As the Halloween season looms, a set of unsettling predictions emerges, particularly disconcerting for HR professionals:

In a decade, internal HR departments may cease to exist.
Critical business functions like payroll could be outsourced.
Non-revenue-related backend services might vanish.
Seemingly far-fetched? Not quite, as elements of this forecast are already materializing. The payroll outsourcing industry is projected to reach a value of $10.336 billion by the end of 2023, growing steadily at 4.4%, indicating a rapid transformation underway.

But why is this transformation happening? In this article, we delve into the developments prompting the question: Is HR on the brink of extinction?

Assessing the Landscape

Firstly, let's clarify what we mean by HR in this context—internal HR departments responsible for tasks like payroll management, insurance handling, benefits administration, and expense processing.

So, why are these departments diminishing? Partly, it's due to overarching trends affecting all white-collar sectors, notably the AI revolution. The World Economic Forum anticipates the displacement of 85 million jobs due to AI between 2020 and 2025. Consequently, roles within HR that are easily automated, such as talent acquisition, may be the first casualties.

However, AI alone is not the sole reason for dwindling HR departments. Other departments within a company are equally susceptible to AI transformation.

Risk Without Reward

A distinctive challenge facing HR is its vulnerability to outsourcing. While every company requires a system for payroll and related processes, the question arises as to why this function should remain in-house. This matter was explored in a recent interview with CEO Sagar Khatri. According to Sagar, "HR Ops is a department that every company requires. But even if you run it amazingly well, you aren’t rewarded. If you get it wrong, however, it leads to many issues—such as wrong salaries, delayed payments, and ultimately employee dissatisfaction."

In essence, while every company needs HR, the traditional approach is costly, compliance-heavy, and doesn't directly contribute to the core product or service. Sagar envisions a future where the entire HR service can be bundled and provided by a single vendor, replacing the need for in-house HR departments.

Efficiency Through Outsourcing

Outsourcing and full automation eliminate compliance risks, reduce costs, and mitigate the threat of employee dissatisfaction. According to PwC, companies outsourcing payroll management save an average of 18% more than those managing it in-house. This represents just the beginning of potential productivity gains.

Sagar emphasizes the importance of focusing energy on what adds value to a business: "Anything that doesn’t add value to your business shouldn’t require any time spent managing it. As a CEO, if you can get away with managing one less person or one less department, you can spend that energy on building a great product or service."

The Verdict

Are the days of HR numbered? The signs point in that direction. However, this doesn't mean HR professionals will vanish. Instead, individuals will be empowered to accomplish more with the aid of technology, rendering larger HR departments unnecessary.

As Sagar aptly puts it: "Back in the day, every company had its own server rooms and IT department. But these have completely disappeared with the rise of AWS, Microsoft Azure, and other cloud services. In the same way, mid-market HR departments will cease to exist."