Why Human Resource Outsourcing Saves British Companies 40% in HR Costs

Recent studies show that companies can reduce their HR staff size by 18% through human resource outsourcing. British companies are moving toward external HR support as 39% of businesses outsource their HR functions to concentrate on core activities.

The data makes a strong case for HR outsourcing. Cloud-based HR solutions proved their worth during COVID-19. Companies using these solutions reported only 2% payroll issues, while 19% of businesses handling everything internally faced challenges. Most organisations choose to outsource their payroll processing first because it helps them boost accuracy and minimise compliance risks.

Your company can save money substantially through HR outsourcing. This piece will help you understand which functions you should outsource first and how to pick the right provider. You'll also learn practical steps to create an HR outsourcing strategy that works well with your business goals.

Why British Companies Choose HR Outsourcing

British companies are changing faster towards HR outsourcing. The main drivers are high operational costs and ongoing skills shortages. Research shows that outsourcing HR services can reduce administrative costs by £357.37 per employee.

Rising HR management costs

British businesses face intense financial pressures that force tough decisions about resource allocation. UK companies expect higher recruitment and talent management costs, with over two-thirds anticipating an increase. Poor hiring decisions hit organisations hard. A mid-manager level mismatch with a £42,000 salary could cost companies more than £132,000 to fix.

Employee retention makes these costs even higher. About 43% of new hires quit their roles within 90 days, and 57% of recent recruits don't meet performance expectations. This creates an expensive cycle of repeated recruitment and training.

Skills shortage effect

British organisations face a big challenge with the skills gap. 71% of UK businesses have experienced labour shortages last year, while 77% struggle to find needed skills. These gaps directly hurt business performance. Companies can't pursue 38% of growth opportunities because they lack talent.

Some sectors feel the pinch more than others. Healthcare, manufacturing, and hospitality sectors face tough recruitment conditions. About 82% of businesses think access to skills will threaten market competitiveness in the next five years.

Companies turn to HR outsourcing solutions to solve these problems. This lets them access expert knowledge without the expense of an in-house HR team. SMEs see the value in converting fixed HR costs to variable ones, with 39% planning to outsource their HR functions.

Outsourcing gives organisations access to expert knowledge in vital areas like employment law compliance, employee relations management, and HR best practices. This expertise helps businesses guide complex workforce challenges while they improve operational efficiency.

Understanding HR Outsourcing Costs in the UK

British companies face a heavy financial burden by managing HR functions in-house. Research shows that a worker's total cost to organisations is almost double their base salary.

Current HR costs for British companies

A company spends £62,892 yearly on an employee with a £31,722 base salary](https://hrreview.co.uk/hr-news/real-cost-of-hiring-average-uk-employee-is-62000/149526). The cost has sections for office space (£15,600), recruitment (£6,544), National Insurance contributions (£3,412), and pension provisions (£764).

These costs rise even higher for hospitality and retail businesses that hire hourly workers due to constant recruitment cycles and training needs. Workplace conflict alone costs the UK economy £28.5 billion each year](https://www.elementsuite.com/articles/types-of-hr-costs-and-how-to-reduce-them/).

Common HR budget challenges

HR departments are under pressure as half of them face budget cuts or expect them soon. Teams must now balance cost control while keeping employees happy and staying compliant.

The situation looks worse because 52% of HR professionals say their department takes the biggest hit during budget cuts. The core team believes their business doesn't value HR functions enough, with 56% expressing this concern.

Areas with highest cost impact

Traditional recruitment agencies charge 20-30% of starting salaries, making them a major expense. Each new employee costs about £1,121 to train.

Companies must set aside these operational costs:

National Insurance - 13.8% of earnings for employees over 21

Pension contributions - minimum 8% with employers providing at least 3%

Employee benefits - ranging from workplace rewards to transport subsidies

Cost management remains the main financial challenge for 57% of SMEs. Notwithstanding that, outsourcing HR functions could help save money. Mutually beneficial alliances can help companies reduce overhead expenses and turn fixed HR costs into variable ones.

Breaking Down the 40% Cost Savings

"By outsourcing HR, you can significantly reduce overhead costs and eliminate the expenses of maintaining an in-house HR department." — James Gleick, American author and journalist, expert on cultural and technological change

Studies show that companies can reduce operational costs by up to 40% when they outsource their HR functions. Multiple areas within HR operations contribute to these impressive savings.

Salary and benefits reduction

Companies eliminate expenses tied to in-house HR teams through outsourcing. The numbers tell an interesting story - in-house wages cost 2-2.5 times more than what outsourcing vendors charge. An in-house worker's cost ranges from £23.82-£27.80 per hour, while outsourcing vendors deliver the same services at just £11.91 per hour.

The cost difference becomes even more striking with teams. A three-person outsourced accounting team costs £38,120 per year, compared to a single in-house bookkeeper's salary of £58,770. Companies working with HR service providers see average savings of 15%, with some cutting costs by up to 40%.

Technology cost savings

HR outsourcing providers make substantial investments in advanced HR software and technology solutions. Companies can access these tools through partnerships without making huge upfront investments. The available solutions include:

Automated HR processes

Payroll technology

Cloud-based systems

Live data analysis tools

Most HR leaders - about 77% - say outsourcing has made their payroll processes more accurate and efficient. Service providers offer these sophisticated systems at rates that are nowhere near what individual companies would pay on their own.

Training and development savings

Training programmes offer another opportunity to cut costs. Outsourcing firms provide detailed training initiatives that improve employee skills and reduce internal training expenses. These providers spread their expertise across multiple clients, which helps keep costs down and makes their services more affordable.

Smart planning remains vital, as 40% of companies end up spending more than expected. Companies should get a full picture of their current HR processes and create detailed outsourcing strategies to maximise savings. The money saved can go into marketing initiatives, staff wellbeing programmes, or other activities that propel development.

Modern HR Outsourcing Services

"Outsourcing your HR needs gives you access to professionals with in-depth knowledge of compliance regulations. This reduces the risk of issues and ensures that your business remains up to date with ever-changing laws." — The HR Consultants, Professional HR consulting firm

Modern HR outsourcing has grown beyond basic administrative support. It now includes advanced technology solutions that boost efficiency and productivity. A detailed study by PwC HR Tech shows organisations using modern HR solutions have significant improvements in performance management.

Digital HR solutions

Digital HR solutions make processes smoother through social, mobile, analytics, and cloud technology. These solutions increase HR productivity while keeping culture, people, structure, and processes in line. 86% of companies that use digital HR platforms report better performance management efficiency.

Remote HR support

Remote HR support delivers key documentation and advice through phone and email. This flexible approach helps businesses get expert guidance while managing costs. Remote HR services provide detailed support for employment law compliance, performance management, and recruitment processes.

AI-powered HR tools

AI technology transforms HR operations through automated tasks and informed decisions. Companies that implement AI-powered HR tools achieve:

35% reduction in time-to-hire

30% decrease in administrative time

20% reduction in employee turnover

Cloud-based systems

Cloud-based HR systems offer exceptional accessibility at budget-friendly rates. In fact, 51% of professionals use these systems to manage their workforce. About 56% of organisations use cloud solutions to automate manual tasks.

Security remains the top priority in modern HR solutions. Without doubt, 88% of businesses report better core HR data security after implementing cloud systems. These platforms include reliable features such as:

Data encryption

Multi-factor authentication

Routine backups

Live analytics capabilities

Cloud integration helps businesses merge various HR functions, including payroll, benefits, and attendance tracking. Companies that don't use cloud-based HR programmes face 4x more obstacles in improving employee management experiences.

Key HR Functions to Outsource First

The first step toward successful HR outsourcing starts with picking the right functions to outsource. Research shows two main areas that consistently bring the highest value when outsourced.

Payroll processing

Companies outsource payroll more than any other HR function because it involves complex calculations and tax regulations. Studies reveal that organisations see a remarkable 35% reduction in administrative calls to their HR departments after outsourcing payroll.

Outsourced payroll services cover:

Wage calculations and tax deductions

Benefits administration

Compliance monitoring

Direct deposit management

Tax return form generation

Businesses get specialised expertise and stay compliant with changing labour and tax laws through outsourcing. Payroll providers give you self-service portals that let you check periodically and get support whenever needed.

Recruitment services

Recruitment outsourcing brings major benefits since hiring takes significant time and expertise. External recruitment firms have the right tools, networks, and strategies to screen, interview, and select candidates efficiently.

Professional recruitment process outsourcing (RPO) providers give you:

Job description creation

Position posting

Resume screening

Interview coordination

Background verification

Onboarding support

Evidence shows that RPO solutions improve recruitment outcomes by:

Getting better candidates

Making hiring faster

Cutting recruitment costs

Finding more talent

Managing compliance better

RPO becomes especially valuable during corporate changes like mergers, acquisitions, or geographical expansion. These providers excel at handling high-volume hiring while keeping quality standards high.

Businesses should look at their specific needs before picking an outsourcing partner to get the best results. Your chosen provider must be flexible and expandable to handle changing needs. Clear communication channels and reliable approval processes are vital foundations for successful implementation.

Implementing HR Outsourcing Successfully

HR outsourcing success depends on careful planning and execution. Companies can make a smooth transition and stay efficient when they think over several important factors.

Selecting the right provider

Your search for HR outsourcing partners starts with really good research. Assess providers based on their industry experience, track record, and how well they match your organisation's culture. Look for a provider that shows:

Proven expertise in your sector

Strong data security protocols

Clear communication channels

Flexible service offerings

Creating transition timeline

A well-laid-out transition timeline will give a smooth flow to daily operations. Data shows that companies with detailed transition plans face 40% fewer implementation challenges. Your timeline should include:

Knowledge transfer phases

System integration steps

Staff training schedules

Performance monitoring standards

Staff communication plan

Communication plays a vital role throughout the outsourcing process. Research reveals that employees who know about organisational changes are 4.6 times more likely to deliver their best work.

You can encourage transparency and trust by setting up:

Regular updates through multiple channels

Clear points of contact

Two-way feedback systems

Open dialogue opportunities

The core team needs consistent communication before, during, and after the transition. Direct lines between HR providers and employees help build a culture of transparency and trust.

Results improve when you implement unified communication systems that help share key messages easily. Your employees should also understand how their roles fit into the bigger organisational picture.

HR outsourcing providers can share updates about benefits, training programmes, and policy changes through strategic communication. This helps keep employees involved while everyone stays true to company values during the transition.

Note that documenting your existing HR processes and procedures are a great way to get guidelines for your outsourcing partner. These documents help transfer knowledge and keep services running smoothly.

Measuring ROI from HR Outsourcing

ROI evaluation from HR outsourcing needs systematic measurement and analysis. Professional Employer Organisations (PEOs) show an average ROI of 27.2%. Other outsourcing solutions usually give lower returns.

Setting cost-saving targets

Clear cost-saving goals help organisations track how well their HR outsourcing works. Research shows the total costs of bringing new employees on board add up to £3,176.64 per hire. These costs cover recruitment, paperwork, training and lost productivity.

You can calculate ROI this way:

Take away original investment value from final investment value

Divide the result by investment cost

Multiply by 100 to get percentage return

Tracking performance metrics

These metrics are vital to measure HR outsourcing success:

Cost per hire (CPH): Covers advertising, recruiter salaries, onboarding costs

Time to fill: Shows days between position opening and candidate placement

Interview to offer ratio: Shows quality of candidate selection

Offer to acceptance ratio: Reveals match between candidate expectations and company offerings

Companies should use recruiting metrics dashboards to analyse hiring information better. These dashboards help organisations spot trends, find inefficiencies and make informed decisions quickly.

Adjusting outsourcing strategy

Regular checks will ensure HR outsourcing supports changing business needs. Companies learn more about workforce metrics through standard processes and clear documentation - from absence rates to salary standards.

Here's how to improve outsourcing results:

Set specific KPIs for time-to-onboard and employee satisfaction

Check metrics regularly with outsourcing partners

Improve processes based on performance data

Good communication with HR outsourcing partners is vital. Successful partnerships need clear targets, open dialogue and shared HR goals. A unified communication system helps spread updates about benefits, training programmes and policy changes smoothly.

Conclusion

British companies can save substantial costs by outsourcing their HR functions. The transition needs careful planning, but businesses that outsource HR functions can achieve remarkable results. Their operational costs drop by 40% while recruitment and payroll processes become more efficient.

The right provider selection and clear performance metrics determine success. Companies should begin with essential functions like payroll and recruitment. Based on measured results and organisational needs, they can expand their outsourcing scope.

Cost reduction is one of many HR outsourcing advantages. Your business gains lasting value through specialised expertise, advanced technology solutions, and better compliance management. Regular monitoring and thoughtful implementation of HR outsourcing can reshape your workforce management and deliver substantial returns on investment.

FAQs

Q1. What are the typical costs of HR outsourcing in the UK? HR outsourcing costs in the UK vary depending on the company's size and specific needs. Ad-hoc support may start from £200 per hour, while monthly retainers for ongoing services can range from £300 to £1,000 or more.

Q2. How does HR outsourcing contribute to cost reduction? HR outsourcing helps reduce costs by eliminating administrative burdens, saving on employment expenses, and providing access to specialised talent. This allows businesses to focus on core activities and customer demands while remaining competitive.

Q3. What are the main benefits of outsourcing HR functions? Outsourcing HR functions streamlines business operations, reduces expenses, and helps companies meet operational goals. Key benefits include efficient management of benefits and payroll, improved talent acquisition and development, and enhanced compliance with regulatory requirements.

Q4. Which HR functions are most commonly outsourced? Payroll processing and recruitment services are typically the first HR functions to be outsourced. Payroll outsourcing can reduce administrative calls by 35%, while recruitment process outsourcing (RPO) improves candidate quality and accelerates hiring cycles.

Q5. How can companies measure the ROI of HR outsourcing? To measure ROI from HR outsourcing, companies should set clear cost-saving targets and track performance metrics such as cost per hire, time to fill positions, and offer acceptance ratios. Regular assessment and adjustment of the outsourcing strategy based on these metrics ensure optimal results.