7 Challenges to Outsourcing HR (and How to Overcome Them)

What is HR outsourcing?

HR outsourcing is the process of hiring a third-party service to handle some or all of a business’s human resources tasks, such as running payroll, dealing with employee benefits and recruiting employees. 

Typically, businesses outsource HR functions to save time and ensure experts handle essential tasks. Even companies with internal HR departments may outsource specific functions to enhance HR compliance and access specialized expertise.

Challenges of outsourcing HR

While having experts handle all your HR headaches sounds like a great idea, some potential challenges exist. Before handing over your HR tasks to an HR outsourcing (HRO) provider or professional employer organization (PEO), take time to understand what could go wrong and how to address those issues.

There can be a disconnection with staff.

The word “human” is part of “human resources” for a reason. HR representatives help employees feel like they have a voice and bring value to the company — a critical function. Transferring these duties to computer software or an off-site third party can make your team members feel disconnected from their employers. As an employer, you also risk not fully understanding your staff’s needs and frustrations.

“Employees can feel disconnected from HR when it’s outsourced, leading to a lack of trust and engagement,” explained Lisa Rigoli, a leadership coach and HR consultant at Element of Change. “The challenge is ensuring employees feel heard, supported and valued even when HR functions are external.”

There may be a lack of deep organizational understanding.

According to Rigoli, one of the biggest hurdles when outsourcing HR is ensuring external providers truly understand the organization’s nuances. 

“That includes its culture, leadership dynamics and the unspoken expectations that impact employee engagement,” Rigoli explained.

Outside providers may understand your employee handbook and disciplinary policies, but if they don’t truly get the subtleties of your company culture and organizational goals, you risk a lack of employee engagement and lowered productivity. 

Owners and managers may feel a loss of control.

According to Adam Calli, founder and principal consultant at Arc Human Capital, business owners may feel a loss of control when they hand over critical functions like payroll, benefits administration and employee relations to an outsourced HR service. They may feel uneasy about giving outsiders access to sensitive information or trusting them to uphold the company’s standards.

“They may be unwilling to let go of tasks or to share openly with HR,” Calli cautioned.

There’s less flexibility with HR processes.

In small businesses especially, HR reps and managers can help employees out in a pinch — whether it’s paying out unused vacation days in an emergency or letting them dip into next year’s leave early, for example. When HR is automated or outsourced, these types of accommodations for loyal workers can be difficult, if not impossible.

Problems and processes can take longer to resolve. 

In situations where an error has been made, such as a payroll discrepancy or incorrect vacation day counts, going through a third-party HR service can result in long delays before the problem is corrected. Typically, this is due to additional layers of communication and approval required with third-party providers. As a result, employees can be left feeling angry or frustrated. 

Additionally, the hiring process may take longer with an outside recruiter and employee onboarding and training might feel less customized and personal than if you used your own in-house HR department. 

Privacy and security concerns can arise.

HR outsourcing can leave your employee data vulnerable to security threats if your third-party partner’s software isn’t secure. Many service providers use web-hosted software to handle HR functions, potentially leaving sensitive employee information vulnerable to cyberattacks and system failures. The last thing you want is to have your employees’ personal banking or medical information released to the public and break Health Insurance Portability and Accountability Act laws.

HR outsourcing can be costly. 

One of the biggest concerns for many small businesses considering outsourced HR is the cost since prices can vary greatly. It might seem tempting to simply hire an internal HR professional to handle all your HR needs, but that can be expensive too — and one person may not be able to cover all the functions HR entails.

The good thing about HR outsourcing is that you can choose which functions you want to outsource. This flexibility allows you to start small and gradually add more HR services as your needs grow. For example, you might decide to keep employee benefits management in-house but outsource your HR compliance tasks.

How to overcome the challenges of outsourcing HR

While outsourcing your HR functions can have potential limitations, there are a few easy ways to mitigate these challenges.

Keep an internal HR employee on staff.

A satisfied, hardworking staff is a business’s biggest competitive advantage. By ensuring employees’ voices are heard, you can create a company culture that values their contributions. 

As noted above, one of the biggest challenges of outsourced HR is not having someone on-site to troubleshoot the everyday problems, frustrations and miscommunications that inevitably arise in any work environment.

One solution is to hire an internal employee to handle specific HR functions in-house. They can act as a liaison, working with your HR outsourcing agency to ensure all HR tasks align with your company’s values and culture.

It’s also a good idea to have an internal hire manage employee-centric duties such as company culture, diversity, equity and inclusion and performance management.

Ask about the service model when assessing providers.

Calli pointed out that outsourcing service models vary, so it is crucial to ensure a good understanding of your working relationship’s structure. 

“Ask how you will communicate with one another,” Calli suggested. “Having a personal touch and, in this case, a personal contact, makes a huge difference as an HR outsourcing company gets to know your culture and your employees.” 

Calli also emphasized the importance of understanding any outsourcing partner’s security protocols. “You should understand the technology setup and determine the security arrangement, such as whose servers [your data] will be housed on and who will have access and control,” Calli advised. 

Having a mutual understanding of all aspects of your outsourcing relationship will help improve collaboration with your outsourcing company and, ultimately, how well you serve your employees.

Ask the outsourcing company about customization.

HR outsourcing companies typically provide an HR platform for you and your employees to access important HR information, such as time-off requests and benefits management. When setting up your arrangement with an HR vendor, ask about customization options. 

For example, many top-rated HROs and PEOs allow you to create policies within the software that are as strict or flexible as you need. Additionally, ask about customizing employee access, adjusting reporting features, integrating third-party tools and even adapting communication methods to match your company culture. The more flexible the platform, the easier it will be to create a great experience for your employees.

Consider outsourcing only certain services.

Many excellent HR outsourcing services let you pick and choose which functions to hand over, allowing you to maintain a personal touch and deal with specific tasks in-house. Typically, you’ll appoint an in-house manager or HR team member to act as a liaison between your employees and the outsourced HR company.

These are the most common services HR outsourcing companies offer:

• Payroll services, such as paying employees, handling payroll taxes and tracking sick time and vacation
• Employee benefits, such as health and life insurance and retirement plans
• HR management, such as recruiting, hiring, firing, exit interviews and annual reviews)
• Risk management, such as employee compensation, safety training, regulatory compliance, conflict resolution and office policies 

While outsourcing any of these services can save your business time and money, it might be smart to keep people-centric tasks — like hiring, firing and performance reviews — in-house. Also, allowing your employees to share their frustrations and concerns about outsourced services will help you assess what’s working and what isn’t, so you can find the best solution for your business.

Casey Conway contributed to this article.