With the noticeable rise of Small and Medium Enterprises (SMEs) and startups, many companies consider outsourcing the human resources (HR) function; the most common scheme being the delegation of the entire function or parts of it (like Compensation & Benefits) to a third-party company to run on behalf of the organization. Although outsourcing as a concept isn’t new -the most familiar of which happens with the IT function- the decision to outsource HR is a more difficult one. No matter the company, employees are an imperative part of the business and are always empirical to the success of any organization.
So, the question becomes when should a company outsource? In some parts of the world, especially more developed countries, this is an obvious choice because it often comes with significant financial and operational efficiencies. The same doesn’t always hold true for developing countries as labor costs and systems maturity are very different.
There are many instances when HR outsourcing can be considered. The most obvious case is when the company is less than 30 people, especially when it is selling products, not services. However, even if it is selling services, at this size, outsourcing can be a good alternative. Outsourcing can be an effective means to manage costs for small companies. The case for companies over 50 people becomes more complicated.
There are many instances when companies should consider outsourcing HR or at least part of the function; outsourcing is not an all-or-nothing equation. A more obvious sub-function to consider outsourcing is what pertains to transactions. For example, outsourcing personnel files and payroll management. If a company recruits a lot of early career employees or is a company with substantial employee turnover in a service industry, like a call center, outsourcing recruitment may be an excellent alternative. Companies that require a very broad HR skillset but their amount of work does not justify full-time HR employees for each of the HR areas, can take advantage of outsourcing parts of what they do. In addition, outsourcing HR offers higher levels of compliance, as a result of very focused, deep expertise in certain areas and contractual agreements on deliverables and KPIs.
So when shouldn’t a company outsource HR? Companies with people at the center of what they do should be cautious about HR outsourcing and should even minimize it, as in the case of consulting firms or hospitals. Outsourcing HR does create distance between management and employees because often more sophisticated issues relating to engaging employees and developing them are not attended to and are not seen as a priority, or are simply difficult to be assumed by an external party who is not synced to the organization’s culture and mandate.
When the third-party company is very distant from the organization, this is when the outsourcing experience is found challenging. The level of understanding of the organizational culture, norms, practices, structure, processes and a long list of issues will determine this distance. If the distance is wide, the result becomes inability to characterize the organization in the way that is truly reflective of them, especially in the case of recruitment. Most outsourced companies, depending on their scope, may also come off as very focused on tasks and less so on people, which may also send inaccurate messages to candidates, employees or other key stakeholders.
There are also other models to consider. Bringing on an HR consultant with a hands-on approach is a great alternative, especially when there are other more junior members of the HR team who can support implementation. The closer the consultant is to management, the higher the impact. However, a pure external HR advising approach is rarely successful. The important thing to consider is that HR, like many functions, requires a pragmatic approach that is built on people working together and building trust and rapport.
At the end of the day, human resources is one thing that is all about human interactions, which is a big part of what makes it so complicated.