Deciding to Outsource

The decision to outsource should be based on rigorous analysis and benchmarking to establish how other organizations manage their HR activities. This will define the level of service required. The cost of providing the existing service internally should also be measured. This will be easier if an activity-based costing system is used in the organization.


To minimize problems, careful consideration should be given to the case for outsourcing. It is necessary to assess each potential area with great care in order to determine whether it can and should be outsourced and exactly what such outsourcing is intended to achieve. The questions to be answered include: Is the activity a core one or peripheral? How efficiently is it run at present? What contribution does it make to the qualitative and financial well-being of the organization? This is an opportunity to re-engineer the HR function, subjecting each activity to critical examination to establish whether the services can be provided from within or outside the organization, if at all. Outsourcing may well be worthwhile if it is certain that it can deliver a better service at a lower cost.

Selecting Service Providers 

Potential service providers should be required to present tenders in response to a brief. Three or four providers should be approached so that a choice can be made. The tender should set out how the brief will be met and how much it will cost. Selection should take into account the degree to which the tender meets the specification, the quality and reputation of the firm and the cost (this is an important consideration but not the only one – the level of service that will be provided is critical). References should be obtained before a contract is drawn up and agreed. The contract should be very clear about services, costs and the basis upon which it can be terminated.

Managerial and Legal Implications of Outsourcing 

Service providers need to be managed just as carefully – if not more so – than internal services. Service standards and budgets should be reviewed and agreed regularly and management information systems should be set up so that performance can be monitored. Swift corrective action should be taken if things go wrong, and the contract terminated if there is a serious shortcoming. 

The legal implications of outsourcing are that it will be based on a service contract and the purchaser of the services has the right to insist that the terms of the contract are fulfilled. Purchasers also have a duty to fulfil their side of the contract, for example, providing agreed facilities, meeting the leasing terms set out in a car fleet management contract, and paying for the services as required by the contract.