The Disadvantages Of Outsourcing HR Functions (+How To Avoid Them)

If you’re overwhelmed with administrative HR tasks or worried about compliance, you may be considering outsourcing HR as a way to ease your burden. For many companies, that’s a good option. But before you go this route, you may be wondering if there are any potential disadvantages of outsourcing HR that you should consider. Let’s find out.

In this article, we’ll highlight some of the most common problems employers may face when outsourcing HR functions. After reading this, you’ll be aware of the possible downsides of outsourcing HR – and tips for managing them – so you can decide if an outsourced approach is the best option for your business.

How Does Outsourcing HR Work?

Outsourced HR providers offer specific knowledge and expertise to help you reduce the risks that can arise from employee relations issues, wage and hour disputes, and regulatory compliance.

When you choose to outsource HR functions, an external professional will handle as much or as little as you’d like. You can hire an HR consultant for specific tasks like an employee handbook or engage them for more inclusive strategic guidance on all aspects of your HR program. Either way, you’ll get proactive support from a specially-trained expert.

What are the disadvantages of outsourcing HR functions?

While outsourcing HR functions may be a good fit for your company, there are some aspects to this approach that you may want to consider before choosing to go down this path. Here, we’ll discuss the top five potential disadvantages of outsourcing HR and how to handle them.

Lack of Control

For many companies, HR is the heart and soul of the organization. The HR team knows your employees, the dynamics in the workplace, and what does or doesn’t make workers happy. 

When you outsource HR, you give up some degree of control. That comes with an understandable concern that you will no longer have your finger on the pulse and won’t have the insight to know how to make the best decisions for your workforce.

How to Maintain Control

The reason you’re hiring a third-party HR professional is to leverage their knowledge and expertise to help alleviate some of your burden and keep you in compliance. What you do with their recommendations is up to you.

That means that even if you outsource, you remain the decision-maker and have the final say in HR matters. So if an outsourced HR provider gives you guidance for dealing with a particular issue in the workplace, you can choose to take the suggestions or not.

Culture Changes

For many employees, their company’s culture is what motivates them to come to work every day. When an outsider is in charge of handling workplace issues and setting the tone, it can be tough for employees to accept.

When you choose to outsource, you need to be aware that bringing in a vendor could possibly disrupt the current dynamic or impact morale. Employees want to feel engaged, so this is especially true if your employees feel they’ll be more disconnected from what has always been a face-to-face function – HR – in the past.

How to Avoid Cultural Upsets

The best way to avoid these potential disadvantages of outsourcing HR is to work with a provider who respects the culture you’ve built and just wants to ensure you’re positioned for growth. Ask for references from consultants you’re considering and follow up to see if clients experienced any impact on their culture when outsourcing.

It’s also important to reassure employees that even though the HR vendor is off-site, that won’t impact them directly. Generally, an HR partner works with your management team. They’ll focus on more strategic tasks like protecting the business and typically won’t deal with employees on a regular basis. Instead, you or your designated staff works as a liaison between your employees and the HR provider. 

Cost

When considering outsourcing of HR, one of the biggest barriers for many companies is the potential cost. That’s why many companies look to bring in an internal HR professional instead. However, it can be challenging to find the right person. And, even if you do, you may not have the budget for them. Last year, the median pay for an HR Manager was $130,000, and that doesn’t take into account the true cost of a new hire. 

When outsourcing HR functions, you can expect to pay between $45 and $1,500 a month depending on the services you need. But that’s an average, and different service levels and add-ons can drive those prices up. 

How to Make Outsourced HR More Cost-Effective

Since you can pick and choose the type of services you need from your vendor, ultimately, you have control over what you spend. 

One way to help prevent costs from getting out of control is to start small and add services as your needs and budget allow. Alternatively, you can just bring in a vendor for some one-off support to strengthen your own internal team’s capabilities as needed. 

Another option for those who may be looking for more than just HR services is to see if your provider offers package, or bundled, pricing if you use them for other services such as payroll. This approach can help you lower your cost of outsourcing HR.

Frequent Turnover

When you bring on an HR provider, you’ll likely have discussions with some of their team members during the sales process. But those individuals may not be who you work with on a daily basis.

Instead, you’ll probably be assigned a representative to your account. Over time, they’ll become familiar with your workplace, top HR issues you need to be concerned about, and how to reduce your exposure. Like in any business, however, that person may leave, and things may slip through the cracks. 

How to Ensure Vendor Stability

Even though turnover is one of the potential disadvantages of outsourcing HR, it doesn’t mean your provider will be less attentive to your business when your primary contact is gone. The key is to thoroughly evaluate potential vendors before you engage with them. 

Ask peers, colleagues, or industry associations for references you can speak to. Ask the vendor’s clients about their commitment, follow through, and how they handled any changes to their team. It’s also important to make sure that all members of a vendor’s team have the same level of expertise so you have predictable service, no matter who your day-to-day contact is.

Data Insecurity

Privacy and confidentiality are paramount in HR. If you’re used to keeping all your sensitive company or employee information in-house, you may worry about putting that highly personal information in the hands of another company. 

And that’s understandable, especially in times of increased security threats. In addition to cybersecurity issues, you may also be concerned about improper sharing of the data among your HR vendor’s staff.

How to Protect Your Data

Just like using any outsourced vendor for sensitive information, you’ll want to check the reputation of the vendor you’re considering. Ask about how they will prevent the release or abuse of sensitive information. You’ll also want to spell out protections in your outsourcing contract.

Effortlessly Manage Your Workforce With The Outsourcing of HR

Both in-house and outsourced HR can be good options for your business. The key is to understand the pros and cons of each approach to decide what’s best for your business. If, after researching the potential disadvantages of outsourcing HR functions it still sounds like a good fit for you, the next step is to find the right provider for your organization. Our guide to the top 7 considerations when evaluating providers can help you find the best partner for your company.

This blog was originally published in August of 2022 and was updated in July of 2023 for accuracy and comprehensiveness.