HR Department

Outsourcing HRM: The advantages, disadvantages, costs and opportunities

There are many options for HRM outsourcing. Therefore, here we clarify advantages, disadvantages, costs and possibilities of HRM outsourcing.


  1. What is Human Resource Outsourcing?

  2. What are the pros and cons of HR outsourcing opportunities?

  3. How to choose the right type of HR outsourcing for your HR tasks

  4. 10 HR outsourcing options and what they entail

  5. The costs for external service providers

  6. 6 tips on how to get the most out of human resource outsourcing

  7. Is HR outsourcing worth it for you?

When it comes to HR outsourcing, there are many different types of arrangements that employers can make. So in this blog post, we'll talk about the benefits, drawbacks, costs, and options of HRM outsourcing. After all, only by understanding the different options and costs available to you can you make an informed decision about which type of HR outsourcing is best for your business.

What is Human Resource Outsourcing?

Human resource outsourcing (HRO) is a process in which companies outsource all or part of their human resource functions and responsibilities to an external provider. HRO can supplement or completely replace in-house staff.

There are many types of HR outsourcing variations, each with its own advantages and disadvantages.

What are the pros and cons of HR outsourcing opportunities?

As companies increasingly look for ways to reduce costs and increase efficiency, outsourcing HR has become an increasingly popular option. Indeed, by hiring an external service provider to manage HR functions, companies can free up internal resources to focus on other areas.

In addition, by outsourcing HR, you gain access to expert knowledge and resources that companies may not have internally. And by outsourcing the management of HR functions to an external provider, companies can help reduce their overall risk.

While HR outsourcing offers many potential benefits, it's important to carefully weigh the costs and risks before making a decision. However, once a conscientious consideration has been completed, HR outsourcing can be a valuable tool for companies of all sizes.

There are many different types of HR outsourcing options available to employers, depending on their specific needs. For example, some employers choose to outsource only one aspect of their HR function, such as payroll. Others choose to outsource their entire HR department.

Thus, each type of outsourcing has different benefits that companies can take advantage of. For example, application management systems can help streamline the hiring process by automating many of the tasks associated with posting job ads, reviewing resumes and scheduling interviews.

Outsourcing payroll and benefits administration can free up time for HR staff to focus on more strategic tasks.

Outsourcing employee training and development can give you access to experts who can design and deliver high-quality training programs that meet your employees' specific needs.

But what are the general advantages and disadvantages of HR outsourcing?

Advantages Disadvantages
Numerous possibilities Loss of control over various functions
Better risk management Rising expenses
Efficiency gains through the latest technologies Poor availability of your HR partner
Expert knowledge and experience Risk of errors from the third-party provider

When considering HR outsourcing, it is important that you carefully review your needs and goals to ensure that you are choosing the right type of outsourcing option for your organization.

It should also be noted that the HR processes that are successfully outsourced are always those where the external provider has a deep understanding of the employer's business and culture, and is able to bring in their services in a way that aligns with the employer's goals.

But what type of HR outsourcing fits your organization?

How to choose the right type of HR outsourcing for your HR tasks

Choosing the right type of HR outsourcing can be a daunting task. After all, there are so many options and terms to choose from. So, below we outline some common types of HR outsourcing agreements and what they mean for you and your business.

The most common types of HR outsourcing agreements are full-service HR outsourcing, functional HR outsourcing, and project-based HR outsourcing. Each type of arrangement has its own advantages and disadvantages, so it's important for companies to carefully consider their needs before choosing an outsourcing option.

The 3 different arrangements for their HR outsourcing:

  • Full-service HR outsourcing: this type of outsourcing arrangement is also known as an "all-inclusive" or "bundled" arrangement. In this case, an outside vendor handles all aspects of the HR function for the employer, including but not limited to benefits administration, payroll, recruitment and staffing, employee relations, training and development, policy implementation, and compliance with state and federal laws.
  • Functional HR outsourcing: in this type of outsourcing arrangement, the vendor performs certain HR functions for the employer. The most common HR functions outsourced are benefits administration, payroll, and recruiting and staffing.
  • Project-based HR outsourcing: this type of arrangement is typically used for specific HR projects or initiatives, such as implementing a new performance management system or developing an employee handbook. The vendor works with the employer to complete the project within a specific timeframe and budget.
Knowing the different arrangements in HR outsourcing will help you, as an employer, make the best decision for your business about which functions to outsource and which to keep in-house.

However, it is important to know which HR processes an external service provider can handle for you. That's why we've listed below which HR functions and HR processes you can outsource in the first place.

10 HR outsourcing options and what they entail:

1. Payroll accounting

The most common form of outsourcing in HR is payroll. This involves hiring an external service provider to manage payroll, including calculating and distributing paychecks, filing tax returns and ensuring employees are paid on time. Payroll can be a time-consuming and complicated task, which is why many companies choose to outsource it to save time and money.

2. Compensation and benefits administration

Another popular form of HR outsourcing for your HR department is benefits administration. This involves hiring an external provider to manage employee benefits such as health insurance, retirement plans and vacation days. Benefits administration can be complex and time-consuming, so many companies choose to outsource it to save time and money.

3. Recruitment and selection of employees (recruiting)

Another type of HR outsourcing involves recruiting, i.e. personnel recruitment. This involves finding and hiring new employees. In this area, an external provider takes over the identification, selection and hiring of employees for the respective company.

4. Employee training and development

Training is about providing new employees with the skills they need to be successful in their jobs. Employee training and development, then, is the process of providing training and development opportunities for employees.

This area can also be outsourced to an external provider. 

5. Performance management for employees

Managing the performance of your HR department involves setting goals for employees and measuring their progress against those goals. Many companies choose to outsource these tasks because it is a labor-intensive process.

6.    Organisatorische Entwicklung:

Organizational development is the process of developing and implementing plans to improve the efficiency and effectiveness of an organization. This area of human resources is also often outsourced to an external provider, as these external service providers often have specialized knowledge that makes organizational development more efficient.

7. Strategic human resource management

Strategic human resource management is the process of developing and implementing plans to improve the efficiency and effectiveness of a company's human resources. This area of human resources can also be outsourced due to a lack of expertise within the company itself.

8. Employee relations

Employee relations is the process of managing the relationship between an employer and its employees. But also the management of employee communications, complaints and disputes.

9. HR information systems

HR information systems is the process of managing data and information related to an organization's human resources.

10. Health and safety at work

Workplace health and safety is the process of ensuring that employees are protected from workplace hazards. This can be outsourced to a third-party provider who manages all aspects of workplace health and safety for the employer.

Employers can outsource any or all of these functions depending on their needs.

But what does it actually cost to outsource these various functions?

The costs for external service providers

The way external providers bill for their services varies greatly and therefore the costs for external service providers depend on several factors. For example, there are the following billing constellations:

  • A flat fee per service
  • Hourly
  • Per pay period
  • Monthly
  • Annually
  • Per employee per month
  • A percentage of each employee's income

And regardless of how an external service provider is billed, the final cost will depend on these factors:

  • The type of service (individual or flat-rate bundle).
  • The complexity of your staffing problem
  • The number of your employees

Since it is nearly impossible to list the costs for all HR outsourcing functions, we have limited ourselves to the most common ones:

HR outsourcing services Functions taken over Costs for HR outsourcing services
Employee handbook An employee handbook contains policies and procedures for the workplace, helping to limit your potential legal liability and costs. 1.500-3.000 €
Recruiting Recruiting includes everything from job descriptions and postings to sourcing, screening and hiring candidates.

Different flat rates;
Hourly rate from 175-250 €

Background checks Typically, various levels of screening are offered, ranging from a simple background investigation on employment history to a more comprehensive check that includes criminal history. 25-100 € per employee
Sexual harassment training One way to address the issue of sexual harassment is to conduct a live class on the topic. 1.500-5.000 €
Compensation Strategies Individual structuring of the compensation strategy 100-150 € per hour

As you can see, the cost of HR outsourcing depends on the type of services you need and the provider you choose. Payroll is usually the least expensive type of HR outsourcing, while more comprehensive arrangements can be more expensive. Be sure to consider your company's budget when deciding which type of HR outsourcing is right for you.

6 tips on how to get the most out of human resource outsourcing

Regardless of what type of HR outsourcing you choose for your Company, there are some important tips you should follow to ensure the success of the process.

  • Do your research: Not all HR outsourcing providers are the same. It's important to do your homework and find a provider that is a good fit for your organization in terms of size, industry, needs, etc.
  • Communicate early and often: good communication is key to any relationship - including the one between you and your HR outsourcing provider. Set clear expectations from the start and keep the lines of communication open throughout the contract.
  • Know what you want (and need): When it comes to HR outsourcing, clarity is key. Know exactly what functions you want to outsource and what your goals are. This will help you select the right provider and reach a successful agreement.
  • Be flexible: Things change - and that's a good thing! As your business grows and changes, your HR outsourcing needs may change as well. Be prepared to review the terms of your agreement periodically to ensure it continues to meet your needs.
  • Trust your external provider: Once you've chosen an HR outsourcing provider, it's important that you trust their expertise. After all, they are the experts! If you have concerns, address them early on so that everyone is on the same page.
    By following these tips, you can set your company up for success with HR outsourcing. So what are you waiting for? Start exploring HR outsourcing options today!

Is HR outsourcing worth it for you?

This question always depends on your budget and what you expect from a provider. In general, it is worth outsourcing repetitive activities to more experienced service providers, as this reduces risk and costs.

How do you find out which HR area you should outsource and whether business process outsourcing is worthwhile?

Analyze the various HR tasks and areas in your company and decide which of these ties up the most resources. Agree on 3 time eaters and find out from external providers what they offer and how much they cost. If the costs are lower than your opportunity costs (the notional costs that accrue if your employees continue to take care of these tasks), you should at least consider HR outsourcing.

More information

You are currently thinking about outsourcing and actually a new HR tool is long overdue to successfully digitize the HR area but the decision makers still need to be convinced? Then we have something for you:

EN HR Software als Business Case


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