In-house vs Outsourcing HR: Making the Strategic Choice for Your Business

Explore the benefits and disadvantages between in-house HR vs outsourcing. See which service model mix could benefit you based on your business needs.Are your HR needs outpacing your HR team? Are you facing turnover or compliance challenges? These are just some of the reasons you might compare your options between expanding your in-house HR team or outsourcing certain HR functions. 

What is in-house HR?

Many businesses have some level of in-house HR: meaning an internal team that carries out HR functions within the business. In-house HR teams often handle everyday aspects including recruitment, employee relations, compliance, and compensation and benefits. 

In larger and more established businesses this might involve an entire HR team – but in start-ups and small businesses, these activities might be handled by just one or two key people. As the business grows or changes structure, the demand on HR capabilities and resources increases. Quite often, a small HR team will start to feel stretched thin.

It’s at this point that many organisations consider either expanding their in-house team or working with an external provider. The right answer will depend on the size and structure of the organisation, and how complex its needs are.

57% of organisations now outsource some or all of their HR work, according to Deloitte’s 2024 Global Outsourcing Survey. 

Benefits of in-house HR

In-house HR teams can play an essential role in a company, acting as strategic business partners and directly influencing the employee experience. Other key benefits of an in-house team include:

• Strong employee relationships
  HR staff that are always present can build ongoing relationships and a strong sense of trust with other employees, which can make many HR processes smoother.
• Direct control
  An in-house HR team can have direct control over HR practices and processes, as well as a clear understanding of the company and its culture.
• Access to company knowledge
  In-house teams will often have real-time access to employee performance and engagement data, enabling them to quickly recognise top performers and identify potential issues.
• Immediacy
  Maintaining in-house HR expertise allows for quick response times and immediate availability when this is needed.

Inter-departmental understanding
An in-house HR team can hold a detailed understanding of how departments and teams interconnect, which can strengthen strategic perspective for the organisation.

It’s important not to underestimate these benefits when weighing up whether to invest in HR in-house vs outsourcing, as in-house expertise is a valuable thing. Now let’s consider the other option available to modern businesses: HR outsourcing.  

‍Understanding HR outsourcing

Outsourced HR involves, as one might expect, partnering with an external provider to fulfil some or all of the business’s HR functions. 

Outsourcing service models can be fully managed, co-managed, or project-based, as needed by the business in question. A business might choose to outsource just one HR function, or have all of their HR requirements managed by the external partner. Commonly outsourced HR functions can include payroll, recruitment and onboarding, performance management, and HR compliance. Some outsourcing agencies, such as HumanX, specialise in HR strategy and consulting to help achieve broader goals as well as handling the day-to-day details.

Benefits of outsourcing HR

There are a few key reasons more and more businesses are turning to outsourced HR providers for some or all functions. The advantages of outsourced HR include:

• Cost benefits 

Outsourcing often saves businesses money. This is because the business can minimise ongoing overhead employee costs such as superannuation, sick days, and training expenses.

• Scalability: If the organisation is growing quickly, using an outsourcing partner makes it easier to fill expanding needs in response. The same goes with organisations adapting to fluctuating or seasonal needs, as can be seen in the case study of Few and Far. 
• Specialist knowledge: An external provider can offer both deep and broad experience in the required HR functions, as they have a specialised approach and experience working across companies. 
• Objectivity: An outsourcing agency’s neutrality can be invaluable in complex matters such as developing HR policies, understanding what might be holding the employee experience back, or investigating a workplace incident.‍
• Improved talent acquisition: Working with the right outsourcing firm can help an organisation attract, select, and retain a higher calibre of talent by optimising each process. ‍
• Reduced compliance risk: A quality outsourcing firm will be constantly up-to-date on compliance requirements, helping the business ensure that it’s a best-practice employer.‍
• Freed-up focus: Allocating certain functions to an external provider can also free up an organisation’s internal resources for core business activities and strategic decision-making.

So there are certainly some distinct advantages of outsourcing – particularly the objectivity, specialist expertise, and resource reallocation. 

Improved access to talent is the main driver (42%) for businesses using third-party outsourcing services, according to Deloitte’s 2024 Global Outsourcing Survey.

Deciding between in-house HR vs outsourcing

When faced with the two options and when deciding which service level to choose, it helps to consider the following important aspects for your business:

• HR requirements and complexity: Managing a small team in-house is one thing; managing a large and evolving team or navigating a HR transformation is another entirely.   
• Price comparison : Be sure to consider all potential internal costs including recruitment, training, and staff turnover when comparing in-house costs to outsourcing quotes.
• Company size and growth stage: An outsourcing provider can be particularly beneficial if the business has expanding or shifting HR needs.  
• Compliance needs: There’s no room for error when it comes to rules around leave, payroll, overtime, and workplace safety standards. When you don’t have the internal knowledge to hand, an external specialist can help.‍
• Company culture and strategy: If you don’t yet have a thriving company culture and successful HR strategy, the right HR consultants can help you to nurture these.

You might choose to invest in a comprehensive in-house team, to outsource certain processes, or to have an external provider handle all of your HR matters. Quite often, though, the best outcome comes from a mix of the two HR models. 

Making the right choice for your business

So which option is right for your business? Start with these self-assessment questions to clarify whether an in-house or outsourcing investment is your next step, and which HR functions need attention. 

Self-assessment questions around HR and outsourcing

• Could your HR practices benefit from a neutral perspective?
• Are you anticipating growth or a busy period ahead?
• Are your HR requirements becoming increasingly complex?
• How much time and resources are going into each HR function? 
• Are there HR issues you can’t easily identify or resolve internally?
• Do you currently have doubts about meeting HR compliance requirements?
• Could in-house staff be better supported with external assistance?

Sometimes, the catalyst for outsourcing might be more of a HR misalignment with broader organisational goals or strategies. This was the case with Total Image Group (TIG), which benefitted from a comprehensive HR audit, framework development, and change management process with HumanX.

Measuring success

Whatever HR model mix your business ultimately implements, measuring progress and success is key. This is typically done through a tailored mix of key performance indicators (KPIs) to assess effectiveness and make real-time decisions with confidence. These metrics can include (but are certainly not limited to) engagement rate, employee turnover rate, time to hire, and cost per hire. 

FAQs about in-house vs outsourced HR

Finally, let’s consider some of the most commonly asked questions about in-house vs. outsourcing HR here in Australia.

What size of business benefits most from in-house HR?

Larger businesses with more resources typically benefit more from having in-house HR departments. These might be organisations with 150 or more employees and the cash flow to support a large HR team. Meanwhile, mid to large sized businesses can really benefit from working with an outsourcing provider as their in-house function evolves. 

In particular, there’s also a notably high rate of outsourcing amongst smaller employers when it comes to payroll. 41% of companies with 51-100 employees outsource their payroll function, according to The 2024 Australian Payroll Survey Results.

How can you calculate the true cost of in-house vs outsourced HR?

This can certainly feel like a tricky calculation, because there are so many direct and indirect costs to consider. For example, the indirect costs of in-house HR can include software and office space, while indirect costs for HR outsourcing might include the time and resources spent liaising with the outsourcing firm. It can help to consider the HR mix of businesses that have a similar size and structure, and to explore case studies to understand how similar challenges have been tackled. Reputable HR outsourcing firms will also be happy to have an obligation-free discussion to explore needs and costs.

Is it possible for businesses to transition between models as they grow?

Absolutely – and many do! Quite often, outsourcing can be helpful to support a business through a transformation or growth phase. Other more established businesses might turn to outsourcing to address archaic HR policies or practices or identify something that isn’t working. The right mix and timing will be different for every business, and can evolve as the company does. 

How long does it take to implement a change in HR models?

Once again, this depends on the needs of the business. An outsourcing provider such as HumanX can respond rapidly for something urgent like a workplace investigation, while strategy and policy work might take weeks to months depending on complexity. 

What HR functions are most commonly outsourced?

Commonly outsourced HR functions include compliance, employee relations, workplace investigations, and learning and development. Another very common area is HR consulting, which can help businesses get to the heart of a particular HR matter and guide productive change. 

How can you ensure quality control with outsourced HR?

Choosing the right outsourcing provider is vital to ensuring you aren’t actually wasting time and resources when outsourcing. When assessing potential providers, there are a few ways to check for quality. You can read client testimonials and explore a provider’s resources to get a sense of their approach. But one of the best ways to get a feel for a working relationship is to start a conversation. A quality provider will establish clear communication and expectations upfront, while working to deeply understand your unique needs. 

HumanX is a people-centred provider of HR outsourcing services with offices in Sydney, Melbourne, Newcastle, Perth, Brisbane and Canberra. We love showing just how transformative quality HR outsourcing can be. Get in touch today to discuss how our HR specialists could support your business needs.