When Should Your Company Outsource Its HR? 5 Scenarios Leaders & HR Pros Can Look For

HR is one of the most critical aspects to successfully growing a company. Reliable studies say that companies that are very good at key HR services (recruiting, onboarding, development, retention…) enjoy 3-4 times the revenue growth of those who are average or poor. 

So for company leaders or an HR manager, it's difficult to know when it’s a good idea to outsource your HR functions. And which ones to outsource. And how to go about it. As someone who’s been both an HR leader in companies and an HR consultant to companies, it’s something I’ve been asked a lot. So I’ve put together some tips to guide company leaders & HR professionals. Let’s start with a definition.

What's the difference between HR consulting and HR outsourcing?

HR consulting provides strategic advice and expertise to improve overall HR performance and effectiveness. HR outsourcing involves delegating specific HR functions to external service providers for operational efficiency and cost savings. The choice between the two depends on the company's goals, resources, and the specific HR challenges it faces.

When should a company outsource its HR? 5 Scenarios

The decision to outsource HR should be carefully evaluated based on the company's unique circumstances, strategic priorities, budget considerations, and desired level of control over HR processes and functions.

Here are 5 situations in which outsourcing HR may be beneficial:

• Need To Maximize Cost Efficiency:
  If a company finds it more cost-effective to outsource HR functions rather than maintaining an in-house HR department. Examples of judging cost-effectiveness are provided below.
• Lacks In-House Expertise:
  When a company lacks in-house expertise in certain HR areas, such as payroll administration, benefits management, or compliance, outsourcing allows access to specialized knowledge and skills provided by experienced HR service providers.
• Need To Stay Focused On Core Activities:
  Outsourcing HR functions allows company leadership to focus on core business activities and strategic initiatives without getting bogged down in administrative tasks or HR-related complexities.
• Temporary Need:
  In cases where a company has a temporary need for additional HR support, such as during a merger or acquisition, outsourcing can provide flexible, short-term solutions without the long-term commitment of hiring additional staff.
• Limit Compliance & Litigation Risk: 
  To assist companies with organizational compliance and mitigation of legal risk by providing HR professionals who have a deep knowledge of local, province/state, and federal employment laws and regulations, helping companies ensure compliance and mitigate legal risks.

Is it cheaper to outsource HR?

When analyzing the cost/benefit of outsourcing your HR there are two main factors to consider:

1. The cost of in-house HR: The average annual salary for an HR manager runs between $75K-$105K. Add to that the cost of employment taxes, benefits etc (18-26% typically). If you can outsource your HR functions for less than that, then outsourcing will make sense until your company grows to the point where you can bring it in-house.

2. The cost of under-spending on your HR: Relying too heavily on internal team members who have limited HR experience, can cost your company by failing to comply with ever-changing legislation.

What's the most common HR functions that are outsourced?

In my experience, it often depends on what stage of growth your company is at. For startups who don’t want to incur the cost of a full-time HR manager, it might mean outsourcing every HR function including setting up proper process HR processes and procedures from the ground up.

For more mature companies who need to augment (pun intended) their HR team, these are the 9 most common functions outsourced:

• Payroll
• Benefits management
• Hiring
• Onboarding
• Employee Relations
• Stay & Exit interviews
• Compensation
• Terminations / Outplacement
• HR Strategy

How does outsourced HR work?

After you define the areas you wish to outsource, you can contract a qualified HR outsourcing firm on an hourly or project basis. But there are a few things to watch out for. 

Some outsourced HR outsourcing firms structure their services under a monthly retainer fee, much like a legal firm. Our caution there is you can easily get tied down to an expensive commitment and be unsure of the return you’re getting.

Other outsourcing firms charge a more reasonable monthly subscription fee. The downside there is that you get call-centre level support that never really gets to know your business and unique challenges.

At AugmentHR we recommend that companies just starting to outsource their HR, purchase a package of hours they can use as needed. That way you get access to senior HR consultants with no commitment.

Learn more about our Flexible HR Hourly Bundles. Or learn more about how the team at AugmentHR can help you outsource your HR in a customized & flexible manner.

And Join Our Webinar on Improving Your Team’s Emotional Fitness

Check Out More HR Solutions for Outsourcing & Improving Employee Retention

•  4 Common Challenges with HR Outsourcing (including solutions for each)
•  5 Strategies To Improving Employee Relations
•  Low Employee Retention? 4 Causes & 9 Solutions

Christine Fowler is a senior HR Consultant with AugmentHR, a Toronto-based HR consulting firm serving Canada and beyond. Christine has a Bachelor’s Degree in Psychology and a strong work ethic. She has over 20 years of experience in HR helping corporate, non-profit and family-owned companies in various sectors. Her career started as an HR leader at one of the most-recognized micro-breweries in Canada where she built a high-performing HR team & function from the ground up. She thrives in helping companies develop compensation and performance management programs that build culture and employee retention.