Guide to HR Outsourcing for Small Business Growth in 2022

With today's changing job market, HR has become more important than ever. It is crucial for any business to have access to a strategic resource that can help with recruitment, retention, compliance, and other mission critical needs

By David Bradshaw, Chief Executive Officer
11th August, 2022
David is a highly experienced consultant specializing in business strategy, lean operations/automation, and human resources. He holds a Master's degree from the University of Cambridge, UK, and an MBA from Quantic School of Business and Technology.

In this article, we'll take a look at how HR Outsourcing can be used most effectively to support small business growth in the current climate

HR Trends to watch in 2022

The relationship between employer and employee is changing. In a market where demand outweighs supply 2:1, employees are becoming more choosy about where they work. Since the pandemic and the Great Resignation, attitudes and preferences are shifting. HR is not just about dealing with employee relations issues and managing compliance anymore - if a company wants to grow in today’s competitive job market they need to invest in their HR team and make sure they are doing everything they reasonably can to keep their employees happy.

As well as the supply and demand imbalance, we are also dealing with dramatically increased mobility - with an unprecedented level of people switching jobs. This effect is not to be underestimated. Just like taxes and inflation on savings and investments, employee mobility can put a serious dent in your growth efforts. Employee turnover is a serious threat to any small business, with lots of hidden costs such as loss of knowledge, customer relationships, retraining costs, and decreased morale. Estimates vary, but it is safe to say that losing an employee is much more expensive than the cost of replacing them.

Combine these effects with a backdrop of rapidly changing employment law, and it is easy to see why having professional HR support is a must - even for the smallest of employers.

Benefits of Outsourcing HR

The general benefits of outsourcing HR are numerous and well documented, including lower costs and commitment, improved access to relevant talent and experience, faster outcomes, and lower distractions.

While these benefits are universally applicable, the most important benefits to a small-but-ambitious company looking towards growth are access to talent and faster outcomes. Cost will always be a factor, but should play second fiddle to getting the right skills and experience helping you accelerate the growth of your business.

When is the right time for a small business to outsource the HR function?

Outsourcing is a viable option for businesses that are looking to grow but don't yet have their own HR expertise on staff. For starters, HR outsourcing is a wise decision if you want to focus on your core business and not spend your own efforts on HR functions that, quite frankly, would be better done by somebody else. But perhaps more importantly, working with a strategic HR partner can help you figure out how to grow - bringing to the table valuable skills such as workforce planning, job definition, compensation and benefits strategy, and recruitment marketing. In other words, starting out with an outsourced HR function is often the best way forward as you head into a growth initiative. Not only will you avoid the distractions that come with trying to attract new talent into your business, you’ll likely be more successful and accelerate your growth.

The good news here is that most outsourcing providers are willing to start out small and then scale up their support as and when needed. This is a great way to access HR expertise that will have a meaningful impact on the trajectory of your business, for a very modest outlay - certainly much cheaper (and faster) than hiring your own HR team.

Even if you are not looking at aggressive growth in the short to medium term, outsourcing administrative HR functions such as payroll and compliance can still be a great strategy. Employment law is complex, and presents plenty of bear traps to the unwary small employer. Save yourself the time and trouble, and let a professional take care of it for you. It may only need a handful of hours per month, and be more affordable than you might think.

Challenges You'll Face with Outsourcing Your HR Functions

Outsourcing HR functions can be a great way to save money and time, but it also comes with its own set of challenges. In fact, one the biggest challenges you will face is choosing and selecting a partner that is the right fit for your business. Outsourcing HR is not a new concept - in fact, the industry is pretty large. Over the years, a number of different organizations have entered the market, each offering a different value proposition targeted towards different types of business. The key takeaway here is that not all HR outsourcing services are created equal, and there are huge differences between different providers.

For example, some providers are sprawling organizations of call centers, and you’ll never speak to the same person twice. Avoid these like the plague - you will not receive a tailored service, and vying for attention can quickly become frustrating. These services might first appear attractive from a cost perspective, but be warned - this segment of the industry has a reputation for downright terrible customer service and an infuriating customer experience. Another key challenge with this kind of service include losing control of your own employee experience, as you may find that your provider does not prioritize customer service or employee retention as much as you would have liked.

Another breed of HR outsourcing provider is the PEO, or Professional Employer Organization. A PEO is a type of staffing service that functions as a third-party contract administrator between employers and their employees, while handling all payroll and HR-related administration. Many large payroll processors offer a PEO service, albeit for a handsome fee. A PEO service might be an appropriate time-saver for a small-to-medium sized organization, but you’ll certainly pay for the privilege. Be aware that many organizations supported by a PEO report low employee satisfaction, lack of service, and lack of flexibility. One potential upside to this arrangement for a small business is benefits buying power. A good PEO will be able to provide a superior benefits package for your dollar, when compared to sourcing benefits yourself.

Instead of these, opt for a customer-centric provider, passionate about your success, who will dedicate a suitably-qualified person (or team) to your company so that mutual trust and effective working relationships can be built.