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To Outsource or Not to Outsource

To outsource or not to outsource, is a question which many businesses are faced with today. The choice to outsource by a business is a crucial one which must be carefully researched before a decision is made. According to Weatherly, “outsourcing is an accepted management tool for restructuring and refocusing the way an organization does business.” (see note 1) When deciding on outsourcing, a business should first weigh the advantages and disadvantages of outsourcing.

For a small or midsized company, one advantage of outsourcing would be the cost savings. Outsourcing of functions such as payroll and Information Technology would allow a small company to reduce costs and control operating costs. Another advantage of outsourcing for a small firm would be the access to better technology and systems through the outsourcer. Another advantage of outsourcing for a small firm is that it allows the company to focus on core competencies. For example, the payroll function can be tedious and time consuming. Outsourcing of this function will allow the small firm to concentrate on areas such as marketing and sales which are needed for the growth and long-term prosperity of the firm.
However, there are disadvantages associated with outsourcing for small or midsized companies.

One major disadvantage of outsourcing for a small firm is the threat to the security and confidentiality of issues of the company. For example, if payroll is the function outsourced, then salary information of employees will be at the access of the outsourcer. Another disadvantage which may occur as a result of a small firm outsourcing is the lack of internally generated talent. If the company outsources certain functions then there are no internal staff capabilities in these functional areas. Lack of communication between the outsourcer and the company may also be a problem. This poor communication may result in the misunderstanding of the job to be done with unsatisfactory results. The outsourcer will most likely be providing services to multiple companies and as a result the bigger client may get preference with the smaller firm at a disadvantage.

Large companies should also consider the advantages and disadvantages of outsourcing. One major advantage of outsourcing for large companies is cost benefits. Outsourcing allows a large corporation to reduce costs in HR functions, such as benefits management and payroll. Outsourcing can also help in the improvement of inefficient internal processes within the company. When these internal processes are improved, it results in benefits for the company such as increased productivity, improved service levels and profitability. Outsourcing is also advantageous for large companies as they can now fully focus on core competencies of the business. For example, with the payroll function outsourced, HR now has more time for strategic issues and less administration. As a result there is improvement in the quality and consistency of the HR process.

Before a large company decides to outsource any HR function, they should be aware of the disadvantages associated with outsourcing. One of the disadvantages of outsourcing for a large company is organizational resistance to the outsourcing. Employees may react adversely to outsourcing and this will be reflected in their performance. Another disadvantage of outsourcing for a large organization is the difficulty in managing the relationship with the vendor. If an HR function such as pension plans is outsourced, then employees may have difficulties in the communication of their retirement information since there is now a third party involved.

According to Bohlander, “HR outsourcing is a $25 billion market, with more than 85% of US employers expected to outsource at least one HR function.” (see note 2) Outsourcing of benefits management is one of the main HR functions outsourced by large and small companies. Many companies outsource benefits management as it can be a complicated process due to legal compliance. There are several governmental laws and regulations associated with pension and healthcare plans. The outsourcer would ensure that the client is in full compliance of tax and governmental regulations. Outsourcing of benefits management also allows companies to offer a better quality of service for employees, since the outsourcer has a wealth of knowledge and expertise in the benefits area.

In conclusion, the key for any company regardless of its size is to find an outsourcer that is the right fit for your organization. When choosing an outsourcer a company must remember to focus on the overall objectives of the organization. It is important that a company chooses an outsourcer that understands the corporate culture and image and will therefore strive to uphold these areas. It is also imperative that companies build a good relationship with their outsourcer to avoid miscommunication and leaking of confidential information. In developing an outsource contract, companies should also be proactive and build an exit strategy into the contract highlighting on what grounds a party can terminate the contract. With these factors in mind a company can greatly benefit from outsourcing and maintain a sound relationship with their outsourcer.

Dannielle Deane is 25yrs old from the island of Barbados. Dannielle is a recent graduate of Long Island University, NY where she completed a Masters in Human Resource Management with a GPA of 3.95. At the moment Dannielle is job searching for an HR job to begin her career in Human Resources.

Webpage: http://www.jobfox.com/people/DannielleDeane

1 - HR Outsourcing. http://www.shrm.org/research/quarterly/2005/0805RQuart_essay.asp.

2 - Bohlander, G, and Snell, S (2007) Managing Human Resources. Ohio. Thomson South-Western. pp. 20.


Bohlander, George and Snell, Scott. Managing Human Resources. Ohio:
Thomson South-Western, 2007.
Weatherly, L. “HR Outsourcing” 09 Feb 2008. http://www.shrm.org/research/quarterly/2005/0805RQuart_essay.asp

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