Complete guide to HR outsourcing costs in 2024

Human resources (HR) is a broad business term. It covers multiple functions ranging from simple to overwhelmingly complex, which means it can take a lot of time, money, and stress to get right. Because of this, small teams often choose to outsource their HR at an estimated cost of £100-£300 per month.

With the end of the financial year in sight, business owners are snowed under by tax deadlines, paperwork, and payroll reports. Ahead of April 1 2024, now is the ideal time to find a streamlined, third-party HR provider who can take care of the admin next time around.

In this guide, we’ll explain the main elements that affect the cost of a third-party HR provider, as well as the types of outsourcing available, such as audit or support HR. Read on for a detailed breakdown of what to look for in a provider, how much you should expect to pay, and the pros and cons of every option available.

What is HR outsourcing?

HR departments, also known as people teams, are in charge of everything relating to employee management. When you outsource your HR, you will effectively hand over these responsibilities to a third-party provider or HR consulting firm who can take care of them for a monthly or annual fee.

It is a smart idea to outsource your HR functions as it allows you to focus on your core business activities without losing control of your HR operations.

This is especially true for small businesses, who often have smaller teams. For them, establishing a dedicated HR department would be an unncessary company splurge, especially in today’s poor economy and with many firms scaling back hiring plans.

What cost factors influence the outsourcing of HR?

Before you can estimate your overall HR outsourcing costs, there are a number of factors – both internal and external to your business – that will affect how the fees are calculated. These are:

• Team size: often this is the main influencing factor when it comes to HR pricing, as the more staff you have, the greater your HR needs
• HR functions: a simple function like fixed-fee payroll, for example, will cost far less than bringing in an experienced employment lawyer to represent your small business at tribunal
• Delivery model: most small businesses find they need some degree of retained support but hourly rates, project-based fees, or retainers can influence the overall cost
• Overhead and operating costs: consultants need to factor in their own expenses like software, training, travel, and administrative costs, which can be further passed on to clients
• Industry: specific industry demands and regulations can impact costs. Consultants with expertise in niche areas of HR might charge more for their specialised knowledge and limited availability

Outsourcing of HR: how much does it cost?

HR outsourcing prices vary depending on a number of factors. Generally, your HR outsourcing costs will depend on the breadth of service you choose, and the size of your business. These tend to cover:

1. Payroll and benefits administration: for a fully-managed payroll solution, companies should expect to pay £25 per employee, per month. This includes everything involved in the monthly processing, plus additional services like year-end reporting, auto-enrolment into pension schemes, and HR integration.

2. Training and development: according to a 2023 report by LearnExperts, SMEs can expect to spend around £1,121 per employee when it comes to learning and development (L&D), making it one of the biggest HR expenses. To reduce this cost, you can opt for outsourcing employee training.

3. Recruitment: recruitment costs are easily the most expensive aspect of mangaging an employee. Agencies typically charge 20-30% of the new worker’s annual salary, so a role with a £30,000 salary would cost £6,000-£9,000. However, a bad hire is estimated to cost around three times this amount.

4. Employment law: this is the trickiest area to estimate as it varies massively depending on the complexity of the case and number of people involved. Most HR providers will charge between £150 to £300 per hour for experienced HR professionals involved in grievance and disciplinary procedures.

How much will I spend on HR outsourcing overall?

Pricing for outsourcing human resources typically works in one of two ways: either as a fixed fee (per employee, per month), or as a percentage of each employee’s monthly wage.

• Using the above estimates, you can expect to spend £200 per month, per employee for HR outsourcing (ignoring recruitment costs)
• Using the second pricing method, you’ll pay approximately 2% to 10% of a worker’s annual salary

Types of HR services to outsource

HR outsourcing providers offer custom services that you can choose from. Here are three of the most common services for small businesses:

1. HR audits

HR audits look at your current HR activities, including terms of policy, documents, procedures and systems, in order to see what needs to be done to get your business operating legally and efficiently. You should expect to pay around £700-£1,000 for a comprehensive HR audit.

An HR audit is usually extremely comprehensive and takes a ‘fine tooth comb’ approach to assess all of the different HR practices in your business. Generally speaking, a full audit will look at a range of features, including:

• Recruitment practices
• Employee development and disciplinary
• Health and safety
• Payroll and benefits

Though these features may be included, some businesses may prefer to specify which functions they want audited – this will especially be the case where smaller businesses have established HR concerns. An HR audit is also useful if you have some HR services in-house, but need to clarify where changes should be made.

You should expect an HR audit to include some small fixes, but fundamentally the results form the basis of HR consulting services fees going forward, and will feed into an actionable plan. Which brings us to..

2. Specialist HR consultants

Businesses can also benefit from the hire of a specialist HR consultant for managing their day-to-day people tasks or projects. Most of these will charge their own rates, which may be broken down on an hourly, daily or fixed fee basis.

Typically, you can expect to pay slightly less overall if you want your HR consultant on a retainer basis. With this option, the HR consultant hourly rate will be in the region of £60+, compared with £80+ an hour if you’d rather pick and choose your HR help.

Of course, you may sometimes need to hire an HR consultant for weeks or months at a time – the rates above can be expanded to cover longer periods of time, or you may even be able to negotiate a discount with your HR support team if that’s the case.

3. HR support costs

HR support is a way of outsourcing the day-to-day running of your HR function, as well as supporting the business in its people management endeavours. Although HR agencies will do the legwork for you, HR support still means support, and will require some degree of involvement on your part.

Small businesses usually opt for HR support on a monthly fixed fee basis, making the cost of human resources easy to digest. Some of the most common HR support services include support and advice during disciplinary and grievance procedures, redundancy, and recruitment, as well as health and safety, training and development, payroll, and benefits.

Should I outsource HR?

For the vast majority of small to medium businesses and UK startups, it makes sense to outsource HR. This lets you focus on the core aims of your business, and sidestep the headache of some of the most difficult and time-hungry tasks involved in running a business.

Human resources also does not generate revenue, so you’ll want to take care of it as quickly and cheaply as possible. Just be aware that slip-ups in HR can be extremely costly because many HR services require specialised skills. That’s why it’s crucial to do it properly.

Ultimately, the choice between outsourcing your HR and keeping it in-house depends on the specific functions you’re after. Some – like employment law, payroll, and pensions – are tricky to manage cost-effectively in-house, so outsourcing these makes sense.

Pay-as-you-go vs retained HR costs

If you can’t decide whether or not to outsource HR long-term, a good option is to purchase a pay-as-you-go plan, rather than invest in a costly retainer. That way, you can test out a consultant to make sure you’re happy with their services without attaching an unaffordable price tag.

• Retained consultancy = you’ll be charged a minimum service fee per month, so you’ll want to make use of a base level of HR support
• Pay-as-you-go = you’ll be charged a set amount based on what services you require, and how long for

Small businesses usually reach the threshold to make retained consultancy worthwhile. This is especially important if you have no in-house HR skills, and want to be safe in the knowledge you’re working within employment law – just note that there will also be a maximum usage cap.

Pay-as-you-go can be invaluable if you have an unusual project you need specific help with, but don’t want to invest in a lengthy retainer. Below, we’ve weighed up the pros and cons of retained and pay-as-you-go payment plans, so you can best assess the value of each to your business:

Which business is a retained model best suited for? If you have ongoing HR needs, want proactive support, and value continuity, consider a retainer.

Which business is a pay-as-you-go model best suited for? If your HR needs are sporadic, budget is tight, or you prefer project-based flexibility, opt for this model.

Can I manage HR myself?

If you’ve read the above and decided that outsourced HR doesn’t work with your budget constraints, a cheaper option is to DIY your human resource tasks by using HR software – a simple tool that automates HR tasks and makes in-house management much easier.

HR software pricing varies, but paying for it is usually cheaper than paying to outsource your HR. Rippling, one of our top recommended HR platforms, charges prices starting from an affordable £7 per user, per month.

Meanwhile, Deel’s HR software, which can automate HR admin and reporting for employees around the world, is free for businesses with up to 200 employees.

Other HR software providers work out prices on a bespoke, per-business basis, and so don’t display their rates transparently. Moorepay, which makes extensive HR expertise available to its users, is a popular example.

Compare HR outsourcing prices

From reading this article, you’ve learned more about HR outsourcing costs, including the factors that may affect pricing and what the potential benefits of outsourcing your company’s HR requirements may be.

Here at Startups, we think the best way to find the right HR outsourcing for your small business is to go straight to the suppliers. That’s why we’ve built a quick and easy quote-finder below to help you compare and save on quotes.