Why do small businesses need HR?

HR develops the culture of an organisation, manages pay and recruitment and strives to maintain or improve employee satisfaction, as well has handling grievances and disciplinary procedures.

However, businesses with fewer than 50 people rarely have an inhouse HR department. Mostly they go down the outsourcing HR route, which is why there are many HR consultancies specialising in small businesses.

Whether you decide to manage HR in-house or decide on outsourcing to an HR agency depends on the circumstances and priorities for your business. Here, we break down the pros and cons of each.

A guide to outsourcing HR – Choosing to outsource HR services makes sense for businesses that are too small to have their own in-house manager. However, you need to be clear about what you need from the outset to avoid a one-size-fits-all approach.

Pros and cons of outsourcing HR

Advantages of outsourcing HR services

Here are the advantages of outsourcing HR according to Citrus HR’s Rachel Mudd:

• Cost-savings. “Outsourcing is significantly cheaper than hiring a qualified HR professional, even part time, for almost all small companies. It also fits the need better—very few small companies actually need an HR person for even one day per week, so hiring is often wasteful.”
• Access to specialist knowledge. “Outsourcing means you can keep on top of the more specialist aspects of HR, for example employment relations issues or handling a TUPE transfer. In-house professionals rarely have all that expertise themselves and have to be more generalist.”
• Legal compliance. “Good HR providers will ensure you are up to date with legal requirements for businesses, which is important, as the law changes most months, often with enormous consequences for breaches.”
• Cover for absences. “Any employee needs time off for holidays and can get sick from time to time. By using an outsourced HR service, you can ensure that you always have access to expert advice whenever you need it, which is not possible with an in-house HR pro at a small company.”
• Time efficiency. “By outsourcing these functions, employers can free up time to focus on making their business successful and profitable.”

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Disadvantages of outsourcing HR services

• Less control. Outsourcing is less personal and could result in feeling a loss of control. An employee may find it easier to approach a colleague they work with regularly
• Culture disconnect. An organisation’s culture stems from its HR strategy. If the HR team is external, this may create a disconnect between its strategy and the employees
• Worries over data protection. By outsourcing HR, you’re entrusting a third party with your data

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Pros and cons of an inhouse HR team

Pros to having an inhouse HR team

• Easier to find the right talent. “In-house recruiters are there to ensure the small business can get the right talent that sticks around, helping SMEs to grow in the most organic [and cost efficient] way possible,” says Anna Moore of Pollinate’s HR team. “Our own in-house recruiter has been with us from the beginning and has made a massive impact across the business, working closely with hiring managers, line managers and candidates to ensure we get the right fit, resulting in an annual staff turnover for 2021 at an impressively low 12 per cent.”
• More personal. Employees can hold a face-to-face meeting at any time, building trust and engagement between an organisation and its staff.
• Quicker resolutions. Having a member onsite should, in theory, allow for discussions to escalate quickly and for any issues to be resolved efficiently.

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Disadvantages of having an inhouse HR team

• It can be expensive. Depending on the size of your business, hiring employees can be more expensive than outsourcing.Of course, you might think about hiring someone in-house to be your HR manager. According to HR outsourcing firm Peninsula, if you do decide to hire a full-time HR manager, the average national HR manager salary is £43,000. This compares to around £1,200-£3,600 per year for fully outsourced HR management, including health and safety, payroll, etc.
• An employee may have a heavier workload. By having a small HR team, each individual will have a wide range of responsibilities, from payroll management to recruitment. When this is outsourced, the third party will have experts in each area.
• Access to HR systems. The chances are, the software you have in-house will not match the capabilities of systems used by outsourcing HR agencies.

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This article was originally published in May 2022.

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