As small businesses grow, the pressure to formalize HR processes increases. Founders start thinking about hiring an HR officer or even building a small HR team.
This might feel like progress. But many SMEs underestimate what it takes to maintain that decision. The salary is just the start. The true cost of running HR in-house is far higher than most expect.
In this blog post, we’ll explore those hidden costs beyond the obvious salaries and benefits and unpack how they impact growing businesses.
We’ll also show how Proten’s HR Insourcing model offers SMEs a smarter, more scalable alternative to the traditional in-house route.
The Visible Costs Of an In-House HR Team:
When SMEs decide to bring HR in-house, the first expense that comes to mind is salary. A competent HR manager or officer is not an entry-level hire. Even at a junior level, the annual salary is a significant commitment for a growing business.
But salary is only one part of the package. Employers also carry the cost of benefits such as health coverage, pension contributions, paid leave, and allowances. Add training courses, certifications, and professional memberships; these costs are necessary for HR staff to stay up to date.
What starts as “just one hire” quickly turns into a permanent overhead that eats into budgets already stretched by other business priorities.
The Hidden Costs SMEs Overlook
Salaries and benefits are only the beginning. Once an HR officer is on the payroll, other costs emerge that SMEs often don’t anticipate. These costs are less visible, but they hit just as hard.
1. Turnover Risk
An in-house HR setup often relies on one or two hires. If that person leaves, the entire HR function collapses overnight. Recruitment pauses, payroll gets delayed, compliance deadlines are missed, and employee issues pile up.
Replacing HR staff also isn’t cheap. Studies show replacing an entry-level employee typically costs 30-50% of their annual salary; mid-level roles cost 50-150%, exec roles up to 200%+. For SMEs, one resignation can reset months of progress.
2. Limited Expertise
HR is not a single skill. It spans recruitment, payroll, compliance, employee engagement, training, and conflict resolution. Expecting one person to carry all of that leads to gaps.
A junior HR officer may handle payroll but miss key compliance updates. A mid-level manager may be strong in recruitment but weak in policy drafting. SMEs often end up paying consultants to fill these gaps, adding more unexpected costs.
3. Technology and Tools
HR systems aren’t optional anymore. Payroll software, HRIS (Human Resource Information Systems), compliance platforms, and performance management tools are necessary for accuracy and efficiency.
Licensing these tools costs money. On average, companies are charged ₦1,200 (~USD 2.78) per employee per month for HRIS (payroll, leave, performance, expense management). Varies by modules. Multiply that by headcount, and the numbers climb fast.
4. Training and Development
HR staff themselves need regular upskilling to stay current with labor laws and best practices. Professional certifications, seminars, and workshops are another cost center. If training isn’t provided, the risk of errors in compliance or poor hiring practices increases, which often costs even more.
5. Time Drain for Business Leaders
Hiring HR doesn’t mean founders or managers stop thinking about HR. In reality, leaders still spend time supervising the function, resolving escalated employee issues, or even stepping in when the HR officer lacks expertise. This is time that could be spent on strategy, sales, or operations. The hidden cost here is productivity loss.
6. Scaling Pressure
An HR officer can comfortably manage 20–30 employees. Beyond that, the workload becomes unmanageable. SMEs that scale quickly soon discover one HR hire isn’t enough. Adding another officer doubles the costs, and the cycle repeats.
The Impact on SMEs
When all these costs stack up, the effect on a growing business is clear. What started as a move toward professionalism becomes a drain on resources.
1. Strained Cash Flow
SMEs run on tight margins. Allocating millions annually to a single HR hire or doubling that when turnover happens pulls funds away from marketing, product development, or sales. HR is meant to support growth, but in this setup, it can stall it.
2. Slower Processes
A small HR team often struggles to keep up with recruitment demands, payroll deadlines, and compliance updates. Bottlenecks form. Employees get frustrated. management ends up stepping in, which slows the entire organization.
3. Compliance Risks
Nigeria’s labor laws, pension rules, and health insurance mandates are strict. Missed deadlines for pension remittances can trigger penalties of at least 2% of unpaid contributions for each month in default.
Under the Pension Reform Act 2014, employers are legally required to remit both employee (≥ 8%) and employer (≥ 10%) pension contributions within 7 working days after salary payment. Late remittances incur a penalty of at least 2% per month on unpaid amounts.
In recent years, PenCom has fined employers ~N14.3 billion for late pension remittances and recovered N12.5 billion in penalties from defaulting employers over roughly 11 years.
Non-compliance with PAYE tax or NSITF obligations exposes businesses to additional fines and legal disputes. For SMEs, these penalties hurt far more than for large corporations.
4. Employee Experience Gaps
HR is more than paperwork. It’s how employees are recruited, onboarded, developed, and retained. When HR is under-resourced, new hires are poorly onboarded, employee relations issues drag out, and morale dips. That leads to higher turnover, which starts the cycle again.
The Proten Alternative: HR Insourcing
There’s a better way for SMEs to manage HR without carrying the weight of full-time hires. Proten’s HR Insourcing model gives businesses access to a complete HR department at a predictable cost and with none of the hidden overheads.
Instead of depending on one hire, you gain a team of specialists covering recruitment, payroll, compliance, employee relations, and training. This means expertise is always available, no matter the HR challenge.
Proten’s approach is built for SMEs. The service scales with your business, so you don’t pay for more than you need in the early stages, and you don’t scramble to expand HR capacity as your headcount grows. There’s no downtime from turnover, no surprise costs from compliance mistakes, and no need to budget for expensive HR software or training.
What you get is stability: policies drafted correctly, payroll processed on time, compliance handled, and employees supported. All while you keep your focus where it matters on customers, growth, and revenue.
Conclusion
Hiring an in-house HR team feels like a natural next step for growing SMEs. But once salaries, benefits, turnover, software, and compliance risks are factored in, the cost quickly outweighs the value. Instead of solving HR challenges, many businesses find themselves adding new ones strained cash flow, stalled processes, and mounting risks.
Proten’s HR Insourcing offers a smarter path. It gives SMEs full-scale HR support, immediate access to expertise, and predictable costs, without the burden of building an internal team from scratch. It’s HR designed to grow with your business, not slow it down.
Ready to scale without the hidden costs of in-house HR? Discover how Proten’s HR Insourcing can support your growth.
