Why companies outsource their HR function
HR outsourcing came to the forefront of the business activity primarily as a means to achieve cost reduction. Outsourcing the non-core functions of the companies began to become an option once companies began to recognize the value of focusing on their core competencies rather than the non-core functions. Organisations have now begun to use various forms of outsourcing for non-core functions such as cleaning, catering, security and other relatively low skilled jobs.
Outsourcing can be defined as, “The delegation of one or more business processes to an external provider, who then owns, manages and administers the selected processes based on defined and measurable performance metrics.”
Outsourcing has the following characteristics:
• The Outsourced Provider has an Increased Level of Risk
The outsourced provider is accountable for the employees on his employment and is responsible for them delivering the required services to the company is on time. The providers must bear all the risks and penalties in case their people fail to deliver the services as per the schedule.
• Length of the Contract
Outsourced deals are generally contracted for a couple of years, or approximately a period of at least five to ten years. Outsourcing duties require a significant investment by the provider in terms of resources, people and technology.
• Closer Integration of the Provider with the Customer Organisation
The outsource providers are so involved with the customer organisation that many a time, organisations fail to recognize whether the provider they are dealing with is part of the provider’s team or their own organisation.
Why companies outsource the HR function
While one of the major reasons for outsourcing the HR function is short-term cost saving, it is not the only reason. stated below are a few reasons companies often outsource their HR function:
• Various Factors
Organisations often turn to outsourcing as part of business-wide exploration of service delivery options along with several other internal functions e.g. the organisation may have a parent company that encourages the outsourcing strategy. The decision to outsource cannot be taken by the HR team alone. It is usually influenced by other factors such as the team of directors or other internal forces driving the organisation.
• Reduction in Costs
One of the most common reasons companies outsource their HR function is to reduce the cost of the HR process. Although organisations could achieve most of the cost reduction through their own conscious efforts, many companies fail to bring about a transformation, as they do not possess the right technology and scale, or the skill to do so. Hence, organisational managers derive the conclusion that it is much more cost-effective to use an external recruitment service provider who can provide established infrastructure, adequate experience and expertise to their customers. Outsourcing providers cater to a wide range of organisations and are able to spread the cost over a large number of employees, enabling them to achieve extensive training that individual organizations might not be able to provide. Outsourcing also reduces the cost of overheads that are involved in providing the service and reducing the workload does, ensuring consistency in the provision of service.
• Administrative Work and the HR Function
Administrative work often hinders HR from functioning strategically. HR stands a chance for the wider scope to operate at a higher level if it is freed from the burden of administrative work. Organisations are often faced with difficulties in breaking away from administrative tasks and seeking other approaches to enable them to focus on other activities.
• Risk Reduction
Organisations have a legal obligation to comply with the legislation of local and national employment. Failure to comply with legislation can take up management time. Bad experiences of managers with the employees of the organisation is one of the most common triggers for exploring outsourcing options.
• Improvement in the Quality of Service Provided
Companies and organisations that aim at improving the quality, speed and effectiveness of the HR operations often face two issues:
- They lack knowledge of the best training processes and the implementation of the processes.
- The HR teams are so accustomed to their regular ways of working, the organisation faces difficulties adapting a customer-focused service centre approach.
Service providers outsourcing HR are experienced and possess the knowledge of the best practice processes.
• Increasing the Capacity of the HR function to respond to Organizational Changes
When smaller organisations fail to invest in an internal HR function during the early growth years due to various factors, outsourcing the HR function is a tool used by most of the companies. The HR function is also outsourced by organisations if they wish to transform their already existing HR function but cannot effectively change the delivery structure of the services without external intervention. HR function is also outsourced at a time when the company, for various reasons, does not have an HR infrastructure and cannot afford to establish a new internal HR operation.
• Payroll and Accounting Cost
The cost of outsourcing payroll is lesser as compared to the cost of maintaining an in-house payroll staff. Outsourcing can help the company delegate responsibilities such as, employee payslips, tax and deduction advice, and payroll analysis, for the purpose of accounting. Outsourcing the above non-core responsibilities allows the company to focus on other core responsibilities and future endeavors.
• Efficiency
Maintaining efficiency and productivity in the workplace is essential. Outsourcing frees the organisation managers from additional paperwork and allows them to focus more on improving the efficiency and effectiveness of the workplace and organisation thus attaining goals.
• Employee Development
Outsourcing the HR functions can help manage performance and development of the employees in the workplace. Outsourcing the HR function helps ensure that the employees abide by the rules and regulations of the organisation and comply with the company’s policies and procedures to help the organisation meet business goals. Outsourcing companies monitor the employees’ performance and report accordingly to the management. Thus, outsourcing the HR function minimizes the workload on the managers by reducing the administrative responsibilities.
• Compliance with Rules and Regulations
Many businesses fail to keep up with constantly changing rules pertaining to the management of insurance claims, hiring, and benefits regulations. The failure to comply with these rules can lead to dire financial consequences. While labor costs account for one of the largest operating business expenses, payroll, tax overheads and other expenses such as the health insurance premium, workers’ compensation insurance, recruiting fees, and legal costs add to the list, making it harder for companies to keep track.
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