What Is Human Resource Outsourcing (HRO)? A Comprehensive Guide

Imagine your business thriving as you focus on core operations while a team of experts handles your HR functions seamlessly. This could be a reality with human resource outsourcing.

This strategic move can boost productivity, cut costs, and streamline your business processes— especially for companies lacking the resources to maintain an in-house HR team.

We’ll walk you through the essentials of human resource outsourcing, its advantages, the key functions you can outsource, and how to choose the right provider. 

What Is Human Resource Outsourcing?

Human resource outsourcing (HRO) is simply hiring a third-party company or professional (i.e., an independent contractor) to manage all or some of your HR functions, allowing you to allocate more resources to core activities and strategic growth.

Outsourcing HR services can be more efficient, strategic, and cost-efficient than hiring in-house employees to handle your HR needs.

Some of the best HR outsourcing providers include:

• BambooHR
• ADP
• Papaya Global
• G&A Partners
• Bambee
• Trinet
• Paychex
• Near

These companies offer a range of services, ensuring that your HR functions are in capable hands.

Small to medium-sized businesses that lack the resources to maintain a full-fledged, in-house HR team are particularly best suited to outsourcing their HR functions.  Start-ups and rapidly growing companies can also benefit from HR outsourcing as they may need to scale their HR functions in line with their growth quickly.

Moreover, businesses operating in industries with high compliance demands or those with a diverse workforce spread across multiple locations might find HR outsourcing beneficial. Ultimately, any company seeking cost-efficiency, streamlined processes, and access to specialized HR expertise could consider outsourcing its HR functions.

Key HR Functions You Can Outsource

You can outsource a variety of functions to HR outsourcing providers, such as:

• Payroll processing: Outsourcing payroll processing can save time and ensure accuracy, as it involves complex calculations and compliance with tax laws.

• Benefits administration: This involves managing employee benefits packages, which can be time-consuming and require specific knowledge of regulations and policies.

• Recruitment and hiring: Outsourcing recruitment and hiring processes can streamline these tasks, making filling open positions faster and more efficient.
• Talent management: HR outsourcing providers can help retain top talent, contributing to the overall strength and competitiveness of the business.
• Compliance: Compliance with labor laws and regulations can be complex, and the goalposts can seem ever-changing. Outsourcing this function ensures that you stay compliant without having to monitor changes in the law constantly.
• Tax functionality: Managing tax-related matters can be complex and requires a deep understanding of tax laws. Outsourcing this function can help you avoid penalties and ensure compliance.

• PTO tracking: Keeping track of employees’ paid time off can be a tedious task. Outsourcing this function can ensure accurate tracking and compliance with company policies.

• Engagement tools: Engagement tools are used to boost employee morale and productivity. HR outsourcing providers can offer advanced tools that might be too costly for some businesses to maintain independently.

• Live customer support: Having a dedicated HR support team can enhance employee experiences and resolve issues quickly, contributing to a better working environment.

Advantages of HR Outsourcing for Businesses

The benefits of HR outsourcing are extensive, including:

Cost savings

One of the primary benefits of HR outsourcing is the potential for significant cost savings. Outsourcing HR functions can result in cost savings by reducing the need for in-house HR staff and the associated expenses like salaries, benefits, and office space. 

An HR outsourcing service can also facilitate streamlined business processes, further decreasing operational costs. 

The cost range for HRO services for small and midsize businesses can range anywhere from about $10 a month per employee to $100 or more, depending on how many services you are paying for—which can be more cost-effective than maintaining an in-house HR team. The cost savings per employee if a company outsources some or all of its HR tasks can be substantial. 

Enhanced efficiency

Outsourcing HR functions can lead to streamlined processes and improved efficiency. HR professionals from outsourcing firms often have the knowledge and tools to handle HR tasks more quickly and accurately than non-specialized in-house staff.

Expertise and experience

An essential advantage of HR outsourcing is the access to specialized knowledge and advanced technology it offers. HR outsourcing enables companies with limited resources to access advanced technology that may be too costly to maintain independently. This access to cutting-edge tools and resources allows you to improve your HR operations significantly.

Compliance and risk management

Outsourcing HR can help you comply with labor regulations. HRO providers typically offer a range of support for compliance, such as:

• Automated tools for payroll compliance
• Assistance in developing company policies
• Online compliance training services
• Dedicated HRO support teams for specific compliance issues

Enhanced employee satisfaction and engagement

Outsourcing certain HR functions, such as payroll and benefits administration, can increase accuracy and timeliness, increasing employee satisfaction. This, in turn, can positively impact employee engagement and retention.

Potential Challenges or Drawbacks of HR Outsourcing

While outsourcing HR functions can offer numerous benefits, like everything, there are potential challenges. However, in most cases, by being aware of the potential difficulties, you can take proactive steps to mitigate them. Some common challenges include:

Communication issues: Communication challenges can arise when working with an external provider, especially if they are located in a different country. Miscommunication may lead to misunderstandings, errors, or delays in HR processes.

Reduced flexibility: With HR functions being managed externally, you could lose some flexibility in making quick HR-related decisions.

Hidden costs: While outsourcing is often pursued for cost savings, there may be overlooked hidden costs, such as additional fees, customization charges, or costs associated with transitioning back to in-house HR functions.

Employee resistance: Employees may resist changes in HR processes, especially if they perceive outsourcing as a threat to job security or are used to in-house HR services. Clear and transparent communication and managing employee expectations is vital.

By being mindful of these potential challenges, you can choose an outsourcing solution that will best mitigate them.

How To Choose the Right HR Outsourcing Provider

Choosing an HR outsourcing company is, of course, a significant decision that requires careful consideration. Here are key factors to keep in mind when selecting an HRO provider:

Services offered

Assess the range of services offered by the HRO provider. Ensure they can meet your specific needs, whether it’s payroll processing, benefits administration, talent acquisition, compliance management, or other HR functions.

Expertise and experience

Evaluate the provider’s expertise and experience in HR outsourcing. Look for a track record of success and experience in serving businesses similar in size and industry to yours.

Technology and infrastructure

Examine the technology and infrastructure the provider uses. A reliable HRO provider should have up-to-date HR management systems to efficiently handle your company’s requirements.

Compliance and risk management

Verify the provider’s knowledge of and compliance with local labor laws and regulations (and international regulations, if relevant). A strong emphasis on compliance and risk management is crucial to avoid legal issues.

Reputation and references

Research the reputation of the HRO provider. Check client testimonials, reviews, and references to gain insights into their performance and customer satisfaction. Consider reaching out to existing clients for feedback.

Scalability

Assess whether the provider’s services can scale with your business as it grows. Your chosen HRO solution should be flexible enough to accommodate changes in the size and structure of your organization.

Data security and privacy

HR outsourcing involves handling sensitive employee information. Ensure the provider has robust data security measures and complies with relevant privacy regulations.

Cost structure and transparency

Understand the provider’s pricing structure and ensure there are no hidden costs. Look for transparency in pricing and billing processes.

Communication and customer support

Evaluate the provider’s communication channels and customer support. Access to responsive and knowledgeable customer support is essential to address issues promptly.

Cultural fit

Assess whether the HRO provider’s values and culture align with your organization’s. A good cultural fit can contribute to smoother collaboration and understanding of your business needs.

Global capabilities (if applicable)

If your business operates globally, ensure the HRO provider has experience and capabilities in managing HR functions across different regions. This includes understanding local laws, languages, and cultural nuances.

Service level agreements (SLAs)

Clearly define the provider's SLAs, including response times, resolution times, and performance metrics. Having well-defined SLAs helps manage expectations and ensures accountability.

Exit strategy

Understand the terms of the contract, especially regarding exit strategies. Know the process for transitioning out of the agreement, including data migration and the return of any outsourced functions in-house.

Assessing these factors thoroughly will help you make an informed decision when choosing an HRO provider that aligns with your business goals and requirements.

How the Transition From In-house HR To Outsourced HR Typically Occurs

The transition from in-house HR to outsourced HR typically involves several steps:

1. Evaluation: The first step is to evaluate your current HR functions and determine which ones would benefit from being outsourced. This could be due to factors such as complexity, time consumption, or the need for specialized knowledge.
2. Selection of provider: Once you’ve identified the functions to outsource, the next step is to select an HR outsourcing provider. This involves researching potential providers and assessing them based on the factors we covered above.
3. Contract negotiation: After selecting a provider, you’ll need to negotiate a contract that outlines the terms of the outsourcing agreement, including the services to be provided, costs, and responsibilities of each party.
4. Transition plan: The next step is to develop a transition plan. This plan should detail how the HR functions will be transferred from in-house to the outsourcing provider. It should include timelines, responsibilities, and contingency plans.
5. Implementation: Once the transition plan is in place, the implementation phase begins. This involves the actual transfer of HR functions from in-house to the outsourcing provider.
6. Review and adjustment: After the transition, reviewing the process and making any necessary adjustments is important. This could involve tweaking processes, addressing any issues that came up during the transition, and ensuring that the outsourced HR services meet your needs.

Communication is key during this transition. Keeping employees informed about the changes and how they will be affected can help ensure a smooth transition and lessen any impact on employee satisfaction and morale.

Evaluating the ROI of HR Outsourcing

Calculating the return on investment (ROI) of HRO involves several steps.

1. Identify the costs: This includes the fees paid to the outsourcing provider, any technology or infrastructure costs related to outsourcing, and the cost of managing the relationship with the provider.
2. Calculate the savings: This involves quantifying the savings achieved through outsourcing. It could include the reduction in labor costs, decrease in overheads (like office space and equipment), savings from avoiding penalties and fines due to non-compliance, and the reduction in time spent on HR tasks by your internal team.
3. Measure the additional value: In addition to cost savings, outsourcing can also provide additional value, such as increased productivity, improved compliance, access to expert advice, and enhanced employee satisfaction. While these may be hard to quantify, they are important factors to consider in your ROI calculation.
4. Calculate the ROI: The basic formula for calculating ROI is (Net Benefit / Cost) * 100. The net benefit is the savings plus the additional value minus the cost.
5. Monitor regularly: ROI should be monitored regularly as costs, savings, and additional value can change over time.

Remember, the ROI will vary depending on your unique situation and the specific HR functions being outsourced, so making comparisons with other companies or benchmarks might not be useful. 

Final Thoughts

HR outsourcing offers numerous benefits, including cost savings, enhanced efficiency, access to expertise, and improved compliance and risk management. By understanding the key HR functions you can outsource and selecting the right provider, you can reap the rewards of HR outsourcing. 

If you are also looking to make savings in your recruitment and salary costs, Near can help. Near’s services go further than some HR outsourcing providers in helping you cut costs when it comes to recruitment. 

Not only can we cut your sourcing and screening time by 50–60%, reducing your time to hire, but we can find you highly qualified talent with salary expectations 30–70% below their US-based peers. 

We assist you in hiring top Latin American talent from start to finish, including handling payroll. Don’t wait; book a free consultation today to discuss how we can help you elevate your business to new heights!

Frequently Asked Questions

What is the difference between human resource outsourcing and using a PEO? 

Human resource outsourcing and professional employer organizations (PEO) are both types of HR outsourcing but serve different purposes. HRO involves outsourcing specific HR tasks or functions to an external provider. This could include tasks such as payroll, benefits administration, or talent management. With HRO, your business retains direct control over its employees and their management.

On the other hand, a PEO is a more comprehensive outsourcing solution where the PEO becomes your co-employer. The PEO takes on many of the legal responsibilities of being an employer, such as compliance with employment laws and regulations, while you maintain day-to-day control over your employees. This model can provide access to benefits and HR services you might not otherwise be able to afford.

Is human resources outsourcing the same as business process outsourcing?

While both human resources outsourcing and business process outsourcing (BPO) involve delegating specific tasks or functions to external service providers, they are not the same. HRO is a type of BPO that refers specifically to outsourcing tasks related to human resources management, such as payroll, benefits administration, and talent management.

On the other hand, BPO is a broader term that encompasses outsourcing various business functions, including but not limited to HR. BPO can include customer service, accounting, marketing, or IT. So, while all HRO is a form of BPO, not all BPO involves HR functions.