Outsourcing your business HR: when to do it, the benefits and the pitfalls

There are powerful cost-saving arguments for outsourcing human resources, but when is the right time to do it?

When you were starting out, you probably didn’t think about outsourcing your business HR for you and one or two other people. Now that your employee count is into the hundreds, you’ve got more to think about in terms of recruitment, payroll, performance and staff morale.

Even then, you might not need to rearrange the furniture  – or move office entirely – to make room for an in-house HR department. Why not hire an external team instead? We explore just when to outsource your business HR and the considerations you need to make.

Why should I be outsourcing my HR?

Moorepay cites that 95pc of businesses outsource at least one business function (61pc specifically outsource their payroll). So, let’s look at the reasons for outsourcing. The first and most obvious is to save money.

Further research from Deloitte says that 59pc of businesses globally use outsourcing to reduce their expenses; 57pc use it to focus on their core business; and 47pc use it to solve capacity issues.

Related: 7 of the best HR consultancy companies in the UK

Though Phil Clarke, former director of HR consultancy, Independent, is ‘convinced’ that cost is still the number one driver of outsourcing decisions, whatever spin outsourcing providers or their clients may put on it.

“Often, outsourcing decisions are led by the procurement division of a company, which comes at it purely from a cost point of view,” says Clarke. “What’s happened, which is encouraging, is that HR [professionals] have led outsourcing decisions. They want to see an improvement in the quality of the service as well.”

Ann Bevitt, a partner at law firm Cooley LLP who specialises in outsourcing deals, has a similar view. “Cost is either the only driver or one of two key drivers [the other being quality of service]. An organisation is perhaps not being totally honest with itself if it doesn’t accept that.”

See also > Five trends in HR to be aware of in 2020 – what you should know

False economies

That said, both Clarke and Bevitt are sceptical about the cost savings promised by HR outsourcing. While Clarke stresses the inadvisability of focusing on cost reductions without regard for quality, Bevitt points out that the real savings sometimes turn out to be smaller than anticipated.

She cites the example of a company with five HR staff that announces it is going to make them all redundant and outsource the function. Two of the staff leave to take up new jobs and the company finds it can manage just fine with the remaining three.

In such a situation, which Bevitt says is typical, some or all of the savings attributed to outsourcing could have been achieved simply by trimming down the HR function. So, when considering outsourcing, the cost of the deal should be compared to that of a streamlined in-house team.

Bevitt gives another example – a company that has grown by acquisition, with different employment policies originating from the acquired companies. Even if this company did outsource its HR function, she argues, it would be much cheaper to harmonise the differing policies first, rather than passing on the problem and paying the outsourcing provider to handle a more complex set-up.

Remember that external HR firms are experts in specialised areas, especially compliance. Workplace laws change all the time and they can guide you through the legalities of a woolly situation. It’s useful to have them on-hand when you don’t have anyone in-house with the specific expertise.

Steve Hallows, UK MD of manufacturer Abicor Binzel, used an HR consultant to advise him on the correct steps in the process when he considered making redundancies.

“I think it’s essential to get advice to make sure you don’t trip up by failing to follow the correct procedure,” says Hallows. “We retain [the consultant] and he is there to guide the company through the process, which can be fraught with many dangers if you don’t do it right.”

David Readman, the founder of consultancy Employment Practice and Law, says that winning an employment tribunal is “90pc about getting the process right”.

“Companies that try to do it themselves, especially if they have no expertise in the area, often dig themselves into a hole and spend a lot more money trying to get out of it [than they would have spent on advice],” says Readman.

See also > Third party outsourcing trends among UK businesses

Dealing with redundancies is a particularly tricky element of HR, where the benefits of seeking external help are obvious, especially for smaller businesses without in-house personnel expertise. But there are companies that extend this approach to their entire HR function, rather than reserving it for a crisis.

Teneo is a fast-growing IT company, which generates sales largely by reselling American products in the UK with added services. “I’m quite clear about what we do as a business, and that means I’m clear about what we don’t do,” says founder and CEO Piers Carey. “We don’t have skills or knowledge in HR matters and we aren’t big enough to be able to afford to have those skills in-house.”

Carey is wholehearted in his praise of the various companies that help him out with the administrative and legal side of HR, but when it comes to recruitment, he’s more lukewarm.

“It’s the one area that still causes us issues,’ he says. ‘We’ve often felt that [agencies] are giving us whoever they’ve got on their books rather than the right people for the job.”

Though there are one or two recruiters Carey uses regularly, who show more understanding of his business, he admits that finding the right people too often comes down to ‘trial and error’ or ‘pot luck’. Rather than using a set process, he’ll deploy a variety of tools, from staff referrals to job websites. “You have got to be tactical and use all the options at your disposal,” he says.

A flying start

Airport retailer World Duty Free is another company that faced a big hiring challenge: recruiting staff for new outlets in Heathrow’s Terminal 5. HR director Geoff Hall says that 150 staff were required, all of whom had to undergo an extensive security check including references going back five years. Given the timescale, the company’s in-house HR team simply could not have coped.

The key to completing such a project successfully, according to Hall, is seeing the outsourcing provider as an extension of your own team. “We got them temporary security passes and they came to work in our retail outlets and talked to staff and front-line managers to help them with the screening process,” he states.

Cost reductions were roughly 20pc when you factor in management time saved, and the pre-interview screening process improved too, so that five jobs were offered for every ten candidates interviewed, as opposed to the usual three. “The commitment of the line managers doing the interviews increased tremendously because they were seeing better people,” says Hall.

Of course, outsourcing arrangements don’t always go smoothly, and they are easier to get into than to get out of, according to Bevitt. “They can go drastically, drastically wrong. The danger is, if you outsource, especially if the employees don’t transfer across, you have lost that body of knowledge for good. Even if you take it back in-house, it will take time to build that up again.”

Can I outsource certain HR functions and keep the rest in-house?

Yes, you can also go for a mix – and many companies do. For instance, you could have in-house HR for recruitment and dispute management and outsource your payroll. It could enhance your in-house efforts, especially if you’re a larger company.

The experiences of Hall show that there are many ways to blend outsourcing with in-house capability, especially when it comes to more complex areas such as recruitment. It’s not an either-or decision, more a question of working out the result you want and then figuring out how to get there.

Companies most commonly outsource HR for:

  • Recruitment
  • Creating and updating employee documents
  • Payroll
  • Compliance
  • Benefits connected with commercial partners e.g. gym, free coffee

You can find providers who offer retainers as well as pay as you go packages for individual services like the ones above.

If you’re unsure of how to split your functions, try performing an in-house HR audit to give you some idea.

How much does outsourcing HR cost?

Firms will normally charge per employee so it’s wise to keep this in check if you’re a rapidly-growing company.

Even if you have a monthly or hourly bill retainer, you could be slapped with upfront costs too. Each company will have their own specifics when it comes to how much they charge. Look these up on these before you commit to anything.

Sign up to a free period first if you can – some providers offer a 14-day or 30-day trial.

What about Brexit?

The HR impact of leaving the EU is still unclear. It depends how EU and UK workers’ employment rights are affected after Brexit and whether your company decides to mirror these changes.

The downsides of outsourcing your HR

Businesses often worry that an external HR will be weaker, with relationships that are less personal. They also fear of losing out on local knowledge that’s specific to the company and losing control over essential elements of the business. Though many HR firms pride themselves on protecting your data – especially since the advent of GDPR – security and information leaks remain an issue when you can’t see what’s going on.

What’s more, if some functions are handled in-house and others externally, that leads to fragmented services. Hiring the wrong firm could see you tied to a long contract (some are between five and ten years). An external HR firm will be more difficult to get hold of which could dampen staff morale if it’s an urgent matter.

Whoever you choose, they need to understand your business strategy. With an external company, you run the risk of standardising procedures rather than reflecting the culture of the company. It can be a cold experience, frankly. Plus, if the HR team doesn’t understand company culture, they could hire the wrong staff, leading to higher turnover and further problems.

So, should I outsource my HR?

You know you’re ready to outsource when admin processes start slowing down productivity at work. Doing an aforementioned HR audit will help pinpoint these problems sooner. Be vigilant of an overstretched HR department or formerly thriving processes which are slipping in standard.

The decision around outsourcing HR can be straightforward if you’re a smaller organisation: if you don’t have the expertise and can’t afford to hire another person, it’s a no-brainer. For larger companies that have ongoing HR needs, it’s perfectly feasible to bring specialists in-house, or use a mixed approach.

Bevitt adds that keeping some sort of in-house HR presence could be important if you are trying to foster a ‘caring’ culture within your company. “Though you may choose to outsource bits, there is still value in having someone there as a human face of HR within the organisation, rather than just giving employees a call centre number.”

With additional reporting by Anna Jordan.

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Nick Britton

Nick Britton

Nick was the Managing Editor for growthbusiness.co.uk when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...