Businesses with fewer than 50 employees rarely have an HR team. Outsourcing HR allows a small business to free up time for whoever has been seconded to the role, usually a senior manager with some HR experience in the past or you if you’re running the business.
However, not only does this leave your small business vulnerable to legal challenges when HR procedures haven’t been rigidly followed, doubling up like this eats into the business’ productivity.
With soaring energy bills for businesses, rising inflation and rising wage bills, companies will be looking to save money where they can.
Outsourcing all or parts of the HR function can be a cost-effective way of reducing overheads, while benefiting from expert skills.
See also: How to decide on HR policy for your small business
Getting the experts in
One of the common reasons for a small business outsourcing HR is to have access to higher levels of experience, knowledge or expertise.
A common area for outsourcing is pensions, where regulatory rules and changes to the legislation have become so complex that, in most instances, organisations enter into an agreement with a third party to manage the investment and administration of their schemes.
>See also: Top 10 HR tips
What can you outsource?
HR covers a wide range of activities, including:
Strategy and objective setting
Recruitment and selection, especially international hires
Terms and conditions of employment, both statutory and occupational
Pay and benefits
Employee relations
Supporting line managers in discipline and grievance situations, dismissal, absence management, staff appraisal and redundancies
Equal opportunities/managing diversity
Organisation design and development
IT policy including data and privacy
Training and development, including coaching and mentoring initiatives
Remote and hybrid working policies
HR analytics and reporting
Learning and development platforms
To support these, whoever looks after HR will also have to develop policies and procedures, train line managers, inform and consult employees and their representatives and maintain the “official” records of each employee through their personnel files.
It is possible for all or any of these activities to be outsourced. Many organisations hand over recruitment and selection activities to a third party. The provision of flexible benefit schemes, pensions, training and development also lend themselves to third-party delivery.
>See also: 7 of the best HR consultancy companies in the UK
Benefits of outsourcing HR
Gaining better quality support than the business currently offered in-house
Reduced cost (savings could be over £35,000)
Increased efficiency
Access to improved HR IT systems
Improved management information (metrics)
Access to HR expertise not available in-house, such as specialist TUPE transfer advice
Increased flexibility and speed of response
Reduced risk
Disadvantages to outsourcing HR
Losing control
Loss of local knowledge or internal knowledge and expertise
Failures in service delivery
Lack of confidentiality and security
Poor relationships
Standardisation (the provider makes all clients follow the same procedures and practices)
Outsourcing HR contracts can be lengthy, with agreements of 5-10 years not uncommon
Choosing an outsource provider you are establishing a potentially long-lasting relationship, so you need to take time deliberating on the right provider.
When a provider has been chosen, service-level agreements will need to be created, which are essential to the smooth running of outsourced services.
>See also: 6 HR software tools you can use for small business
Working together
Managers and other employees will need help and support in coming to terms with the new arrangements. In addition, the provider will need to know as much as possible about your small business and its goals.
If the provider is going to offer advice to staff and managers, it will need to have access to employee files and records and to HR policies and procedures. You will also need to ensure that any transfers of information are properly protected as required by GDPR legislation.
>See also: Outsourcing HR v inhouse HR management
6 steps for outsourcing HR as a small business
Identify the reasons for outsourcing
Think about the alternatives
Consider the internal implications
Look for suitable providers
Agree a service level agreement
Transfer your HR needs across
#1 – Identify the reasons for outsourcing
If you’re thinking about outsourcing HR, you need to identify the reasons why you want to do this and what impact it will have on your employees.
Why do you need to outsource HR? Is it because your business is too small to have its own inhouse HR manager? Or because you want to tap into expertise provided by an HR provider?
If the answer is because you think your current internal HR manager is not fit for purpose, or is overwhelmed by the workload, remember you could be in a costly redundancy situation.
#2 – Think about the alternatives
Of course, you might think about hiring someone in-house to be your HR manager. If you do decide to hire a full-time HR manager, the average national HR manager salary is £44,871 according to Indeed.
This compares with around £200-£800 per month for fully outsourced HR management, including health and safety, payroll, etc.
#3 – Consider the internal implications
If the reason for outsourcing is a cost one, then you need to look carefully what the true internal costs are and whether outsourced cost really is cheaper. Don’t just think about the known costs; factor in the hidden costs such as redundancies or redeployment of staff currently covering the work.
#4 – Look for suitable providers
You can find the Small Business guide to HR consultancy providers here, which lists seven of the biggest outsourcing HR providers.
Regular contributors to Small Business when it comes to HR issues include:
When considering an HR provider you should ask them:
What sectors do they serve?
Do they specialise in SMEs or larger companies?
What response times are guaranteed?
How is employee data protected?
Can they support growth and international hiring?
International hiring can be handled by an Employer of Record (EOR), such as Deel.
#5 – Agree a service level agreement
A service level agreement (SLA) between your business and the HR provider is essential in order to be clear about expectations and responsibilities on either side.
The SLA should include:
Names of both parties
Date the contract will start and when it endsFunctions that the HR provider will carry outGoals and objectives which the HR provider will aim to achieve
How often the partnership should be reviewed, i.e. set regular performance updates
Payment details
By going into detail about exactly how you would like the HR experts to help your company, you can avoid a “one size fits all” approach and ensure the service is tailored to own small business’s needs.
However, it’s important to make sure the SLA is flexible enough to allow for adjustments in goals if needed.
#6 – Transfer your HR needs across
Once you have agreed on your provider, either you or somebody in your team will have to manage the HR transition and, once your new outsourced service is up and running, monitor and assess its effectiveness.
And of course you will need to review as the contract comes to an end before deciding whether to review or not.
Further reading on outsourcing HR
Small business HR – everything you need to know
Outsourcing your business HR: when to do it, the benefits and the pitfalls
