The Growing Trend of HR Outsourcing: What it Means for HR

Episode 25: The Growing Trend of HR Outsourcing: What it Means for HR

Trina Sunday: Today I’m diving into a topic that’s reshaping how businesses operate globally. The exponential rise of HR outsourcing, consulting and fractional hr. What’s driving it? what does it mean for HR teams? And how do we fit into this evolving landscape? Welcome to Reimagining HR with Trina Sunday, the rule breaking podcast where we challenge our thinking and our current people practises. This podcast is for time poor HR teams and business leaders who are feeling the burn, lacking laughs and not feeling the love. I’m Trini, your host and I’m here to cut through the bs, explore different ways of thinking and create high impact HR functions because happier, healthier organisations are better for our people and our bottom line. So if you are keen to flip traditional HR on its head, hit the follow or subscribe button so you’re the first to know when new episodes drop. I’m, here to help and also to shake things up. So let’s get started. At a time where businesses are in a constant quest for efficiency and agility, HR outsourcing has emerged as a strategy that can either make or break us in the HR profession. But how does outsourcing compare to engaging HR consultants or even fractional HR professionals? In this episode I’m looking at how we can navigate these cloudy waters and, weighing the pros and cons of trusting external expertise with your people. But before we look at the pros and cons of HR outsourcing, let’s distinguish between HR outsourcing and hiring HR consultants. HR outsourcing is delegating some or all of your HR functions to a third party, right? A third party provider who takes over specific HR tasks on an ongoing basis. These can include payroll processing, compliance management, employee benefits administration, recruitment or full scale HR operations. And the outsourced firm acts as an extension of your business, but they operate externally and they often have multiple clients. HR consulting on the other hand, which is a space that we play in, more typically involves bringing in a HR expert or a team of consultants to work on a specific challenge or a strategic initiative. And unlike outsourcing, consulting engagements are usually project based, right? Focusing on delivering solutions for issues like workforce planning, leadership development, organisational change. Fractional HR though, is growing in popularity in Australia, noting it’s been around as a concept for a very long time. But it’s a hybrid approach where businesses engage an experienced HR professional on a part time or flexible basis. So it’s offering a more embedded and strategic HR function without the overhead of a full time hire. So fractional HR professionals are really valuable for growing businesses that need senior level HR expertise, but they’re not ready to hire a full time exec. So understanding these distinctions is crucial when you’re trying to decide whether you need to outsource any of your HR activity and if you do, what the right approach might be for your business and for your brand in hr.

But what I’ve been looking at recently is like, why is HR outsourcing booming so much? It feels like everywhere I turn there’s a new HR consultant, a new HR consulting firm every day. Like, it feels like it’s exploding. Now, globally, businesses are under immense pressure, right, to reduce costs while remaining agile and competitive. I get it. HR functions like payroll, recruitment, compliance and employee benefits, they’re complex and they’re really resource intensive. So that’s especially true for small and medium sized enterprises. SMEs that can lack the capacity to manage that stuff internally. And by outsourcing, HR companies can access expert services without the overhead of maintaining an in house team. There’s more flexible pricing models, which can also mean that you only pay for what you use. In Australia, outsourcing is helping SMEs comply with rapidly changing employment laws as well. So for example, businesses benefit from outsourcing providers that specialise in areas like award interpretation and Fair Work act compliance. But similarly, in Asia, given the diversity of laws in the region, outsourcing is often used to manage workforce compliance across multiple jurisdictions. And meanwhile in the US and Europe, we’re seeing significant investment in technology driven HR outsourcing, which is a trend. That brings me to another thought. Technology’s revolutionised HR outsourcing. That’s what it looks like to me from the outside anyway. And providers are now leveraging AI and cloud based systems to deliver faster and more accurate services. From automating payroll and leave management to streamlining recruitment. Technology reduces the admin burden. And the best part, companies can access cutting edge HR platforms without having to invest in that costly infrastructure. But globalisation is another driver. Right? And last episode I was talking a lot about divisiveness around the globe right now. But globalisation is seeing more businesses expand internationally or embrace remote work, meaning that a global workforce becomes more of a challenge. So HR outsourcing providers can bridge the gap. They offer expertise in international laws, the cultural nuances and compensation practises which can differ right from one country to the next.

And for example, a company with teams in Singapore, Germany and the usa, they can rely on an outsourcing provider to ensure the compliance and the consistency across those different borders. But let’s take a closer look at some of the most common HR functions that businesses outsource like. They typically fall into two categories, right? That’s our life, strategic and operational. And the operational HR functions that we see outsourced are the things that you would typically expect. So payroll processing, it’s one of the most frequent and providers manage everything from salary calcs to tax deductions, compliance with local payroll laws. And it’s an operational task, but it is absolutely, critical to employee satisfaction and trust. This is an operational task, but it is absolutely critical to employee satisfaction and trust. You can do whatever you want, but if you don’t pay people properly, there’s trouble. Right. And all of us know that, if you work in HR benefits admin is another one that’s expanding though, and that can include managing employee health insurance, retirement plans and other perks and sometimes outsourcing. That function ensures accuracy and compliance and it just relieves internal HR teams of that admin work. Recruitment and onboarding is interesting though. So while recruitment absolutely has a strategic element, such as aligning hires with the business goals and making sure we’ve got a good workforce plan, the administrative side, so including posting job ads or conducting background cheques, processing new hire paperwork, it’s often outsourced. Right. And the other element that’s probably the most outsourced operational HR function would be compliance management. So, staying on top of employment laws and regulations because it is very complex, even in Australia, across state jurisdictions and how that overlays with the national system and collective bargaining, it can be a minefield if you get it wrong. And so outsourcing ensures that businesses avoid costly legal issues while freeing up internal resources to focus on the strategic stuff. But there’s lots of people still outsourcing strategic HR functions, which I find really interesting if we are positioning ourselves as strategic business partners. But a lot of the things that we’ve seen that are being outsourced are, things around talent acquisition strategy, for example. So some companies will outsource higher level recruitment services such as crafting employer branding strategies or identifying really senior, leadership talent. So executive headhunting and the like. And these tasks require expertise and an understanding of industry trends a lot of the time. And so you get some intel and insights from outside that you might not have inside your organisation, which is looking from within.

But learning and development has been outsourced for a very long time. Different elements of it anyway. And so while internal HR teams often design and deliver training, outsourcing Providers can bring really specialised knowledge and particularly for leadership development or technical upskilling programmes. Makes sense, right? Not everyone can be an expert, so your L and D team would be massive if you’re doing everything internally. But the other big one is HR tech implementation. So introducing new HR systems or upgrading existing ones is a strategic move and costs a bucket. So exec has a laser like focus on what it is that you’re doing in that space. So outsourcing providers bring the technical expertise needed for a seamless implementation and integration in theory, but that’s if your in house team is in the know and had the chance to get the specs right before the consultants or the team sworn in. Another area that we are seeing and hearing of being outsourced a lot is performance management systems. So while day to day management’s usually internal, some companies are actually outsourcing the design and implementation of performance evaluation frameworks. And I see this as something quite common where people would be outsourcing. Something that I would see as an organisational development specialism and makes sense. But you would need really heavy cross functional collaboration with your HRBPs and your operational leaders to make sure that’s going to hit the mark. Because external operators and outsourced providers, they’re going to create something in a vacuright? And probably using the same template they’ve used for the 20 clients they’ve done it for before you. But whether these activities are operational or strategic, outsourcing allows companies to scale their HR efforts efficiently. However, it’s essential to maintain oversight to ensure alignment M with your goals. Like you can’t let consultants go rogue, it will hurt you and it will hurt your brand. But there’s a lot of pros, right? And we know on the face of it what they are like there’s things like cost efficiency, expertise focus, like being able to scale the legalities of things, the time saving that we’ve touched on. we know that outsourcing can dramatically reduce cost by handing off admin and that kind of thing and we know that there’s expertise you can bring in that you don’t have and we can ride out maybe some seasonal fluctuations or businesses that are wanting to scale and grow so they’re not ready for the full scale team yet. Like we get it right but there’s lots of cons, there’s lots of reasons not to outsource and things can be really murky. And in the work that I do and that we do at reimagine hr, we are finding that There are a lot of people that are jumping to outsourcing where really it’s coming from a place of lacking confidence and capability, but really it should be something that should be driven from in house. And some of the reasons for that is like the complete loss of control, for example. It’s the perilous abyss. we all know the embedded consultant that’s come in and they’ve come in to do a piece of work and three years later they’re there and they’ve created some empire for themselves. But outsourcing HR functions means relinquishing some control over people management processes, right? Which can be challenging for businesses that prefer direct oversight of employee relations and company culture, which you should have all the time. But there’s also confidentiality concerns, like HR involves handling really sensitive employee data. And outsourcing means that we’re going to need some strict security measures to protect that confidential information and to prevent breaches. And there’s a quality issue that can come like, not all outsourcing providers are created equal. Right. so choosing the wrong partner can lead to inconsistency and some real issues with the quality of the services that your internal clients get. But the biggest issues that I see is around cultural misalignment, like, we’re not keeping the crew united, yo. So outsourced providers may not fully understand or integrate what your company’s unique culture is, which can lead to disconnects in communication and employee engagement. But beyond the cost and the compliance, HR outsourcing allows businesses to focus on what they do best. And by delegating HR functions to external experts, companies can channel their energy into core business activities, whether it’s product innovation, customer experience, strategic growth. However, outsourcing isn’t just about cutting costs or offloading work. It’s about enhancing or should be the overall HR function. So, for example, like, providers can bring fresh insights and best practise that improve your processes and employee experiences.

Now, I talk about the fact that there’s no such thing as best practise and it’s about best fit. But at the end of the day, if you’re sitting around the table and you have someone from outside bringing ideas that other people have tried and tested, you don’t just take one and apply it, you can take what was best fit for them and what they have proven to be a best practise for them and use that to examine and, really dissect kind of what’s happening in your organisation. But if outsourcing does all that, why do we need HR departments then? Like, should we be shaking in our boots or what? And I think this is a really key thing around how we remain relevant. Like HR remains relevant amid the rise of outsourcing and consultancy by focusing on our strategic, cultural and leadership roles within our organisation. So while external providers can handle compliance and payroll or even leadership on a fractional basis, internal HR professionals remain essential. But you’ve got to know why you’re essential. If you can’t tell people why, you are absolutely critical to your organisation. We probably need to lean in and start there. And a lot of it is because internally we’re the only ones that can help drive organisational culture. We are uniquely positioned with a lens that looks across our entire organisations. So we are positioned to shape culture, to impact engagement and belonging which external providers can support but they can never fully own. The other role that we have internally is around being the voice of the employee. And I know that I’ve had and done, podcast episode in the past around whose side are we on, the employee or the employer? But internal HR teams build long term trust with employees. We’ve got relationships across the entire organisation and so we have insights and input that can ensure that people’s strategies align with the business values without harming people. Like we have that lens, we should be bringing that to the table and we do that through aligning the HR with the business strategy. Right? We’re the only ones that can do that from inside and fractional and outsourced HR support can be valuable in that. But it’s in house HR leaders that keep the people agenda tightly connected to business priorities. And often they’re business priorities that are evolving. Right? So we need to stay on it. But the other thing that only we can do as internal HR leaders is around that, navigating change and crisis. We’re the ones that are there, so external expertise can help, but it’s internal HR teams that ensure continuity in times of transformation or crisis or rapid growth. It’s us that do that. So the key for HR leaders is to adapt and evolve. leverage consultants for specialised expertise, but do so while strengthening your own strategic value within your business.

I know 100% that outsourcing isn’t a one size fits all solution. So while it offers immense benefits, it can also create challenges, right, for internal HR teams. And we’ve seen this even through, and I have personally, through the fact that I’ve spent 20 years in house in HR, I’ve spent 15 years in senior HR leadership roles and now obviously run an external consultancy and I call it and look at it on whether I’m using my inside voice or outside voice. And some people that know I talk a lot would say that that’s Trina speaking, before she’s thinking. But my inside voice is my in house HR voice and my outside voice is actually the lens and the insights that I bring from being outside the organisation. But in both of those roles, and no matter what voice I’m using, I’m, inherently backing in HR as a profession, I’m backing you in and want to use my inside voice and my outside voice to make life better. And so we do a lot of that by helping HR teams in lots of different ways. Right. But often it’s about helping to clarify strategic priorities. While working alongside outsourcing providers, we help build confidence in managing the relationships with internal and external partners. And at the end of the day we help strengthen capability so that HR teams can focus on high impact areas like culture and leadership development. Well, we can help do some of the legwork and drive some of that thought leadership in terms of other things that can have an impact. But we also help understand how business needs translate into workforce needs, capacity, capability and culture. It can be the perfect storm if it’s disconnected. You might have the right number of people, but are they doing the right stuff? Are they coming with the right attitude? Potentially not. And so at the end of the day, you don’t then get the outcomes that you’re looking for and the needs are different for everyone. Like, we recently worked with a Perth based company that outsourced payroll, but they wanted to keep recruitment in house and this was an SME. But it was through our coaching sessions that we helped their HR leader redefine their role, ensuring that they could deliver strategic value without getting bogged down in the operational tasks. And part of the core work I do is helping HR leaders determine should I outsource or not at all. But our approach is pragmatic, Right? So whether you’re considering outsourcing for the first time or you’re navigating the complexities of a hybrid model, we want to ensure that HR teams remain impactful. That’s our end game. That’s why we exist. So whether people need fractional HR leadership or hands on consulting or, tailored outsourced solutions, you need to ensure that there’s alignment with your business goals and your culture. And while we ask good questions and while I’m really super comfortable sitting in the silence while you have your. I’ve Got no bloody idea moment. Not everyone does. But we all have those moments. And if your HR networking circles tell you otherwise, and if you’re talking with an outsourcing partner and they keep jumping in and not letting you think about what the need is and asking good questions and allowing you to get clarity, which might mean that you don’t need them, then they’re not in it for you. And that’s where I know that my expertise and what the team do and our exposure across strategic end to end HR and the work we do in culture and job design capability, mapping gender equity, we do lots of things that enable businesses to be really proactive in their workforce decisions and to drive really sustainable change and success. But that’s because we’re all about the practical, right? practical workforce planning frameworks, facilitating leadership discussions that are based in action, not chat, and helping to design really future ready HR strategies that optimise talent and business outcomes. Future ready, right? Future ready being the key. And I feel like when you’re looking at as an outsider, so if I’m using my outside voice, it’s one of the biggest gifts that I think we can bring to our HR clients is clarity. Over where the hell do I start? And I talked last episode about how many in my HR networks have heavy hearts and clouded minds right now. And that’s what happens when you’re overwhelmed and you’re approaching burnout. Things get foggy real fast. And navigating the divisiveness that we’re seeing globally and at, home can make work life feel really challenging. So having an independent person as a sounding board can help you prioritise, having an impartial person help the HR team brainstorm and workshop ideas and challenge. Thinking about the status quo can help you get clarity and galvanise the team. Having a specialist come in and fill some of the gaps or thinking that you haven’t been able to get headcount for that can help you move faster, faster at getting projects scoped, validated, co created and implemented. It’s a winner. People see your impact, which enhances your credibility and therefore your brand for the HR team, but also for you personally. And at the end of the day, no one HR person can do it all. And every HR team has capability gaps because of external pressures, changing priorities, lack of resourcing, HR turnover.

We never have a full bench, do we team? And it can be super frustrating. It’s also frustrating. I know that you can get headcount for a consultant, but not for the headcount I’ve been there too. I, can absolutely relate. But you gotta keep pushing. But then see how you can use those external partners. Use them, use us, use me. But use them to make you and your HR team more impactful. You need to be the one that has the choice. You need to be the one that’s calling the shots. And that means aligning yourself with someone who has your back, someone that is invested in your success. And that takes the time and effort to deep dive into what your exact problems are that you need to solve. And is it even the right problem? If a consultant pulls out frameworks in the pitch meeting and you’re sold on the fancy pitches run, there is a cookie cutter coming for you. But as the demand for HR outsourcing continues to grow, businesses have to approach it strategically. Outsourcing and fractional HR are definitely in scope for our SME. Clients and external consultants have their place, depending on what you want to achieve, right? So here’s a few takeaways to reflect on whether you’re outsourcing a function. Engaging external consultants Fractional hr start small, like outsource specific tasks like payroll or compliance. First to test the waters and make sure you pick the right partner. Like, you’ve got to ensure that providers understand your industry and your goals, but most importantly, your culture. Because culture is 100% your handbrake to effectiveness. No matter what you want to do or achieve, your culture is going to break it. And your leadership as an extension of that culture, they’re not going to support it. So you’ve got to pick the right partner that can work within that context, your reality. But you also need to maintain oversight.

I talked about consultants going rogue. Like, you have to keep an internal point of contact to track performance alignment and to really build and nurture that relationship with your outsourced providers. And at the end of the day, measure roi. Like regularly evaluate the impact of outsourcing, whether it’s on efficiency, cost, employee satisfaction. When considering HR outsourcing, consulting or fractional hr, even measuring return on investment is critical. But jeez, it can be hard, can’t it? Like, it’s easy for me to stand here and say businesses should evaluate, the financial and the strategic benefits of these engagements. But coming up with the metrics, and even just the word metrics makes you start to shudder in anticipation of data analysis or something. But there’s a few things that you need to consider measuring, right? And at the end of the day, it is critical to understand if it’s worth it. Because you’re going to be asked, was it worth it? And so without measuring anything, you’re not going to be able to answer. By not being able to talk to the numbers, it also is going to make M people doubt your business acumen. Like, if you’re just not measuring whether this investment has been worthwhile for your organisation, people are not going to see you as commercial. So if you want to be a strategic business partner, you got to show up with some numbers, but numbers that mean something. So whether that’s looking at cost savings, you can compare the cost of outsourcing or engaging a consultant versus hiring an internal HR team, but make sure you factor in the salaries, the benefits, the training, the compliance risks, not just the rem, like the whole thing, the on costs, all of it. you could look at things like efficiency gains. So assess the time that’s been saved by outsourcing administrative tasks, which would then allow your internal HR team to focus on strategic initiatives. This can be really annoying to do, right? Let’s just be real, but use apps like Toggl Time Tracker app, for example, to make it as painless as possible. Like it works on desktop, it works on mobile. So that can be really helpful. You don’t have to track it for the rest of your life. Track it through a normal cycle or a month or whatever you think the data can be replicated. But also look at talent impact. So what are the improvements in retention, engagement and satisfaction, for example, that have come from some of these expert hr, interventions. But the true cost of compliance and mitigating risk, that’s a really key one to measure.

So if you can evaluate reductions in legal risks or fines or penalties due to improved compliance management, that’s massive. It’s about savings. I saved the organisation this amount of money because putting this outsource solution in place meant that we saved this amount. It means something, it’s powerful. And the other thing is around strategic contributions. The harder to measure. But see if you can try and determine how external HR expertise has contributed to workforce planning or culture initiatives or leadership development. It’s harder to quantify. It is, but it’s something that you can actually look at and get data, get the voice from your employees and see what they’ve got to say about what’s improved. But whether these activities are operational or strategic, outsourcing allows companies to scale their HR efforts efficiently. But you need to manage it, you need to have oversight and you need to use it to have a positive impact on your business. Not just because you can’t be arsed doing the work. So it’s gotta be impactful. And while we don’t play in the outsourced HR operations space ourselves here at Reimagine hr, but we do have a network of phenomenal peers who do. Which is often why my coaching clients tap into that when they’re working with me, Western Australia particularly. But we have seen a huge increase in the demand for our consultancy services to support strategic initiatives, to facilitate business and HR planning events to coach HR leaders through the floodwaters, even if they’re rising fast. Outsourcing is not always the answer. You need to know your value, not undermine it. And when you’re in it, it can be hard to see what the right move might be for your business and your people function, and for you personally. But looking ahead, we can expect to see more companies adopt hybrid models where outsourcing complements internal HR teams. Technology is going to play a bigger role with AI and analytics, shaping how HR services are delivered. Like that’s a fact. Things are going to change and we’re going to need some different skills to help us do that. But at Reimagine hr, we’re excited to help businesses navigate that shift. We want to see empowered HR teams with the clarity, confidence and the capability that they need to thrive. Imagine that. Thanks for tuning in and leaning in to this week’s episode. As we look to Reimagine how we show up for our people or organisations and community, reach out to us via our website at reimaginehr.com.au with your HR horror stories or suggestions of people you’d love to hear from or topics you want to explore.

It’s all about people, purpose and impact and we are here for all of it.

Until next time, take care, team.