• Dhruv Parikh

Outsourcing HR functions

Updated: Nov 18, 2020

Today, almost any function can be outsourced- from Sales, Marketing, Operations, Customer Service to Human Resources. Once you determine the core of your business, you may decide to outsource everything else. One of the most common and easiest functions which can be outsourced is Human Resources. The top reasons why companies outsource HR are highlighted in the graphic below.


Most companies, small or large, outsource some parts of their Human Resources function. This article elaborates on the scope and advantages of outsourcing HR for Micro, Small and Medium enterprises.


Why outsource Human Resources?

If you deprive yourself of outsourcing and your competitors do not, you are putting yourself out of business.

The role of HR is changing. In 1800s, the role of HR was to provide employees with food, clothing and shelter. Today, it is about motivating employees through fair appraisals and compensation systems. Soon, the role of HR will be that of a change agent, an innovator and a strategic partner.

Rapidly changing market dynamics. Competitive pressures have caused organizations to spend more time focusing on their core business. So organizations tend to decide and do what they are good at and outsource everything else. Outsourcing, in general, helps by saving time, reducing cost and bringing expertise as discussed in the previous article- Taking the outsourcing decision.

Fixed cost to variable cost. HRO agencies charge per employee in your company. This makes the HR costs variable. You do not need to pay fixed salaries to HR executives or managers in your team. Overheads for workstation, laptop, hiring and management costs also reduce significantly.

Better quality and efficiency. If you are a baker, you will be good at baking cakes and not necessarily at managing payroll, compliance, grievance redressal etc. HRO agencies are experts in all administrative activities of HR. They are able to add value by leveraging their experience and expertise in the field.

Best practices. It may not be easy to decide whether you want 5-day or 6-day work weeks. It depends on the industry you are in, the kind of employees you hire, regulations etc. HRO agencies are well-equipped to help you with framing such policies and managing your HR function at industry standards.

Technological pace. It is almost impossible for an entrepreneur to know about the latest advancements in HR technology, which is evolving at brisk pace. Why is it important? Because it helps reduce time, effort and resources used to manage HR functions. It also helps improve effectiveness of recruitment, engagement, building culture, communication etc.

Risk mitigation. India has 30+ labour laws and statutory compliances like PF, ESIC, professional Tax etc. Each of them has different regulations, formats, deadlines and implications. Companies need to know which are relevant to them and ensure compliance. Failing to do so can lead to penalties and P&L impact. HRO agencies can help understand and guide you to mitigate risks of non-compliance.

Catalyst for change. For companies which have historically been inefficient in some activities like MIS, analytics, following TATs and meeting deadlines, the efficiency of HR agencies can help these functions turn around and help the decision-makers of the company.

What to outsource?

Do what you do best, outsource the rest.

It’s challenging to run a business smoothly with your HR team drown under piles and piles of files and paperwork. This is why the majority of employers today are turning to HR outsourcing. After all, having some external support is not a bad thing. Human Resource Outsourcing (HRO) includes outsourcing of administrative and repetitive tasks, tasks which require expertise and experts.

Administrative and repetitive tasks · Background verification · Onboarding new joinee · Attendance and payroll · Statutory compliance · Grievance redressal · Performance appraisal · Documentation · Policy implementation

Tasks requiring expertise · Learning and development · Recruitment and selection · HR and process audits · Policy framing · Organization structuring · KRA – KPI planning · Compensation structuring · Strategic HR planning

Potential pitfalls of HR outsourcing

Just like hiring the right talent is essential for growth so is selecting the right HRO agency to ensure smooth transition and management.

Benefit-cost analysis unclear. Calculating the costs for processes that are to be transferred to the outsourcing partner and agreeing upon an appropriate costing model is not always easy. The cost of managing HR in-house should be compared with the fees of HRO agency. The cost of in-house teams should include salaries, overheads, supervision cost, hiring cost, attrition cost and cost of errors.


Standardization of processes. By outsourcing HR, companies often need to accept the standards of the HRO agency. These may not always be in line with standards set by the company. In such cases, it becomes essential to find the right partner who can conform to company’s standards.


Security concerns. Many service providers use web-hosted software to handle HR functions, leaving sensitive employee information potentially vulnerable to security threats as well as crashes. Checking the HRO agent’s security record and references is essential when you're finalizing your HRO agent.


Longer turnarounds. In situations where an error has been made going through a third-party HR service can mean a long wait before the error is fixed, leaving the employee angry or frustrated. In addition, when an employee quits and the business is using an outside recruiter, the hiring and training process might take longer than it would with an in-house HR department, which can be more proactive about hiring and training employees before positions even become open.


Loss of flexibility. In small businesses, HR teams would be empowered to go beyond policies to take commercial decisions. For e.g. paying out unused vacation days in an emergency. When HR is outsourced, these types of accommodations for loyal workers can be difficult if not impossible. Hence it is important to have HR partner who is flexible to such requests.


Perfection is not attainable, but if we chase perfection we can achieve excellence. HR outsourcing has its benefits and pitfalls. If a company is committed to make the alliance work, it can create an advantage which very few competitors can replicate.

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