HR Outsourcing vs. In-House: A Guide for Small Businesses
As your small business grows, managing HR becomes increasingly complex. Deciding whether to hire an in-house HR professional or outsource HR functions is a critical decision that impacts your budget, flexibility, and long-term goals. This guide explores the costs, benefits, and practical considerations to help you choose the right option for your business.
Hire Inhouse or Outsource HR?
What Are the Key Differences Between HR Outsourcing and In-House HR?
Your decision will depend on your business’s unique circumstances, including size, growth stage, and budget. Here’s a breakdown to help you weigh the options:
1. Cost Comparison: In-House HR vs. Outsourcing
Deciding between in-house HR and outsourcing often starts with understanding the financial impact. To help you make an informed decision, we’ve developed an In-House HR Salary Calculator to provide a clear picture of the total cost of hiring an HR professional.
In-House HR Costs
When hiring in-house, costs go far beyond the base salary. Use our In-House HR Salary Calculator below to see the full breakdown for your business. Key costs include:
Base Salary: Depending on experience, salaries range from:
HR Coordinator/Administrator: £25,000-£35,000 annually.
HR Manager: £45,000-£60,000 annually.
Head of HR/HR Director: £70,000+ annually.
Employer National Insurance Contributions: £4,000-£6,000 annually for a £45,000 salary.
Pension Contributions: Around £2,250 annually at 5%.
Recruitment Fees: Up to 30% of the annual salary if you use an external recruiter, potentially £18,000 for a £60,000 hire.
Training and Development: Essential for keeping your HR team up-to-date on compliance, best practices, and HR trends.
Example: For an HR Manager with a base salary of £50,000, the total annual cost could start at £70,000, once additional expenses are factored in.
By using our calculator below, you can customize these figures to your business and see the true cost of an in-house hire.
Inhouse HR Salary Calculator
Outsourcing HR Costs
Outsourcing HR offers a cost-effective alternative. Unlike hiring in-house, outsourcing eliminates recruitment fees, National Insurance, and pension contributions. Instead, you pay a transparent monthly fee tailored to your needs.
For example, the People Management Partners Fractional HR Department offers:
Comprehensive day-to-day HR management.
Scalable HR systems, processes and resource built for growth.
Full 52-week seamless coverage.
This means you get the expertise of an entire HR team—without the overhead of hiring in-house. Depending on the services you need, the monthly cost will typically be in the region of £1,500 to £5,000 per month, or £20,000 - £60,000 per year
2. Expertise Needed: Single Specialist vs. Team Support
The expertise you need depends on your business goals and the challenges you face. In this section we expand on some of the pros and cons of both an inhouse HR person and outsourced HR support.
In-House HR Expertise
An in-house HR professional will likely have deep expertise in specific areas, such as employee relations, leadership development, or recruitment. However, they may lack broader skills in compliance, strategic HR planning, or culture development.
For example:
Recruitment Specialist: Excellent for managing hiring but would not normally have expertise in compliance or employee development.
HR Generalist: Good all-round knowledge, and often very skilled in managing employee relations, but may struggle with strategic planning or pay and benefits work.
As your business grows, gaps in expertise may become more evident. To fill these gaps, you might need to hire additional team members or consultants, which all adds to the cost and complexity of maintaining an in-house HR team.
Outsourced HR Expertise
Outsourced HR providers offer access to a diverse team of professionals with expertise across all areas of HR. This is particularly beneficial for small businesses that require support in multiple areas, such as:
Legal compliance and employment law.
Strategic HR planning.
Recruitment and onboarding.
Performance management and culture-building.
By outsourcing, you gain access to expertise that can evolve with your business without the cost of hiring multiple specialists.
3. Flexibility and Scalability
The ability to adapt your HR support to your business needs is critical as you grow or as your business needs and goals change.
In-House HR Flexibility
An in-house HR hire is a fixed asset, which can limit flexibility:
If your business needs increase, you may need to recruit additional HR staff.
If your business faces financial strain, reducing in-house HR costs can be challenging due to redundancy laws and employer obligations.
Outsourced HR Flexibility
Outsourcing HR allows you to scale support up or down based on your requirements:
As your business grows, you can access additional resources or expertise without the need to recruit.
If your needs reduce, you can adjust the scope of services and costs accordingly.
For example, with the People Management Partners Fractional HR Department, you can start with just getting the essentials in place, then expand to include more strategic HR projects as your business evolves.
4. Seamless Coverage and Continuity
Ensuring your business has continuous HR support is essential for compliance and employee satisfaction.
In-House HR Continuity
While an in-house HR professional offers on-site presence, they will need time off for:
Holidays.
Sickness or other types of personal leave.
During these periods, HR tasks may be delayed or passed to other team members, potentially impacting compliance or employee relations.
Outsourced HR Continuity
Outsourcing ensures uninterrupted HR support. Providers like People Management Partners offer:
Full 52-week coverage, so there are no gaps during holidays or sick leave.
Access to a team of professionals, ensuring consistent service regardless of individual availability.
This level of continuity is especially beneficial for small businesses that can’t afford to have HR responsibilities left unaddressed.
Making the Right Decision for Your Business
So now you have read through the pros and cons of each, to choose between in-house HR and outsourcing - consider the following:
Budget: Can your business afford the total cost of hiring in-house, or would a fractional service be more cost-effective?
Expertise Needed: Does your business require broad HR expertise across multiple areas, or just a specific focus?
Flexibility: Do you need scalable support that grows with your business?
Ease of management: Do you want to take on someone that will need line management and personal development, or would you prefer to manage a support contract?
Finding it Hard to Choose Between Inhouse and Outsourced HR?
Our 12-Month Programme combines the best of both worlds, offering small businesses a tailored blend of in-house and outsourced HR benefits. Here’s what you can expect:
Dedicated Support: A named People Partner as your main point of contact, plus access to a team of HR experts.
Year-Round Coverage: 52 weeks of HR support to handle your day-to-day HR needs.
Customised Solutions: Development of tailored HR systems, policies, and processes to fit your business.
Manager Development: Training and coaching for managers to build internal leadership capability, plus we will train someone in house on how to manage your HR
Scalable HR Function: Over the 12 months, we create a robust, scalable HR framework aligned with your business goals.
Flexible Options After 12 Months:
Transition to in-house HR with our help recruiting or training a team member.
Continue with our flexible, ongoing support.
For less than the cost of hiring an in-house HR manager, this programme delivers a professional HR function, while also enhancing your internal HR capability.
It’s the ideal solution for growing businesses that need expert HR support without the long-term overheads. You can find out more here
Final Thoughts: Which Option is Right for You?
For small businesses, the decision to outsource or hire in-house isn’t one-size-fits-all. If you’re unsure, it would be great to chat over a virtual coffee We can help you explore your needs, weigh the pros and cons, and point you in the direction of an HR solution that fits your business’s goals and budget.
Your people are your greatest asset—choose an HR solution that helps them thrive.