Should Small Businesses Outsource Human Resource or Build Internal Human Resource?

Dec 2

Every small business eventually reaches a point where Human Resource responsibilities start piling up. Payroll, hiring, compliance, employee issues — suddenly, the owner is handling Human Resource tasks late at night, and the business needs a real solution.

That’s when the big question comes up:

Should we outsource Human Resource, or should we build an internal Human Resource team?

Below is a clear, organized Q&A breakdown to help you choose the right path without unnecessary risk, cost, or confusion.

What Does Human Resource Actually Include for Small Businesses?

Human Resource is much more than payroll and hiring. It includes:

Recruiting and onboarding
Payroll and tax compliance
Benefits administration
Performance management
Policies and handbooks
Employee relations
Terminations and documentation
Training and development
Workplace safety and compliance

For many small businesses, these tasks fall on untrained staff — increasing errors and potential liability. That’s when outsourcing or building Human Resource becomes essential.

What Does Outsourcing Human Resource Mean?

Outsourcing means hiring an external company to manage some or all Human Resource functions.

Common providers include:

Human Resource Consultants

Offer guidance on compliance, policies, hiring, and sensitive issues.

Human Resource Outsourcing Firms (HROs)

Handle day-to-day Human Resource tasks such as onboarding, employee issues, payroll coordination, and documentation.

Professional Employer Organizations (PEOs)

A co-employment model that offers payroll, benefits, compliance support, and risk management.

Outsourcing gives small businesses professional Human Resource expertise at a lower cost.

What Does Building Internal Human Resource Mean?

Internal Human Resource involves hiring employees who work directly for your company.

Common roles include:

Human Resource Generalist
Human Resource Manager
Recruiting Specialist
Payroll/Benefits Coordinator

Internal Human Resource provides greater control, stronger culture-building, and on-site employee support.

What Are the Benefits of Outsourcing Human Resource?

Outsourcing Human Resource is often the easiest and most cost-effective option for small businesses.

Cost Savings

Much cheaper than hiring a full-time Human Resource employee for companies under 50 employees.

Access to Experts

You gain certified professionals who stay current with laws and compliance.

Reduced Legal Risk

Proper documentation, compliant policies, and support with terminations reduce liability.

Faster Recruiting

Outsourcing firms have access to advanced tools and larger applicant pools.

Software Is Often Included

Human Resource Information Systems (HRIS), onboarding portals, and payroll tools come standard.

What Are the Benefits of Internal Human Resource?

Internal Human Resource provides advantages outsourcing cannot fully replicate.

Immediate, On-Site Support

Employees can get real-time help with concerns and conflicts.

Stronger Culture Development

Internal Human Resource shapes communication, engagement, and company values.

Deeper Business Understanding

Internal teams know your people, processes, and priorities.

Full Customization

Policies, training, and processes can be tailored to your company’s unique needs.

What Are the Risks of Outsourcing Human Resource?

Outsourcing has limitations, including:

Less Direct Control

You depend on external timelines and processes.

Employee Disconnect

Employees may feel more comfortable with internal Human Resource.

Quality Varies Between Providers

Some vendors offer generic, low-impact support.

Limited Culture Influence

External Human Resource teams can’t fully embed into your culture.

What Are the Risks of Internal Human Resource?

Internal Human Resource also has challenges:

Higher Cost

Salaries, taxes, benefits, and software add up.

Skill Limitations

One person cannot excel in compliance, payroll, recruiting, training, and employee relations all at once.

Compliance Risk

Laws change frequently, and gaps can lead to violations.

Costly Hiring Mistakes

A poor Human Resource hire can increase turnover and legal exposure.

Cost Comparison: Outsourcing vs Internal Human Resource

Internal Human Resource Costs (Full-Time Human Resource Generalist)

Salary: $60,000–$90,000
Benefits: $8,000–$15,000
Human Resource Software: $3,000–$12,000/year
Training & Certifications: $1,000–$4,000

Total: $72,000–$121,000+ per year

Outsourced Human Resource Costs

Human Resource Consulting: $500–$2,000/month
HRO Services: $1,000–$4,000/month
PEOs: 2–5% of payroll

Total: $12,000–$48,000 per year

👉 Outsourcing is typically 50–70% cheaper for companies under 50 employees.

When Is Outsourcing Human Resource the Better Choice?

Choose outsourcing if:

You have fewer than 50 employees
You need Human Resource support immediately
Compliance or payroll feels overwhelming
You want predictable monthly costs
You want to reduce legal risk
You don’t have Human Resource expertise in-house
Your business is growing quickly

Outsourcing is ideal for early-stage and small businesses.

When Is Internal Human Resource the Better Choice?

Internal Human Resource makes sense when:

You have 50–70+ employees
You want strong on-site support
Culture-building is a priority
You need ongoing recruiting
You can afford the salary + software
You want full control of Human Resource strategy

Growing mid-sized companies benefit most from internal Human Resource.

What Is the Hybrid Human Resource Model?

A hybrid Human Resource model combines both approaches:

Internal Human Resource + Outsourced Human Resource Support

Example:

Internal Human Resource handles culture, communication, and employee relations
Outsourced Human Resource manages compliance, payroll, and complex issues

This is often the most flexible and efficient solution.

What Happens If You Choose the Wrong Human Resource Model?

The wrong decision can lead to:

Compliance violations
Mismanaged terminations
Payroll errors
Low morale
High turnover
Slow hiring
Legal risk
Manager burnout

Human Resource mistakes are extremely costly — especially for small businesses.

Final Checklist: Outsourcing vs Internal Human Resource

Choose Outsourcing If You:

Have under 50 employees
Need help fast
Want to reduce legal risk
Don’t have time to manage Human Resource
Want predictable monthly costs
Need support with hiring, compliance, or policies

Choose Internal Human Resource If You:

Have 50–70+ employees
Want strong on-site support
Need help with culture-building
Can afford trained Human Resource staff
Want full control of strategy

Choose Hybrid If You:

Want expertise AND internal alignment
Are growing quickly
Need both flexibility and structure

Conclusion

There’s no one-size-fits-all answer. The best Human Resource model depends on your business size, goals, and risk tolerance.

For companies under 50 employees, outsourcing Human Resource is more cost-effective and less risky.
For larger or fast-growing businesses, internal Human Resource offers stronger cultural alignment and daily employee support.

Regardless of your choice, the goal is to:

✅ Protect your business
✅ Support your team
✅ Build a strong, compliant Human Resource foundation

If you need help evaluating your Human Resource structure, Salsbury & Co. can provide guidance and create a customized plan that fits your business perfectly.

April Salsbury

April Salsbury, MBA is a strategist, an analyst, an operational guru, a recognized leader and C-suite global healthcare executive with drive and focus for competitive markets. Co-host of The Business Forum Show and regular contributor to various business journals, she possess multi-functional and multi-national competencies with more than 20 years experience in business and healthcare. Her expertise is in invigorating revenue growth and infusing value of lean practices in growing companies through improvements to cash flow and operations management.