In an effort to increase the bottom line, most companies struggle between the choice of insourcing vs. outsourcing HR function. While some may decide to keep the key and strategic HR functions internal, hr operations like leave management, payroll and benefits administration etc are often outsourced.
For smaller businesses, outsourcing might be a cost-effective mechanism for the organization as they need not invest in building/ purchasing software and developing manpower expertise. However, for mid to large businesses with relatively larger employee base, the cost advantage is outdone by the below demerits of outsourcing:
- Time lag: There is time lost in an employee reaching out to an HR and then HR reaching out to a vendor for any issues/clarifications whereas an in-house team can be reached out directly by employees thus, reducing the time taken in getting the issues solved. Also, this would mean higher productivity of employees as they would save a lot of time in explaining the problem to the vendor and then following up for rectifications.
- One time investment vs recurring cost: While insourcing calls for a heavy one-time investment, this often balances out in long-term as the organization saves on vendor evaluations, contract renewals, and vendor payouts on an ongoing basis.
- Vendor’s poor performance: Performance standards may not be up to the mark which will have a negative impact on the overall operations of the company. While employees are evaluated on a regular basis, vendors have periodic evaluations only leading to below average performance levels.
- Data confidentiality: Sensitive information like salary increases, change of structure etc is fed to an outsourced agency so that they can make necessary changes in their operations. In spite of all confidentiality clauses, whether deliberate or not, there is a high possibility of information getting leaked in some form or the other.
- Dependence: Once HR Operations are outsourced, organizations get highly dependent on the vendor for every work. Any problem at the vendor site ( software or staffing issues, natural calamity etc), directly impacts the organization as there is no backup plan or in- house expertise to manage the situation. Also, HR team looks up to the vendor for every small work/information and doesn’t work on its own skill building and knowledge up gradation.
- An absence of human touch: One of the biggest drawbacks of outsourcing is the reduction of face to face interaction of HR Operations team with employees. Most employee issues get solved efficiently when done face to face rather than through calls or emails. Also, employees tend to prefer people who are present at the office site and trying to manage the problem rather than calling a vendor to discuss the same.
- Alignment/Process change: In the case of the change in the business plan/strategy, it is difficult to align the outsourced vendor with the revised strategy. The vendor often seeks extra charge for making the required changes during the year and might not cooperate enough. This has a huge adverse impact on the operations of the company as it leads to chaos and confusion in the mind of employees.
Source: Sales Coach Institute, USA
In nutshell, the decision of insourcing vs outsourcing should be taken after a lot of due diligence and reduced one-time cost of outsourcing should not be the only driving factor. Lower employee morale or erroneous operations will have a much longer lasting impact on the overall performance of the company. Whether strategic tasks or routine activities, it makes more long-term sense to take the route of insourcing of HR Operations.