POV: Why outsourcing HR is always a mistake

According to Accenture, 3 in 4 businesses now outsource at least one Human Resource (HR) function. This trend has been driven by a rise in layoffs and today, some leaders believe that outsourcing HR can save businesses both time and money.

While it may seem tempting to cut costs by outsourcing HR, I believe leaders are better off keeping their HR in-house. Even despite economic pressures.

It can be hard to convince startup founders to invest in an in-house HR team because many founders think HR simply isn’t important. In fact, a recent survey found that 88% of U.S. workers have worked for a small company with no dedicated HR person. What’s worse, half said not having an HR department contributes to a toxic workplace.

But HR involves more than just recruitment, admin, and training. It’s the glue that holds a business together. It defines its mission, vision, and core values. All of these variables influence a company’s culture. HR should never be overlooked as a simple box-ticking exercise, least of all for a startup.

During its inception, a startup is still fresh and typically lacks identity. It needs a founder to be hands-on and carve out a direction for the business which employees can buy into.

A new startup doesn’t need an external HR agency that doesn’t understand the business it is shaping. More often than not, I have found that an external HR agency will follow a copy-and-paste approach, applying the same policies and practices that they use for their corporate clients—which generally won’t be suitable for any startup. They certainly won’t take into account the nuances and culture of an individual and unique startup.

People value human touch and authenticity. It’s why the handwritten birthday, wedding, or congratulatory card is still so popular. It’s the same way with HR. Employees like to be promoted, rewarded, and confided in directly. This isn’t always possible with large corporations that have layers of management. But small, young businesses should always have the capacity for regular one-to-one time.

This is especially important during the initial hiring process when founders are building their founding team. Most startups lack an established reputation, which means they often need to convince new hires to join.

A paycheck is just part of the package. Staff will need to be sold on an environment in which they can develop and enjoy their work. You can’t tell me an outsourced HR will be able to instill the same level of confidence that a founder would. If that’s the scenario, hiring will always be difficult.

Founders need to be close to all hiring decisions, as hiring the wrong candidate is easy to avoid but hard to fix. These errors are not only damaging for businesses but are extremely costly and time-consuming when re-hires must be made. When you’re working with a small budget, this is something you cannot afford.

Despite the transformative impact AI is having across the business world, I don’t think HR tech is advanced enough, or cost effective enough, to replace in-house HR teams quite there yet. Least of all for startups that have stringent budgets and unique and dynamic needs. But I’m very optimistic about the future of this space, and it could be a fantastic tool for cutting costs and increasing efficiency for fast-moving startups.

In the near future, AI may well be able to judge character and measure work ethic and compatibility between a candidate and the company culture. But, for now, founders must focus on selecting the right people for their business themselves.

Even if they have to sift through a 500-long stack of CVs, an in-house HR team is always best. In fact, this can be a good exercise for founders and HR teams. It’s the best way for founders to learn about people, who, ultimately, are the most important aspect of a company’s long-term success.

Leaders need to take the time to learn more about workers, their goals and ambitions, to build strong relationships. This is perhaps the most important aspect of sustained long-term success.

Founders should foster an appetite for innovation and entrepreneurship as the business scales so that original team members embrace their ethos and become ambassadors of the culture themselves. They pass on what they know to new recruits, and the business becomes a self-fulfilling machine.

But to ensure employees grow with the business, founders must dedicate time to retention. This begins from day one with being candid about expectations and opportunities for promotion. Founders shouldn’t make false promises. And when promises are made, they must act on them. Having an in-house HR team makes all of this easier.

An openness for ideas to improve the business should also always be communicated. Employees shouldn’t feel disempowered by a hierarchy and instead feel part of one singular collaborative unit. These startups are by far the strongest, having the trust and transparency of their employees to resolve grievances early, even reducing their risk of failure by 20%.

Having bootstrapped many startups throughout my career, I’ve learned the hard way that there should never be any shortcuts to scaling a business. Founders can expect to spend at least 40% of their time on hiring, HR tasks, and payroll—because of how important these duties are. And they shouldn’t shy away from them because they don’t directly generate income.

Despite several new HR outsourcing companies that have attracted millions of dollars in venture capital promising to revolutionize HR, outsourcing is not the future for startups. If you’re a founder, it’s always better to do the HR yourself. You’ll reach profitability sooner, you’ll have a tighter grip on company culture, and you’ll improve your staff retention.