The field of HR outsourcing is in the midst of a significant upheaval.
Between a surge in AI-powered tools, a greater emphasis on tech-enabled HR, and a shift from transactional to strategic HR initiatives, organizations today are increasingly turning to outside partners to help them navigate the modern HR landscape. But how common is HR outsourcing, why specifically do organizations outsource HR functions, and what kind of outcomes are organizations that outsource HR seeing?
As HR leaders navigate this evolving landscape, understanding the current state of HR outsourcing is crucial for making informed decisions. Here is the state of HR outsourcing in 2024.
HR outsourcing remains a common practice among organizations seeking efficiency and cost savings. According to Deloitte's most recent Global Shared Services and Outsourcing Survey, HR continues to be a predominant function outsourced across industries.
In fact, nearly two-thirds (62%) of organizations outsource some or all of their HR work. Within the HR space, payroll (79%), HR analytics/reporting (57%), and recruitment and staffing administration (57%) are the top processes typically outsourced or shared with third-party providers.
More to the point, Deloitte’s survey suggests that outsourcing is increasingly becoming a value driver for most organizations. For example, 84% of organizations said in 2021 that they wanted to reduce costs via outsourcing and shared services; in 2023, 83% said they had achieved that objective. In other words, almost every organization that wants to use outsourcing to reduce costs has been successful in doing so.
Interestingly, Deloitte identified a couple of areas of unexpected gain where more organizations achieved outcomes they weren’t even aiming for: developing new capabilities and reducing risk.
In other words, only 41% of organizations aimed to use outsourcing to reduce their risk profile in 2021, but more than half (58%) found that by 2023 they had reduced risk. How? By using outsourcing as a component of their business continuity planning and diversifying service delivery models.
This emphasis on using third-party HR partners to drive value is characteristic of high-performing HR teams. The Hackett Group has found that “world-class” HR operations are more likely to outsource than average or underperforming HR groups.
The focus in HR outsourcing seems to have shifted from merely offloading tasks to leveraging technology-enabled solutions. According to Stacey Cadigan, a partner in Human Capital Management at consultancy Information Services Group (ISG), organizations partnering with providers can better adapt to rising costs and new employee expectations.
“The HR environment is constantly changing, with rising costs and new employee expectations,” she says. “Organizations that partner with providers can survive and thrive by adapting to these conditions with the help of technology-enabled solutions.”
This includes AI-enabled services, especially in recruiting, employee learning, and contact centers, especially for functions with “low variability and few process steps.” That can include functions like generating job descriptions or handling other routine tasks. Continued technological transformation positions HR functions to play a more strategic role, moving beyond transactional tasks to drive better business outcomes. “Service providers and clients together have already identified multiple use cases for GenAI,” agrees Jan Erik Aase, partner and global leader at ISG Provider Lens Research. “With technology advancing this quickly, it is time for companies to transform HR.”
Organizations that outsource HR functions often experience significantly improved business outcomes. The Hackett Group's 2023 findings reveal that “Digital World Class” HR organizations run at 33% lower costs than their peers, with a significant reduction in full-time equivalent (FTE) staff. These organizations are also 49% more likely to be perceived as valued business partners within their organizations.
By outsourcing transactional activities, these top-performing HR groups can focus more on value-added tasks, contributing to their superior performance. Specifically, outsourcing allows these world-class HR teams to redirect 12% of team labor away from routine transactional work into value-driving efforts. As a result, they spend only a fraction of their time on functions that can be capably handled by a third party. In turn, their in-house HR teams spend 37% more effort on strategy and planning for the future.
These world-class HR organizations not only use more HR outsourcing, but they also invest significantly more in technology – 85% greater cost per FTE – than peers. As a result, they spend 39% less on labor per employee and allocate 23% less to labor-performing transactional tasks.
One word of warning: how an organization outsources its HR functionality matters. Prasanth Nair, vice president and Global Markets leader at Infosys, says, “The HR function is seeing outsourcing differently. It’s not just about cost savings and sending HR transactions abroad, but more and more it’s reimagining outsourcing in the context of transformation and the employee experience.”
To that end, high-performing HR teams make more effective use of third-party providers than others. For example, they are more careful about which activities they outsource. For example, they tend to outsource transactional activities more (45% vs. 29% for peers), but outsource employee life cycle talent management activities less (22% vs. 25% for peers).
They also continuously review and monitor these outsourcing relationships. Instead of treating outsourcing as a “one-and-done” effort, they continuously review and evolve the ways in which they make use of outsourcing in order to maintain their efficiency advantage while building and enhancing HR capabilities.
Taken altogether, HR outsourcing in 2024 is characterized by a strategic shift towards leveraging technology and focusing on value-added activities. Organizations that embrace this transformation can achieve significant cost savings, efficiency improvements, and enhanced strategic capabilities.
As HR leaders, understanding the current state of HR outsourcing and its impact on organizational performance is essential for making informed decisions that drive better business outcomes. By partnering with service providers like Professional Employer Organizations (PEOs) and leveraging advanced technologies from third-party subject matter experts, HR functions can evolve to meet the demands of the modern business environment, positioning themselves as critical contributors to organizational success.
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