Is HR Outsourcing Right for Your SME?

HR is a valuable business function.

Your HR staff manage leave and benefits, they handle recruitment, and hopefully help you avoid employee litigation!

However, most companies don't hire a specialist HR professional until they're up to about 50 employees.

The vast majority of businesses therefore decide whether to spread HR duties between a number of unqualified professionals or seek help from elsewhere.

HR outsourcing is rapidly becoming more popular, with one source finding that the value of HR outsourcing contracts had nearly doubled between 2014 and 2015.

Clearly some businesses are finding HR outsourcing useful - but does it work for everyone?

In today's blog post, we take a closer look at the HR outsourcing options available to small businesses. What are the main pitfalls? How might you benefit from each type of solution?

What is HR Outsourcing (HRO)?

HRO is where a business passes on responsibility for all or some HR tasks to a specialist HR company. Typically, companies choose to outsource the most time consuming HR processes such as managing payroll and employee benefits.

Types of HRO

Typically, outsourced HR processes fall into three categories:

• Transactional HR. These are the day-to-day admin processes that keep your company ticking over.
• Strategic HR. Some companies seek help with long term HR strategy.
• Helpline/emergency HR. Companies can call up a consultant when in need of HR advice.

Some HR companies offer all of these services, while others specialise. You'll need to speak to individual companies to determine how flexible (and expensive!) they are.

The benefits of HRO include:

• A reduced admin burden. Businesses don't need to spend time worrying about HR tasks - they can focus on their core business goals instead. This point is particularly relevant to smaller businesses.
• Access to HR experts at a reduced cost. If you don't have the funds to hire an HR professional, outsourcing can provide access to one without having to pay them a salary.
• Reduced risk. HR companies ought to be aware of the latest legislative changes affecting employment - whereas your non-specialist staff might be less clued up.
• Response times. If you offload HR tasks onto an employee who deals with many other tasks, they might not be able to respond to them very quickly. By contrast, a competent HR consultant should be able to answer queries quickly.

Obviously the benefits will vary depending on your company's circumstances and the outsourcing arrangement that you opt for.

However, the cost and admin factors are often the main selling points for most small businesses.

HRO certainly isn't for everyone. Some companies (including the BBC), have switched back to in-house HR after trying outsourcing.

The drawbacks of outsourcing HR include:

• Reduced control over HR. As a company, you may wish to take a unique approach to some HR issues - but it may be difficult to communicate your preferred approach with your HR provider. This is particularly relevant during recruitment.
• Damaged employee/employer relations. Some outsourcing arrangements may not be well-received by employees.
• Security issues. Handing sensitive data over to a third party is always a risk.
• Dependency. As with any outsourced process, it's easy for a business to become reliant on HRO. If the outsourcing company can't deliver, will your business be able to pick up the pieces?

If you've weighed up the costs and benefits of HRO and decided you would like to investigate your options more thoroughly, it's important not to rush into signing on the dotted line.

HRO arrangements are complex and often bespoke, and can have huge implications for your business. In particular, you should think long and hard about the following areas:

• Contract length and your changing needs. Some companies will try to lock you into a five or ten year contract. It's likely that your needs will change during this time period, so discuss these (and their associated risks) with your chosen provider.
• Flexibility. Is the outsourcing company willing to change processes to match your preferences, or will they instead standardise your processes to match theirs?
• Ability and competency. There's a huge difference in quality between HRO companies, so do you research. Ask providers for case studies and contact numbers so you can find out how the service works for current clients. Ask your network for recommended providers, too.
• Scope and clarity. Ensure both parties are clear on what their roles are in the agreement. Any misunderstandings can be extremely costly.
• Bottlenecks. Think about the current limiting factors in your HR processes and how any outsourcing arrangements might resolve them. Ensure that providers can explain how they will resolve your specific bottlenecks.

First of all, check out HR software. There are plenty of affordable solutions available to small businesses - you might be surprised at the quality of software you can find at a low price. We recommend PeopleHR (which integrates with RotaCloud!) which starts from £1 per employee per month.

Many packages contain self-service features, where employees can use certain features themselves - such as updating personal information and bank details, subject to approval.

Software is particularly useful for companies struggling with the admin aspect of HR, but might not solve your problems if your lack of expert knowledge is holding back your HR efforts.

Another alternative is shared services, where companies combine HR services into one part of the organisation, whereas they might previously have been handled by different trusts, locations or regional offices.

Clearly shared services work best for medium to large companies, as they are more likely to be spread out over several offices.

Making a Decision

If you've made it to the end of this article, clearly you're seriously considering the merits of outsourcing some (or all) of your HR processes.

Only you can decide if HRO is the right move for your company - but it's worth consulting with employees to find out how they'd respond to such a move.

If you'd to supplement your current HR approach with some free HR expertise, check out our HR blog archives!