Why do Companies Outsource HR functions?


The cost of owning a business is relatively high, especially when you’re a budding startup that’s looking to get its company off the ground. While it’s natural to want to do everything in-house, business owners that wish to scale quickly need to consider outsourcing as a viable option. Outsourcing also moves payroll compliance into the hands of knowledgeable professionals.

What Types of HR Functions are Generally Outsourced?

The functions your partner HR company can provide help to streamline your business’ employment functionality significantly. The other company will take on background work, like applicant screening, benefits services, and drug testing, while following the order of steps to process payroll correctly to ensure your business stays legally compliant. 

Although outsourcing HR can greatly benefit your company, you need to ensure you don’t create a culture clash. You’re going to experience some changes in your company’s culture as you adapt to working with another business. Some of these changes will be positive, but others could impact your company. Speak to your staff during the transition to ensure it’s smooth.

10 Reasons Why Companies Outsource Their HR Departments

If you feel that outsourcing your HR department may be the right choice for your company, the following reasons may convince you to take that step towards hiring a third-party business.

1. Outsourcing Reduces Costs

Outsourcing has the potential to save you money without sacrificing the overall integrity of your operations. The more employees you hire, the more you’ll have to spend on salaries, vacation pay, and health and retirement benefits. Businesses, especially startups, need all the help they can get when it comes to their finances, as those savings can be rolled into your bottom line.

2. Outsourcing Allows for Flexibility

When companies have more money to work with, they are given flexibility in how they can spend their savings. You already know that your human resources department, along with payroll, is taken care of, so you don’t need to put away anything for future HR growth. This money can be better used to bring in more frontline employees, invest in better tech, or other necessities. 

3. Outsourcing Fulfills Business Needs

Whether you have your own HR department or you’re handling payroll on your own, there are benefits to hiring an extra HR force. Even large corporations can benefit from outsourcing payroll because a third party can fill in skill gaps that their other employees may not have. They especially come in handy for CEOs who can’t keep up with their rising payroll needs.

4. Outsourcing Lessen Liability 

Federal and state laws change quickly, and there are massive penalties associated with misfiling payroll. On top of that, you may not have the capital to protect yourself if you get unfairly sued for sexual harassment, safety violations, or wrongful termination. When you hire a compliance specialist, this is no longer your problem. Liability passes off to who you outsourced.

5. Outsourcing Guarantees Talent

Hiring can be difficult, especially if you don’t have previous HR training or you’re knowledgeable on how to interview for a position you aren’t familiar with. You could unintentionally hire the wrong person for the job, but when you outsource your HR department, you’re guaranteed talent. Talented HR staff will greatly improve recruitment, training, and onboarding processes.

6. Outsourcing Attracts Skilled Labor

A skilled HR department inevitably attracts more skilled labor because they know what to look for and how to attract what your business needs. When you outsource your HR department, you also gain access to better health coverage, retirement plans, and workers’ compensation rates, which makes your company more attractive. HR can also help you train qualified applicants.

7. Outsourcing Gives Access to Technology

There are plenty of HR outsourcing services that want your attention, so many of them will supply you with the latest technology to stay competitive. These include big-data mining, virtual workforce leadership, analytics, social media, and cloud technology. As a business, you also need superior technology to attract clients. Take advantage of this benefit to scale quickly.

8. Outsourcing Improves Business Focus

Entrepreneurs need to wear many hats, but they’ll start to fall off your head the busier you get. Being overworked won’t benefit your business or your mental health, and taking your focus away from doing what you love can impact your company. Outsourcing your HR department will allow you to focus on the best aspects of your business, which will keep your enthusiasm high.

9. Outsourcing Can Offer Access to Other Services

Many HR outsourcing companies will give you access to other services that you wouldn’t have permission to use otherwise. Since they work with multiple clients, HR specialty firms may have access to economies of scale, which can open up access to perks you can offer your employees. At the same time, you may also be able to deliver these same perks to your clients.

10. Outsourcing Makes Your Current Employees Happier

When your employees have access to fringe benefits, they will feel that their company cares a lot about their wealth and happiness. Happy employees are more productive, stay at their jobs longer, and take fewer sick days. What’s more, happy employees increase your bottom line, but upper management also plays a role in keeping your employees content in the long-run. 

If you provide consistent feedback, growth opportunities and show that you appreciate their hard work, you’ll earn trust and respect from your employees, and potential future hires.

Final Thoughts

Choosing to work with an outsourcing firm will be intimidating at first, but it may be just what your business needs to stay competitive. While in your initial growth stage as an entrepreneur, your company can outsource to receive needed resources and talent to stay afloat.

Although there are problems that can occur from outsourcing, like company culture clashes and mismanaged expectations, you can minimize many of these issues if you and your employees are well-prepared. When you’re ready to make the outsourcing leap, always consider a company that’s focused on helping your employees and your business succeed long-term.


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BDC 315 : Apr 2024