SMEs are the backbone of economies around the world. Representing over 90% of businesses globally, they drive innovation, generate employment and contribute significantly to GDP. However, SMEs face a unique set of challenges compared to larger corporations, especially when it comes to Human Resource management.  

With limited budgets and fewer dedicated HR professionals, aspects like recruitment, training and compliance can quickly become overwhelming for small business owners and managers. These challenges, if not addressed head-on, can impede the very agility that makes SMEs so effective and successful. 

This article will examine the key challenges SMEs face in HR and why overcoming them is crucial for success. We’ll look at the constraints SMEs experience in building an in-house HR team and why many are now turning to outsourcing as a reliable, strategic solution.  

The Big Challenges for SMEs 

Cost 

Building an in-house recruitment team in the UK requires substantial time and financial investment for SMEs. Obvious costs include the price of hiring itself such as labour costs, recruitment staff salaries, training, tools and resources as well as additional expenses, such as management oversight, office space, advertising and background checks. 

However, the hidden costs can be even more alarming. The impact of an empty seat, lost productivity during the talent acquisition process and the cost of lost expertise when your established employees leave, are all factors that collectively suggest substantial additional expenses. 

For this reason, it is widely recognised that outsourced recruitment can offer more predictable costs with better scalability, making it a more cost-effective and flexible solution for SMEs. By partnering with Career Moves Group, your business gains immediate access to an optimised process without the high overheads of an in-house recruitment team. 

Risk 

In-house HR teams will often lack specialised and necessary knowledge around compliance. This knowledge gap exposes SMEs to far more legal and financial risk. More specifically, fines for non-compliance can be crippling – especially to SMEs who must work harder to keep up with frequent employment law changes.  

A recent survey found that the average cost of an employment tribunal claim for UK SMEs was £8,500, with over half reporting a negative impact on productivity, which demonstrates why staying legally compliant requires significant time and resources. 

Areas of risk include discrimination, unfair dismissal, working time regulations and minimum wage rules. Without adequate HR expertise, SMEs can easily find themselves on the wrong side of these complex and delicate regulations. CMG provides ongoing legal updates and insights through their employment law blog to help SMEs remain compliant.  

Time 

HR tasks like recruitment, payroll and training are hugely time-consuming for SME owners and managers. Of the 5.2 million SMEs in the UK, a staggering 624,000 hours are wasted each week on non-business critical tasks. This diversion of time is monumental, taking away from core business activities and strategic initiatives that could significantly propel your business forward. 

The lack of expertise in handling these HR tasks only exacerbates the issue. Business leaders, often strapped for time already, find themselves slowed down by unfamiliar administrative tasks. What a seasoned HR professional could accomplish efficiently in hours, an unskilled manager might struggle with for days.  

The impact of COVID 

The COVID-19 pandemic led to significant adjustments in HR management for SMEs. A majority had to adopt remote work arrangements, adding new challenges in maintaining productivity, employee wellbeing and adapting to digital work environments. This shift to remote operations and the need to manage furloughs put additional strain on SMEs. 

The enduring impact of the pandemic still persists for smaller enterprises, as they work through its lingering effects. Many are experiencing a significant stretch in their HR administration capabilities; a situation made worse by reduced revenues and limited resources, intensifying the challenges in managing effective HR. 

However, outsourcing emerged as a notable solution, offering a cost-effective way to access the necessary expertise to deal with these issues. External HR partners have become instrumental in helping SMEs adapt to the post-pandemic world, including navigating hybrid work models and changing employee expectations, ensuring HR practices are compliant, resilient and adaptable. 

Turnover 

The average employee turnover rate in the UK is around 15%. However, this rate varies significantly from industry to industry. For example, the hospitality industry in the UK tends to reach around 30%, double the national average.  

This highlights the importance of tailored HR strategies to address specific industry needs, especially for SMEs that may not have the resources to manage high turnover rates effectively. 

Losing staff is not only costly, as previously discussed, but can also lead to compliance issues and knowledge drain when employees leave. New hires require time to reach full productivity, which can hinder overall business efficiency – and with high turnover rates, SMEs find themselves in a perpetual cycle of onboarding and training new staff, incurring continuous costs. 

Modern HR technologies, such as digital onboarding platforms, e-learning and training tools, and knowledge management systems can significantly reduce the time and resources needed to bring new employees up to speed. These technologies facilitate a smoother transition for new hires, ensuring they quickly become productive members of the team.  

Additionally, data analytics and employee engagement tools can help SMEs better understand and address the root causes of high turnover, enabling you to implement more effective retention strategies.  

Career Moves Group offers lean recruitment solutions to help companies find and retain talent. Our HR consultants provide guidance and advice on enhancing company culture, career development initiatives, competitive compensation structures and succession planning.  

Perspective 

Outsourcing HR functions can provide SMEs with a more strategic, high-level perspective on their HR needs and challenges. CMG are able to benchmark the SME’s practices against other organisations and industries. They can identify gaps or opportunities for improvement that may be difficult for internal HR staff to see given their immersion in the organisation’s culture.  

External advisors also bring specialised expertise in areas like compensation design, training program development and recruiting that an in-house team may lack. This focused perspective enables more strategic HR planning tailored to your specific business goals, bringing innovative ideas and new approaches.  

It’s always important to take time to understand your culture and values to ensure a good fit, but we are also able to take a fresh look and be more likely to challenge the status quo. We can ask “why do you do it this way?” without concerns about internal politics.  

Networks

Recruiting the right talent is vital for SMEs to thrive and grow. However, smaller companies often lack the extensive professional networks and recruiting resources that larger corporations possess. This can make it challenging to connect with qualified, skilled candidates – and where an SME’s agility can make the difference between success and stagnation, this is an important issue. 

Modern recruitment technologies, such as advanced applicant tracking systems, AI-driven candidate matching and digital networking platforms, enable SMEs to bridge the gap in their recruitment capabilities. These technologies offer streamlined, efficient processes for identifying and engaging with potential candidates, expanding the reach beyond traditional methods. 

CMG uses these technological tools alongside their extensive networks to source qualified, pre-vetted candidates. By using CMG’s specialist recruitment services, which integrate both human expertise and technological tools, you gain a significant competitive edge in securing the very best talent. 

Adaptation is the key 

The agility and innovation that define SMEs can be quickly stifled by the challenges they face in HR management. Without staying on top of these rising issues, your business fails to keep up and is left treading water. 

The future of HR in SMEs will likely be characterised by a greater reliance on technology, particularly in areas such as AI-driven recruitment, advanced data analytics for workforce planning and digital platforms for employee engagement and training. These tools will not only streamline HR processes but also provide deeper insights into workforce dynamics, enabling SMEs to make more informed decisions. 

The rise of the gig economy and remote work will also reshape the workforce. SMEs will need to adapt to these changes by developing flexible HR policies that cater to a more diverse and distributed workforce. This will involve rethinking traditional models of employment to include contract workers, freelancers and remote employees. 

The role of HR Partners

Outsourcing HR has expanded rapidly over the past few decades, where the global HRO market is projected to grow at a rate of 7% from 2022 to 2030. As more challenges are added to HR management, the appeal of outsourcing these functions becomes increasingly evident. 

HR partners will play a key role in helping SMEs handle these new trends, offering strategic guidance and support in implementing cutting-edge HR solutions. CMG’s approach is centred around alleviating these weighted burdens, allowing SMEs to regain their agile and strategic focus. This means that you can benefit from the expertise and resources typically reserved for larger corporations, without the costly investment of building an in-house team.