Pros and Cons of Outsourcing HR Functions for Small Businesses

Small businesses often have fewer resources than larger ones, potentially making it more efficient to outsource certain functions rather than keep them in-house.

Certain functions of an organization’s HR operations are common options for outsourcing. According to a study by staffing agency Kelly Services, 36% of all employers outsource part or all of their HR responsibilities, with the most outsourced functions being payroll (56%), recruitment (49%) and benefits (40%). This article outlines options for outsourcing and highlights the benefits and drawbacks of outsourcing HR functions so small businesses can consider whether this strategy is right for them. 

Outsourcing Options

Small businesses may choose to outsource functions for various reasons; for example, organizations may not have enough resources to hire personnel, or they may want to increase efficiency and focus time and energy on other matters by delegating HR tasks. Whatever the reason for outsourcing, there are different ways employers can go about implementing this strategy. 

One outsourcing option is to hire a professional employer organization, which provides comprehensive HR services. Alternatively, there is HR outsourcing (HRO), where individual tasks can be outsourced to third-party providers. With HRO, rather than delegating all HR tasks to an outside party, only one or a few functions, like payroll processing, will be outsourced. Further, employers may also choose to leverage technology vendors when outsourcing. Many technology vendors now offer services such as Form I-9 compliance software, time and attendance tracking.

Ultimately, a small business’s decision on whether to outsource will be specific to their individual needs. It is important for employers to consider whether to outsource all or some of their organization’s HR functions because the type of outsourcing they engage in could lead to a different outcome for their business. 

Benefits of Outsourcing

There is a range of advantages to outsourcing some or all of a small business’s HR tasks. Employers may realize the following benefits:

• Flexible & Scalable Support — Outsourcing allows small businesses to adjust HR services as they grow or face changing needs without committing to the cost of a full-time hire. This adaptability ensures long-term value and operational efficiency.
• Multi-Level Expertise — Finding someone who can handle both day-to-day HR tasks and strategic planning is challenging and costly. Outsourcing provides access to professionals who deliver tactical execution and strategic guidance, helping businesses build strong HR foundations.
• Access to Specialized Knowledge — HR encompasses a wide range of functions, from payroll and benefits administration to compliance and employee relations. Outsourcing gives small businesses access to specialists in each of these areas, which is a huge value-add that’s often overlooked. This depth of expertise helps ensure that each function is handled with precision and up-to-date knowledge.
• Productivity & Compliance Gains — According to Paychex, nearly 7 in 10 small business leaders spend one week per month on HR tasks. By outsourcing time-consuming responsibilities, internal teams can focus on core business activities that drive growth. Additionally, outsourcing can help build foundational HR systems and processes that support long-term efficiency so your business can stay current on compliance requirements, mitigate risk and avoid penalties.

Looking at these advantages of outsourcing, it’s evident that small businesses can benefit from seeking assistance from professional HR services.

Drawbacks of Outsourcing

While many small businesses may benefit from HR outsourcing, the drawbacks may not make it worthwhile for some. These disadvantages should be considered when deciding whether to outsource HR-related tasks:

• Reduced Personalization—Having people outside of an organization handle the personal matters that are present in many components of HR—such as each employee’s personal identifiable information or their compensation and benefits package information—runs the risk of a depersonalized experience for employees. While experts in their fields, external HR professionals are less likely to personally know the individuals they are helping, and they are likely unfamiliar with the company culture. This can lead to employees feeling like there is a disconnect between them and the people assigned to handle their information.
• Reduction in availability—Outsourcing HR responsibilities can also mean that there isn’t an internal HR professional on-site or, if there is, they may not have access to all of the information that the outsourced HR companies do. This can make it difficult for employees to contact HR as frequently as they may like or need.
• Communication Gaps—Delegating tasks to professionals outside the organization can cause a business to risk losing that area of knowledge altogether. When an employer freely outsources all HR-related tasks, they may no longer pay attention to them, which can effectively separate them from a portion of their business. If employers outsource too much of their HR operations or simply no longer focus on tasks they choose to outsource, the resulting lack of in-house knowledge can create disconnects between the outsourced HR professionals and the organization. It can also lead to increased confusion if employers are no longer providing the requisite attention to the outsourced tasks. 

Weighing the drawbacks of outsourcing HR tasks is important for a small business before they make any decisions. Such disadvantages can help employers consider the factors that affect their HR outsourcing decisions. 

Summary

While saving money or increased compliance could make outsourcing HR functions the right decision for some small businesses, factors such as the forfeiture of in-house experts and decreased availability may keep others from outsourcing. Employers should consider all benefits and drawbacks before choosing to outsource any of their small businesses’ HR functions.

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