Disadvantages of outsourcing


There are two sides to every coin, and the same is the case with outsourcing human resources. It’s largely advantageous though, with more and more businesses turning to PEOs or employee leasing firms. However though outsourcing human resources functions can save time and money, it can also cause employees to feel disconnected with the company.


The most commonly outsourced HR functions are background checks, employee assistance programs and flexible spending accounts. While outsourcing these functions may not cause a disconnect between employees, companies have the option to outsource other functions that would. When deciding which functions to outsource, it is important to weigh the disadvantages.

Loss of Human Factor

 According to the August 2008 SHRM study, the loss of face-to-face interaction is the biggest disadvantage of outsourcing. Employees want a familiar face when they have HR issues; replacing a human with an 800 number to call is not a positive exchange. For example, when answering questions of a personal nature or discussing a possible retirement, most people would feel more comfortable talking face-to-face. Employees want to feel secure with their personal information and decisions.


Climbing Costs

Cost savings is often considered an advantage of outsourcing, however, the August 2008 SHRM study found that 28 percent of the companies reported their costs had increased due to outsourcing. It can also take more time, especially during start-up. Proposals are accepted and evaluated, then processes must be outlined and put in place. This transition period can be costly.


Outsourcing HR functions discourages the development of in-house expertise. SHRM's August 2008 study found that 43 percent of the companies surveyed prefer to develop their own employees, rather than hire a third-party to do the work for them. Outsourcing important HR functions such as employee training and development can prohibit your HR employees from accomplishing their career goals. For example, hiring a third-party to conduct safety or compliance training could prevent an HR training professional from learning something new and challenging.


Change Company Culture

Outsourcing can definitely change the company's culture. It can drive a wedge between HR and the employees, which leads to trust issues. Outsourcing certain staffing functions, such as background checks, employment verifications or resume screening, may have no impact on culture. However, outsourcing more personal functions, such as employee training, new employee orientation or retirement processing, can change the company's vision drastically.

Misplaced loyalty

One of the most significant concerns with outsourcing human resources is the chance of misplaced loyalty. Employees outsourced might not put in the similar kind of effort as hired staff or display such an interest in your company. This inevitably leads to the question of control. It may be difficult to control employees in certain cases of outsourcing agreements where the employee is hired on contract and doesnt need to report to anyone within the organization.

  • Hidden costs

Clients must watch out for hidden costs or unexpected changes in the services offered, and other aspects that differ from the contract they signed.


"Picking up spaghetti"

Handing over unnecessarily complex or badly understood systems to an external provider can be like "picking up spaghetti". This limits potential benefits from outsourcing. If processes cannot be improved before a move, the organization may have to accept off-the-shelf replacements that are not specifically geared to their needs.


  • Already existing effective IT systems in-house

The greatest financial benefits of outsourcing often come from using sophisticated software. If effective IT systems already exist in-house, cost savings may not be achieved from an external provider;


Plenty of work on manager / staff relationships

Good employee management practices remain essential, and the key relationship between staff and their line managers remains in-house, leaving plenty of work on manager / staff relationships that still has to be handled despite the outsourcing relationship;


  • Local knowledge

Local knowledge and ownership of human resource processes could be lost.


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  • Contracts

Contracts- HR outsourcing can include unfavourably long contracts and problems with                contract renewal, and contractual misunderstandings.


  • Control 

HR outsourcing can lead to a loss of management control, because it is more difficult to manage outside service providers than managing your employees.


In businesses with a small number of employees, HR outsourcing offers a high cost of service per employee.


 HR outsourcing contracts can lead to a loss of flexibility in your business making it harder to react to changing business conditions. 


  •  External HR Outsourcing providers don’t have the same level of focus and understanding of your customers needs as in-house HR.


It can be a threat to security and confidentiality. If your HR outsourcing includes confidential information, you must be very careful in choosing your outsourcing provider. In doing so, you must have a clear HR Outsourcing Policy in place, well communicated.

Challenges Faced by Human Resource Outsourcing Companies

  • Scoping: Human resource HR outsourcing companies need to determine the appropriate scope to achieve scale and deliver service models and frameworks, be it for payroll outsourcing or employee benefits outsourcing
  • Recruitment and retention of talent: Human resource HR outsourcing companies need to grapple with the result of increasing wages in HRO hotspots
  • Speed of transition: Human resource HR outsourcing companies need to adjust to short timeframes and provide the appropriate corporate support whilst not crossing cultural boundaries.

Understanding the advantages and disadvantages of HR outsourcing
Outsourcing has become an important part of day-to-day business in the United States. Once he was with in-house service for accounting, payroll and HR services are the norm. But rise of affordable, cheap outsourcing has enabled business solutions, diversification and conservation witnessed important for businesses of their own in-house hosting services. Some companies have yet to embrace this growing trend, however, mainly because they do not understand and disadvantages of HR outsourcing prior.

The key is to find outsourcing providers with a real partner, but as a PEO. A true partner for outsourcing all the services usually run by house-in your HR department without the needHR take a skeleton staff on hand to answer questions or process development immediately. PEO provider may lose control to employees, while a true outsourcing partner, you can get a solid base.

HR Outsourcing your services need to provide document management to manage and track information, create documents and provide services and much more. In addition, employee communications, reporting, payment services,Guidelines and compliance, access, background checks and other recruitment services, and also dependent services such as dispute resolution and grievance handling can be provided.


However, you can get rid of the disadvantages if you clarify all matters with the PEO such as costs, services offered, length of contract, employee loyalty, and other details before finalizing the contract. Ultimately, outsourcing human resources does work for the betterment for your organization.


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