A guide to HR outsourcing for small business

Outsourcing HR makes sense for businesses that are too small to have their own inhouse manager. However you need to be clear about what you need from the outset to avoid a one-size-fits-all approach

Businesses with fewer than 50 employees rarely have an HR team. Instead, a senior manager who may have had some HR experience in the dim-and-distant past may have been seconded to the role. Not only does this leave your small business vulnerable to legal challenges when HR procedures have not been rigidly followed, doubling up like this takes away time from his or her day job.

Or, if you yourself are handling HR, it takes time away from running your business and eats into your own productivity – one of the biggest challenges facing any small business.

With the ongoing cost-of-living crisis, rising inflation and spiralling wage bills, companies will be looking to save money where they can.

Outsourcing whole or parts of the HR function can be a cost-effective way of reducing overheads, while benefitting from expert skills.

Outsourcing HR is usually more cost effective than having a full-time salaried employee.

See also: How to decide on HR policy for your small business

Getting the experts in

One of the common reasons for outsourcing 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 to outsource?

HR covers a wide range of activities, typically:

  • Strategy and objective setting
  • Recruitment and selection
  • 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

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

Pros of outsourcing HR

  • Gaining better quality support than the business currently offered in-house
  • Reduced cost
  • 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

  1. Identify the reasons for outsourcing
  2. Think about the alternatives
  3. Consider the internal implications
  4. Look for suitable providers
  5. Agree a service level agreement
  6. Transfer your HR needs across
  7. #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 £43,000.

    This compares with around £1,200-£3,600 per year 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.

    Or you could go with a specialist SME HR consultancy sourced through Enterprise Nation.

    Regular contributors to Small Business when it comes to HR issues include:


    Ask to speak to another of their clients and interview them about how satisfied they have been with their service.

    #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 ends
      Functions that the HR provider will carry out
      Goals 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

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Tim Adler

Tim Adler is group editor of Small Business, Growth Business and Information Age. He is a former commissioning editor at the Daily Telegraph, who has written for the Financial Times, The Times and the...

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