The true cost of managing HR internally for SMEs

Introduction

While working in my internal HR roles for decades, I was always a little concerned about the rise of outsourcing HR. However, HR isn’t just about hiring and holidays. For small to medium-sized businesses, internal HR can quietly drain resources, bury teams in admin, and expose the company to legal risk. What starts as a cost-saving move often ends up as a false economy.

Since running My HR Hub and working with our team of HR Consultants, I realised that outsourcing HR makes business sense. In the packages we offer, you can have the whole life cycle of HR expertise in one retainer, from HR Strategy, HR Consulting, HR outsourcing to HR Admin – we cover it all! For any business to recruit the equivalent of this expertise from HR Director level to HR Admin support and everything in between, this is simply not affordable!

Over the years of running My HR Hub, I also realised that internal HR and external Consultancy do not need to be working against each other. At My HR Hub, we work with and support many HR Directors and internal HR teams to help with capacity, additional projects, guidance and an objective and impartial partner to support with a range of HR activity. We also work and supply HR teams with our tech, such as BreatheHR, HirefulATS and Health and Wellbeing solutions.

Outsourcing your HR allows your business to have access to a dedicated team 52 weeks of the year, each and every day. If you are a small business with, let’s say with one employee managing the HR in your business, you need to factor in annual leave, sickness and other absences. By working with an external HR Consultant, you are covered each and every day to ensure continuity of your business.

Internal HR and external outsourced HR can work in partnership for the greater good of any business.

In this article, we break down the true cost of managing HR internally and why many SMEs are rethinking their approach.

Why HR matters more than you think

HR isn’t just a back-office function. It's the backbone of culture building, employee relations, hiring, onboarding, payroll, performance management and legal compliance. For SMEs, it’s easy to overlook HR’s strategic importance, especially when growth feels more urgent than governance. But a weak HR setup can create cracks that widen as the business scales.

Internal HR is often started and informally handled by a founder, office manager, or finance lead. It works for a while. Then, issues pile up: payroll errors, missed reviews, hiring delays, or worse, compliance violations. Suddenly, HR becomes reactive, draining time and focus from revenue-generating tasks. The pressure on these roles to deliver and keep abreast of the constant flow of the HR and Employment challenges is also not fair.

Effective HR management supports the business leaders in creating and growing a business and aligning the people agenda alongside this. Mismanaging the HR of any business, can quietly undermine growth and create risks.

What internal HR really involves for SMEs

Many SMEs underestimate how much HR does, even with a small team, even in a small business. Managing HR effectively means juggling a wide range of tasks and wearing many, many hats:

• Drafting and updating employment contracts and handbooks

• Handling onboarding and off-boarding

• Managing annual leave, sick pay, and absences

• Keeping up with employment law changes

• Conducting performance reviews and disciplinary actions

• Ensuring GDPR compliance for employee data

• Managing pensions, benefits, and insurance

• Tracking training and development

• Ensuring employees are happy and engaged

• Being a credible leader and working with trust and confidence

Without a dedicated HR professional or systems to help manage the myriad of work, these important tasks often fall to someone without HR expertise, usually the business owner or office manager. That’s risky. Mistakes don’t just lead to inefficiencies; they can lead to fines, tribunals, or staff dissatisfaction.

Internal HR may feel manageable at first. But as your team grows, so does the complexity and the cost of getting it wrong. My HR Hub is here to protect you, your business, your Managers and your employees and to grow a healthy business.

The financial cost of in-house HR

On the surface, handling HR internally seems like a money-saver. You avoid hiring an HR manager or paying for external services. HR is a critical business partner, and the importance of the role increases by the year, the facts tell a different story though:

Salary costs

Assigning HR tasks to senior staff diverts them from their core roles. If your operations manager spends 10 hours a week on HR, that’s 10 hours of lost productivity costing your business far more than perhaps outsourcing this expert role.

Errors and fines

Non-compliance isn’t cheap. Failing to follow proper procedures with contracts, dismissals, or data protection can lead to costly penalties. UK employment tribunals are on the increase each year with employees taking advantage of the ‘no win, no fee’ and free legal advice. Question is – are they more savvy in HR and employment law than you or your Managers managing them?

Recruitment inefficiencies

Without proper processes, hiring drags on. Delays and poor candidate experience can mean missing out on talent, prolonging vacancies and raising agency fees. Everything need to happen in an instant now, good candidates do not wait and are in demand. A sluggish hiring process will lose out on talent.

Turnover costs

Poor HR practices lead to disengaged staff. High turnover adds direct costs recruitment, training, lost output and indirect ones, like morale damage. Experienced HR outsourcing can help you identify the areas of concern, work on improving these and help with that leaky bucket!

Time and productivity losses

Time is one of the most undervalued resources in any SME, and internal HR consumes a lot of it. For non-HR professionals, even basic tasks take longer. Drafting a compliant contract, handling a grievance, or managing payroll queries can swallow hours each week. At My HR Hub we have the tools, experience and support to absorb the admin and gain back time to add real value where it matters.

Admin overload

Without streamlined systems, tracking leave, expenses, and benefits becomes a manual slog. Chasing signatures, updating spreadsheets, and responding to repetitive queries sap valuable time from your team. At My HR Hub we have the tools, AI and support to absorb the admin and gain back time to add real value where it matters.

Interrupted workflows

HR issues rarely arrive at convenient times – nothing is more unpredictable as folk as they say. A staff conflict or a last-minute sick note often pulls key people away from their day-to-day work. This constant switching slows output and increases error rates. A HR Consultant ‘on tap’ like My HR Hub, can help you in the peaks of HR challenges, letting you carry on with your day job.

Decision delays

SMEs without clear HR processes often stall on hiring, performance reviews, or policy updates, decisions that directly impact business momentum.

When key people are bogged down by HR admin, strategic work suffers. The opportunity cost of this lost time adds up quickly.

Compliance Risks and Legal Exposure

HR compliance is a legal minefield, especially in the UK, where employment law is complex and constantly evolving – this continues to be the case with the huge tsunami of employment law changes coming through in 2025 and 2026. For SMEs managing HR internally, keeping up with these regulations can be daunting.

Legal obligations

From right-to-work checks and contract law to holiday entitlements and redundancy procedures, the rules are detailed and strict. A single oversight, like missing a mandatory consultation period, can lead to tribunal claims.

GDPR concerns

Employee data is sensitive and must be handled carefully. SMEs relying on spreadsheets or unsecured systems risk data breaches, which carry heavy fines and reputational damage. We have the systems that can track and manage this automatically for you.

Policy gaps

Many SMEs lack formal HR policies or documentation. That leaves them exposed if disputes arise, as they can’t demonstrate fair or consistent treatment.

Tribunal exposure

UK tribunals don’t require legal fees to lodge a claim, making it easier for disgruntled employees to take action. Even when you’re in the right, defending a case takes time, money, and focus.

Managing HR without legal support or up-to-date knowledge is risky. One mistake can cost more than years of outsourced HR support.

My HR Club at £49 + VAT per month is a great and affordable way of keeping up with all changes, having access to an HR Portal and joining a like-minded community of support, expertise, building your confidence in all things HR and how to manage this.

The human factor: Morale, burnout & errors

When HR is handled in-house without proper support, it doesn't just affect compliance or finances it hits your people hard.

Overstretched staff

HR duties often fall to employees who already have full-time responsibilities. This leads to stress, burnout, and mistakes. HR admin becomes a burden, not a function. Most of the UK Managers who have people management responsibilities are not adequately trained (therefore protecting your business). At My HR Hub we offer monthly Management Training at a very affordable price. Training budgets should not be a barrier to giving your Managers the confidence, knowledge and know how when it comes to critical and risky HR situations.

Lack of support for employees

Without a dedicated HR presence, staff may feel there’s nowhere to turn with workplace issues. That undermines trust and can escalate minor problems into major ones. At My HR Hub you have the option to offer our confidential support to your employees. If they have no one to turn to that they trust or to confide in, the likelihood is that they will speak to a ‘non win, no fee’ lawyer, ACAS or a Trade Union. What could be a simple issue that can be mediated via outsourced HR, can lead to an unpleasant and costly situation.

Inconsistent experiences

Onboarding, reviews, training, and even conflict resolution vary depending on who handles them. This inconsistency creates confusion and frustration.

Mistakes multiply

Whether it's underpaid wages, missed appraisals, or mishandled grievances, errors damage morale. Employees notice when HR isn’t up to standard, and they’ll leave for companies that do it better. They want more and expect more from HR.

Your people are your business. If HR isn’t helping them thrive, it’s silently harming your culture, retention and exposing you to litigation.

Comparing Alternatives

Outsourced & Digital HR

For SMEs, internal HR isn’t the only option. Outsourced providers, digital HR platforms and applicant tracking systems offer affordable, scalable alternatives without the typical overheads.

Outsourced HR

Outsourced HR services give you access to qualified HR professionals for a fraction of the cost of hiring in-house. They handle contracts, disputes, compliance, and strategic advice. Many offer 24/7 support over 52 weeks of the year, giving peace of mind around tricky situations.

Digital HR platforms

Tools like Breathe automate admin-heavy tasks like holiday tracking, payroll, and performance reviews. They centralise data, improve accuracy, and save hours every week.

Hybrid solutions

Many businesses use a mix of tech for day-to-day tasks, with on-call experts for legal or complex issues. This keeps costs down while ensuring compliance and consistency.

These options are often more cost-effective than internal HR, especially when factoring in risk reduction and time savings. They also scale more easily as your business grows.

Making the Right Call for Your Business

There’s no one-size-fits-all approach, but for most SMEs, internal HR is a temporary fix, not a long-term solution. The real decision is whether your current setup is still serving your business.

Ask yourself:

• Are HR tasks pulling key people away from core duties?

• Do you have the level of HR expertise in your business?

• Are your Line Managers trained in HR or at least basic Employment Law?

• Have you had any near-misses with legal or compliance issues?

• Do employees know who to turn to for HR support?

• Are you confident your contracts, policies, and procedures are up to date?

If you’re answering ‘no’ or hesitating, it’s time to reconsider your setup. Whether it’s outsourcing, bringing in tech, or a blend of both, the goal is the same: protect your business, support your people, and focus on growth.

Rethinking HR for SME Growth

Managing HR internally might feel like the lean, logical choice, but for many SMEs, it’s a hidden liability. The time drain, legal risk, and impact on staff morale add up fast. What starts as a cost-saving move often ends up limiting growth.

The good news? Smarter and more cost-effective HR solutions exist. Whether it’s outsourcing, adopting HR tech, or combining both, investing in proper HR support is no longer a luxury; it’s a necessity for sustainable success.

If your internal HR setup is stretched, reactive, or makeshift, now’s the time to rethink. Your business and your people deserve better.