Outsourcing Vs In-House HR for SMEs: A Comprehensive Guide

Outsourcing Vs In-House HR for SMEs: A Comprehensive Guide

Managing human resources efficiently is crucial for small and medium-sized enterprises (SMEs) and outsourcing HR can do just that. As we’ve discussed in previous blogs: your HR should be delivering you a return on investment. And if it’s not, please get in touch. We need to talk!

We often face the question from prospective clients:

Why should I outsource HR instead of hiring an in-house team?

With limited resources and increasing competition, SMEs need to find ways to optimize their HR functions. This is where the right HR service model for SMEs comes into play. By leveraging the expertise of an outsourced HR provider, SMEs can save time, reduce costs, and focus on their core business activities.

Understanding HR Needs for SMEs

SMEs face unique HR challenges that differ from those of larger corporations. These include managing compliance with ever-changing employment laws, handling employee relations, and ensuring efficient payroll processing. Effective HR management is vital for maintaining a motivated and productive workforce. However, many SME owners lack the time and expertise to handle HR tasks effectively.

Outsourcing HR has huge benefits for SMEs like this small team in a stat up organization

The Costs and Limitations of In-House HR

Hiring an in-house HR team can be prohibitively expensive for SMEs. An HR generalist’s salary can exceed $60,000 annually, not including payroll taxes, benefits, and other associated costs. Additionally, SMEs may not require full-time HR support, leading to underutilization of resources.

In-house HR departments also face challenges in staying updated with the latest HR trends and compliance requirements, which can result in costly legal issues. An organization like ADDA HR, that is across many different sectors and states, will have a greater breadth of knowledge and therefore; the ability to find more creative solutions.

The Benefits of Outsourced HR

Cost Savings: Employing a salaried Head of HR will typically cost around $60,000 per year. Then there are all of their benefits, insurances etc… And of course one person probably isn’t enough during your busiest times. They’ll need other team members to help with admin and payroll. However they won’t need them full-time, which means they will be idle for periods of time

This is just one area that outsourced HR providers significant cost savings, over in-house HR. SMEs only pay for the services they need. This makes it an affordable option for smaller businesses. In particular those who’ve recently found themselves at the point of legal obligation to offer employees those benefits.

Access to Expertise: Outsourced HR providers offer access to a team of HR professionals with diverse expertise. This includes specialists in areas such as talent management, benefits administration, payroll, and compliance. SMEs benefit from a level of expertise that would be difficult to achieve with a small in-house team.

Outsourcing HR for SMEs gives them the advantage of access to high level expertise, like those of Adam Diane of ADDA HR - pictured here talking at HR Technologies, London 2024
ADDA CEO Adam Daines giving a speech at the 2024 HR Technologies Conference

Flexibility and Scalability: Outsourced HR services can scale with your business. Whether you have ten employees or a hundred, outsourced HR can adapt to your needs. This flexibility is particularly beneficial for growing SMEs.

Compliance: Keeping up with employment laws and regulations is a major challenge for SMEs. Outsourced HR providers stay abreast of legal changes, ensuring that your business remains compliant and avoids costly penalties.

Focus on Core Activities: By outsourcing HR tasks, SME owners can focus on what they do best – running their business. This leads to increased productivity and business growth. Think about it: are you an expert in HR? Or is your expertise (and therefore your time) more valuably expended elsewhere?

In order to maximise your revenue, you must not waste time as a business owner on tasks that you are not qualified to handle!

Comparing In-House and Outsourced HR

Cost Efficiency: In-house HR teams require salaries, benefits, and overhead costs, while outsourced HR services offer a pay-as-you-go model. Outsourcing is generally more cost-effective for SMEs.

Efficiency: Outsourced HR providers offer streamlined processes and advanced HR technologies, leading to increased efficiency. In-house teams may struggle to match this level of productivity.

Flexibility: Outsourced HR services can scale with your business needs, providing more flexibility than a static in-house team.

Expertise: Outsourced HR teams consist of specialists in various HR functions, offering a broader range of expertise than an in-house generalist.

Compliance: Outsourced HR providers stay updated on employment laws and regulations, reducing the risk of legal issues for your business.

A pair of old fashioned scales offers a visual representation of weighing up the pros and cons of outsourced HR for SMEs

In-House HR: Pros and Cons


  • Direct control
  • Immediate availability
  • Tailored to company culture


  • High costs
  • Limited expertise
  • Scalability issues

Outsourcing HR: Pros and Cons


  • Cost-effective
  • Access to expertise
  • Flexibility
  • Compliance


  • Perceived lack of control
  • Potential for miscommunication

How to Choose the Right Outsourced HR Partner

Selecting the right HR outsourcing provider is crucial for maximizing the benefits. Here are some tips:

Assess Your Needs: Determine what HR functions you need help with and ensure the provider offers those services.

Check Credentials: Verify the provider’s credentials and reputation. Look for industry certifications and positive client testimonials.

Understand Their Services: Ensure the provider offers comprehensive services that cover all aspects of HR management, including compliance, payroll, and employee relations.

Evaluate Technology: The provider should use advanced HR technologies that streamline processes and improve efficiency.

Consider Costs: Compare pricing models and ensure the services fit within your budget.

Communication: Effective communication is key. Choose a provider that is responsive and transparent in their dealings.

Outsourced HR Service Models for SMEs

When considering HR outsourcing, SMEs have several options to choose from. Each HR service model offers different advantages:

Professional Employer Organizations (PEOs): PEOs co-employ your team, offering benefits, workers’ compensation, and other services at a shared cost. This model can save money on benefits but may limit flexibility in managing HR policies.

Human Resources Organizations (HROs): HROs act as a fractional HR department, handling everything from payroll to compliance. Unlike PEOs, HROs do not co-employ your team, giving you more control over HR policies.

Administrative Services Organizations (ASOs): ASOs focus on administrative tasks like payroll and compliance but offer fewer strategic HR services. This model is suitable for SMEs needing basic HR support.

A happy SME owner having made the right choice to outsource HR in his business

Why Outsourcing HR is the Best Choice for SMEs

Outsourcing HR functions offers numerous benefits that make it the best choice for SMEs:

1. Cost Savings: By outsourcing HR, SMEs can avoid the high costs of hiring and maintaining an in-house team. This includes salaries, benefits, and overhead expenses.

2. Expertise: Outsourced HR providers offer access to a team of experts with specialized knowledge in various HR functions. This ensures that SMEs receive high-quality HR support.

3. Scalability: Outsourced HR services can scale with your business, providing the right level of support as your company grows. This flexibility is particularly valuable for SMEs.

4. Compliance: Keeping up with employment laws and regulations is a significant challenge for SMEs. Outsourced HR providers stay updated on legal changes, ensuring your business remains compliant.

5. Focus on Core Activities: By outsourcing HR tasks, SME owners can focus on running their business, leading to increased productivity and business growth.


Outsourced HR services offer a cost-effective, flexible, and efficient solution for SMEs. By partnering with an outsourced HR provider, SMEs can access a wide range of expertise, ensure compliance, and focus on their core business activities. This leads to improved productivity, reduced costs, and ultimately, business growth.

As the business environment becomes increasingly complex, investing in outsourced HR is a smart move for any SME looking to stay competitive and achieve long-term success.

As competition rises, making strategic decisions about HR management can make all the difference. Consider outsourcing your HR functions and experience the benefits of a best-in-class HR team without the high costs.

Your business deserves the best – and outsourced HR can deliver just that.

For a FREE CONSULTATION please contact us today.

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