What Are the Pros and Cons of Outsourcing HR?

HR Outsourcing (HRO) means using a third-party provider to handle part or all of a company’s human resources functions. For startup companies without a human resources (HR) department or companies with existing HR departments that may be overburdened, HRO can have many benefits. As HR functions are increasingly managed off-site by humans or AI, it can result in several disadvantages. Weighing HR outsourcing pros and cons will help determine the best options for your needs.

Types of HR Outsourcing

Outsourcing providers fall into three categories: Professional Employer Organization (PEO), Business Process Outsourcing (BPO) and Administrative Services Organization (ASO)

Professional Employer Organization (PEO) refers to HR vendors who usually provide full-service HR services. A PEO can be used to replace an entire HR department or as a supplement. When a PEO oversees all HR functions, you enter into a co-employer model where you both share the legal responsibilities for employees.

Data shows that when working with a PEO, companies experience greater growth and increased employee retention. “Businesses hiring a PEO grow twice as fast, have 12% lower employee turnover, and are 50% less likely to go out of business,” states the National Association of Professional Employer Organizations (NAPEO).

In Business Process Outsourcing (BPO), HRO companies do not use a co-employment model. The employer bears the legal responsibility for the employees. Instead of outsourcing all HR functions, employers choose to outsource one or more back-office functions. HR outsourcing companies use various technology platforms to manage and deliver their work, such as a payroll system or employee survey software.

An Administrative Services Organization (ASO) only provides administrative services. ASOs can help with payroll, taxes, compliance, onboarding, and some other HR functions. They do not replace the entire HR department and do not use a co-employment model. With an ASO, you have the flexibility to customize the specific services that you need while maintaining full control over your employees.

What Functions Can Be Outsourced?

Any HR function can be outsourced, from partial outsourcing for one or more functions to full-service outsourcing. You may choose to use a vendor for a one-time service, periodic service, or ongoing service. Startup companies and small businesses are more likely to outsource their entire HR department since they may not have the resources for an in-house HR department.

Outsourcing functions include HR management, payroll, benefits, recruiting, onboarding, training, employee surveys, employment law and compliance, risk management, employee relations, performance management, background checks, and Employee Assistance Programs (EAPs). Outsourcing options exist for interdisciplinary functions such as internal communications, company culture and DEI.

AI software is often used to perform outsourcing functions. While automating tasks streamlines operations and increases efficiency, human personalization decreases. Lattice details over 50 cutting-edge AI tools currently used by HR. With proper human supervision, AI has the power to help HR professionals work smarter, not harder. As AI makes some tasks quicker and easier, it frees up time to focus on personally interacting with employees and tackling strategic functions.

The Cost of Human Resources Outsourcing (HRO)

According to Insignia Resources, “57% of companies outsource at least one HR function.” Instead of using several vendors, many companies bundle HR outsourcing services with one provider handling multiple HR tasks. The HRO market has experienced steady growth as a result of automation tools, remote and hybrid workers, changes in compliance rules, and many companies reducing their workforce size.

Insignia Resources reports that a small business with 25 employees can expect to pay $130-$200 per month for HRO and see an average ROI of 150%. Companies with 100 employees can expect to pay $430–$650 monthly and see an average ROI of 175%.

HR outsourcing companies have varying pricing structures. Some use a subscription-based model with monthly or annual pricing. Others have project-based pricing or flat rates for one-time services. Costs may be per employee or based on the number of services used. Costs may differ based on location, company size and complexity of services.

When To Consider HR Outsourcing

Businesses of all sizes have many reasons to consider outsourcing some or all of their HR functions. Startups and small businesses may not have an HR department or human resources tasks may be performed by other employees. Businesses with an HR department may have employee shortages and overburdened HR departments. You may find that HR tasks are taking too much time, or you may want to reduce the size of your HR department. When HR administrative tasks are outsourced, human resources professionals have more time to focus on bigger goals with less stress.

According to the Paychex 2025 Business Leader Priorities survey, “34% of leaders responding spend more than 10 hours a week on HR administration.” This costs companies $171,997 annually, or $3,308 per week. “61% of leaders plan to outsource HR administration in the year ahead.” Payroll processing is the top task they plan to outsource, as it is one of the most time-consuming HR tasks. Respondents expect that outsourcing will result in fewer mistakes and reduced costs as well as improvements in productivity, analytics, regulatory compliance, and recruiting.

Outsourcing HR functions provides a cost-effective alternative to hiring full-time employees to do the tasks. With budget constraints, requests for hiring new employees may not be approved, and you may not have the cash flow for additional salaries and benefits.

HRO can also be used to provide employees with new features, such as self-service options and mobile solutions, which are necessary for remote and hybrid workers. The complexities of regulatory and compliance requirements can be delegated to an outsourcing company. Expert guidance will enhance compliance and free up time for business leaders to focus on core business functions.

HR Outsourcing Pros

HR outsourcing has many benefits for companies of all sizes. From handling specialized services and relief for overworked staff to replacing entire human resources departments, HRO is a cost-effective way to save time while increasing accuracy and compliance.

• Saves time and resources: For companies without an HR department, other employees may have the added responsibility for these tasks. Companies with overburdened human resources employees may not have the resources to hire additional staff. Outsourcing provides much-needed relief and the necessary resources so employees can focus on strategic tasks.
• Improved accuracy:  “The number-one expected benefit for leaders who outsourced HR administration, according to the Business Leader Priorities study, was ensuring fewer mistakes,” reported Paychex.
• Increased productivity: Without the administration burdens, HR employees and executives have more time to focus on strategic functions, thus increasing productivity.
• Enhanced compliance: HRO companies that specialize in compliance take the burden off your team by managing the complex and ever-changing landscape of HR compliance laws. Their expertise helps reduce legal risks, ensure regulatory accuracy, and keep your company updated on changing requirements specific to your location.
• Risk management: Utilizing HRO minimizes the risk of worst-case scenarios, lawsuits and conflicts that can emerge.
• Cost-effective: Your outsourcing bill may be lower than paying the salary and benefits for employees to do the work. Plus, you will likely benefit from a Return on Investment (ROI) and save valuable time on administrative tasks, such as payroll.
• May lower benefit premiums: As a result of the strong relationships that HR companies have with benefit providers, they can negotiate better rates for companies of all sizes. Companies may also be able to increase their benefit offerings, which is especially important for employee retention.
• Consultant for startups: Entrepreneurs gain access to human resources experts through HR outsourcing. With strategic guidance and help with HR administrative tasks, outsourcing provides valuable resources without the need to research and do everything yourself.
• Aids in managing seasonal employees: Companies may have different HR needs depending on the season. For example, a summer camp does not need a year-round HR department but does need extra HR help in the spring and summer, making HRO an ideal seasonal option.
• Improves the employee experience: Whether you are looking to improve employee engagement and company culture or hiring and retention, HR outsourcing provides many options. Employees are happier when they feel more engaged and have access to more efficient systems and better benefits.

HR Outsourcing Cons

Employing off-site companies to do work that was previously done in-house causes some challenges and pitfalls. This physical distance may cause staff to feel disconnected and make it harder to get mistakes resolved.

• Cost: Depending on which functions you outsource and the size of your company, the cost will vary greatly. For some functions, HRO presents a cost-effective option, while other services, especially full-service vendors, may be more expensive.
• Staff disconnection: Using outside parties with humans that are off-site is less personal than having employees on-site. This makes it harder for employees to manage their HR issues. Plus, managing company culture becomes harder without HR professionals on-site.
• Less human approach with less communication and control: When impersonal AI software is used, it removes human from the term human resources. According to Insignia Resources, “68% of HRO contracts now include cloud-based HR platforms.” This results in less in-person communication and personal control.
• Misunderstanding the organization: From recruitment challenges to company culture, a person working outside the organization will not fully understand what it is like to work internally.
• Less flexibility: HR outsourcing companies have more set standards and procedures with less flexibility for individual needs.
• Some tasks may take longer: Since outsourcing firms are dividing their time between many clients, employee requests may take longer, such as payroll corrections.
• Mistakes: Having HR tasks performed by third parties may increase the risk of mistakes in some areas and may make it take longer to fix mistakes.
• Cybersecurity risks: Using outside vendors and AI increases cybersecurity risks. Employees provide HR with their confidential information, which is essential to protect.

How to Choose HR Outsourcing Companies

Use the cost-benefit analysis guidance and HR outsourcing checklists from Hubstaff to help you identify, select and transition to the best provider for your needs. After determining your needs and identifying which human resources functions you would like to outsource, make a list of questions to ask in interviews and start researching companies. Consult lists of the best HR outsourcing companies, such as the list from People Managing People. Seek recommendations from your LinkedIn network.

As you request proposals and interview potential companies, consider the cost, scope of services, availability and speed of support, industry experience, reviews, data security, and technology integration. Determine how frequently you will receive communication and reports, plus how quickly problems will be addressed. With the provider be flexible to adjust as your company grows or downsizes?

As you review proposals, compare services offered and look for responsive providers. Choose options within your budget that will be able to scale with your business and align with your company culture. Consider the working relationship you will have with the account manager. Verify all credentials, expertise, references and previous experience in your industry.