HR outsourcing involves a business hiring an external company to manage some or all of its human resource functions. Businesses commonly outsource HR to increase efficiency, gain expert advice, and save costs. 

The most frequently outsourced HR tasks include payroll services, employee benefits administration, and various aspects of HR management such as recruiting, hiring, onboarding, firing, exit interviews, and annual reviews. 

Research has shown that the global HR outsourcing market is experiencing significant growth, with projections indicating substantial expansion in the coming years. Here’s a list of the most recent statistics – 

Global HR Outsourcing Market –

• Expected to reach $53.9 billion by 2024
• Projected to grow at a compound annual growth rate (CAGR) of 19.44% from 2021 to 2028
• Estimated to generate $35.11 billion by 2028

Adoption Rate and Satisfaction – 

• 59% of organizations outsource at least one HR function
• 92% of organizations that outsource HR are satisfied with the results

Cost Savings and Productivity – 

• Companies can save up to 32% in HR costs through outsourcing
• HR outsourcing can lead to a 53% increase in productivity
• Outsourcing HR can result in a 26% increase in revenue per employee

Improved HR Functions – 

• 21% improvement in employee engagement
• 28% improvement in employee retention 
• 50% improvement in time to hire
• 30% increase HR process efficiency 
• 52% increase HR compliance adherence 

These statistics underscore the growing popularity and potential benefits of HR outsourcing for businesses, including streamlined HR operations, reduced costs, and enhanced overall HR performance.

Types of HR Outsourcing

Professional Employer Organizations (PEOs) – 

• PEOs provide HR outsourcing through a co-employment arrangement, acting as the administrative co-employer of a company’s workforce. 

• This model particularly suits mid-sized organizations with fewer than 50 employees. 

• PEOs handle various HR functions, including processing payroll and taxes, submitting necessary wage and tax information to the government, and managing employee benefits. This allows businesses to focus on their core activities and allocate resources more effectively. 

• While the PEO manages many HR responsibilities, the client company retains specific duties. These include managing employee documentation (e.g., new hire paperwork, employee details), making decisions about layoffs, and overseeing day-to-day business operations. 

Essentially, the company maintains control over its workforce while benefiting from the PEO’s expertise in navigating complex HR tasks. 

Administrative Service Organizations (ASOs) 

• ASOs provide administrative and HR support to businesses without entering into a co-employment relationship like Professional Employer Organizations (PEOs). 

• Instead of sharing legal and financial responsibility for a company’s employees, ASOs concentrate on managing specific administrative tasks to help companies streamline HR processes. 

• Some of the services offered by ASOs include payroll processing, benefits administration, HR technology solutions, and risk management. 

Essentially, an ASO acts as an extension of a company’s existing HR department, providing specialized expertise and support in specific areas, without assuming the role of an employer. 

This allows businesses to maintain control over their HR functions while benefiting from the ASO’s specialized knowledge, technology, and resources. It is thus a cost-effective solution for businesses looking to improve efficiency and compliance without the complexities of a co-employment model. 

Human Resources Outsourcing (HRO) 

• HRO involves contracting specific HR functions to external providers. Instead of a full-scale outsourcing arrangement with a PEO, businesses can customize their HRO services based on their unique needs and budget. 

• HROs cater to a diverse range of businesses, from small businesses to large corporations. 

They offer a wide array of services, such as – payroll processing, employee benefits administration, talent acquisition, employment law compliance,  employee relations,  performance management, background screening,  risk management, drug testing, and employee counseling. 

This in turn allows businesses to focus on their core competencies while ensuring specialized HR functions are handled efficiently. By leveraging external expertise, companies can potentially reduce costs, improve compliance, and enhance the overall effectiveness of their HR operations. 

For example, a small business might outsource talent acquisition and payroll to an HRO, while a larger corporation might utilize HRO services for employee development programs or risk management.

Pros of HR Outsourcing 

There are numerous advantages to business outsourcing some or all of their HR functions. These include – 

• Cost Savings – Outsourcing HR can significantly reduce costs, potentially saving businesses up to 32%. This is achieved by cutting labor and administrative expenses and benefiting from the provider’s economies of scale. 

By outsourcing, companies avoid the need for full-time HR staff, which saves on salaries, benefits, office space, technology, and training. Additionally, outsourcing payroll alone can contribute to these savings.

• Access to Expertise – HR outsourcing gives businesses access to a team of skilled professionals who specialize in areas like payroll, benefits, compliance, and recruitment. 

This is especially useful for small businesses that can’t afford in-house experts. For instance, outsourcing ensures access to specialists who understand complex labor laws, helping companies stay compliant and avoid legal issues.

• Scalability & Flexibility – HR outsourcing provides flexibility, letting businesses easily adjust their HR services as needed. Companies can scale their HR support up or down in response to changes like workforce size or business growth. 

This is especially helpful for startups and fast-growing companies that need to quickly adapt to evolving HR needs.

• Improved Efficiency – By using the provider’s expertise and technology, businesses can automate tasks, reduce mistakes, and enhance overall HR effectiveness. Statistics show that outsourcing can boost productivity by 53% and improve HR process efficiency by 30%.

• Access to Technology – HR outsourcing often provides access to advanced technology like HR management systems and AI-based recruitment tools. 

This can be more cost-effective than buying and maintaining these systems in-house, especially for small and mid-sized businesses. Using these technologies helps automate tasks, improve data management, and boost overall HR efficiency.

Cons of HR Outsourcing 

While there are several advantages to HR outsourcing, it is important to consider the potential drawbacks. These include – 

• Limited Control – Outsourcing HR means giving up some control over HR functions, requiring trust in the external provider to handle sensitive employee information and align with the company’s culture and goals. 

This loss of control is a common concern, so it’s crucial to ensure clear communication and well-defined roles and responsibilities to manage this effectively.

• Risk to Company Culture – HR is key to maintaining company culture, and outsourcing it might create a gap between the external team and the company’s values, which can affect employee morale and engagement. 

To address this, it’s recommended to keep some HR functions in-house to ensure alignment with company culture.

• Communication & Coordination Challenges – Working with an external HR provider can cause communication issues, delays, and coordination problems, which may frustrate both employees and management. 

This can lead to more time and effort needed to resolve issues compared to managing HR in-house.

• Confidentiality Concerns – Sharing sensitive employee data with a third-party provider always involves some risk, even with strong security measures. Businesses need to thoroughly check potential providers to ensure they have proper safeguards for protecting confidential information.

• Potential for Hidden Costs – Cost savings are a major reason for HR outsourcing, but businesses should watch for hidden costs like extra service fees or contract termination charges. 

To avoid surprises, it’s important to conduct a detailed cost-benefit analysis and review contracts carefully with potential providers.

HR Outsourcing Best Practices 

To ensure a successful HR outsourcing experience, consider the following best practices – 

1. Planning & Strategy 

To effectively outsource HR, first identify which tasks, like payroll or recruitment, are best handled externally while keeping strategic functions in-house. 

Set clear goals for outsourcing, such as cost savings or improved compliance, and ensure the decision aligns with your business strategy and values. 

Perform a detailed cost-benefit analysis to compare outsourcing costs with keeping HR functions in-house, taking into account any potential hidden expenses.

2. Select a Reliable HR Outsourcing Provider 

When selecting an HR outsourcing provider, thoroughly research and compare options based on their expertise, services, costs, and reputation. 

Ensure your provider aligns with your company culture and values and has strong data security practices, including encryption and regular audits. Choose providers with specialized knowledge in the HR functions you need, especially if your industry has specific regulatory requirements.

3. Implementation & Management 

To ensure a successful HR outsourcing arrangement, establish a detailed Service Level Agreement (SLA) that defines service scope, performance expectations, and key metrics. 

Set up clear communication channels and use tools for regular updates and feedback. Be transparent with employees about the outsourcing process and how it affects them. 

By following these best practices, businesses can improve their HR outsourcing experience, making the most of external expertise to streamline HR functions, cut costs, and allow internal teams to focus on key business goals.

How ProSource Solutions Can Help you with All your HR Outsourcing Needs

ProSource Solutions offer a range of PEO services designed to address your HR Outsourcing needs. These include – 

• Payroll Processing 
• Employee Benefits Administration 
• HR Compliance 
• Risk Management 
• Employee Relations Support
• Training & Development 
• Technology Solutions 
• Recruitment & Onboarding 
• Legal Support 
• and many more…

As your chosen co-employer, ProSource Solutions allows you to concentrate on expanding your business while we manage the intricacies of HR administration. 

Our commitment is to transform your company into an ‘Employer of Choice,’ turning your business goals into reality.