The Current State of Human Resources Outsourcing

CoAdvantage- Over half of companies today are outsourcing at least one or more of their HR functions.

That’s according to the HR Dive 2021 Identity of HR Survey, which found that 54% of organizations outsource benefits administration and 53% outsource payroll processing, the two most common HR functions to outsource. Much of this outsourcing may be driven by a desire for “maximizing value within budgetary constraints,” as the HR Dive report writes. Survey respondents cited budget as the top challenge created by the COVID-19 pandemic, so the past year has only sharpened the need for cost saving measures like wise investments in outsourcing.

Indeed, outsourcing is all about the value it can produce.

The Hackett Group has long assessed the factors that differentiate what they call “world-class” HR organizations from others. Their most recent report finds that “world-class HR functions operate at a 25% lower cost with 31% fewer staff and are 91% more likely than peers to have HR business partners who can act as strategic advisors to the enterprise.”

In fact, previous research from The Hackett Group has found that world-class HR operations outsource certain HR functions by huge margins: compensation administration (75% of world-class organizations vs. 47% of others), benefits administration (62% vs. 38%), payroll administration (62% vs. 33%), recruiting (50% vs. 22%), etc.

Notably, they also found that world-class HR operations outsource 17% more HR services and have 16% lower outsourcing costs when compared to HR organizations as a whole. The lower costs are likely the result of smart partnerships, increased automation, and leveraging digital transformation – since world-class HR organizations are also 1.6 times more likely “to have adopted next-generation cloud-based core applications.”

That being said, outsourcing is not a panacea, and – like anything else – it must be done well if organizations want to successfully reap its rewards. When implemented poorly, it can lead to worse outcomes. A 2020 report from Deloitte found that some employers, after outsourcing during the pandemic, brought at least some functions back in-house after being disappointed in the meager or mediocre value produced by their providers.

A report from Grant Thornton might help explain what’s going on in those cases. Though the survey is a bit older, its central finding is evergreen: it’s key to choose the right outsourcing provider. They found that the number one driver for success in an outsourcing relationship, cited by 88% of respondents, is good communication. Further, 56% of respondents also said the most critical quality to look for when selecting an outsourcing partner is service reliability.

Deloitte seems to agree, writing in its report:

“Investing in strong service orchestration is key, as it will help ensure organizations realize maximum benefits from their service provider ecosystem, resulting in … reduced value leakage.”

In other words, outsourcing some or all aspects of HR can provide tremendous benefits – as discovered by The Hackett Group’s world-class organizations – but it requires the right partner and a commitment from both parties to communicate, collaborate, and – in Deloitte’s words – orchestrate their efforts.

CoAdvantage, one of the nation’s largest Professional Employer Organizations (PEOs), helps small to mid-sized companies with HR administration, benefits, payroll, and compliance. To learn more about CoAdvantage’s ability to create a strategic HR function in your business that drives business growth potential, contact us today.