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Outsourcing is the practice of hiring external organizations or individuals to perform tasks, handle operations, or provide services that are either difficult to manage internally or are outside the company’s core competencies. This approach allows businesses to focus on their primary activities while leveraging the expertise and efficiency of external providers. Also, companies use outsourced workers due to talent needs and to manage workforce needs such as hiring for specific projects or temporary increases in demand.
| Types of Outsourcing | Description |
|---|---|
| Contract Labor | Engaging individuals or groups on a contractual basis to complete specific projects or tasks. This can include skilled professionals such as IT specialists, engineers, or consultants. |
| Other Businesses | Partnering with other companies to handle certain functions or services. For example, a business might outsource its customer service operations to a specialized call center. |
| Temporary Help | Hiring temporary workers through staffing agencies to fill short-term needs. This is often used to manage seasonal demands or temporary increases in workload. |
| Freelancers and Gig Workers | Utilizing independent professionals who offer their services on a project-by-project basis. Freelancers can provide a wide range of services, from graphic design to content writing. |
| Managed Services | Contracting with a third-party provider to manage and deliver a specific service, such as IT support or payroll processing, on an ongoing basis. |
For outsourcing to be successful, organizations must treat all workers equally, regardless of their employment status. This means giving both alternative and traditional workers the same level of respect in terms of culture, inclusion, and work assignments.
The distinction between a contractor and an employee is crucial for HR to understand. Contractors are typically hired for specific projects or periods, often working independently and managing their own taxes and benefits. They are not entitled to employee benefits like health insurance or paid leave. An employee, on the other hand, works under the company’s control, receiving regular salaries and benefits, and is subject to company policies and procedures.
HR must know the difference to avoid misclassification and comply with labor laws. If a company hires someone as a contractor who should be an employee, there can be legal issues and fines.
HR is important for any company, but not all businesses can afford full-time HR staff. Over the past decade, outsourcing HR has become a smart choice for many small companies. Their current staff often lacks the time or expertise to handle employee relations, benefits, payroll, and HR compliance. This has led many HR professionals to explore entrepreneurship in HR outsourcing and “fractional HR.”
Smaller companies, and sometimes larger ones, often outsource tasks like benefits and payroll management to third parties. This practice has been common for years. Recently, there’s been a trend towards “fractional HR” to manage daily, weekly, or monthly HR tasks such as compliance, employee relations, and talent management.
Fractional HR is a growing industry, with many HR companies and individuals offering these services. It involves providing HR services on a part-time or intermittent basis, tailored to the company’s needs and budget. An HR professional might work onsite for a set number of hours or days each week or month, handling everything from compliance issues and training to employee support. For companies focused on employee development, the HR resource can also manage performance, succession planning, training, and development.
Outsourcing, while often seen as a cost-saving measure, comes with its own set of challenges that can impact a company in various ways. One significant disadvantage is the loss of control. When a company outsources a function, it hands over a portion of its operations to an external party. This can lead to a disconnect between the company’s goals and the outsourced service provider’s execution. The company may find it difficult to ensure that the outsourced tasks align perfectly with its standards and expectations.
Another critical issue is the expense. While outsourcing can reduce costs in some areas, it can also introduce hidden expenses. These can include the costs of managing the outsourcing relationship, ensuring compliance with regulations, and dealing with any issues that arise from the outsourced work. Over time, these additional costs can add up, potentially making outsourcing more expensive than handling the tasks in-house.
Service quality is another area where outsourcing can fall short. The external provider may not have the same level of commitment to quality as the company’s own employees. This can result in subpar performance, mistakes, and delays, which can ultimately affect the company’s reputation and customer satisfaction.
Employee morale and culture are also at risk when outsourcing is implemented. Employees may feel threatened by an external provider, fearing their jobs are at risk. This can lead to decreased morale and productivity. Additionally, the company’s culture can suffer as the sense of unity and shared purpose among employees is disrupted. The introduction of an external team can create a divide, making it harder to maintain a cohesive and motivated workforce.
Outsourcing offers many benefits that can greatly enhance a company’s operations. One of the primary advantages is cost savings. By outsourcing certain functions, companies can often reduce their operational expenses. External providers typically have specialized expertise and cost advantages due to size that allow them to perform tasks more cost-effectively than if managed internally.
Another key benefit is the ability to concentrate on core business activities. When non-core functions are outsourced, companies can allocate more resources and attention to their primary business goals, leading to enhanced productivity and a stronger competitive position in the market.
Access to specialized expertise is also a significant advantage. Service providers are usually experts in their respective fields, with up-to-date knowledge of best practices, technological advancements, and industry trends. This expertise can help companies improve the quality of their services, stay compliant with regulations, and implement effective business strategies.
Outsourcing also offers flexibility and scalability. As a company grows or experiences changes in demand, an external provider can easily adjust the level of service to meet the company’s evolving needs. This flexibility is particularly beneficial for small and medium-sized businesses that may not have the resources or money.
Moreover, outsourcing can lead to improved service quality and customer satisfaction. By leveraging the expertise of specialized providers, companies may be able to offer better services to their customers, contributing to a more positive customer experience and stronger brand loyalty.
Source: This Tutorial has been adapted from "Human Resources Management" by Lumen Learning. Access for free at courses.lumenlearning.com/wm-humanresourcesmgmt/. License: CC BY: Attribution.
REFERENCES
Volini, Erica, Jeff Schwartz & Indranil Roy. (2019, July 29). "Creating Value form the Alternative Workforce." The Wall Street Journal. https://deloitte.wsj.com/cfo/2019/06/24/creating-value-from-the-alternative-workforce/?id=us:2sm:3tw:4wsj
