Human Resources Outsourcing: Benefits, Services, Costs, & Best Practices

What sets exceptional HR departments and forward-thinking employers apart is their ability to adapt to change and remain resilient in the face of challenges. According to HR Works, Inc., the most common issues employers encounter include talent attraction and retention (56%), succession planning and leadership development (32%), and employee engagement (31%).

Other notable challenges include keeping up with compliance requirements (24%), navigating uncertainties and change (24%), and implementing automation solutions and HR technologies (16%).

Rather than viewing these as setbacks, high-performing HR teams see them as opportunities to drive growth, strengthen organizational culture, and maintain a competitive edge. One of the most effective strategies for addressing these challenges is human resources outsourcing (HRO).

Currently valued at $276.44 billion USD, the HRO industry reflects a growing global push for stronger compliance, improved employee experiences, and greater use of technology. If you’re considering outsourcing HR functions, this guide will walk you through the essentials — from benefits and services to costs and best practices.. 

What Is Human Resources Outsourcing?

HR outsourcing is a strategy of delegating most or all HR functions to an external provider in another country with lower labor costs, such as the Philippines. These HR outsourcing companies help clients build a dedicated offshore team of HR professionals, who will provide them with the expertise, skills, and knowledge to perform the outsourced functions.

Businesses leverage HR outsourcing to access cost-effective talent, integrate new technologies and tools, and invest more resources in high-impact activities.

Human Resources Outsourcing vs. Recruitment Process Outsourcing (RPO)

We often associate (and interchange) recruitment with human resources. However, in the context of outsourcing, these two strategies are different. The main difference between HR outsourcing and RPO lies in their services:

• Human resources outsourcing: This outsourcing strategy encompasses a broader scope of services, including benefits administration, payroll processing, employee training, and recruitment. 

• RPO: RPO companies provide recruitment services. Examples include talent acquisition, employer branding, employee screening and onboarding, DEI (diversity, equity, and inclusion) reporting, and applicant tracking system (ATS) optimization.

Human Resources Functions You Can Outsource

There are plenty of HR responsibilities that an external provider can handle for you. Here are five examples:

1. Talent Acquisition

Hiring the right people for the job is key to success. Talent acquisition professionals approach hiring more strategically, factoring in long-term talent needs to build a competent and diverse workforce. 

They enhance employer branding, create employee profiles, and identify the skills and traits required for the role. Apart from sourcing and screening the most qualified talent, these professionals also network with potential candidates. 

Outsourcing talent acquisition can close hard-to-fill jobs faster, enhance talent pipelines, and improve talent acquisition strategies. 

2. Performance Management

Performance management is the practice of evaluating employees’ performance and the value they provide while ensuring their contributions align with the organization’s goals. 

This function involves setting and meeting performance expectations, identifying high performers and underperformers, creating consistent feedback loops, and developing skills to improve performance. 

Outsourcing performance management to a service provider improves retention and engagement, creates healthy feedback cycles, and equips companies with world-class best practices in employee training and development. 

3. Payroll Processing

Payroll processing refers to the calculation, management, and distribution of employees’ compensation. Payroll specialists generate payslips, report withholding tax, and create and manage payroll schedules. In this function, accuracy is critical. Nearly half (49%) of surveyed employees will job hunt after only experiencing two payroll issues.

Outsourcing this HR function can help your HR department ensure accurate calculation of taxes, comply with local laws and regulations, safeguard sensitive payroll data, and improve employee loyalty.

4. Benefits Administration

Benefits administration is an HR function encompassing the design, provision, enrollment, and management of employee benefits. Benefits administrators also educate employees and coordinate with insurance providers and other vendors.

In addition to reducing costs, outsourcing benefits administration can ensure your company’s benefits are attractive to new and existing employees. It also helps businesses build personalized benefits solutions for staff members, which improves employee satisfaction.

5. HR Compliance

HR compliance managers ensure that a company’s environment, workplace policies, hiring processes, and other matters meet industry standards and comply with labor and employment laws. In addition to conducting compliance training programs, they coordinate with employees from other teams, such as IT and payroll, to strengthen data privacy and maintain payroll compliance.

By outsourcing this function, businesses can collaborate with a skilled HR compliance manager who can help them support their compliance goals and navigate the complexities of HR compliance.

Benefits of Human Resources Outsourcing

Below are the advantages of outsourcing HR services:

1. You Can Increase Your Savings

“Slash labor costs by 70%!”

Chances are, you’ve probably come across this claim from many of the best business process outsourcing (BPO) companies, including KDCI Outsourcing. There’s truth in this, though. 

Unlike hiring in your home country, outsourcing HR services to a developing country is more cost-effective due to the lower cost of living and labor. This means you can hire specialized HR expertise at a more cost-effective rate compared to local expertise.

2. Your HR Department Can Stay On Top of Labor Laws and Compliance Standards

Because outsourced HR service providers are up to date with changes in regulations and standards, your company can comply with labor laws and avoid hefty penalties and rocky legal disputes. 

3. You Can Access New Technology

According to Auxis, citing Gartner, most surveyed HR leaders (around 76%) said their HR department will be left behind in terms of organizational success if Generative AI or other AI-powered technologies have not been deployed within a year or two.

By outsourcing to an HRO provider, your HR department will be transformed into an AI-powered space where technology and HR professionals work hand-in-hand to deliver operational efficiency across all functions, from recruitment to talent management.

Cost of Human Resources Outsourcing

The cost of outsourcing HR functions typically ranges from $45 USD to $1,500 USD per month, depending on your headcount and the type of services you need. If you’re exploring HR outsourcing in the Philippines, here’s how average annual salaries compare with those in the United States:

• Talent Acquisition Specialist
  
  • Philippines: $5,415.72 USD
  • USA: $62,876 USD
    
• Payroll Specialist
  
  • Philippines: $5,590.17 USD
  • USA: $56,982 USD
    
• Training and Development Specialist
  
  • Philippines: $6,105.80 USD
  • USA: $68,172 USD
    
• Benefits Administrator
  
  • Philippines: $6,206.67 USD
  • USA: $64,903 USD
    
• Human Resources Compliance Manager
  
  • Philippines: $1,471,446 USD (likely an error in reporting)
  • USA: $59,863 USD
• Human Resources Manager
  
  • Philippines: $10,455.39 USD
  • USA: $86,139 USD

Common Pricing Models In HR Outsourcing

The provider’s pricing model may also influence your overall outsourcing costs. Here are the most common ones you’ll encounter:

• Fixed Fees: The HR outsourcing service provider charges a set monthly rate for the service. Headcount is not factored in for this model, so it’s ideal for clients who prefer stability and predictability in costs. 
• Per Employee Per Month (PEPM): The client pays a set fee per employee. If you have five payroll specialists with monthly salaries of $465 USD, you’ll pay $2,325 USD each month. The PEPM model is also great for keeping costs predictable.
• Project-Based/Pay-As-You-Go: For this model, the client pays a set fee for an outsourced HR service. For example, if you need urgent background checking services, the HR outsourcing firm may charge $1,000 USD. 
• Percentage of Payroll: You pay 2% to 12% of the total cost of payroll. For example, if the monthly payroll totals $20,000 and the HR outsourcing company charges 12% of the cost, you’ll pay $2,400 USD a month. However, expect costs to be higher due to incentives, performance bonuses, or holiday pay.

While there is no right or wrong pricing model, some HR outsourcing providers offer custom pricing tailored to your unique business needs.

Factors That Influence the Cost of Human Resources Outsourcing

To better help you anticipate costs, here are factors to take note of when outsourcing HR services:

• Expertise: Specialized and senior-level HR professionals cost more than their less specialized and entry-level peers.
• Industry: HR professionals in some industries earn higher paychecks.
• Start-Up/Implementation Fee: The HR outsourcing service provider may charge a one-time start-up or implementation fee for data migration, training, technical set-up, and many more.
• Extra HR Functions: You may also avail of the provider’s one-time HR services, which entail additional charges on your end.

5 Best Practices for Effective Human Resources Outsourcing

Outsourcing HR can be the best decision for your HR department (and your whole business) if you follow these five tips:

1. Establish A Clear Rationale for Outsourcing HR Functions

Anyone can be captivated by client success stories, but behind those stories are the goals and expectations set by the clients themselves. Before outsourcing HR functions, ask yourself and your team: Why are we outsourcing? 

Take a deep dive into your organization’s HR department and identify all its inefficiencies as well as knowledge and skills gaps. From there, you can determine your whys and goals for HR outsourcing. 

For example, if your HR team lacks expertise in certain tasks or the right technology, you can easily determine which functions to outsource to your HR outsourcing provider. This way, you know the kind and level of support you need from the vendor.

2. Vet Providers Not Just for the Cost

Treat evaluating a potential outsourcing partner as you would with vetting a candidate for a role. This means doing a thorough background check of an HR outsourcing provider. While cost is important, it shouldn’t be the only factor for choosing the right outsourcing company. 

Find out if the vendor has experience offering HR services in your industry, or has the right expertise to support your outsourced function. For example, if you’re a US business outsourcing compliance, you’d want to work with an outsourcing company that’s experienced in outsourced compliance services to US clients. 

Check employee reviews for negative reviews about the provider. Do these employees complain about toxicity, burnout, or poor career opportunities? If so, these are red flags. 

You’ll want a company with high employee retention for stability and consistent quality. You’ll also want a provider who values professional development and work-life balance, so your potential offshore staff can provide the level of service that exceeds your standards.

Reaching out to the provider’s clients is a great way to get unfiltered, objective reviews about your potential HR outsourcing firm. 

3. Ask About Fees

While outsourcing is cost-effective, you wouldn’t want to be surprised by hidden fees and other expenses associated with outsourced HR services. Before agreeing to a partnership, ask about the provider’s available pricing models. Does the HR outsourcing company charge a flat rate per employee, or does it offer custom pricing?

Regardless of the model, knowing the breakdown of costs — from start-up fees to employee rates — helps you plan for your outsourcing budget, ensure financial stability, and keep expenses to a minimum without compromising business needs.

4. Protect Your Data At All Costs

Did you know that external vendors are the cause of over half of data breaches (62%)? This alarming statistic highlights the importance of prioritizing data security when outsourcing to a third-party provider.

Your potential human resource outsourcing company must have:

• Strict data security measures, regular security audits, and risk management plans.
• World-class IT infrastructure, complete with cutting-edge VPNs and other security software solutions.
• Clean history of compliance with the General Data Protection Regulation (GDPR) and other relevant regulations.
• IT employees who are trained in handling online vulnerabilities. 

Because data security is a deal-breaker (as it should), don’t hesitate to request proof of the provider’s security audits and cybersecurity capabilities. This is to ensure that the HR outsourcing company lives up to its words of data privacy and security. 

While human error remains a threat for companies (22%), you can’t work with an outsourced employee who intentionally and maliciously discloses sensitive information. We recommend asking the HR outsourcing service provider about their pre-hiring processes, including thorough background checks.

5. Treat Your Outsourced HR Staff Like Your Own

Outsourcing is also about building a solid relationship with your offshore HR team. To make your offshore staff feel at home with your internal team, learn about your offshore team’s culture not just to smooth out and understand differences, but also to enhance cultural sensitivity and build rapport.

Schedule regular meetings, feedback sessions, and check-ins to improve performance, share insights, and ensure alignment on goals. Most importantly, acknowledge your outsourced HR team’s hard work and contributions in the partnership. Some clients even give tokens of appreciation after busy periods or during holidays.

Remember, how you treat and value your offshore employees plays a role in the success of your human resource outsourcing initiatives.

Leverage KDCI’s Human Resources Outsourcing Services

Overhauling your HR department means embracing the discomfort of change. Fortunately, you don’t have to do everything alone. 

At KDCI Outsourcing, we offer outsourced HR roles ranging from background checkers to HR data analysts to support your department. Our experience in working with companies from multiple industries, including finance and healthcare, has helped us understand specific industry needs and create tailored offshore HR solutions that factor in those needs.

If you’re looking for a sign to outsource human resources and build your team of HR staff, now’s the time to do so. Contact us to get started!