Why Outsourcing Your HR Functions is Sometimes a Good Idea

“Human resources” is an umbrella term that covers the whole range of business operations related to employees. That includes dealing with recruitment, training, salaries, bonuses, discipline, staff relations and grievances.

There are some business owners who have a full-service approach to HR outsourcing – they hand it over to an HR consultancy and virtually forget about it. At the other end of the spectrum are those who do all their employee-related business in-house. But many medium and small businesses outsource at least some of their HR functions. That could mean using a recruiter to screen job candidates or using an external service to deal with paying staff wages. 

We thought we’d weigh up the pros and cons of contract HR services to find out if outsourcing HR for small businesses is a good thing.

What are the benefits of external HR support?

Large organisations with hundreds of employees generally have dedicated in-house HR departments, but it’s not something that’s financially viable for small businesses. If you’ve only got six employees, you probably won’t be able to pay a seventh just to make sure they all get their monthly salary.

But inevitably, business HR issues that are beyond the expertise of the existing team will crop up. For example, employment law might not be a management strong point, but it’s something that will arise if a business is to stay legally compliant. Or a company might want to expand into a new market but lack the connections to find the most qualified candidates in that region. That’s when they might turn to human resources outsourcing services to address their recruitment needs.

The chief benefit, compared to the costs of employing full-time or even part-time staff, is HR outsourcing prices. The Chartered Institute of Personnel and Development (CIPD) lists reduced costs and increased efficiency as its top two reasons businesses outsource human resources. It also cites “access to HR expertise that is not available internally” and “increased flexibility and speed of response to HR problems”. That is reason enough for many businesses to use it.

Time is another key consideration. People HR puts it at the top of its list of advantages of HR outsourcing services. “HR does not create products or services and does not contribute to the bottom line of a business”, it says, so it’s taking away time that in-house staff could be spending making profit or business-critical decisions. And if you’re not used to dealing with the minutiae of HR day in, day out, you’ll be slower to work through issues when they need your attention.

HR needs for small businesses are typically very different to those of larger ones, too. There’s less of a hierarchy so movement within the business – something that an HR department typically oversees – isn’t an issue.  

Are there drawbacks?

External HR support for small businesses isn’t without its disadvantages. As with any form of outsourcing, you’re ceding control of some part of your business to another party, at least temporarily. It’s not uncommon for small businesses to pay for HR solutions and then find out that there wasn’t really a problem in the first place. As CIPD says, “The organisation must ask at the outset why it needs to change the way its HR function currently operates.” 

Personnel Today points out that there can be other bumps on the road too. For a start, there’s a loss of flexibility through adhering to another company’s HR policies. But an important consideration is that there’s physical distance between the company, its staff and its HR department. While many HR services for small businesses may well offer HR advice on tap, there could be the feeling that the support services might not have your best interests at heart. They’re not at your Christmas party or sharing a coffee machine, so there will always be that slight disconnect.

The best HR service providers will offer flexibility and mould themselves around your business. But don’t forget that the reason HR specialists are efficient is because they can offer the same service to multiple small businesses, so there’s an economy of scale – bespoke services are always more expensive.

Alternatives to outsourcing HR

Might there be a third way? One option that could be available to medium-sized enterprises is offshoring. That’s where you open an office in another jurisdiction where labour and running costs might be cheaper. Unlike outsourcing, the office (which can be virtual) is part of your business, but as HR doesn’t always need to be in the same location as the operation, it can work for some companies.

Another potential alternative is allowing staff to use technology for more of a self-service HR experience. Staff can be given apps or access to online portals where they can find their handbook, book holidays, report sick absences, raise grievances and even undergo online training courses. It might not completely remove the need for in-person HR, but by taking on some HR tasks, it can cut costs.

Outsourcing human resources: the verdict

For businesses that are too small to justify the expense of dedicated HR professionals, the benefits of outsourcing far outweigh the drawbacks. Even though small business owners usually do end up becoming quite adept at all things HR, they’ll never have the in-depth expertise of a company that does nothing else. And they’ll also be using up time that they could be channelling into growing the business.

As with any outsourcing, do your research before you pick a partner, and enter a service level agreement with them to ensure you won’t be left waiting when you need them. 

Finally, you can often keep costs lower by automating some HR tasks and picking outsourced services off the peg from the professionals.

Now that you know why outsourcing your HR functions is sometimes a good idea, check out our guide to the five best HR outsourcing services to help small businesses

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Your complete business toolkit

Rovva puts everything you need for your business in one place. From an accountancy helpline to a drop-in business lounge - we've got everything covered.