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When to Outsource HR Functions

“When to Outsource HR Functions”

Perhaps your time ought to be spent managing your core business instead of managing your employees. A one-time investment in choosing the correct human resources firm could free up loads of time for more lucrative endeavors.


To outsource or not to outsource? That is indeed the question many business owners and managers have been pondering of late. Proponents of outsourcing claim that farming out such tasks as payroll, relocation or benefits allows a company or department to avoid getting bogged down with day-to-day chores and instead lets it focus on its core business. Critics, on the other hand, claim that outsourcing can result in a loss of control and a perception among employees that the company is not being personally responsive to their needs.

In spite of such criticism, outsourcing remains big business. According to the Economic Intelligence Unit, North American businesses spend $141 billion per year on outsourcing. A 1997 study by Dun & Bradstreet Corporation and The Outsourcing Institute revealed that human resources (HR) activities constitute 12% of that figure.

For some businesses, outsourcing the entire HR function may be the best possible option. Others dare not send out any HR duties whatsoever. To make the most educated decision for your own company, you’ll need to make a careful and calculated assessment of your employee population, its needs and expectations. You’ll also have to factor in your own budget and internal capabilities.

In this Quick-Read, you will find:

  • Steps to determine if outsourcing HR is the best solution for your company.
  • Steps to select the best vendor for your company.

You may also want to see Quick-Read "When to Outsource Technology."


Use of outsourcing has grown as companies have begun to recognize the need to focus on their core business functions. One of the routine business operations outsourced most frequently is human resources. According to New York-based Buck Consultants, in 1996, 35% of 102 companies with fewer than 1000 employees outsourced one or more HR functions. By the year 2000, the percentage had increased to 59% of 116 companies ["More Companies Outsource their Core HR Functions," HR Focus (August 2000): 8.]. Two of the most commonly outsourced HR functions are employee training initiatives, which were outsourced by 58% of companies in 1999, and recruitment functions, farmed out by 38%.

When implemented correctly — and for the right reasons — outsourcing can be a tremendously advantageous strategy. Outsourcing simply as a means of cutting costs or without proper research, however, can be disastrous. A poorly considered decision can damage not only the bottom line but also employee satisfaction. This in turn affects your ability to retain valued employees.

Is outsourcing your best option?

Before rushing into any outsourcing arrangement, first determine whether outsourcing is the right strategy for your company.

Examine your overall business and company culture.

  • Set short- and long-term goals and objectives.
  • Determine how outsourcing will complement those objectives.
  • Ask employees and managers how they feel about the way HR functions are currently being handled.
  • Study the capabilities of staff members and the technology currently available within the company.
  • Consider if outsourcing will allow your company to offer a wider set of benefits that will help in attracting and retaining employees.

What to do if outsourcing looks promising

  1. Form an internal committee of four or five people from different functions, such as HR, finance, tax and legal. This committee will be responsible for initiating outsourcing research and obtaining requests for proposals (RFPs) from vendors.
  2. Research each area of HR you might outsource, measure your current in-house capabilities and identify qualified vendors. If possible, solicit proposals from vendors you have worked with in the past. If not, talk to your business peers about the vendors they have used in their companies. If your personal contacts are not productive, look in the yellow pages of the phone book under "Human Resources…" and "Personnel…"
  3. Carefully research possible vendors. Look at their reputation, financial stability and credentials. Check their references and ask probing questions. Select those vendors whose RFPs most closely suit your needs and your corporate culture. Ask them to meet with your committee and give a formal presentation.
  4. Select a primary vendor and a back-up vendor. Working with legal counsel, draw up a contract that specifically outlines the vendor’s responsibilities, what kind of performance is expected and what measurement will be used to determine whether expectations have been met. Be sure to include an early-out option in case either party becomes dissatisfied with the arrangement.
  5. Maintain ongoing monitoring of your vendor. Establish a regular reporting system, along with penalties for inadequate performance. Also consider introducing incentives for exceeding goals or achieving unexpected cost savings for the company. Ensure that all federal and state reports are filed accurately and on time with the appropriate agencies.


At most small companies, HR management usually falls to the owner or another executive who tries to juggle (or insists on juggling) such responsibilities on top of regular duties. That was the approach initially taken at Hanson, Moser & Associates, a Phoenix-based public relations and marketing communications firm. Established in 1980, the nine-person firm was purchased in 1991 by Scott Hanson, an employee since 1986.

At first, Hanson handled insurance and other HR duties, while his wife managed the books, including payroll. After four years of that arrangement, Hanson decided to find an outside vendor that could handle all of the firm’s HR duties.

He selected Administaff, a Professional Employer Organization (PEO), to serve as his HR department. In addition to handling payroll and insurance services, Administaff also manages the firm’s 401(k) program. It offers classes in leadership and communication, and it provides access to a credit union, a toll-free Employee Assistance Program (EAP), adoption assistance and direct deposit of paychecks. In addition, Administaff assisted in the development of an employee manual.

According to Hanson, outsourcing his company’s HR functions has allowed his small firm to provide the kinds of benefits that he needs to compete with larger firms.

"In our industry, we stand out when it comes to what we offer our employees," he says. "That has helped us tremendously in the retention of employees."

DO IT [top]

  1. Determine your underlying reasons for wanting to outsource one or more HR functions in the first place. Are you simply trying to achieve a cost savings or are you looking for capabilities and technology that your company does not have in-house? Do you wish to free up the time of those who currently handle such duties, so that they may play a more strategic role in your company’s future direction?
  2. Identify your needs. Are you looking to farm out just one aspect of your HR, such as payroll or 401(k) administration, or would you prefer to outsource the entire function?
  3. Determine if you would be better served by one vendor for all functions or if you will need to outsource various functions to a variety of vendors. Keep in mind that coordinating the efforts of numerous vendors may complicate the process.
  4. Identify potential vendors, and request descriptions of their services.
  5. Once you’ve selected the vendor(s) best suited to your corporate culture, be sure to communicate to employees that such an approach was chosen because it will provide them the best possible service. Be sure to emphasize that it does not mean you plan to be less responsive to their needs.



Strategic Outsourcing: A Structured Approach to Outsourcing Decisions and Initiatives by Maurice F. Greaver (AMACOM, 1999).

Internet Sites

The Outsourcing Institute, "an Executive Resource Network and forum for executives interested in the strategic use of outside resources"

National Association of Professional Employer Organizations. To see a NAPEO membership directory, click on "Member Directories" and "Find a PEO."

"Buyer’s Guide: HR Outsourcing" BuyerZone.com, 2000.

Article Contributors

Writer: Julie Cook

New York-based Buck Consultants.

Peter Bendor-Samuel, president, Everest Group, Dallas, Texas, (972) 980-0013.

Mary Cook, president, Mary Cook & Associates, Scottsdale, Ariz., (602) 563-4917.