HR articles

HR Outsourcing: Pros and Cons, What to Outsource and What to Keep In-House

2026-10-24 12:48
SHORT ANSWER

HR outsourcing means handing an HR activity — payroll, benefits administration, occupational health, training, part of recruiting — to an outside provider. It pays off when a mature provider market exists, the activity is not core to your business, and the provider costs no more than 20–30% above doing it yourself. Keep strategy, key knowledge and the in-house person employees trust inside.

Course on this topic: International HR Course: Global HR Management Training

Every HR team has more work than people, so sooner or later the question comes up: do this ourselves or hand it to someone who does it for a living? Outsourcing is a tool — it works for some activities and fails for others. Below I go through the real pros and cons, what to hand over and what to keep, the main models, the process of choosing a provider and how to control one.

If you already have a function in mind, jump to the free outsource-or-keep tool.

What is HR outsourcing?

Outsourcing is contracting out activities that the company used to perform itself. HR outsourcing is the same thing applied to HR work: payroll, benefits, occupational health, training, part of recruiting.

The idea behind it fits into one line from my course slides: focus on core competencies and outsource the rest. A company has many tasks. For each one it can either do it itself or give it to an organisation that is good at exactly this — and then build a long-term relationship with that organisation, not change providers every six months.

A few related terms you will meet:
  • Cosourcing — you outsource only one part of a function.
  • Insourcing — among other meanings, bringing a previously outsourced function back in-house.

Pros of outsourcing HR functions

  1. Focus. Your HR team spends its time on what makes the business different, not on routine that a specialist does faster.
  2. Fewer people to manage. The benefits listed in my workforce planning course: a smaller headcount, less supervision, lower overhead and fewer managers.
  3. Expertise you do not have. Payroll is the classic example. When a company enters a new country, it needs someone who knows how to do it correctly under local rules, and a local provider already does.
  4. A way out for small companies. The course material suggests considering it below about 100 employees, when there are rarely resources for an in-house HR team.
  5. Flexibility. The scope is not fixed for life. You review the work regularly and either hand over more or take something back, because you now need it inside or it has become cheaper inside.

Cons of outsourcing HR

  1. Employees lose a person they trust. People want an impartial colleague they see every day to turn to with a work problem or a dispute with a coworker. A provider is not that person.
  2. The small things disappear. An in-house HR person looks into group offerings, builds incentive programmes, remembers recognition and birthdays. You cannot count on a provider to do that.
  3. You may give away control over people decisions. Most PEOs insist on the final right to hire, fire and discipline employees. That may not suit your business.
  4. Security and outages. When everything is stored and handled online by an outside service, data security and crashes become your risk too.
  5. Morale. Outsourcing can hit morale, so the course process includes an employee briefing when the partner is announced.
  6. Unclear prices. Fees depend on headcount, options and geography; contracts usually run a year.
  7. Dependence. In my CIO course, vendor reliability includes financial stability, support and SLA, and dependence on specific people. The same risks apply to an HR provider.

Which HR functions to outsource — and which to keep in-house

The activities most commonly outsourced, according to my GPHR and international HR course materials: occupational health, payroll, pensions and training. If you are unsure about outsourcing everything, the same materials suggest starting with parts — payroll and benefits.

What should not go outside in full? My CIO course has a list for IT, and it transfers well to HR: architecture, key business systems, knowledge management and strategic decisions. In HR terms:
  • Keep inside: HR strategy and people decisions, the knowledge of how your company works, the core HR system and data, and the person employees go to with problems.
  • Candidates to hand over: payroll and benefits calculation (especially abroad), occupational health, training delivery, parts of recruiting, and support services such as cleaning.
The rule from the CIO slide is short: outsourcing is a focus tool — leave inside what creates your competitive advantage.
FROM MY PRACTICE · iDEALS

I saw the outsourced HR model in practice at iDeals. When a company opens offices in unfamiliar markets, it is simpler to hand part of the functions outside.

We had this in China and, if I remember correctly, in Brazil: there we outsourced payroll and benefits calculation. It was not full outsourcing — we still handled recruiting and training ourselves. What went outside was the routine part specific to the local market.

This setup is rare. It is usually needed when the head office in one country opens a small branch in another, with its own legislation and specifics, where there is no point in placing a full HR team.

Outsource the routine that depends on local rules. Keep the functions that shape your people and your culture.

— Mike Pritula

HR outsourcing models: PEO, BPO, ASP and RPO

HR outsourcing services generally fall into four categories: PEOs, BPOs, ASPs and e-services. The terms are used loosely, so find out exactly what a provider offers, especially when it comes to liability for employees.
PEO — Professional Employer Organization. Becomes the co-employer of your staff and takes legal responsibility for them, including the final say in hiring, firing and pay. By proper definition it is a PEO only if it takes that legal responsibility; some services use the label for payroll and benefits without it.

BPO — Business Process Outsourcing. A broad term for outsourcing a process in any field, not only HR. It usually improves the process with technology.

ASP — Application Service Provider. Hosts software on the web and rents it out, including HR software for payroll, benefits and more.

RPO — Recruitment Process Outsourcing. You pay for the recruiting process: analysis and planning, job marketing, sourcing and engaging talent, candidate assessments and candidate care.
RPO is easier to understand next to the other ways to pay for hiring:
  • Contingency search — you pay for a hire. No hire, no fee.
  • Retained search — you pay for the search, whatever the result. In my course example, part is paid before the search starts (say 30%), part after the first candidates, and the rest at the end.
  • RPO — you pay for the recruiters’ time and process, not for results.
  • In-house — your own recruiters, plus growing and moving your own people into open roles.

When does outsourcing an HR function make sense?

My workforce planning course gives three conditions. Outsource when:
  1. there is a developed market of providers for this activity;
  2. the activity is not a priority for the company;
  3. the provider costs no more than 20–30% above your own staff.
How: run a tender and do a test run of the service. Tools: process analysis, a technical specification and the tender procedure.

Why accept paying more? Because in-house staff cost more than their salary: someone has to find, process, train and replace them.
FROM MY PRACTICE · STB (STARLIGHTMEDIA)

At the STB TV channel we realised at some point that our cleaning staff was bloated. We constantly had to look for people and train them; they came to the HR department, got processed, and so on.

We said: let’s find a cleaning company. It will send a person, hire them, train them — and they will clean. We did exactly that, and everyone was happy. That was minus 100 people on our staff.

Outsourcing makes sense when the activity is not core for the company and when it costs the same or 20–30% less. Even if it is more expensive, it often still makes sense, because we usually spend more on people than just their salary.

Non-core work does not have to sit on your payroll. Compare the full cost of a person, not just the salary.

— Mike Pritula
FREE TOOL

Outsource or keep in-house?

Pick one HR activity and answer nine questions. Start from an example or set your own answers — the verdict updates at once.

Outsource 14 of 14 points

The criteria point outside: a mature market, support work, a fair price and no skills or local expertise in-house.

The full HR outsourcing process — needs analysis, budget, RFP, vendor evaluation, contract and restructuring — is in the International HR Course: Global HR Management Training.

How to outsource HR: a 10-step process

The HR outsourcing process in my GPHR and international HR courses has ten steps. The global version is the same as the local one.
  1. Analyze needs and objectives. The most critical stage: what exactly you want to hand over, why, and what you expect from the provider.
  2. Plan the budget. Know what you can spend and what the service costs you in-house today. That comparison shows the expected return.
  3. Develop a request for proposal (RFP). A written request for solutions and prices that fit your requirements — in practice, an invitation to a tender. It also makes answers consistent, so you can compare them.
  4. Forward the RFP to potential vendors with instructions on how and by what date to submit.
  5. Evaluate vendors. Criteria depend on your size, priorities and industry.
  6. Choose the vendor. Check licensing, ask for insurance certificates and assess how long the business has been around.
  7. Set up the contract: key deliverables, implementation time frames, payment terms, performance standards, training expectations, upgrade costs and responsibilities. The course material also advises a clause that lets you end it with 30 days’ notice.
  8. Develop and execute the project plan. Some start in a day, others need a gradual handover.
  9. Measure performance. Evaluate the work regularly.
  10. Restructure if needed: hand over more, or take back what you now need inside.
For the vendor shortlist itself, the same logic as choosing HR software applies — I described my own path in Choosing HRIS: the Mike Pritula experience.

How to control an HR outsourcing provider without micromanaging

The control checklist from my CIO course works for any provider. Control is not pressure — it is clear expectations, metrics and regular feedback.
  • Result, not process. Pay attention to the value delivered, not the hours spent.
  • Predictable deadlines. Plan vs fact, regular reviews.
  • Quality. Errors, incidents, rework — for payroll, every mistake in a payslip counts.
  • Communication. Regular statuses and clear escalations.
  • Knowledge transfer. Documentation, so the work does not depend on one person on their side.
  • Security and access. The provider gets only the access it needs, and changes are controlled.
  • A few basic metrics. The share of tasks delivered on time, the number of critical errors, and the satisfaction of internal customers.

Common mistakes when outsourcing HR

  1. Skipping the needs analysis. If you cannot say what you hand over and why, the RFP is vague and every proposal looks the same.
  2. Buying a label. PEO, BPO and RPO are used loosely. Read what the provider actually does and who carries legal responsibility for employees.
  3. Changing providers every six months. Outsourcing works when the relationship is long-term and the provider works almost like an internal team.
  4. Announcing nothing to employees. Silence feeds rumours. Brief people and give the business reason.
Not sure what your HR function does well today and what is worth handing over? Start with a diagnosis — my HR Audit guide walks through it.
HR outsourcing is neither a cost-cutting trick nor a threat to HR. It is a focus tool: hand over routine where a mature market, a fair price and a measurable result exist, and keep inside what makes your company different. The full process for international companies — from needs analysis to restructuring the outsourced organisation — is in my International HR Course: Global HR Management Training.
FAQ

Frequently asked questions

What are the main advantages of HR outsourcing?

You focus on core work, cut staff and overhead, need fewer managers, and get expertise you do not have — for example local payroll rules in a new country. The scope is flexible: you can hand over more or take work back.

What are the disadvantages of outsourcing HR?

Employees lose an in-house person they see daily and trust, a provider will not take care of perks and recognition, and a PEO usually wants the final say on hiring and firing. Online services add security and outage risks, and the announcement itself can hurt morale.

Which HR functions are most often outsourced?

Occupational health, payroll, pensions and training. Benefits administration and parts of recruiting through RPO are common too. Strategy, key knowledge and employee relations usually stay inside.

What is the difference between a PEO, a BPO and RPO?

A PEO becomes the co-employer of your staff and takes legal responsibility for them. A BPO takes over a business process, not only in HR, and usually improves it with technology. RPO is outsourcing of the recruiting process, where you pay for the process rather than per hire.

When should a small company outsource HR?

Course materials suggest considering it below about 100 employees, when you lack the people and experience to keep HR in-house. If you are unsure, outsource only parts, such as payroll and benefits.