on hand who has seen it all before can help you make sense of any difficult scenarios you encounter. 
  • Remain in compliance: One recent study found that 40% of mid-sized companies experience fines or penalties because they weren’t in compliance with government regulations. Outsourced HR professionals are experts in the ever-changing regulations around HR, and they can ensure your company remains in compliance.
  • Access to state-of-the-art technology: Small companies may not know what the best HR technology is or how to effectively utilize it. Outsourced companies can often provide access to these kinds of tools and software, adding value beyond core HR services for small businesses.
  • Additional time for core business functions: HR services like recruiting, benefits, and payroll take time. And while they’re important, they’re not directly earning your company profits. Outsourcing HR can free up valuable time for business owners and administrators to focus on revenue-driving core business functions. When every hour counts, outsourcing HR just makes sense.

Disadvantages of Outsourcing HR

  • Potential for miscommunication: It’s easy to pop over to someone’s desk who is next to yours, or even to have a quick Slack message with an employee. It might be more complicated to remain in regular communication with an outsourced company…especially if the company is in another time zone or is difficult to get a hold of. However, the right outsourced HR firm will have practices in place, like weekly meetings or a shared dashboard, to make sure that both parties are communicating well and often. 
  • Perceived loss of influence: It’s a common concern for business owners to be concerned with a loss of control, especially when it comes to specific functions like recruiting, hiring, and payroll. No matter how much you outsource, a good HR partner will feel like an extension of your team. A great firm will take the time to get to know your business and culture so the business owner feels like the HR function still has the company culture and influence embedded in it.
  • Potential for hidden fees or lengthy-contracts: If it sounds too good to be true, it just might be. As with any contract, there’s the potential for hidden fees or difficulties in cutting ties should it become necessary for a small business owner to end a contract. Companies should find a trusted outsourced solution with transparent fee structures and flexible packages that allow you to scale up—or down—as needed.

What are Outsourcing Strategies?

Once you’ve decided that you’re interested in outsourcing HR for your business, you must decide which strategy (or strategies) you’ll employ to do so. Let’s take a look at some common outsourcing strategies.

Strategic Services

Strategic services help businesses tackle specific, pointed problems or issues with expert guidance. For example, with HR strategic services, companies may find assistance in crafting an employee performance or improvement plan. Or, they might help develop a Talent Strategy that fills your recruiting pipeline with great talent.

Ongoing Services

Ongoing services are designed to be ongoing services that support your company with tactical day to day tasks. In essence, ongoing services can tackle specific services areas, or they can be your entire HR team—whichever suits your needs. An ongoing service strategy takes an execution focus to make sure a business is compliant and on time with things like compensation, benefits administration, regulatory filing, and more.

Take your HR to the Next Level with Milestone

If you’re ready to realize the benefits of outsourcing HR, Milestone Business Solutions is here to help. We believe in true business partnerships that will give you the peace of mind that comes from knowing your HR functions, like your employees’ benefits, are in good hands. With Milestone, our team is your team, and we bring decades of experience to help provide your business with the HR expertise you deserve. If you’re ready to reimagine your back office, reach out today.

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