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HR outsourcing—breakfast of champions or chumps?

It's easy to get the impression from websites like and that outsourcing is the secret to success for progressive companies from every industry. Tap into the best-of-breed for all you need.... Leverage world-class capabilities without the need for upfront investments.... Get the best, for less.... Keep the core; get rid of the rest—now that's a sure recipe for success.... The not-so-subtle message is that smart and savvy companies use outsourcing to run rings around the competition. You also are left with the impression that the benefits of outsourcing accrue immediately upon signing the contract – with little time or effort required of the customer.

But if outsourcing is such a smart competitive weapon then why do so many companies struggle to realize its promise? The truth is that outsourcing is simply one of many different tools available to managers. Like any other tool, it won't work very well if applied to the wrong task. You can use the prongs of a hammer to remove a screw, but a screw driver works a lot better. And like any tool, it requires the right mix of skill and effort to use it properly.

A recently released study by the Society of Human Resource Managers (SHRM) on outsourcing of human resource function activities shows that HR departments are increasingly embracing outsourcing as a part of strategies to deliver more value to the companies they serve. The entire survey is available to SHRM members.

Many years of studying IT outsourcing trends and practices suggests that HR is following the same pattern as IT and experiencing the same results.

COST—Whether IT, finance, logistics, etc., multiple studies show that while a majority of companies farm out work to outside providers to save money, cost reduction is frequently NOT achieved. HR apparently is no different. According to the SHRM survey, the number one reason (56%) for outsourcing among respondents was to save money or reduce operating costs. Yet only 31% of the survey respondents indicated that they actually achieved cost savings. The remaining 69% indicated that costs remained the same (23%) or increased (9%), or they did not know whether savings were achieved (37%). These results should give serious pause to HR executives contemplating outsourcing to reduce costs.
QUALITY—Here the evidence is murky. Few companies have good measures of quality of internal processes at the time of outsourcing. So it's hard to tell definitively whether quality improves afterwards. Many outsourcing managers have told me that the users of the process are usually less happy with the quality of service they receive after outsourcing than they were before. But the outsourcing managers are usually satisfied because they believe quality would be worse had the process remained in house. Satisfaction with quality also varies depending on the type of process outsourced. The more complex the process, the more likely quality issues will emerge. For example, 65% of respondents to a survey conducted last year by CIO Insight magazine of companies outsourcing applications development and support said that quality was the most significant problem they experienced.

FOCUS—Numerous studies show that successful outsourcing relationships allow internal staff and management to focus on the things that really matter. This seems to be the case for HR as well. Three-quarters of the SHRM survey respondents indicated that outsourcing allowed them to focus on core business functions. Sixty-six percent indicated that it allowed them to spend more time on strategy development and execution. However, beware of the core competency trap. If too many activities or a process that is problematic are outsourced, it may require management and staff to spend as much or more time overseeing the external provider than when the process was performed internally.

The reality of outsourcing is that it is more like Special K than Wheaties—it can help you stay fit and trim but only when part of a sensible diet and daily exercise regime. Outsourcing works when it supports an effective business strategy and when the right amount of resources and management attention are applied to its implementation. Unfortunately this is not the case in many outsourcing situations. Thus it should come as no surprise that the success rate of outsourcing is mixed. But be clear—this lack of success is caused not so much by any flaws in outsourcing as the failure of managers who pursue it for the wrong reasons and in the wrong ways.


Tony DiRomualdo is a business researcher, writer, and advisor with Next Generation Consulting. He works at the intersection of people, business strategy, and information technology to help companies create a committed and high performance workforce. Tony can be reached at

The opinions expressed herein or statements made in the above column are solely those of the author, & do not necessarily reflect the views of Wisconsin Technology Network, LLC. (WTN). WTN, LLC accepts no legal liability or responsibility for any claims made or opinions expressed herein.


Jim H responded 9 years ago: #1

Your comments about HR Outsourcing not being a cure-all have some validity. However our experience with advising clients about HR outsourcing with a Professional Employer Organization – PEO has been that most business owners and managers who make the leap almost never go back to doing it “in-house”. Over 95% of all PEO clients continue to use a PEO each year. Of course careful review of vendors and their capabilities is a requirement. With hundreds of PEOs operating in the United States, The process of selecting a PEO can be time consuming and frustrating. Many states require a PEO to be licensed in order to do business. In addition, each PEO has different risk tolerance (for workers’ compensation insurance), health insurance offerings and general HR service capabilities.

SBL responded 6 years ago: #2

Thanks for sharing and keep posting more new information.

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