Redundancy vs contract exit: the cost of scaling down

Key takeaways

Exit costs in in-house vs outsourcing are often ignored until volume falls. Making a £28,000 employee with six years' service redundant costs roughly £7,000 in statutory redundancy pay and notice, plus process time. Ending an outsourcing contract usually costs the notice period, often 30 to 90 days, during which service continues.

• Redundancy: about £7,000 for a £28,000 employee with 6 years' service.
• Contract exit: usually the notice period, with service continuing.
• Redundancy: needs a fair process and possibly consultation.
• Contract exit: needs data return and a handover plan.

Why do exit costs matter in the comparison?

A cost comparison that assumes volume never falls flatters the in-house option. If demand drops, a product line closes or work is automated, reducing an in-house team costs money and time, while an outsourced service can usually be scaled down within the notice period. Flexibility has a value.

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What does redundancy cost?

Employees with two years' service are entitled to statutory redundancy pay: half a week's pay for each full year under 22, one week's pay for each year from 22 to 40, and one and a half weeks' pay for each year aged 41 or over, with weekly pay capped and service capped at 20 years. Notice, or pay in lieu, is due on top.

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What does a worked example look like?

An employee aged 35 on £28,000, about £538 a week, with six years' service is due six weeks' statutory redundancy pay, about £3,230. Statutory notice is six weeks; paid in lieu with employer costs, about £3,700. The total is roughly £7,000, before management and HR time, advice and any enhanced contractual terms.

What does ending an outsourcing contract cost?

Usually the notice period in the contract, often 30 to 90 days for SME services, during which the service continues and you pay for it. Watch for minimum terms, early termination fees and exit charges for data or handover. Check these before signing, not when you want to leave.

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What process does redundancy need?

A fair process: a genuine redundancy situation, fair selection, individual consultation, and considering alternative roles. If 20 or more redundancies are proposed at one establishment within 90 days, collective consultation rules apply. GOV.UK sets out the employer's duties.

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How do you plan for flexibility?

Size the in-house team for the steady core you are confident of, and put variable or uncertain volume with a provider on sensible notice terms. That limits the cost of scaling down without giving up the in-house knowledge you need.

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What are the other ways to scale down in-house?

Redundancy is not the only route. Reducing hours by agreement, not replacing leavers, moving people to other roles and ending temporary contracts can all reduce capacity. Each has its own rules and costs, and all take longer than scaling down an outsourced service, which is why variable volume suits outsourcing.

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What does this look like in practice?

A pattern we see in UK logistics firms: a contract win leads to hiring four administrators, and when the contract ends two years later, the business faces redundancies. Where the extra volume sat with a managed team, the business simply scaled the service down at the end of the notice period.

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Exit cost checklist

Include these in any comparison.

• Estimate how likely volume is to fall in 3 years.
• Calculate statutory redundancy and notice for in-house roles.
• Add process, advice and management time.
• Check outsourcing notice periods and exit fees.
• Put uncertain volume on flexible terms.

Next step

Tell us which volume is steady and which is uncertain. We will cost the exit risk of each model in a 30-minute call.