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Updated Jan 30, 2024

5 Challenges to Outsourcing HR (and How to Overcome Them)

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Skye Schooley, Senior Lead Analyst & Expert on Business Operations

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Human resources (HR) outsourcing offers many benefits – namely, the opportunity to save money, time and resources so you can focus on your long-term goals and business growth. However, there are some drawbacks to shutting down (or forgoing) an in-house HR department and relying on an outside vendor to handle your company’s HR duties. Learn more about the challenges businesses face when outsourcing their HR needs.

Editor’s note: Looking for the right HR outsourcing solution for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

How does HR outsourcing work?

HR outsourcing works by your business hiring an outside company to handle some or all of your human resources tasks, such as payroll processing, employee recruitment and employee benefits administration. Businesses outsource job functions when they need assistance with tasks outside of their internal team’s expertise or capabilities. For example, they may not have an internal employee or team with the bandwidth or know-how to perform a specific function, so they must enlist an external person, product or organization to do it for them. 

FYIDid you know

Outsourcing is common with HR functions. Although it’s sometimes essential, businesses may turn to outsourcing simply to help them run more smoothly.

Challenges of outsourcing HR

Before you decide if HR outsourcing is right for you, it is vital to understand the benefits and challenges associated with outsourcing HR functions.

1. Disconnection with staff

The word “human” isn’t part of “human resources” for nothing. HR representatives are critical to help employees feel like they have a voice and value in the company. Transferring these duties to computer software or an off-site third party can lead to staff feeling disconnected from their employers – and employers not fully understanding their teams’ needs.

2. Less flexibility

In small businesses especially, HR reps and managers can help employees out in a pinch – paying out unused vacation days in an emergency or letting them dip into next year’s leave early, for example. When HR is automated and/or outsourced, these types of accommodations for loyal workers are difficult, if not impossible.

3. Problems taking longer to fix 

In situations where an error has been made – say with payroll or with the number of vacation days an employee has – going through a third-party HR service can mean a long wait before the error is fixed, leaving the employee angry or frustrated. In addition, when an employee quits and the business uses an outside recruiter, the hiring and training process might take longer than it would with an in-house HR department, which can be more proactive about hiring and training employees before positions even open up.

4. Privacy and security concerns

HR outsourcing can leave your employee data vulnerable to security threats if the company’s software isn’t secure. Many service providers use web-hosted software to handle HR functions, potentially leaving sensitive employee information vulnerable to security threats and crashes. The last thing you want is to have your employees’ personal banking or medical information released to the public and break HIPAA laws.

TipBottom line

To minimize the possibility of security threats, check each vendor’s security record and references when shopping for web-hosted HR services.

5. Cost

One of the biggest concerns for many small businesses considering outsourced HR is the cost, since HR outsourcing costs can vary greatly. It might seem tempting to simply hire an internal HR professional to take care of all your HR needs, but they might also be expensive or unable to cover the many functions HR entails. The good thing about HR outsourcing is that you can choose which functions you want to outsource. This means you can start small and then add more HR services as your needs grow. For example, maybe you want to keep your employee benefits in-house but outsource your HR compliance needs.  

FYIDid you know

HR outsourcing services can cost anywhere from $50 to $1,500 per employee per month, depending on what services you need and how many employees you have.

How to overcome the challenges of outsourcing HR

While outsourcing your HR functions can come with potential limitations, there are a few easy ways you can mitigate these challenges.

Keep an internal HR employee on staff.

A satisfied, hardworking staff is the biggest competitive advantage a business can have, and you can create a company culture that values employees and their contributions by making sure their voices are heard. As you can see from the list above, one of the biggest challenges of outsourced HR is not having someone who can troubleshoot the workday problems, frustrations and miscommunications that are inevitable in any work environment.

One solution is to hire an internal employee to handle certain HR functions in-house. They can act as a liaison, working with your HR outsourcing agency to ensure all HR tasks align with your company’s values and culture. It is also recommended that you have an internal hire manage employee-centric duties like company culture; diversity, equity and inclusion (DEI); and performance management.

Ask the outsourcing company about customization.

HR outsourcing companies typically include an HR platform for you and your employees to access pertinent HR information, such as time off. When setting up your arrangement with an HR vendor, ask about customizability. Many top-rated human resources outsourcing (HRO) and professional employer organization (PEO) platforms can be customized to create policies within the software that are as strict or flexible as you need.

Outsource only certain services.

Fortunately for companies considering outsourcing, the best HR outsourcing services let you pick and choose which functions to hand over to them, so you can keep personnel on hand to handle those important interpersonal relationships and to act as a liaison between employees and your HR vendors.

While some vendors have an all-or-nothing policy regarding your HR functions (they either want to handle all your HR processes or you can’t use them at all), many offer an a la carte option, allowing you to decide which functions you’d like to keep in-house and which can be performed elsewhere.

These are the most common services HR outsourcing companies offer:

  • Payroll services (paying employees, handling taxes, and tracking sick time and vacation)
  • Employee benefits (health and life insurance, retirement plans, etc.)
  • HR management (recruiting, hiring, firing, exit interviews, annual reviews)
  • Risk management (employee compensation, safety training, regulatory compliance, conflict resolution, office policies) 

While outsourcing any one of these services would save your business time and money, it might be wise to keep people-centric jobs (think hiring, firing and performance reviews) on the premises. In addition, allowing your employees to air their frustrations and concerns about the outsourced services will help you assess what’s working and what isn’t to find the best solution for your business.

Best HR outsourcing services

There are countless great HR outsourcing services on the market, but that doesn’t mean they will all be a perfect fit for your business. As we mentioned above, some services come in bundled HR packages, whereas others offer a la carte HR outsourcing. Additionally, while plenty of businesses can get by just fine with standard outsourcing services, some services can be tailored to certain industries or focus on specific HR functions.

The level of detail you need in your HR service depends on your business size, type and culture. To help you narrow down your search, we spent countless hours analyzing and researching the best HR outsourcing services to find some ideal choices.

Here are a few options to get you started:

  • ADP: An HR powerhouse, ADP offers comprehensive HR outsourcing services. It’s an especially good choice for businesses looking for great employee benefit administration. It has in-house payroll, virtual and on-site employee training, and more than 550 integrations. Read our review of ADP to see if it’s a good fit for you.
  • Paychex: Businesses looking for a service that can scale with them as they grow should check out Paychex. The company offers comprehensive HR services and an intuitive dashboard with self-service features. It can help you proactively monitor employment laws and maintain legal compliance. Check out our review of Paychex to learn more about its HR services.
  • TriNet: Smaller teams with at least five employees may want to consider TriNet. This full-service HR outsourcing company specializes in industries like architecture, consulting, education, e-commerce, financial services, life sciences, manufacturing, retail and technology. It offers 24/7 support, which can be especially helpful for small businesses that are just learning the ropes of HR. Check out our TriNet review to learn more.
  • Bambee: If you are looking for assistance creating HR policies, Bambee can help implement customized policies that match your company culture. It offers payroll processing, risk mitigation, talent management and corrective action assistance. Read our review on Bambee to learn more.
  • Insperity: This HR solution is a great choice for businesses needing comprehensive assistance with HR services like payroll, employee benefits administration, risk mitigation and talent development. It even offers employees access to over 4,500 self-paced online courses and 20,000 online books. Check out our Insperity review to learn more.
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Skye Schooley, Senior Lead Analyst & Expert on Business Operations
Skye Schooley is a human resources writer at and Business News Daily, where she has researched and written more than 300 articles on HR-focused topics including human resources operations, management leadership, and HR technology. In addition to researching and analyzing products and services that help business owners run a smoother human resources department, such as HR software, PEOs, HROs, employee monitoring software and time and attendance systems, Skye investigates and writes on topics aimed at building better professional culture, like protecting employee privacy, managing human capital, improving communication, and fostering workplace diversity and culture.
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