HR outsourcing: A guide for small businesses

Having your business HR requirements managed externally could help you to save time and money – but is it right for your startup?

Businesses outsource HR if they are facing challenges with handling employee-related tasks. There can be lots of different causes. For example, your company being in a period of growth. Management may simply be confused about what is HR.

Whatever the reason, HR tasks – including payroll, hiring, and employee benefits – are an incredibly important element of your business to get right. That’s why a lot of SMEs choose to save time and money by handing responsibility to experts, rather than taking it on with their already large workloads.

The need for outsourcing has also become greater post-pandemic. Big policy changes, like working from home, require lots of support from experienced professionals.

You might not know whether to use an outside service for HR. Or maybe you first want to compare prices from leading HR providers to see what support is available to your business and how much it will cost. This guide will outline the pros and cons to outsourcing, the functions they provide, and some examples to choose from.

By the end, you’ll know everything you need to decide whether outsourcing is the right choice for your business’ HR needs.

What is HR outsourcing and how can it help small businesses?

HR outsourcing (HRO) is the process of subcontracting HR functions to an external, third-party provider. These providers are often specialists in HR, and range from generalist HR services through to consultants who focus on specific areas of HR.

A business can use HRO to handle all of its HR duties; alternatively, it may decide to partially outsource HR, with specialists only managing certain areas, such as payroll or recruitment.

There are a number of ways in which HR outsourcing can support small businesses, such as advising on day-to-day HR duties – such as employment legislation, or health and safety regulations – as well as maintaining employee records and conducting administrative tasks.

Plus, it can also provide you with expert guidance in the more niche and potentially complicated areas of HR. One example of this is TUPE, which stands for Transfer of Undertakings (Protection of Employment) and applies when there’s a change in business ownership.

As a small business owner, you might not have the ability, understanding, or time to manage all of this. But through HR outsourcing, you can gain access to consultants with the expertise and capacity to take on all sorts of HR responsibilities, including:

• Performance management – conducting performance-related tasks efficiently
• Dedicated HR resource – providing expertise as and when required, or an ongoing basis
• Learning and development – ensuring team members are completing training and developing in their role with specialist guidance
• Recruitment – attracting and hiring the right talent for your organisation to help it grow
• Rewards – ensuring that salaries, perks, and other benefits are suited to both the needs of your business and those of your team members
• Absence management – acquiring insight into your employees’ absences and ensuring that the correct procedures are being followed
• Employment law – advising on the latest developments and legislation in this essential area of HR to keep your business up-to-date
• Health and safety – assessing workplaces, and providing guidance on another crucial element of HR to ensure your business is compliant

For more information, see the answer to ‘which HR services can be outsourced?’ in our dedicated FAQs section.

Also, the CIPD has a detailed guide on HR outsourcing.

Benefits of HR outsourcing

By choosing to outsource HR, your business could benefit in the following ways:

• Greater flexibility – you can alter which services you need as and when required
• Access to specialists – you can hire experts in particular areas of HR when you need them, instead of relying on one person to understand everything
• Save money – streamline spending and only pay for assistance in the types of HR that are essential to your business
• Improve processes – cut out any unnecessary operations and refine how your business runs
• Better technology – outsourcing can give you access to a wider range of technology, including HR software
• Reflect wider organisational changes – if you choose to outsource other aspects of your business, then doing the same with HR can help to create a more cohesive approach
• More time for strategy and management – outsourcing frees up resource that can be dedicated to leadership and strategic decisions, whether that’s senior team members’ time, or the expertise of an in-house HR department (if your business has one)
• Contingency – if you do have an in-house HR team member who then decides to leave, outsourcing means that this vital function is always being managed
• Boost legal compliance – a specialist in employment law or other areas of legislation can help to ensure that your business is fully compliant and isn’t missing anything important
• Enhanced recruitment processes – from sourcing candidates to managing interviews, outsourcing recruitment allows your business to optimise its hiring procedures

Would my small business benefit from outsourcing HR?

Although outsourcing your HR function offers plenty of potential benefits, is it right for your business? Here we offer more information to help you decide.

HR checklist – does my small business need HR outsourcing?

To help you better answer this question, it’s worth asking yourself the following additional questions:

• Do you have a high rate of staff turnover at your company? This can often come as a result of you not fulfilling your employees’ individual requirements
• Are all of your employee files organised properly? Do they contain all of the relevant documents, and do you know what they are? Are they stored correctly? Do you know how they should be stored? The content and storage of these details, as well as the way your business handles them, are strictly defined
• Do you have an employee handbook, and do all employees have access to it? This will give details on all of your main policies and procedures
• Are you recruiting new staff as quickly as you would like to? As previously mentioned, staff are your primary resource, and are crucial to your company’s growth
• Is a performance review process for employees in place? Formal feedback will enable employees to work to the best of their ability

Business size – is my company big enough for HR?

In short – yes, your business is always big enough for HR, no matter what size it is. It can be difficult, though, to define HR requirements in terms of the size of your business based solely on its number of staff. However, some industry experts do have suggestions on how many HR staff certain business sizes require.

An industry standard for determining how many HR team members a company needs has traditionally focused around one HR team member for every 100 employees.

However, this is very much a general figure that may no longer be relevant, and which doesn’t take into account any variations across industries or business needs. For example, small businesses are likely to need more HR resources to balance the demands of a growing business, such as when it comes to hiring staff.

What the experts say about small business HR outsourcing

How to find the best HR consulting firm for your small business

While every business will have its own requirements, what should you be looking for when choosing the best HR firms? We outline some of the main factors to take into consideration:

• Specialism – does your company want to outsource support to specialists in working with small businesses, or a particular area of HR?
• Location – consider if you’ll need a consultant who understands the location you’re working in, or if someone from another location could offer an objective perspective
• Services – think about what you want outsourcing HR to provide your business, whether it’s one-off advice or ongoing support, as this is likely to influence the type of support that you choose
• Reviews – search online for reviews to compare other businesses’ experiences, and to discover recurring positives and negatives of potential HR outsourcing support services
• Budget – once you have an idea of the type of services you want for your business, consider the funds that you can allocate for it, as this will influence which support options are available to you

What budget does a business need for HR outsourcing?

Here, we provide a brief overview of the general costs associated with different types of HR outsourcing.

As the figures above show, hiring an internal HR team member can often be a much greater expense to your business than outsourcing your HR needs.

An in-house HR manager’s salary is likely to be in the region of £42,000 per year. In contrast, hiring an HR consultant on a retained basis is around £1,680+ for 12 months. So HR outsourcing allows you to reduce expenses for your business, but still benefit from the expertise of an HR professional.

Even businesses with hundreds of employees may still outsource HR, whether to save money or ensure these duties are performed correctly. And the rates for services provided on a per employee, per month basis often get cheaper as the number of staff goes up.

Read our guide to HR outsourcing costs for more detailed pricing information.

Or, to compare quotes based on your own business requirements, simply send across some information about your business and its HR needs by filling in this short form – it’s easy, free and quick!

HR outsourcing: Making the right decision for your small business

HR outsourcing is a broad term. It covers everything from getting an external provider to manage a specific function, such as payroll or recruitment, to full outsourcing, in which a third-party oversees all aspects of HR on behalf of your business.

HR outsourcing offers a way for businesses, particularly smaller ones, to access expertise and gain insight into important areas of HR that they may otherwise not be able to.

Whether it’s the right decision for your business, however, depends on several factors. You’ll need to assess if the flexibility, expertise, and money-saving that can come from outsourcing HR outweighs any potential challenges, such as reducing control on some areas of your business, as well as maintaining your company culture.

How far these latter issues might affect you depends on the type of HR outsourcing service and provider that you choose, with your selection possibly based upon a provider’s specialism or location, as well as your available budget and other factors.

Overall, outsourced HR support is best for small businesses that:

• Are on a budget – you can expect an internal HR manager’s salary to be about £42,000 per year, whereas it’s possible to work with a retained HR consultant for £1,680+ for 12 months
• Need assistance with specialist areas of HR – some functions, such as payroll, pensions, TUPE (Transfer of Undertakings (Protection of Employment)), and more, all require an in-depth understanding of the correct processes
• Have minimal time – HR is an important aspect of business operations, and it requires dedicated time and resources. If this isn’t available internally, then outsourcing HR offers a way to ensure your business HR is still being prioritised

Whether you’re looking to keep costs down, get specialist expertise, or could do with more time in your day to focus on other areas of running your business, there are many ways that HR outsourcing could help you. To be connected with HR consultants, and compare quotes for their services, just let us know about your business requirements with our short form.

HR outsourcing: FAQs

You’re likely to have a lot of questions when deciding if HR outsourcing is right for your small business. Here, we answer some of the most common queries to help you through the decision-making process.

Why do companies outsource HR functions?

There are a number of reasons why businesses might outsource HR. One reason is to have access to HR experts that can advise on compliance with laws and regulations. As well as this, it could be to supplement any existing in-house HR resource with additional knowledge and time for specific projects.

Plus, it’s another way to help lessen the stress of running a small business, knowing that experts are looking after such a key function. And it’s also a way to refine business processes, including possible operational expenses.

Is outsourcing HR expensive?

The price of HR outsourcing in the UK varies across business types, sizes, and industries. However, it’s generally cheaper than managing HR internally, as there are a range of ways to pay for the services required.

This includes hiring a consultant to conduct an HR audit for a one-off fee, using ad-hoc support on an hourly basis, or paying a monthly fee for a retained service.

For example, it’s possible to completely outsource all HR functions starting from £100 per month. Ongoing HR support is available for as little as £4 per employee, per month.

Which HR services can be outsourced?

Outsourcing is available across many areas of HR, including:

• Payroll
• Recruitment
• Employment law
• Health and safety
• Employee wellbeing
• Covid-secure services

Can outsourcing HR save my company money?

HR outsourcing can save your business money, as it’s often a much cheaper way of benefitting from HR expertise. An internal HR manager is likely to have a salary of approximately £42,000 per year – and you’ll also need to take into account any training or equipment expenses. As you can see, the figures start to add up.

In contrast, you can expect to pay around £110 for an hour of an HR consultant’s time. And if you wish to have a consultant on-hand each month, a HR consultant on a retained basis is likely to be priced from £140 per month.

Written By

Scarlett Cook Writer

Scarlett writes for the energy and HR sections of the site, as well as managing the Just Started profiles. Scarlett is passionate about championing equality and sustainability in business.

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