How Do You Work Out the Real Cost of Outsourced HR?
If you're comparing outsourced HR support, the headline price only tells you part of what you need to know. Two providers can charge similar monthly fees but take very different amounts of work off your hands. Equally, a lower-cost option can become much more expensive over the year if your business needs regular help with employee issues, change or manager support.
We've already looked at the different outsourced HR models and when each can work well for an SME. This time, the focus is narrower: what actually drives the cost once you decide to outsource and how do you work out whether one option is genuinely better value for your business?
This post is for: SME owners comparing outsourced HR support or reviewing whether their current arrangement still represents good value.
You'll leave with: a clearer way to assess the real cost of outsourced HR and the questions to ask before choosing or changing provider.
This post isn't: another guide to the different HR outsourcing models. We've covered those before; this article focuses on what drives cost in practice.
If you want something more specific, these may help:
Outsourced HR for UK SMEs: When It Works (and When It Doesn’t)
Outsourced HR: Worth It? One Decision Guide to Avoid Buying the Wrong Support.
How predictable do you need the cost to be?
One of the first decisions isn't simply how much you want to spend but how much certainty you want over that spend.
Pay-as-you-go support can work well when HR needs are genuinely occasional. You pay when you need help and there's no larger monthly commitment. The difficulty comes when a business has a few busy months. A grievance, disciplinary matter, long-term absence case or restructure can quickly increase the annual cost, particularly if several issues happen at once.
A retainer gives you a more predictable monthly cost but that only helps if the level of support included matches the way you're likely to use it. If complex casework, on-site support or manager training aren’t included in the fee, the monthly figure is unlikely to show the full picture.
The most useful starting point is how variable your HR needs are likely to be and how comfortable you are with that variation in your monthly expenditure.
Headcount doesn't tell you how much HR support you'll need
It's tempting to assume that a business with 40 employees will need roughly twice as much HR support as one with 20, but in practice, headcount is only one part of the picture. An established 40-person business with experienced managers, low absence and little organisational change may need less support than a 20-person business that's recruiting quickly, dealing with performance issues and asking new managers to lead people for the first time.
The amount of HR support you're likely to use is often driven by the complexity of the business rather than the headcount. Manager capability, employee turnover, absence levels, employee relations history, recruitment activity, restructuring and the pace of growth can all increase the amount of help needed.
That's worth considering when you're looking at per-employee pricing. It may give you a simple way to calculate the fee but it doesn't necessarily tell you whether the package matches the level of support your business is likely to need over time.
Work out how much of the job the provider is actually taking on
This is one of the biggest differences between outsourced HR services and it's easy to miss when you compare quotes.
Two providers may both say that employee relations support is included. With one that may mean advising your manager on the process and reviewing a letter they've drafted. With another it may mean preparing the paperwork, briefing the manager, helping structure the meetings and keeping the process moving from one stage to the next.
Both are providing employee relations support, but clearly they aren't removing the same amount of work from the business.
Before comparing price, be clear about what you and your managers will still be expected to do. If the business has capable managers with the time and confidence to run processes themselves, an advice-led service may be enough. If most of the work involved in a specific situation will actually still be left with the owner or manager, maybe a more hands-on service may represent better value even if the fee is higher.
Consider whether your managers should need less help over time
Outsourced HR shouldn't automatically mean that managers contact HR for every decision indefinitely. Some issues will always need specialist input, but good day-to-day HR support should also help managers become more confident with the issues they're expected to handle on a regular basis. If a manager needs the same level of support for the same type of issue year after year, it's worth asking whether the arrangement is building capability in the business or simply dealing with each problem as it appears.
This is something to explore with the provider before you choose them. Is helping managers become more confident part of their approach, or is the service mainly designed around giving answers when managers call? Do they explain the thinking behind the advice, help managers prepare for conversations and support them to handle similar situations more independently next time?
The answer to these questions affects cost because confident managers usually need less intervention on routine matters and are more likely to raise issues before they become harder to resolve.
Don't judge a retainer only by how many hours you used
A retainer can look like poor value in a quiet month if you judge it only by the number of calls or hours used, but that misses the value of having support available when you need it.
But part of what you may be paying for is access to somebody who already knows the business, its managers and the background to previous decisions. When something does happen, you don't have to start by explaining the organisation from scratch or finding a provider who has capacity to help.
The question is whether that access and continuity are useful to your business. For some SMEs, they're valuable because issues can be dealt with quickly and managers know where to go. For others, HR needs are so occasional that paying for ongoing access doesn't make commercial sense.
That's why utilisation on its own is a poor way to assess value. You need to look at what the arrangement gives you when you need it as well as how often you use it.
Ask better questions before you decide
The most useful provider conversations go beyond the monthly fee and the list of services. You want to understand how the arrangement will work when the business is busy, when something difficult happens and when your needs change.
These questions usually tell you much more than asking whether a service is 'unlimited':
What usually causes your clients' costs to increase during the year?
What would you expect our managers to handle themselves and what would you take off their hands?
If we had a grievance, disciplinary matter or redundancy next month, what would be included and what would be charged separately?
How much of your support is advice and how much is hands-on help with the process?
How do you help managers become more confident so they need less support with routine issues over time?
What tends to make one business with our headcount need much more support than another?
How will the cost change as our headcount grows and are there any thresholds or package changes we should know about?
What does a typical client like us actually spend over a year, including any additional work?
At what point would you tell us that a different level or model of HR support would make more sense?
If the answers are clear, you can make a much more realistic comparison of the likely annual cost, the amount of internal time you'll still need to provide and the level of support you'll actually receive.
You can then compare providers on the likely annual cost, the internal time still required and the level of support the business will actually receive.
FAQs
Is a monthly HR retainer always better value than PAYG?
No. It depends on how often you're likely to need support, how predictable you want the cost to be and what is included in the retainer. A business with very occasional HR needs may get better value from PAYG, while a business with regular employee issues or rapid growth may value the certainty and continuity of a retainer.
Why is outsourced HR often priced by headcount?
Headcount gives a straightforward way to calculate a predictable fee as the business grows. It also broadly reflects the fact that more employees usually mean more potential queries, management issues and HR activity. The important thing is to understand what level of support is included within that pricing and whether it matches the needs of your business.
When should an SME consider bringing HR in-house?
There's no single headcount at which this becomes the right answer. It depends on how much HR work the business generates, how much of it needs regular internal presence and whether the cost and flexibility of outsourcing still suit the business.
Disclaimer
This article provides general information and practical guidance. It isn't legal advice. The right HR support model will depend on the needs and circumstances of the individual business.
