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You need HR support, and you needed it yesterday.
The question is: Should you start building an in-house HR infrastructure or outsource it?
There’s no one-size-fits-all answer. At a startup, the key is determining which parts of HR you should own, which to delegate, and also knowing when to make those decisions.
For more than a decade, I’ve built HR operations from the ground up, scaled internal teams, and partnered with external providers to help more than 150 startups grow from seven to nine figures.
Let’s dive into how you can get the most out of both in-house and outsourced HR to put your startup on the path to success.
What HR Activities Can Startups Outsource?
Knowing what HR activities to outsource or keep in-house starts with understanding some fundamentals. Having worked with early-stage startups all the way to 9-figure companies, I’ve found that four key areas are a priority for early-stage companies:
- Compliance, payroll, and benefits: The backbone of any HR operation. These functions protect businesses from legal and financial risk by ensuring employees are paid on time and all regulations are met.
- Talent acquisition: Startups need the right people to grow. HR identifies and attracts talent with the skills, experience, and character to help your business succeed.
- HR strategy and culture: Aligning HR with business goals, defining values, and fostering a culture that attracts, develops, and retains top talent.
- HR infrastructure: The systems, processes, and tech that keep everything running smoothly and scaling with the business.
Each of these functions is essential, but every startup will prioritize them differently depending on its goals and needs. Let’s take a closer look at how to identify the HR activities that matter most for your startup and what that means for your outsourcing strategy.
How to Determine Which HR Activities Are Most Important
Deciding what to outsource comes down to one question: What’s worth your time?
You answer that by figuring out whether an HR task is high-value or low-value. If you want a complete deep dive on this topic, check out my podcast episode.
High-value activities have a direct, strategic impact on your business. They include:
- Talent acquisition
- HR strategy
- Culture development
- Building a scalable HR infrastructure
- Benefits strategy
Low-value activities are usually more routine and include things like:
- Payroll processing
- Compliance
- Benefits administration (note, this is different than building a benefits strategy)
These categories aren’t set in stone. What’s high- or low-value can vary depending on your startup’s stage, priorities, and capacity. The key is knowing which tasks are most important at any given time.
For example, if your capacity to deliver work is constantly underwater, you’ll likely want to treat talent acquisition as a high-value priority. Separately, if the employee experience is suffering because you haven’t yet defined an organizational culture, you may want to invest in HR strategy support.
Outsourcing HR can help with all of this. Read on to find out how!
Types of Outsourced HR Support
Outsourced HR comes in many forms, and each one is designed to manage specific business needs. Examples of outsourced HR include:
- Professional Employer Organizations (PEOs)
- Fractional HR leaders
- Business Process Outsourcing (BPO)
- Staffing agencies and recruiters
Let’s take a closer look at each one.
Professional Employer Organizations (PEOs)
PEOs are third-party providers that handle employee administration, including payroll, benefits, and compliance with labor laws.
According to a 2022 study by the National Association of Professional Employer Organizations, 15–17% of companies with 10–99 employees, and around 40% of businesses less than 10 years old, work with a PEO.
PEOs work best for startups with fewer than 50 employees. They’re often cheaper than hiring a full-time HR person and can negotiate better benefit rates than a small startup by itself.
If your startup is growing quickly and is approaching or has exceeded 100 employees, a PEO usually stops making sense. At this stage, it’s better to hire a dedicated HR professional because you’ve hit a significant growth milestone and your startup no longer saves money on PEO benefit rates.
Fractional HR Leaders
Fractional HR leaders are experienced professionals who bring the strategic insight of a seasoned HR executive without the cost or commitment of a full-time hire. It’s no wonder an Ampleo study finds fractional hires are up 57% since 2020!
The fractional approach is ideal for startups with fewer than 50 employees. A fractional HR leader acts as an extension of your team, often serving as a de facto head of HR. They shape culture, structure the organization, ensure compliance, and guide the employee experience, helping build your startup’s HR strategy while also handling the day-to-day operations.
Having delivered fractional HR consulting for more than a decade, I’ve seen how powerful this model can be. It gives companies the flexibility to scale HR support as business needs change, provides access to specific expertise, and offers a cost-effective way to build a strong HR foundation. Most importantly, it brings a fresh, objective perspective that helps uncover opportunities to strengthen the people side of the business.
Business Process Outsourcing (BPO)
BPOs are independent consultants or specialist practitioners who can lead specific projects, like conducting audits or building your HR infrastructure and tech stack. Recruitment outsourcing is also popular with growing startups looking to access several recruiters for a fixed monthly rate.
Some startups use these consultants instead of fractional HR, usually to reduce costs. I don’t recommend this for HR strategy support, as consultant work can become outdated or exceed its original scope, especially in the fast-moving, chaotic environments that define startup life.
BPOs can also be subject matter experts that you keep on retainer or hire as needed for niche expertise on subjects like labor law and compliance. Using BPOs for this purpose is a smart move. Early-stage companies rarely have in-house expertise in these specialized areas, so having someone on-call with deep knowledge can significantly reduce risk.
Staffing Groups and Recruiters
Recruiters and staffing groups source, screen, and sometimes onboard job candidates.
It’s common for startups and large organizations alike to outsource to recruiters, and they can be very effective at identifying and evaluating candidates for your company. That said, I would take their evaluations with a grain of salt. You don’t want to fully rely on the recruiter’s assessment of a candidate and should never cut corners when making your own assessments, which should be handled internally.
As a rule, I tell companies to align with a 3rd party recruiter on what elements they are expected to assess versus what you plan to assess internally. This helps to ensure recruiters are not duplicating work, which can harm the candidate experience.
Recruiters can get expensive; I had a client who spent $1.2M/year on recruiters that we gradually worked all the way down to $50,000 within a year. You need to decide whether the investment is worth it at your stage and growth rate. For a deeper dive on how to hire, check out my startup hiring guide.
As you can see, there’s no shortage of outsourced HR support. That said, you may not want third parties in charge of everything. But where do you even begin to build HR in-house?
When to Hire Your First In-House HR Leader
Hiring your first HR leader is not a decision to take lightly. Having worked as a fractional HR consultant, I’ve learned to recognize three signals you’re ready for this important step:
- You’ve nailed product-market fit
- HR tasks are consuming too much of everyone’s time
- Headcount is rapidly approaching (or has exceeded) 50 employees
The headcount milestone is one I watch closely. Without the right expertise, your people strategy can quickly become overwhelming.
Each new employee not only adds administrative and compliance load, but also leaves yet another impact on the overall culture, work experience, and organizational structure of your company. A 2023 Zelt study backs this up, showing most startups make their first HR hire in the 50-employee range.
Whether you’re hiring your first in-house HR leader or exploring outsourced support, it’s important to understand where each approach works well and where it doesn’t. Let’s move on to the pros and cons of in-house and outsourced HR.
In-House vs. Outsourced HR: Pros and Cons for Startups
Both in-house and outsourced HR have their place, but it’s helpful to know how each can support your startup and where they might fall short.
Strengths | Weaknesses | |
|---|---|---|
In-House HR | Full-time staff to guide your startup’s HR in real time Sees business needs and challenges up close Fosters and protects your culture during periods of rapid change Builds institutional knowledge and continuity as you scale. | Costly and resource-intensive early on Coverage for all relevant skills will be difficult when you start with a small HR team Higher exposure to risk without experienced leadership or specialized expertise |
Outsourced HR | Immediate access to broad HR expertise without needing full-time hires A cost-effective way to manage routine or administrative tasks Frees up internal teams to focus on core priorities Scalable support that can grow or be contracted as needed | Less connection to the culture and team dynamics on the ground Potential for communication gaps with vendors or unclear ownership of responsibilities May limit the development of internal HR capabilities |
Looking at the pros and cons provides a helpful overview, but it only tells part of the story. The most effective approach is often a blended one: Many early-stage startups outsource heavily to cover their bases, then bring HR functions in-house as they scale. Even established corporations continue to outsource some HR services that are more efficient or cost-effective to handle externally.
For startups, fractional HR can be a great way to bridge this gap. Let’s go over what to look for in fractional HR next.
What to Look for When Hiring a Fractional HR Leader
If you’ve decided that a fractional HR hire is the right move for your startup, then you’ll need to take care to bring on the right person. While a fractional hire is often cheaper than a full-time hire with the same caliber of experience, it can still be a make-or-break hire for your company.
A strong fractional leader can guide your startup’s HR until you’re ready for a permanent team. Here’s what to look for in a fractional HR leader:
- Deep HR and startup experience: Experience matters, but relevant experience matters most. Choose someone who’s built or scaled HR inside a startup before. They’ll understand the pace, the resource constraints, and how to balance structure with flexibility.
- A strategic mindset: They anticipate challenges and design HR solutions that scale with your business. They think beyond day-to-day tasks to align HR with your company’s long-term goals.
- Industry knowledge: They understand your market, customers, competitors, and talent landscape.
- Alignment with company values: They must embody your company’s values from day one, actively protecting and fostering the organization’s culture.
- Executive presence: They’re elite communicators capable of clearly articulating HR strategy and initiatives to founders, managers, and employees.
- Business acumen: They understand the language of business. Look for a fractional hire who is a business person first and creates value through HR. I recommend looking for someone who understands the entire business, how everything works, and can deliver impact across the business, not just within the people operations function.
The right mix of in-house and outsourced HR depends on your startup’s current needs and business goals. Successful founders treat HR as fuel for growth, investing in both the right people and outsourced partners as they scale.
Take the Next Step: Organize Your Startup’s Chaos and Start Driving Growth
If you feel that your company is reactive and not proactive, lacks a people strategy, is not attracting the right talent, or is bogged down in the doldrums of compliance, then you are not alone.
At the same time, you don’t have to settle, either.
Since 2011, I’ve worked as a fractional HR leader for 150+ companies worldwide. I’ve helped these companies scale from seven to nine figures all through HR, and I can do the same for your organization.
Here’s what you can expect after working with me:
- I’ll audit your people operations and HR practices.
- We’ll develop a multi-year people strategy aligned with your growth goals.
- We’ll design and implement people programs that drive employee engagement and ROI.
- I’ll assist with hiring, training, and onboarding full-time HR professionals to equip your team for continued growth.
If you’re ready to organize your company’s chaos and unlock the next phase of growth, click the button below to schedule a free consultation.
Nahed Khairallah