A guide to outsourcing HR

Richard Smith, head of employment law at Croner, explains how to approach outsourcing your staffing operation.

With the economic situation still in crisis organisations will need to continue to minimise costs and make cost-efficient use of resources for some time yet.

Outsourcing of the whole or parts of the HR function can be a cost-effective way of reducing overheads while benefitting from the skills and expertise of external providers.

If you’re thinking about outsourcing you need to identify the reasons why you want to do this and what impact this will have on your employees.


If the reason for outsourcing is a cost one, then you need to look carefully what the true internal costs are and whether outsourced cost really is cheaper. Don’t just think about the known costs; factor in the hidden costs such as redundancies or redeployment of staff currently covering the work.

Getting the experts in

One of the common reasons for outsourcing is to have access to higher levels of experience, knowledge or expertise. A common area for outsourcing is pensions, where regulatory rules and changes to the legislation have become so complex that in most instances organisations enter into an agreement with a third party to manage the investment and administration of their schemes.

What to outsource?

HR covers a wide range of activities, typically:

  • strategy and objective setting
  • recruitment and selection
  • terms and conditions of employment, both statutory and occupational
  • pay and benefits
  • employee relations
  • supporting line managers in discipline and grievance situations, dismissal, absence management, staff appraisal and redundancies
  • equal opportunities/managing diversity
  • organisation design and development
  • training and development, including coaching and mentoring initiatives

To support these, whoever looks after HR will also have to develop policies and procedures, train line managers, inform and consult employees and their representatives and maintain the “official” records of each employee through their personnel files.

It is possible for all or any of these activities to be outsourced. Many organisations hand over recruitment and selection activities to a third party. The provision of flexible benefit schemes, pensions, training and development also lend themselves to delivery by a third party.

Disadvantages to outsourcing

There are a number of potential disadvantages in outsourcing all or many HR activities. The main problems are:

  • Losing control
  • Loss of local knowledge or internal knowledge and expertise
  • Failures in service delivery
  • Lack of confidentiality and security
  • Poor relationships
  • Standardisation (the provider makes all clients follow the same procedures and practices)

Choosing an outsource provider In choosing an outsourcing partner, you are establishing a potentially long-lasting relationship. It pays therefore to spend time investigating the possibilities before making a decision.

When a provider has been chosen service level agreements will need to be created, these are essential to the smooth running of outsourced services.

Working together

Managers and other employees will need help and support in coming to terms with the new arrangements. In addition the provider will need to know as much as possible about the organisation and its goals.

If the provider is going to offer advice to staff and managers, it will need to have access to employee files and records and to HR policies and procedures. You will also need to ensure that any transfers of information are properly protected as required by the Data Protection Act.

If much of the communication is likely to be electronic, then the infrastructure needs to be put into place so that the system can be operational from the start. If the provider is in a different time zone, he or she needs to make personnel available during the client’s normal working day. IT systems have to be compatible.

Summary of the outsourcing process:

  • Identify the reasons for outsourcing
  • Think about the alternatives
  • Consider the internal implications
  • Look for suitable providers
  • Evaluate the fit with the organisation
  • Appoint someone to manage the transition
  • Make a service level agreement with the provider
  • Transfer the service(s)
  • Monitor and assess customer satisfaction
  • Communicate frequently with service provider
  • Review well before the contract comes to an end
  • Decide on action at the end of the contract

HR outsourcing ‘could benefit business’

More than half of all human resources (HR) directors believe that outsourcing is a valuable service, the results of new survey have revealed.

According to outsourcing specialist hy-phen, 51 per cent of HR directors feel that outsourcing adds value, especially when it comes to payrolls and strategic consultancy.

This survey comes at a time when HR directors are struggling with core issues, such as staff retention, diversity, training and motivation, the research found.

Neil Jones, hy-phen’s managing director, says that outsourcing can help free up time so that HR directors can focus on other areas of the business.

‘Recruitment process outsourcing can not only manage the back-end, high-volume processes such as payroll, but also the more strategic elements of HR, such as talent management and resource planning,’ he added.

Research by the Centre for Applied HR Research has shown that outsourcing HR administration can lead to a shift in focus towards company policy and decision making.

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Small Business HR

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