A guide to outsourcing HR

Businesses with less than 50 employees rarely have an HR team. Instead, a senior manager who may have had some HR experience in the dull and d

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Businesses with less than 50 employees rarely have an HR team. Instead, a senior manager who may have had some HR experience in the dull and distant past was seconded to the role. This not only leaves your small business vulnerable to legal challenges when HR procedures are not strictly followed, but doubling up like this takes time away from his or her day job.

Or, if you manage HR yourself, it’s taking time away from running your business and eating into your own productivity – one of the biggest challenges facing any small business.

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

Outsourcing all or part of the HR function can be a cost-effective way to reduce overhead while benefiting from expert skills.

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

See also: How to Decide on HR Policies for Your Small Business

To get 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 cases organizations enter into an agreement with a third party to manage the investment and administration of their schemes.

What to outsource?

HR covers a wide range of activities, typically:

  • Strategy and goal setting
  • Recruitment and selection
  • Terms and conditions of service, both statutory and professional
  • Pay and benefits
  • Employee relations
  • Support of line managers in discipline and grievance situations, dismissal, absence management, staff assessment and dismissals
  • Equal opportunities / diversity management
  • Organization design and development
  • IT policies including data and privacy
  • Training and development, including coaching and mentoring initiatives

To support this, whoever looks after HR will also need to develop policies and procedures, train line managers, inform and consult employees and their representatives, and keep track of each employee’s “official” records through their personnel files.

It is possible that all or any of these activities will be outsourced. Many organizations outsource recruitment and selection activities to a third party. The provision of flexible benefit schemes, pensions, training and development also lends itself to third party delivery.

Benefits of outsourcing HR

  • Get support of better quality than what the business is currently offered in-house
  • Reduced costs
  • Increased efficiency
  • Access to enhanced HR IT systems
  • Improved management information (metrics)
  • Access to HR expertise not available internally, such as specialist TUPE transfer advice
  • Increased flexibility and speed of response
  • Reduced risk

Disadvantages of outsourcing HR

  • Lose control
  • Loss of local knowledge or internal knowledge and expertise
  • Service delivery failures
  • Lack of confidentiality and security
  • Weak relationships
  • Standardization (the provider allows all customers to follow the same procedures and practices)
  • Outsourcing of HR contracts can be long, with 5-10 year agreements not uncommon

When choosing an outsourcing provider, you are establishing a potentially long-term relationship, so you need to take the time to consult with the right provider.

Once a provider has been selected, service level agreements will need to be created, which is essential for the smooth running of outsourced services.

Work together

Managers and other employees will need help and support to come 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 give advice to staff and managers, he 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.

6 steps for outsourcing HR

# 1 – Identify the reasons for outsourcing

If you are thinking of outsourcing HR, you need to identify the reasons why you want to do it and what impact it will have on your employees.

Why should you outsource HR? Is it because your business is too small to have its own internal HR manager? Or because you want to leverage expertise provided by an HR provider?

If the answer is because you think your current internal HR manager is not fit for purpose, or overwhelmed by the workload, remember you may be in an expensive layoff situation.

# 2 – Think of the alternatives

Of course, you can think of 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.

That equates to 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, you need to take a good look at what the true internal costs are and whether outsourced costs are really cheaper. Do not just think about the known costs; factor in the hidden costs such as layoffs or redeployment of staff currently covering the work.

# 4 – Find suitable suppliers

You can Small business guide to HR consulting providers here, which lists seven of the largest outsourcing HR providers.

Or you can go with a specialist SME HR consultation obtained by Enterprise Nation.

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

Ask to speak to another of their customers and interview them about how satisfied they were with their service.

# 5 – Agree on a Service Level Agreement

A service level agreement (SLA) between your business and the HR provider is essential to be clear about expectations and responsibilities on both sides.

The SLA must include the following:

  • Names of both parties
  • Date on which the contract will start and when it will end
    Functions that the HR provider will perform
    Goals and objectives that the HR provider will strive to achieve
  • How often the partnership should be reviewed, ie set up regular performance updates
  • Payment details

By going into detail about exactly how you want the HR experts to help your company, you can avoid a “one size fits all” approach and ensure that the service is tailored to your own small business needs.

However, it is important to make sure that the SLA is flexible enough to allow for adjustments in goals if necessary.

# 6 – Transfer your HR needs

Once you have agreed on your provider, either you or someone in your team will need to manage the HR transition and, once your new outsourced service is up and running, monitor and evaluate its effectiveness.

And of course you will have to review as the contract comes to an end before deciding whether to review or not.

Further reading on outsourcing HR


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