Outsourcing Your HR Department

By Mohita Nagpal, DARE

Outsourcing your HR department can be an effective strategy, but only if you know when and what to outsource

Human resource is considered to be a source of competitive advantage for organizations, especially in the knowledge sector.

There have been continuous debates whether HR departments act as mere administrative departments in organizations and do little in terms of actual value-addition for employees. Entrepreneurs are increasingly opting for outsourced HR services and asking experts to manage their employees, while they concentrate more on their core competencies. The reason behind is lack of time, resources, or expertise

Most successful outsourcing alliances offer cost savings, standardization of processes, and efficient service. Typically, HR outsourcing has been associated with recruitment. However, that is not the case anymore. Outsourcing operational, administrative, and strategic functions is also gaining momentum.

Different HR functions that can be outsourced
One can outsource various HR functions depending upon the expertise required. Recruitment is unarguably the most common functions outsourced. However, it is functions like payroll, leave tracking, record keeping, etc. that are routine in nature and can be easily farmed out.

Recruitment: Once you are a big organization, outsourcing recruiting makes a lot of sense. The organization will always have the final say in the selection of the candidate, but the screening of resumes, and initial selections can be completely outsourced. Then there are also entrepreneurs who believe that recruitment should never be outsourced to an external party as they cannot fully understand the culture of your organization and will fully understand your requirements.

Administration: This includes maintenance of employee master payrolls, tracking of leaves, any kind of employee redressal and grievances, entry and exit process, paying provident fund and life insurance, and so on. These are people- and effort-intensive activities that can be mastered over a period of time. This is the reason why it makes sense to outsource it to a service provider. According to media reports, Unilever has outsourced their administrative HR functions to Accenture.

Strategy: This includes setting up a performance management system, building an employee handbook, and undertaking activities that offer value addition for employees.

How do I benefit?

The biggest advantage of having an outsourced HR department is that you can concentrate on your core business activities and let the experts manage the HR functions. These service providers are specialists who bring in fresh perspectives, competent policies, and tried and tested process to manage employees. This saves a lot of time and effort of the management. This also helps in the management and standardization of HR processes.

Apart from expertise, you also get access to the latest technology without having to make costly investments. If you are a small organization, you might not have the back-end infrastructure, management bandwidth, and real estate to hold huge training sessions. On the other hand, if you are a big organization then outsourcing the HR department completely can be a cost-effective strategy.

According to Dhruv Agarwala, co-founder, iTrust and a user of HR outsourced services, “Today hiring an HR executive is a difficult job. It is an expensive resource to get somebody who understand recruiting, HR administration, who can set up performance management system and build an employee handbook with the same ease. You can’t get all these benefits through one person. So you have to recruit three to four persons to get benefits of all these activities.” This is where outsourcing firms come into play. Rather than hiring three or four people, if you outsource it, you basically benefit from the know-how of an HR outsourcing firm who have done the same work several times before.

It is not hard for them to write a basic employee handbook for you or set up a basic performance management system. Dhruv further adds, “HR outsourcing firms manage the transition. You get seamless service. Accretion is easy; if one person leaves there is continuity. If one day one person does not come in, they have a back up who comes in. All in all, your HR functions work very smoothly.”

What shall I look out for?

There are a number of considerations that one should look at before deciding upon a service provider. Here are a few tips:

References: The information that these service providers deal with is sensitive and confidential in nature. People have entire employee master and performance management systems with their HR outsourcing firms. There is always an insecurity of important information spilling out. According to Dhruv, “The way you reward people could be a source of competitive advantage. You don’t want that to walk through the door with outsourced organizations. It’s important to hire a reliable firm through references. People who have already used a HR outsourcing firm are the best way to hire.”

Experience in your domain: It is always better to hire a firm that has some experience in your domain. That way they understand your requirements better. However, again, there is a flip side to it. You should not go for a firm that has your immediate competitor as a client. There could be a conflict, because if the competitor is larger than you, then they would be more important for your HR outsourcing firm.

Similar size: It is also very important to select firms that are similar to your size. HR firms measure their performance by the number of people they can place in your organization because that is how they get paid. So, if they are working with a large company where they can place 10 people, they earn 10 times the revenue compared to the one person they will place in a small organization. In that sense, the attention span small companies get is very limited. This is the reason why it is so important to work with firms of your size. If you are a small organization, work with a firm that has 15 decent clients and they will give you a lot of attention

Second thoughts
Though there are not many serious concerns, there is definitely a flip side to hiring an outside agency. Service providers are always considered outsiders; they never fully integrate with your organization. Then there is also the difficulty of managing them as compared to your own employees.

Another disadvantage of outsourcing is the threat to security and confidentiality. When you are outsourcing functions like payroll or other confidential information, you must be very careful in deciding which process to outsource and to which service provider. There could also be a possible loss of flexibility in reacting to changing business conditions. Sharing cost savings may additionally create some confusion.

Startups: Does it work for them?

This is a debatable issue. It depends a lot on how important HR is for your growth. Some startups have successfully outsourced their HR departments, while others have a different take to it. As Dhruv says, “We realized outsourcing right in the beginning is not a good idea because you are building a culture and DNA in your organization. I would recommend founders themselves should recruit in the initial phase. Once you are less, around eight to 10 people, the administrative hassles are very limited. Maintaining leave and payroll for up to 10 people is not hard, you don’t have to pay payroll unless you are 20 people. With 10 people closely sitting in an office, you can work on employee grievances and welfare. Being a small organization, there is no large entry or exit process either.”

However, according to Gita Dang, Talent Advisor Services, “There are two types of companies that go for outsourced HR services. One is very small when they don’t want to have an independent HR team. It is operational HR, particularly payroll, etc., that they will be outsourced by them. Strategic HR is normally always retained. Then over the years they go through a phase where they do it all in-house. Then again once they reach a certain size, they find it cost-effective to outsource it.”

When to outsource?

Once you reach the 40-employee mark, you will realize that admin hassles have grown. That is the time to think of outsourcing. The idea is to handle all the activities till you can; you will automatically know when you can’t manage. There will be a sign when you will realize that you are paying people more because there is no track of leaves, or payrolls are getting delayed. This sort of thing is manageable when you are 10 or 15 people.

However, while outsourcing you have to keep costs in mind. If you get a decent person who has the wherewithal to handle all this, do that. That is what Dhruv did: “The first person who came on board was doing recruiting and some basic admin. As we grew bigger, we realized the need for a separate person for recruiting, admin, and other activities. We could not get the person on board so we decided to go for outsourcing.”

What functions to outsource?

You have to keep weighting your outsourcing decisions. It is all about mental makeup, making the distinction of what you can and cannot do. Dhruv cites an example from his experience: “I make the distinction on a strategic and non-strategic basis. Anything that relies on efficiency and good execution I think shall be outsourced. Exit checklists and leave tracking are simple things. They can be outsourced. Because service providers after a point get [far more] efficient in their work than what you can ever do in your organization. Our job is not to do HR, it is their job; they naturally do it well.”

He further adds, “What motivates your people is of strategic importance. My performance management systems are so effective, I don’t want to lose that competitive edge by outsourcing.”

What are the cost implications?


It is not absolute money, but cost benefits. To have a single person effectively do performance management, effective admin, and effective recruiting is hard. So with outsourced firms what happens is that the firm’s knowledge comes in; they bring the know-how themselves. Thus, you have all the benefits rolled into one. For 40 to 50 people, they will place one person in your organization on a full-time basis and probably a manager on a part-time basis (one or two days week) to oversee things. The manager is the one who brings all the know-how, while the full-time person is responsible for daily activities.