Benefits and Compensation

Outsourcing—Sometimes Your Best Alternative … But …

From payroll to benefits, employers face complex compliance and management challenges. Is outsourcing a best-practice solution?

More and more companies are opting to outsource tasks, roles, and even whole departments. This can have many advantages, such as:

  • Saving money. This could be, for example, from reducing staff or negotiating better healthcare rates.
  • Helping the organization balance an uneven workload by using contingency workers only when needed.
  • Reducing legal risks if the outsourcing company has better track of changing and complex compliance requirements.
  • Utilizing specialized expertise (from outside the organization) on an as-needed basis.
  • Gaining access to specialized data or tools (used by contractors or vendors) without the up-front investment.
  • Staying focused on core competencies while still getting all functions completed competently.

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Here’s the ‘But’

With these advantages, it’s easy to see why more and more organizations are opting to outsource. But there are pitfalls too. Here’s a list of some potential outsourcing pitfalls to try to avoid or minimize:

  • Loss of control over output. Since the outsourcer is providing a good or service using their own processes, this could mean less control over the results. This, in turn, could result in quality issues, and if the outsourcer uses inferior processes or materials, you could still be liable for the product quality or any problems.
  • Loss of control of delivery timing. It may seem obvious, but a major concern is that timelines might not be met, even if agreed on in advance. This can have ripple effects throughout the organization or to your customers. 
  • Unforeseen costs. These can occur for a number of reasons. For example, if the contract is vague, the outsourcer may charge for all extras that weren’t specifically delineated. Even if the contract covers everything, be sure to read the fine print to know what to expect at every step of the invoicing process. Also, be sure the contract notes who will be responsible for costs associated with delays, problems, or legal issues.
  • Communication problems. This is especially a risk since many outsourcers are contracted remotely. Cultural differences can play a role as well—both local culture differences and organizational cultural differences.
  • Less secure data. This can occur in a number of ways. For example:
    • There is less control over confidentiality, even with confidentiality agreements, since you will not have access to the outsourcer’s systems and safeguards.
    • Adding third parties means more potential access points for a data breach.
    • Information could be forwarded or made public without your knowledge.
  • Their problem becomes your problem. And you might not know it right away. This concern is actually quite broad. Any problem incurred at the outsourcing organization—no matter how big or how small—has the potential to affect your business operations. For example, if the company or individual you’re using runs into problems that affect their ability to deliver on time, you may not be aware of them until it’s too late to meet your own deadlines. Here are just a few examples of outsourcer problems that may become your problem:
    • The outsourced company probably has many clients and might be behind schedule—and may or may not inform you quickly.
    • Individuals assigned to a task might fall ill, and you don’t know they’re not working for x days or weeks.
    • The outsourcer may even go out of business unexpectedly, leaving you hanging.
    • If their company cuts corners (unbeknownst to you) or does anything illegal or untoward, your company can become “guilty by association” if a problem becomes public.

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  • Internal employees may be resentful. This is especially true if functions are outsourced that were previously done internally and, even worse, if the output is inferior in any way to the output formerly created internally.
  • Internal employees may be scared. Outsourcing might lead to increased employee turnover, if workers assume their own roles may not be stable. 
  • Compliance requirements may not be met. Typically, your organization is responsible for meeting its legal obligations, for example, regarding wage and hour, discrimination, and so on, even if a function has been outsourced.

In tomorrow’s Advisor, combating these pitfalls of outsourcing, plus an introduction to the guide specially written for smaller, even one-person, HR departments.