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Outsourcing HR: why is it important for Small Businesses?

So you’re a small recruitment business.

Perhaps you’re what is known as a “Mom and Pop” business:

  • a small, independent, family-owned business
  • controlled and opened only in a single location

Or maybe you’re just starting out and have grand designs on growth and volume, or perhaps you are looking to open your second office

For new companies or small established businesses, outsourcing HR (human resources) is often a wise decision.

HR isn’t just about the “hiring and firing” of employees, nor is it purely about the legalities of managing someone in the workplace. HR also includes maintaining and auditing company policies and practices, payroll, benefits administration and compliance management.

In some businesses, an HR generalist may be asked to perform more than one of these HR functions, and that can often result in less than optimal results. Most small to medium-sized business owners know the frustration of spending more time than they want on non-revenue generating activities. Managers and directors can spend a significant proportion of their day engaged in these necessary but time-consuming tasks.

In addition, most business owners agree that their employees are their most valuable assets and managing human resources has become a critical role in managing a business. Yet for some businesses, the various functions of the HR department are too comprehensive and complex to maintain in-house.

Outsourcing can give you access to skills, knowledge and support, and save you costs in the long run.

Top-5 reasons for outsourcing HR

The top five reasons cited for outsourcing HR are:

  • access to skills and knowledge
  • gaining better quality support than the business is able to be offer in-house
  • cost savings
  • risk and compliance management
  • efficiency

Savings generally come from the company either not requiring an HR person in-house, or enabling the person who had taken on the HR function to focus on revenue generating work. There are also considerable savings in having someone manage risk and compliance which result in the reduction of potential legal costs, tribunals or fines if something does go wrong.

How do you decide if you need to outsource your HR functions or not?

Here are the three things you should consider to make up your mind, according to Nicola Goodridge, HR consultant and owner of Good HR writing in the Guardian:

  1. How big is your company?
  2. How much does an outsourced service cost?
  3. What type of provider do you want?

Company Size

Generally, businesses with fewer than 50 employees rarely have an HR team. Instead, they may have a manager or finance director who dabbles in HR because they have some relevant experience in their dim and distant past which seemingly qualifies them to deal with all the people issues that arise.

As a rule of thumb, organisations with more than 50 employees will often find it easier to have an in-house HR department and therefore, though they may still require outsourced HR support, the nature of that service may differ greatly from that utilised by the smaller business.


The costs of outsourced HR will vary depending on the service required.

A specific well-defined project may be required and will occur a one-off cost. Alternatively, an HR company may work alongside the business dealing with day-to-day issues on a retained basis, or they may be called in to sort an “emergency” for which they would charge an hourly rate.


Do you want a “face” who gets to know your business, staff and company culture, who can be flexible in the service you offer and who, by virtue of being a phone call away, can operate as if you have your very own HR department?

Alternatively, you may sign up to an HR support line – a less personal service but one that may suit the nature of your business and complement the expertise you already have within your organisation. It is very much “horses for courses” and the latter may be suitable where there is an experienced HR team who just need reassurance from time to time.

Nicola says that:

As a general rule of thumb, when administrative processes begin slowing down the productivity of the firm it is the time to consider outsourcing the management of your human resources.

Good employee relations are not simply “nice to have” but important to get right as they can directly affect the future revenues of your business.

By prioritising employee engagement you will ensure you are not burdened by high employee turnover, low morale or ineffective teamwork.

Instead, you gain:

  • employees who are productive,
  • enthusiastic and effective team members,
  • people enabling you to maintain an edge in a highly competitive environment.

The attraction and retention of talent is now such a business critical operation that for many businesses, outsourcing their HR function is the best way to ensure that what is arguably their most valuable asset is well managed, freeing them up to concentrate on their core business.”

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