The Intangible Costs of Human Resource Outsourcing

Written by: Rachel Wells

This blog post is based on the Human Resource Management International Digest article “The Intangible Costs of Human Resource Outsourcing” by Mandy Sim.

Outsourcing

When we think about attracting and retaining top talent we rarely think about HR professionals. Somehow finding the best people possible to perform an organization's HR functions seems to get overlooked. And wanting to retain the HR professionals that an organization does have never prevails over a cost savings. Outsourcing of transactional functions of human resource management has become more popular over the years. The text defines outsourcing as the process of “transferring the management and performance of a business function to an external service provider” (57). While the text emphasizes that outsourcing can save an organization a lot of money, and it can also allow in-house HR to function more strategically, Mandy Sim believes there are dangers to outsourcing HR functions.

Dangers to Outsourcing

Mandy Sim is a professor at the Nottingham University Business School in Malaysia. In her article she outlines several different dangers that could arise from the outsourcing of HR functions. Sim first says that major organizational change can be more difficult to achieve if HR functions are outsourced (3). This happens because when outsourcing occurs there is little communication and interaction between employees and HR. Trust is then lost. When trust is lost between the employees and HR, it becomes very difficult for the workforce to accept major organizational change.

Secondly, Sim says that there is a danger of outsourced recruiters giving prospective employees inaccurate information about the job. When an outsourced recruiter has not experienced the job first hand, the information given to the candidate about the client company and the job itself is most likely not correct. This can cause an employee who accepted the job based on inaccurate information to leave quickly. Another round of expensive recruiting will then be needed, and employee turnover will increase.

Thirdly, Sim says that outsourcing HR functions can lead to HR staff not being trained in the outsourced areas such as payroll, training and development, and recruiting. When HR staff moves into managerial positions, they might lack critical knowledge and skills.

Sim also points out that there is less flexibility when using an outsourced company for something like payroll, which the text identifies as a common HR function to outsource. Most outsourced payroll companies charge on a per-transaction basis. Extra charges can occur when you have an increased labor force during certain times, which is common in manufacturing, or wish to have an additional pay period one month. Also, when requesting changes to payroll on short notice it is more common that mistakes will occur. If mistakes are made on the payroll, employee problems can increase. Sim believes that high levels of employee dissatisfaction, low morale, more grievances, low productivity, greater frustration, higher turnover and even law suits may follow (4).

Conclusion

Even though outsourcing reduces an organization's costs, there are many non-financial costs associated with it. An organization should consider carefully all outcomes before deciding to outsource some or all of its HR functions. If an organization is set on outsourcing HR functions, Sim suggests a shared service center where all transaction-based activities are centralized in one place. For recruiting, the text suggests recruitment process outsourcing (RPO). RPO is used to outsource placement of advertisements, initial screening of resumes, and initial telephone contacts. Once these activities are done, the organization's HR staff takes over the rest of the recruiting activities. For training, the text supports the use of computer software vendors to help employees obtain technical certifications on their software. Such certifications provide items for employees to put on their resumes and benefits employers.

For someone like me, who hopes to become a HR professional, this article really made me think about some of the challenges I might run into in the future. It might become standard for organizations to outsource some of their HR functions, but I sure hope it doesn't become standard to outsource all of them. Or else I might be out of a job.

Sim, Mandy. “The Intangible Costs of Human Resource Outsourcing.” Human Resource Management International Digest 18.6 (2010): 3-4.