HR Outsourcing: The Complete Guide to Outsourcing for SMEs

Imagine running your business without the constant worry of managing HR tasks. Picture freeing up valuable time to focus on growth and innovation while experts handle your human resources. This isn't a distant dream. It's the reality for many successful SMEs embracing HR outsourcing. 

In fact, the HR outsourcing industry is thriving in the UK, with revenues reaching £2.2 billion over the last year.

HR outsourcing can seem daunting at first. There are many areas to consider, along with various pros and cons for SMEs and startups. Our comprehensive guide will help clarify many questions and demystify the entire process.

What is HR Outsourcing?

What is the Difference Between HR Consulting and HR Outsourcing?

HR consulting typically involves hiring an external expert to advise on specific HR issues or projects. This could be anything from developing a new HR strategy to handling a complex employee relations issue. In contrast, HR outsourcing involves transferring regular ongoing HR tasks to a provider who then manages these functions on behalf of the business.

Consulting is often short-term and project-based, while outsourcing is usually long-term and operational.

What is the Business Case for Outsourcing?

Outsourcing HR functions is a game-changer for SMEs looking to boost efficiency and effectiveness. By partnering with specialised HR firms, small and medium-sized businesses gain access to best practices, cutting-edge technologies, and economies of scale.

This strategic move translates into significant cost savings, enhanced compliance, and better employee experiences. In fact, over 50% of HR professionals believe that outsourcing helps in retaining top talent and addressing the biggest challenges their organisations face. In the competitive SME landscape, these advantages can provide the critical edge needed to thrive and grow.

However, significant disruption is being caused by technology advances and generative AI. For some smaller businesses with lower HR requirements, leveraging technology might seem like a viable alternative to outsourcing.

To navigate these options, SMEs should closely weigh their business needs and the ROI of both HR technology and HR outsourcing. While advanced HR software can handle routine tasks efficiently, the expertise and strategic insights provided by specialised HR firms often prove invaluable.

Related: The Ultimate Guide to Business Process Outsourcing

How Many Companies Outsource Their HR?

HR outsourcing is a growing trend in the UK. According to IBISWorld, the HR provision industry has been expanding, with revenues reaching £2.2 billion and growing at a compound annual rate of 0.5% through 2024. This growth clearly shows that many businesses are recognising the benefits of outsourcing their HR functions.

What are the Advantages and Disadvantages of HR Outsourcing for SMEs?

Advantages

• Cost Savings: By outsourcing HR, you can significantly reduce overhead costs and eliminate the expenses of maintaining an in-house HR department.
  
  
• Access to HR Expertise: You'll be able to tap into the specialised knowledge of HR professionals who bring a wealth of experience and best practices.
  
  
• Improved Efficiency: Many small businesses and startups lack the time to streamline or enhance their HR processes. Entrusting these tasks to an experienced third party can immediately boost efficiency across various HR functions.
  
  
• Free Up Time for Owners and Managers: HR tasks can consume a lot of time and are a leading cause of burnout among managers and business owners. Using an HR provider will free up valuable time, allowing you to concentrate on what truly matters.
  
  
• Greater Compliance: Outsourcing helps you stay compliant with employment laws and regulations. HR providers are more likely to be up-to-date with the latest legal requirements, reducing the risk of non-compliance.
  
  
• Continuity of Service: Ensure consistent HR support, even during staff absences, providing stability and reliability.
  
  

Disadvantages

• Loss of In-House Knowledge and Processes: Outsourcing can lead to a potential loss of internal HR expertise and understanding of the company culture.
  
  
• Fragmentation of the Service Provided: If not appropriately managed, disjointed HR services can impact overall effectiveness.
  
  
• Less Personal Touch: External providers may not fully grasp the nuances of your company culture and values.
  
  
• External to Organisation: Relying on third-party providers requires effective communication and information sharing, which can sometimes be challenging.
  
  
• Limited Customisation: Standardised services may only partially meet your business's specific needs, leading to potential gaps in service provision.

Understanding the advantages and disadvantages of outsourcing your HR will help you decide whether outsourcing is the right choice for your business.

What HR Functions Should Not Be Outsourced?

Certain HR functions are best kept in-house to maintain a close connection with the company culture and ensure immediate response capabilities. According to the Arbinger Institute, "nearly half (46%) of decision-makers and leaders report that culture drives improvements in critical growth areas such as employee productivity, retention, and engagement as culture improves". 

Therefore, it is essential to keep the following functions in-house:

• Strategic HR Planning: Aligning HR strategies with overall business goals is crucial for maintaining strategic direction and should be managed internally.
  
  
• Employee Relations: Handling sensitive issues, such as conflicts or grievances, requires a deep understanding of the nuances of your company culture. This typically makes it more suitable for in-house management. By keeping this function internal, companies can ensure a more integrated, responsive approach to managing their most valuable asset—their people.
  
  
• Leadership Development: Tailoring leadership development programmes to the organisation's specific needs ensures they are relevant and effective, making in-house management essential. According to Gartner, 46% of HR leaders prioritise developing in-house leadership to meet the specific needs of their organisations.

Related: Leadership Styles and Management Practices

How Does HR Outsourcing Reduce Costs for SMEs?

HR outsourcing reduces costs by eliminating the need for full-time HR staff, office space, and HR technology investments. Instead, SMEs can access these resources on a scalable, as-needed basis. This can lead to significant savings on salaries, benefits, training, and infrastructure.

How Much Does HR Outsourcing Cost?

The cost of HR outsourcing varies based on the services required, the size of the business, and the provider's pricing model. It can range from a flat monthly fee to a per-employee or per-service basis. Assessing the value provided against the costs is crucial to determining the best fit for your business.

Running a thorough procurement process is essential to ensure you select a provider that offers the best mix of value and service.

How to Select an HR Provider

Selecting the right HR provider ensures your business gets the most from HR outsourcing. Consider the following factors: 

• Reputation and Experience: Look for providers with a strong track record and expertise in your industry. A proven history of successful partnerships can be a good indicator of reliability and quality of service.
  
  
• Service Offerings: Ensure the provider offers the specific services your business needs. From payroll to employee benefits management, the range of services should fully align with your HR requirements.
  
  
• Technology and Innovation: Check if they use up-to-date HR technology and practices. Modern HR technology solutions can streamline processes, improve accuracy, and enhance employee experiences.
  
  
• Cost and Value: Compare pricing structures and the value provided. Look beyond the price tag to assess what you're getting for your money. Cost-effective services that deliver high value are ideal.
  
  
• Customisation: Assess their ability to tailor services to your business. Your HR needs are unique, and a provider should offer flexible solutions that fit your specific requirements.
  
  
• Compliance: Verify their understanding and application of relevant laws and regulations. Ensuring compliance with employment laws is critical to avoid legal issues and ensure smooth HR operations.

What are the Key Trends in HR Outsourcing?

HR outsourcing is evolving, with several key trends shaping the landscape. Here's what to look out for: 

• Greater Focus on Hybrid and Remote Working Arrangements: Adapting to the new normal of flexible work environments, HR providers are developing solutions to support hybrid and remote work setups. According to Ricoh Europe, 20% of employees still lack access to essential collaboration tools like Microsoft Teams and Zoom, highlighting the ongoing need for robust remote work support.
  
  
• Focus on DEI and ESG: There is an increasing emphasis on diversity, equity, inclusion, and environmental, social, and governance practices. Research shows that nearly half (46%) of all decision-makers and leaders report that culture drives improvements in critical growth areas such as employee productivity, retention, and engagement as culture improves.
  
  
• The Impact of AI and Automation: AI and automation are transforming HR functions such as candidate screening and performance management. This trend is growing, with AI expected to handle up to 40% of HR tasks within the next few years, significantly enhancing efficiency and reducing biases.
  
  
• Employee Wellbeing and Mental Health: There is a growing focus on supporting employee health and wellness. According to Ciphr, over half (51%) of HR professionals believe that wellbeing and mental health will be the biggest challenge facing their organisation in 2024, emphasising the need for comprehensive wellbeing programmes.

Staying abreast of these trends can help businesses leverage HR outsourcing more effectively, ensuring they benefit from the latest innovations and best practices.

Related: What Are the Advantages of Internal Recruitment?

Final Thoughts

In conclusion, HR outsourcing offers SMEs a strategic way to enhance their HR capabilities, reduce costs, and focus on core business activities. By understanding the benefits and potential drawbacks and carefully selecting the right provider, you can leverage outsourcing to achieve your HR goals effectively and efficiently.

As you consider the future of your HR department, ask yourself: 

• Are you spending too much time on HR tasks instead of focusing on growing your business?
  
  
• Could you benefit from the expertise and efficiency that a specialised HR provider can offer?
  
  
• How well-equipped is your current HR setup to ensure compliance with ever-changing employment laws?
  
  
• Are you equipped to handle the challenges of hybrid and remote working, or could an external provider better support this transition?
  
  
• How important is employee wellbeing and mental health in your business strategy, and do you have the resources to manage it effectively?
  
  

Reflecting on these questions can help you determine whether HR outsourcing is the right step for your business. It's about ensuring HR outsourcing aligns with your company culture, genuinely supports your team, and lifts the burden from you and your managers, allowing you to focus on what truly matters for your business.

Further Reading: Outsourcing Strategy: 10 Proven Steps and Best Practices