Outsourcing Human Resource Functions

HSC Business Studies | Free Study Notes

Outsourcing human resource functions means using an external provider to complete some HR tasks for a business. In HSC Business Studies, this topic sits within Topic 4: Human Resources and helps explain how businesses can manage staffing needs, reduce costs and access specialist expertise.

A business may outsource HR activities such as payroll, recruitment or training instead of completing them internally. This can improve efficiency, but it can also create risks if the business loses control over important employee-related processes.

In this lesson

• what outsourcing human resource functions means

• common HR functions that may be outsourced

• the difference between domestic and global outsourcing

• the benefits and risks of outsourcing HR

• how to apply outsourcing to an exam-style answer

Core notes

What is outsourcing in human resources?

Outsourcing occurs when a business uses another organisation to complete work that could have been done internally.

In human resources, this means an external specialist may manage part of the employer-employee relationship or support the business with specific HR tasks.

Businesses may outsource HR functions to:

• reduce costs

• save time

• access specialist knowledge

• improve efficiency

• allow managers to focus on core business activities

• manage complex legal or administrative requirements

This links closely with interdependence of human resources with other business functions [Interdependence of Human Resources with Other Business Functions], because outsourcing decisions can affect finance, operations and overall business performance.

Payroll

What is payroll outsourcing?

Payroll involves calculating and processing employee pay. This may include wages, salaries, tax, superannuation, leave entitlements and pay records.

A business may outsource payroll to an external provider because payroll must be accurate, confidential and legally compliant.

Benefits of outsourcing payroll

Outsourcing payroll can help a business:

• reduce administrative workload

• improve accuracy

• meet legal obligations

• save time for managers

• reduce the need for specialist payroll staff

For example, a small business may outsource payroll because it does not have a full-time HR or finance team.

Risks of outsourcing payroll

Payroll outsourcing can create problems if:

• employee pay is processed incorrectly

• confidential employee information is not protected

• the provider is slow to fix errors

• the business loses direct control over payroll processes

Even when payroll is outsourced, the business is still responsible for ensuring employees are paid correctly.

Recruitment

What is recruitment outsourcing?

Recruitment involves finding and attracting suitable candidates for a job vacancy.

A business may outsource recruitment to an agency that specialises in advertising roles, screening applicants and recommending suitable candidates.

Recruitment outsourcing may be useful when:

• the business needs to fill a role quickly

• the role requires specialist skills

• managers do not have time to manage the process

• the business wants access to a wider pool of applicants

This links with recruitment strategies [Recruitment Strategies], because businesses need to decide whether recruitment should be internal, external or supported by specialist providers.

Benefits of outsourcing recruitment

Outsourcing recruitment can:

• save management time

• provide access to recruitment expertise

• improve the quality of applicants

• help fill specialist or hard-to-fill roles

• reduce the burden on internal HR staff

Risks of outsourcing recruitment

Recruitment outsourcing can also create risks. An external agency may not fully understand the business culture, the role requirements or the long-term goals of the business.

This may lead to unsuitable employees being recommended, which can increase staff turnover or reduce performance.

Training

What is training outsourcing?

Training involves developing employees’ skills, knowledge and abilities so they can perform their current roles more effectively.

A business may outsource training to an external provider if the training requires specialist knowledge, equipment or accreditation.

Examples include:

• first aid training

• work health and safety training

• leadership training

• software training

• technical training for machinery or systems

This connects with training and development strategies [Training and Development Strategies], because training can improve employee performance and support business goals.

Benefits of outsourcing training

Outsourcing training can help a business:

• access expert trainers

• provide nationally recognised or specialist training

• keep employees up to date with legal or technical requirements

• improve productivity and safety

• avoid the cost of employing full-time trainers

Risks of outsourcing training

The main risk is that external training may be too general. It may not match the specific needs, culture or processes of the business.

Training may also be expensive, and the business needs to check whether the benefits justify the cost.

Contractors

What are contractors?

Contractors are external workers or businesses hired to complete specific tasks or projects. They are not usually permanent employees of the business.

A business may use contractors for:

• short-term projects

• specialist tasks

• seasonal demand

• temporary skill shortages

• work that does not require a permanent employee

For example, a business may hire an external HR consultant to review workplace policies or manage a temporary recruitment project.

Benefits of using contractors

Contractors can give a business flexibility. The business can access skills when needed without committing to long-term employment costs.

Contractors may also bring specialist knowledge that the business does not have internally.

Risks of using contractors

Using contractors can reduce control over how work is completed. Contractors may also be more expensive per hour than employees.

There may also be legal and ethical issues if a business uses contractors to avoid responsibilities owed to employees. This links with legal influences on human resources [Legal Influences on Human Resources], because businesses must follow workplace laws and employment obligations.

Domestic outsourcing

What is domestic outsourcing?

Domestic outsourcing occurs when a business outsources work to another organisation within the same country.

For example, an Australian business may use an Australian payroll company, recruitment agency or training provider.

Benefits of domestic outsourcing

Domestic outsourcing can be useful because the provider is likely to understand:

• Australian workplace laws

• local labour market conditions

• cultural expectations

• local business practices

• time zones and communication needs

This can make communication easier and reduce some of the risks linked to legal compliance.

Global outsourcing

What is global outsourcing?

Global outsourcing occurs when a business outsources work to an organisation in another country.

For example, a business may use an overseas provider for administrative HR support, online training development or recruitment-related services.

Benefits of global outsourcing

Global outsourcing may help a business:

• reduce labour costs

• access specialist skills overseas

• operate across different time zones

• support international business growth

Risks of global outsourcing

Global outsourcing can create challenges, including:

• communication difficulties

• time zone differences

• reduced control

• data security risks

• differences in legal systems

• possible damage to employee trust or business reputation

A business must weigh the cost savings against the risks to quality, communication and control.

Benefits of outsourcing HR functions

Outsourcing human resource functions can help a business improve efficiency and focus on core activities.

Possible benefits include:

• lower costs

• access to specialist expertise

• improved compliance

• faster recruitment or training

• reduced workload for managers

• greater flexibility

For example, outsourcing payroll may allow a small business owner to spend more time on sales, operations and customer service.

Risks of outsourcing HR functions

Outsourcing HR functions can also create problems if it is not managed carefully.

Possible risks include:

• loss of control

• poor quality service

• lack of understanding of business culture

• confidentiality concerns

• communication problems

• dependence on an external provider

• reduced connection between the business and employees

Because HR involves people, outsourcing must be handled carefully. Employees may feel frustrated if important issues such as pay, training or recruitment are managed poorly by an external provider.

Worked example

Exam-style question

Explain one benefit and one risk of outsourcing human resource functions.

Sample answer

One benefit of outsourcing human resource functions is that the business can access specialist expertise. For example, a small business may outsource payroll to an external provider that understands tax, superannuation and leave requirements. This can improve accuracy and reduce the administrative workload for managers.

One risk is that the business may lose control over important employee-related processes. If the payroll provider makes an error or responds slowly to staff questions, employees may become dissatisfied. This can reduce trust and negatively affect business performance.

Common mistakes

• Saying outsourcing means firing all HR staff.

• Forgetting that outsourced HR functions still need to be monitored by the business.

• Confusing domestic outsourcing with global outsourcing.

• Only discussing cost savings and ignoring risks.

• Writing about outsourcing generally without linking it to human resources.

Quick quiz

1. What does outsourcing human resource functions mean?

2. Give two HR functions that a business may outsource.

3. What is the difference between domestic and global outsourcing?

4. Why might a business outsource payroll?

5. Give one risk of using an external recruitment agency.

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