Reports of service vendor use rose in nearly every category. Payroll processing saw the largest year-over-year jump; 61% of respondents said they used such vendors in 2022, while 53% said so in 2021. Staffing companies commanded the next largest increase, followed by executive recruiters and benefits outsourcing/consultants. D&I consultants was the only area that saw a decline.
Percent of respondents that IT Outsourcing Services Company HR functions year over year
The uptick in outsourcing raises a question about the state of HR: Why are HR departments using increased vendor support?
Widespread outsourcing could signal shrinking departments: Vendors supply organizations with essential HR functions that a fully staffed department would normally carry out. Of course, increased outsourcing could evidence another trend. With fewer administrative tasks, HR departments equipped with vendor support may assume more strategic work. Or departments busy with administrative workloads can assign strategic goals to consultants and experts.
To investigate why more HR departments are soliciting outside help, HR Dive spoke with HR consultant Adam Calli. Calli said he's observed an uptick in vendor use among his clients, and he speculated that IT Outsourcing Services Company could stem from cutbacks or strategy — it just depends on the business.
Preserving HR functions despite cutbacks
Employers bringing on vendors may be supplementing HR departments that shrank due to pandemic cuts, Calli hypothesized. COVID-19 prompted many companies to lay off workers. The U.S. Bureau of Labor Statistics recorded a spike in separations between February and March 2020. While separations returned to normal levels by May, they've been steadily increasing over the last two years. And HR departments weren’t spared from these, Calli pointed out.
As employers recover, many may hesitate to add back overhead, positioning outsourcing as a convenient, temporary solution. "Companies know they still have needs for HR services, and outsourcing is a good way to fill the gap until they decide to rehire direct staff," Calli said.
While HR Dive's data did not speak to the relationship between layoffs and vendor use, it revealed patterns between department size and outsourcing. When categorized by department size, vendor use responses tended to break down according to the representation of the sample size. But the data showed a few significant deviations.
Total respondents by department size
Departments of 2 to 5 were the most common.
Outsourcing by HR department size
Smaller HR teams were more likely to outsource HR functions.
Relatively more respondents in departments of 1 to 5 people reported using payroll vendors. The pattern flipped with outsourcing responses in executive recruiting, D&I consultants and staffing companies. More respondents in larger departments reported using those vendors, while fewer — and in several instances far fewer — participants reported using them in smaller departments.
A strategic move? 'Absolutely'
While some companies no doubt called in vendors to take over HR functions to steady operations following layoffs, others are "absolutely" using them to allow in-house staff to pivot to more strategic work, Calli said. "COVID isn't the same factor it was in 2020," he said. "Maybe this is a chance to upgrade HR capabilities and save some money, too."
As Calli pointed out, making room for more strategic work is a longstanding goal of HR departments. "For years, we've been fighting that battle," he said. In fact, the Hackett Group, a consulting firm, named HR's role as a strategic adviser to organizational leaders as the profession's top priority for 2021. The group warned, however, that overcommitment may thwart this goal: "HR organizations are perennially stretched thin and hard-pressed to keep pace with the multitude of priorities on their plate," the Hackett Group said.
Calli put it more simply: "Somebody's got to make sure you're enrolled in your vision insurance. But the more time I spend on that, the less time I have to be strategic."
Just as vendors may free up HR pros of administrative work, outsourcing also may allow companies to scale their HR functions quickly and inexpensively, Calli said. Many companies discovered the value of HR because of the pandemic. But some were too small to warrant a full-time employee or a full-fledged department dedicated to HR alone. A vendor can deliver essential HR values without costing an employer another hire, Calli noted.
"There were companies who did not have HR at all, and when the pandemic hit, our phones started ringing because they needed help, fast," he recounted.
Similarly, organizations with small departments may never churn enough administrative work to make room for the strategic. A strategic vendor — a D&I or culture consultant, for instance — can help, Calli said.
Beware peer pressure
As outsourcing grows in popularity, it will spur additional vendor partnerships, Calli predicted. Some organizations will solicit vendors after seeing industry peers succeed in their own partnerships. Others will take cues from successful ventures within their own organizations, in other departments like marketing or accounting.
Calli warned against this decision-making. "Don't do it because everyone else is doing it," he said. "Do it after careful consideration with the right people to determine whether it's right for you."
He emphasized the role the vendor plays in a successful foray into outsourcing, likening the partnership to a marriage: "You can't just say being married is good or being married is bad. Your choice of mate is going to have a big impact on your success." Calli said he encourages his own clients to consider cost, specialization, compatibility and arrangement options in evaluating a potential vendor.
The right vendor offers significant value for organizations, whether it provides essentials after layoffs, alleviates administrative tasks or offers out-of-reach strategic work. Many employers are looking for those kinds of help as the pandemic lingers, work arrangements shift and workers leave their jobs in droves.
"Wouldn't it be nice to have some strategic HR to help you navigate that craziness?" Calli pondered. "That may be driving this trend, too."
