The 5 Biggest Pitfalls of HR Outsourcing (and How to Avoid Them) / HR Solutions / Last Modified: February 22, 2017

Considering your company's needs and researching potential service providers will help you avoid the 5 biggest pitfalls of HR...

For a small business, outsourcing human resources functions can offer cost savings and efficiency, improved HR strategy, and the ability to refocus strategic efforts on company growth rather than the day-to-day complexities of insurance, payroll and the like.

But as beneficial as it can be for a company, there are pitfalls to HR outsourcing. As a researcher from Lancaster University's management school pointed out, executives should think long and hard before deciding to outsource -- and the decision shouldn't be based on money alone.

Considering your company's needs and researching potential service providers will help you avoid the 5 biggest pitfalls of HR outsourcing:

1. Not having a clear idea of how HR outsourcing will help: Management should be clear about why it is they want to outsource and what they hope to gain from it. They need to make sure they know why outsourcing can enable the company to meet the needs of its employees, how outsourcing will change how HR functions, and how outsourcing will change its business model. Thinking through this decision will not only help the company when it comes to choosing an HR service provider best suited to its specific goals, but it will also help them give an honest and thoughtful explanation to employees about the decision to outsource.

2. Not checking the provider's track record: Frequently, a company and a service provider might be more interested in inking a big deal than really examining whether the provider is actually capable of offering all the services it agrees to, according to one HR blogger. In 2008, NiSource Inc. admitted that a 10-year, $1.6 billion outsourcing agreement with IBM was a failure and did not result in the cost savings originally projected. A company should research potential providers to make sure they have a proven record of success and that they don't take advantage of customers over time by demanding higher prices or backing out of service agreements.

3. Not managing the transition properly: Not thinking through the process by which you switch over to HR outsourcing can create tension in relationships between providers, employees and other stakeholders, as well as damaging the company image. In particular, the company and provider need to make sure employees understand how to use self-service online tools and that they establish a good relationship with any offshore employee care representatives (IE: bridging language or cultural barriers). In addition, companies should be aware of how potential layoffs and outsourcing affect its reputation and ability to successfully recruit employees in the future.

4. Not evaluating the provider's performance: It is critical that companies manage their relationship with their service provider, ensuring that it is fulfilling the previously agreed upon needs and goals of the company. Questions to ask include:

  • Has outsourcing been cost effective?
  • Is the service provider meeting previously agreed-upon deadlines?
  • Has it improved service? Are employees happy with the service?
  • Has it enabled the company to grow and change in a positive way?

5. Not being involved enough with HR functions: While periodically evaluating the service provider's performance will give you insight into how effective they are, you also want to make sure that you don't give up too much control of HR functions. For instance, while it can be helpful to outsource screening of potential job candidates, ultimately, the company should be involved with the hiring of new employees. After all, the company -- not the service provider -- will have the best understanding of how a person will fit into their office culture. Similarly, while it might make sense to outsource basic training of new employees, when it comes to the specific needs of a company, there should be at least some in-house training. This also offers a good opportunity for the new employees to become acquatinted with management and co-workers.

Learn more about HR outsourcing on 

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