How contracted out services are reshaping the chief human resources officer role

Understanding contracted out services in HR

What does it mean to contract out HR services?

Contracting out services in human resources means that an organisation hires an external provider or agency to handle specific HR functions. Instead of managing every HR task in-house, companies use contracted services for areas like payroll, recruitment, employee benefits, and even compliance with government services. This approach is common in both the private sector and public sector, especially among medium and large businesses seeking to optimise costs and access specialised expertise.

Types of HR services commonly contracted

HR departments can contract a wide range of services. Some of the most popular include:

• Payroll working: Managing employee payments, taxes, and deductions through a service provider.
• Recruitment and staffing: Using an agency to find, vet, and sometimes even onboard new workers or contractors.
• Employee benefits administration: Outsourcing the management of health insurance, retirement plans, and other benefits.
• Compliance and legal services: Ensuring the organisation meets all working rules and employment laws, often through a specialist provider.
• Training and development: Contracting with a service organisation to deliver learning programs for employees.

Why organisations choose contracted HR services

There are several reasons why a business might decide to use contracted services. Cost control is a major factor, as outsourcing can reduce overhead and allow for more predictable budgeting. Access to specialised skills and technology is another driver, especially when internal HR teams may not have the expertise or resources to manage complex tasks. In some cases, contracts awarded to external providers allow for greater flexibility, whether the need is short term or long term.

How contracted services change the HR department's work

When HR functions are contracted out, the role of the chief human resources officer (CHRO) shifts. Instead of directly managing every aspect of HR, the CHRO must focus on selecting the right service providers, negotiating contracts, and ensuring that the services contracted align with the organisation's goals. This means more time spent on contract management, request proposal processes, and monitoring service quality. The CHRO also needs to balance the needs of employees and the expectations of the client (the organisation itself), making sure that both in-house and contracted workers receive the support they need.

For a deeper look at how automation is influencing HR outsourcing, see this analysis of automation in service management.

Key drivers behind outsourcing HR functions

Why organisations are turning to contracted services

In recent years, more organisations have shifted to contracting out key HR functions. This trend is visible across both the private sector and public sector, from medium large businesses to government services. Several factors are driving this change, each influencing how chief human resources officers (CHROs) approach their department’s structure and service delivery.

• Cost efficiency: Contracted services often help reduce costs. By working with a service provider or agency, organisations can avoid the long term expenses of hiring and training full-time employees for specialised HR tasks. This is especially true for payroll working, benefits administration, and compliance management.
• Access to expertise: Contracting services allows HR departments to tap into a pool of experts. Providers and contractors bring specialised knowledge, updated working rules, and best practices that may not be available in-house. This is particularly valuable for complex areas like payroll, legal compliance, and statement work.
• Scalability and flexibility: Contracted out services make it easier to scale HR operations up or down. Whether it’s a short term project or a fully contracted ongoing function, contracts awarded to external providers give organisations the flexibility to adapt quickly to changing business needs.
• Focus on core business: By outsourcing non-core HR functions, the internal HR team can focus on strategic initiatives that directly impact employees and business growth. This shift enables the department to play a more advisory role within the organisation.
• Technology and innovation: Many service organisations and agencies offer advanced HR technology platforms as part of their contracted service. This can improve efficiency, accuracy, and employee experience without the need for significant internal investment.

These drivers are reshaping the CHRO’s role, requiring new skills in contract management, vendor relations, and service evaluation. As more services are contracted, CHROs must carefully manage the balance between in-house and outsourced work, ensuring that the organisation’s needs and employees’ interests are met. For more on how pre-hire solutions are transforming recruitment in retail and hospitality, explore this detailed analysis.

Challenges chief human resources officers face with outsourcing

Complexity in Managing Multiple Providers

Chief human resources officers (CHROs) often find themselves navigating a web of service providers, agencies, and contractors. Each contracted service comes with its own set of working rules, contracts, and expectations. Coordinating between in-house employees and external workers can create confusion, especially when service providers operate under different standards or in different regions. For medium and large organisations, the challenge multiplies as the number of contracts awarded increases, making it harder to maintain consistency in HR practices and compliance.

Maintaining Employee Engagement and Culture

When HR functions such as payroll, recruitment, or training are contracted out, CHROs must work harder to ensure that the organisation's culture and values are not diluted. Employees may feel disconnected from the core business if they interact more with agency staff or contractors than with the internal HR department. This can impact morale, engagement, and even retention. Balancing the needs of fully contracted workers and permanent staff requires clear communication and a strong focus on inclusion.

Ensuring Compliance and Managing Risks

Outsourcing HR services brings additional risks, especially around compliance with employment laws, payroll working rules, and government services regulations. CHROs must ensure that every service provider or contractor follows the correct procedures, whether in the public sector or private sector. Mistakes in payroll, misclassification of workers, or breaches of data privacy can lead to significant costs and reputational damage. The complexity increases when services contracted span multiple countries or legal frameworks.

Cost Control and Service Quality

While contracting services can reduce costs, CHROs face the challenge of ensuring that savings do not come at the expense of quality. Service level agreements, statement of work documents, and regular performance reviews are essential. However, it can be difficult to measure the true impact of a contracted service, especially in the short term. Balancing cost efficiency with long term value for the business is a constant concern.

Adapting to Changing Business Needs

As business priorities shift, CHROs must ensure that contracted services remain aligned with organisational goals. This may involve renegotiating contracts, issuing new requests for proposal, or switching providers. Flexibility is key, but frequent changes can disrupt HR operations and affect both employees and clients. Managed service models can help, but only if they are designed to adapt to evolving needs.

For a deeper look at how technology and strategic solutions are transforming the CHRO role in the context of contracted services, explore this analysis of SuiteHR's impact on the CHRO career.

Strategic considerations for selecting contracted out services

Evaluating Service Providers and Contracts

When an organisation decides to use contracted services for HR functions, the process of selecting the right service provider becomes crucial. The chief human resources officer (CHRO) must assess not only the reputation and expertise of the agency or provider, but also how their offerings align with the business’s needs. This includes reviewing the provider’s track record with similar clients, understanding their approach to payroll working, and ensuring their working rules comply with both public sector and private sector regulations.

• Requesting detailed proposals helps clarify the scope of services contracted and the statement of work expected.
• Comparing costs and contract terms across multiple providers can reveal hidden fees or restrictive clauses in contracts awarded.
• Evaluating the flexibility of the contract service is important, especially for medium large organisations that may need to scale services up or down.

Risk Management and Compliance

Contracting HR services introduces new risks, particularly around data security, employee confidentiality, and compliance with government services standards. The CHRO must ensure that any contracted service provider has robust measures in place to protect sensitive employee information and that their processes align with legal requirements. This is especially relevant for payroll and managed service arrangements, where errors can have significant financial and reputational impacts.

Integration with In-House Teams

Another strategic consideration is how well the contracted services will integrate with the existing HR department. The CHRO should look for providers who are willing to collaborate closely with in-house workers, ensuring a seamless experience for employees and maintaining the organisation’s culture. This is particularly important for long term contracts, where the service provider becomes an extension of the HR team.

• Clear communication channels between the service organisation and internal HR staff are essential.
• Defining roles and responsibilities up front helps prevent confusion and duplication of work.
• Regular reviews of the contract and service delivery ensure that the provider continues to meet the business’s evolving needs.

Ultimately, the CHRO’s ability to strategically select and manage contracted services can have a direct impact on the effectiveness of the HR function and the satisfaction of both employees and the wider organisation.

Balancing in-house and outsourced HR responsibilities

Finding the Right Mix for Your Organisation

Balancing in-house and contracted services in HR is a complex task for any chief human resources officer. The right approach depends on the size of the business, the nature of the services required, and the long term goals of the organisation. Many medium large companies are turning to a blend of internal HR teams and external service providers to achieve flexibility and cost efficiency.

Key Factors to Consider

• Core vs. Non-Core Functions: Identify which HR functions are essential to keep in-house, such as employee relations and strategic workforce planning, versus those that can be managed by a contracted service, like payroll working or benefits administration.
• Service Quality: Evaluate the quality of services offered by each provider. Not all agencies or contractors deliver the same level of expertise, especially when it comes to compliance with government services or working rules.
• Cost Management: Outsourcing can reduce costs, but only if contracts are carefully managed. Consider the total costs, including contract service fees, transition expenses, and ongoing management of the service organisation.
• Scalability: Contracted services offer the ability to scale up or down quickly, which is valuable for organisations with fluctuating needs or those operating in both the public sector and private sector.
• Employee Experience: Ensure that employees receive consistent support, whether services are delivered in-house or by a contracted provider. Poorly managed transitions can impact morale and productivity.

Practical Steps for Effective Integration

• Define clear roles and responsibilities for both internal HR staff and contracted workers.
• Establish robust communication channels between your department and the agency or provider.
• Regularly review contracts awarded to ensure service levels are being met and adjust as needed.
• Use a statement work or request proposal to clarify expectations and deliverables for each contracted service.
• Monitor the impact of fully contracted or managed service models on business outcomes, including employee satisfaction and compliance with working rules.

Ultimately, the most effective HR departments are those that can adapt their mix of in-house and contracted services to meet changing business needs. Whether working with short term contractors or long term partners, the chief human resources officer must ensure that all services contracted align with the organisation’s strategic objectives and deliver value to both employees and the business.

Measuring the impact of contracted out services on HR performance

Evaluating the Value of Contracted HR Services

Measuring the impact of contracted services on HR performance is essential for any organisation, whether in the public sector or private sector. With more HR departments relying on service providers for payroll, recruitment, and managed service solutions, leaders must ensure these contracts deliver real value. The assessment goes beyond costs and includes employee experience, compliance, and business outcomes.

Key Metrics to Track

• Service quality: Are contracted services meeting agreed standards? Regular feedback from employees and department heads helps gauge satisfaction with the provider’s work.
• Cost efficiency: Compare the costs of contracting services versus in-house delivery. Consider both short term and long term impacts, including hidden costs like contract management or integration with existing systems.
• Compliance and risk: Ensure the contracted agency or contractor follows working rules, especially for payroll working and government services. Non-compliance can lead to penalties and reputational risks.
• Flexibility and scalability: Assess if the contract service adapts to business changes, such as scaling up during peak periods or supporting new locations for medium large organisations.
• Employee outcomes: Track retention, engagement, and productivity among workers affected by contracted out services. A negative impact on employees can undermine the benefits of outsourcing.

Tools and Approaches for Measurement

Many organisations use a mix of quantitative and qualitative tools to evaluate contracted services. Service level agreements (SLAs) and key performance indicators (KPIs) are standard in contracts awarded to providers. Regular audits, employee surveys, and client feedback sessions provide deeper insights into how well the contracted service is working. For fully contracted or managed service models, periodic reviews ensure alignment with business goals and evolving needs.

Continuous Improvement and Accountability

Effective measurement is not a one-off task. It requires ongoing monitoring and a willingness to adjust contracts or switch providers if the service organisation is not delivering as promised. Request proposal processes and statement work reviews help maintain high standards. Ultimately, the chief human resources officer’s role is to ensure that every contracted service supports the organisation’s mission, delivers value to employees, and drives business success.