Monday, 25 February 2013

Outsourcing HR Functions in Small Business--Part One: An Introduction


Are you thinking about outsourcing some of your small business’ HR functions?  Need some information to help guide you through the process?

In Part One, we’ll be introducing the topic of outsourcing HR functions in small business.

Our Findings

What Is Outsourcing?

Outsourcing is when one organization contracts out the production of products or services to another organization either domestically or internationally (“offshoring”).  In Canadian business, outsourcing (both domestic and international) is commonplace and has been for many years—according to an article on Outsourcing and Offshoring in Canada by Statistics Canada, intermediate inputs (outsourced materials, purchased services, and energy inputs) in Canadian business accounted for 48.5% of gross output in 1961 and eventually 52.0% in 2003 (1).  Notably, within this same time period, material inputs have gradually decreased, whereas service inputs have grown from 10.9% in 1961 to 20.9% in 2003 (1).  Similar trends appear to be found in U.S. business, but statistics on the subject are less available (11; 12).

There are businesses everywhere and in every industry that outsource Human Resource functions.  It is done for numerous reasons and involves weighing out many positives and negatives.  Typically, businesses outsource HR functions due to: financial savings; an increased ability to focus on core competencies; advanced technology; better service levels; specialized expertise; and decreased organizational politics (2).  Although businesses of all sizes outsource HR functions for these reasons, many believe that smaller-sized businesses—those with approximately 10-150 employees—receive the greatest benefit from doing so (3; 4; 5; 6).

Which HR Functions Are Typically Outsourced by Small Businesses?

Simply put, any and all Human Resource functions can be outsourced.  That being said, the types of activities that are typically outsourced tend to be:

- “Rule based
- Repetitive
- Frequently undertaken
- Predictable
- Able to be fully or partly automated by technology
- Able to be delivered by remote sites” (2)

Some of the main functions that small businesses outsource include:

- Payroll
- Benefits
- Criminal and background checks
- Temporary staffing
- Regulatory compliance
- Recruiting
- Training (2; 3; 6; 7; 8)

Because any HR function can be outsourced, what is actually outsourced is more a question of company needs and preferences.  Some businesses prefer to handle most or all HR functions because they see them as a vital part of employee relations or competitive advantage (9).  Some find that the less HR functions they deal with in-house, the more they can focus on their business’ core activities (3; 4; 8; 10).  And others outsource HR functions out of necessity due to a lack of internal expertise (6; 7; 8).  So, as with any other decision a business needs to make, which HR functions are outsourced truly comes down to a cost-benefit analysis that is unique to every company.


(1)- “Outsourcing and Offshoring in Canada” from Statistics Canada:

(2)- “Strategic Human Resources Planning” (5th ed.) by Belcourt, McBey, Hong, & Yap

(3)- “Knowing when to outsource your small business's HR” from The Guardian:

(4)- “Is It Time to Outsource Human Resources?” from Entrepreneur:

(5)- “May I Handle That for You?” from Inc.:

(6)- “Mess with my desk, but not my cheque” from The Globe and Mail:

(7)- “HR Outsourcing Buyer's Guide” from Yahoo Small Business:

(8)- “How to Build a Better Business with Outsourcing” from Entrepreneur:

(9)- “The best way to outsource HR?  Don’t” from The Globe and Mail:

(10)- “The 3 Jobs Your Startup Should Outsource” from Forbes:

(11)- “Domestic Outsourcing and Imported Inputs in the U.S. Economy: Insights from Integrated Economic Accounts” from the U.S. Bureau of Economic Analysis:

(12)- “Outsourcing and Imported Services in BEA’s Industry Accounts” from the U.S. Bureau of Economic Analysis:

Links to More Information

Click here for “Outsourcing HR Functions in Small Business--Part Two: The Positives and Negatives of Outsourcing HR Functions in Small Business.”

Click here for “Outsourcing HR Functions in Small Business--Part Three: How to Outsource Small Business HR Functions.”

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