Outsourcing human resources (HR) processes offers many organizations the temptations of substantial cost savings, the ability to save time and effort on HR functions, and the completion of HR processes and tasks with a higher level of competence and professionalism than the organization may be capable of on its own. However, HR outsourcing partnerships are not a panacea or a catch-all: they are not quick and easy fixes for deep-rooted, systemic problems with HR in different companies. And, too, differing HR functions tend to have differing levels of readiness and ease associated with their outsourcing: some are much easier to outsource than others, and different organizations may even have different investments in different HR functions. Successful HR outsourcing partnerships rely on a deep mutual understanding between both partners, the organization doing the outsourcing and the HR service provider: an understanding of the guiding strategic vision, as well as knowledge-sharing and teamwork for the functions and processes in question.
Outsourcing the human resources (HR) function, the move away from a purely internal approach to handling all HR issues, has been growing in popularity in recent times, with the realization that HR services can be delivered by an outside provider (Marchington and Wilkinson 2011, p. 191). Outsourcing HR may, however, take a number of different forms: for example, one organization may have a shared service centre of its own, or a number of different organizations may combine HR resources and functions (p. 191). Still another model of HR service delivery is that provided by multi-client call centres, which can service many different organizations effectively (p. 191). Another key point of variation concerns the precise HR functions outsourced, with some functions being heavily outsourced, especially “training and development, executive search and selection, recruitment of temporary staff, and outplacement and redundancy counseling”, while others, such as “employee relations, reward strategy, [and] appraisal” are not (p. 192).
There are, as Marchington and Wilkinson (2011) explained, three primary reasons that organizations seek to outsource the HR function. The first is relatively simple: outsourcing HR can potentially net significant savings for an organization (p. 193). External HR service providers, generally speaking, owe their existence and certainly their success to their ability to conduct HR functions at a more attractive price than many organizations can manage on their own (p. 193). That said, the other factor here, of course, is risk: HR functions carry risks all their own, and having an external organization which specializes in HR take on these risks is, for many organizations, a smart decision (p. 193). A related reason, in many ways an aspect of this, is that organizations who outsource HR can implement a “just-in-time” programme for human resources: they can hire only “temporary subcontractors to cover fluctuating demands for labor” (Cooke, Shen & McBride 2005, p. 415). This, of course, can save considerable costs on HR services (p. 415).
The second main reason organizations choose to outsource their HR function is expertise: after all, HR service providers are in the business of providing HR services professionally, and as such they are often able to handle these functions far more capably than many organizations (Marchington & Wilkinson 2011, p. 194). The principle here is specialization: organizations that outsource their HR functions seek to focus on their core strengths, thereby saving themselves a great deal of time, effort, and paperwork on HR by outsourcing to professional providers of HR services (Cooke, Shen & McBride 2005, p. 415). Finally, HR service providers are external to the organization, and as such they can potentially offer the benefits of an independent perspective on complex issues (Marchington & Wilkinson 2011, pp. 195-196).
In essence, the decision to outsource HR functions or not is a “make-or-buy” decision: organizations have to decide whether to “make” their own HR functions, or purchase the services of full-time professionals for this purpose (Alewell et al. 2007, p. 275). The felt need to purchase such services often stems from “an imbalance between manpower requirements, on the one hand, and actual manpower endowment, on the other” (p. 275). Of course, many factors and variables may guide and govern decision-making in this arena, notably new schedules of responsibilities within the organization that might tie up more of its available manpower (p. 275). Other triggers include “cost reduction, lack of capacity, reduced time-to-market, increased quality, new product introduction, balance capabilities, skills shortage and increased responsiveness” (pp. 277-278). All of these change the priorities and balance of responsibilities within organizations in ways that are often salient to decisions about whether to insource or outsource (pp. 277-278).
In much this same vein, Klaas, McClendon, and Gainey (2001) found that distinct approaches to managing workforces are likely to necessitate more intensive investment upfront in order to ensure an effective partnership (p. 126). Human and social capital, of course, forms an important part of any effective organization. These authors found that idiosyncratic practices were negatively related with instances of outsourcing (p. 132). Another key finding was that, again in accordance with predictions, firms that relied on HR processes as strategic were more likely to outsource “transactional, human capital, and recruiting and selection activities” (pp. 127, 132). This is scarcely surprising: for these firms, it is essential that processes of such strategic value be implemented only by professionals of the highest calibre.
As Ettling (2012) explains, technology is changing the face of HR outsourcing. Although HR outsourcing is—or should be—about a great deal more than simply cutting costs, nonetheless this remains an important reason to undertake such a step. As such, technology that can increase the reporting and analytical values of the organization’s HR processes can make a substantial difference. An analogy: the second wave of HR outsourcing, ‘HR 2.0’, improved upon its predecessor with better organization, definition and alignment of processes, not to mention transition plans and better service level agreements (2012). This is the same thing that the third wave of HR outsourcing, ‘HRO 3.0’, has now done to HRO 2.0, with such new technologies as business process utility (BPU) services. As Ettling (2012) explained, BPU follows the cloud-based model of a “scalable, one to many delivery”, and in the HR arena they are extremely user-centric.
However, HR outsourcing is nothing if not a complex topic. HR outsourcing rose to the fore in the public sector during the recession, with budget woes producing a corresponding drive to save the taxpayers’ money (Gray 2008). Local governments, notably borough councils, have been leading the way in outsourcing HR, notably processes like recruitment advertising and payroll. However, this has led to concerns that the public sector might lose the more strategic capacities of HR. The most important thing is for the HR function to already be as good as it can be: in other words, the public sector should seek to optimize its own HR function and then outsource it, if need be. What often tends to thwart HR outsourcing efforts is a lack of clarity and organization: disparate functions need to be carefully delineated from each other, no light task for most HR departments (Gray 2008).
State governments in the United States of America are facing remarkably similar problems, including “demands to cut costs while improving services”, and as in the United Kingdom, they are looking to HR outsourcing as a possible solution (Andrew 2012, p. 46). Here the American states of Florida and Texas are leading the way, realizing cost savings and gains in efficiency that are beginning to draw the attention of other states (p. 46). In America, public sector HR outsourcing yields a typical savings of 15% to 30%, typically about US$5 million to US$15 million per annum (p. 47). American states have adopted the appropriate technologies to capitalize on such savings, as well as ensured that the technologies are managed and maintained appropriately (p. 47). Another important aspect of their success is their strategic partnerships with the HR providers: through these strategic partnerships, both partners align “HR resources, policies, and programs with the overall objectives and plans of the HR agency and state government” (p. 47).
As Gray (2010) explained, as the economy begins to recover from the recession, HR outsourcing is returning to the fore in the private sector, precisely because it has such potential to realize savings for the organizations that adopt this model. However, the problem is that often, organizations overestimate the potentially beneficial effects of outsourcing: for example, one survey of over one hundred companies found that they expected a savings of 37%, but in actuality realized a savings of about 20% (Gray). In fact, there is a very good argument that although cost savings constitutes a major reason to outsource HR, it should not be the reason: organizations should also consider “efficiency, simplification and added value” (Gray).
Outsourcing HR, then, is nothing to be done lightly. For an organization to outsource some or all of its HR functions successfully, management needs to ensure that they know what they are looking for in a service provider—and of course, which functions they plan to outsource are highly relevant to any such considerations as well (Starritt 2002). Good HR service providers will generally wish to engage in discussions with senior management of prospective clients, in order to ascertain the nature and character of the HR work in question. For their part, companies in search of an HR service provider should have many questions of their own, in order to ensure that they are prepared to ascertain whether or not the HR service provider in question is a good fit for the organization (Starritt 2002).
In the implementation phase, outsourcing HR becomes a matter of effective project management (Starritt 2002). Accordingly, Starritt explains, organizations need to have “a mix of good people with both HR and project management experience” (2002). Teamwork goes a long way: the company should be prepared to deploy its best talent to work with the outsourcers in making the transition, in order to ensure an effective implementation as well as to signal the commitment to the project of top management. Another benefit of teamwork in this stage is that by working together, employees of the organization doing the outsourcing and the HR service provider can gain experience working together, thereby fostering trust and ensuring a certain common accountability for the project’s successful implementation (2002). And, too, Starritt argues that the best course of action for an organization to take in creating an external service centre is to allow the HR service provider to whom it is outsourcing to take over its own staff, thereby ensuring continuity (2002).
Khanna and New (2005) lend further attestation to these views: careful planning is essential to ensure that the organization ends up in a productive and sound outsourcing partnership (p. 38). It is essential that organizations not outsource the actual planning of the HR outsourcing project: crucially, they must retain the appropriate human talent and capital in order to ensure good planning and a successful transition (p. 38). Organizations that do not maintain a proper focus on the entirety of the big picture here are likely to end up deprived of valuable human capital, precisely when they need it the most (p. 38). Moreover, organizations should not assume that the HR personnel who covered the outsourced function are no longer needed: “instead, decide on the number of HR personnel required to control and monitor the quality and quantity of workforce at the vendor” (p. 38).
One HR process that is evincing a particularly promising market for outsourcing is recruitment: recruitment process outsourcing (RPO) has been growing in recent years, especially in the manufacturing sector, but also in sectors such as “professional services, hotels and education” (Gray 2011). With the economy recovering, companies are looking to new ways to recruit more intelligently, and RPO is a logical direction for many. Contrary to popular misconceptions, quality of results, not cost-cutting, is the major reason companies are turning to RPO. However, as seen with other usages and aspects of HR outsourcing, RPO has its pitfalls if it is not intelligently managed: in particular, it is essential that the outsourcing firm not do so simply because it has problems of some kind with its internal processes of recruitment. Problems such as these tend to be considerably deep, rooted within the organization, and as such are not readily amenable to the ‘fix’ of outsourcing (Gray 2011).
On the other hand, companies that know how to use RPO can do so and enjoy very satisfactory results. A case in point is tyre manufacturer Goodyear, which in 2009 contracted HR service provider The Right Thing for an RPO deal (Gray 2011). Goodyear managed the process in an intelligent fashion: the tyre manufacturer brought important personnel from The Right Thing in for a special “three-day new hire orientation programme at Goodyear, providing education on the entire company and insight how each area of the business directly affects overall performance” (Gray 2011). Personnel from The Right Thing also interacted with important personnel from Goodyear, in order to learn about their experiences in working with Goodyear as new hires. The result was a strategic integration of personnel from both companies, enabling effective implementation of the project (2011).
And in a study of HR departments in medium- to large-sized Italian firms, Ordanini and Silvestri (2008) found that outsourcing recruitment and selection (R&S) was positively correlated with outsourcing HR functions in general (p. 383). Clearly recruitment and selection services are popular services for firms to outsource. On the other hand, higher dependence on technology and knowledge intensive contexts reduced the probability that a firm would outsource recruitment and selection (p. 383).
The resource-based view (RBV) of the firm has the potential to cast a very great deal of light on firms’ HR outsourcing decisions (Karthikeyan, Bhagat & Kannan 2011, p. 88). The starting point for RBV is the idea that resources and capabilities “are heterogeneously distributed among firms and that they are imperfectly mobile” (p. 88). As a result, a firm can secure competitive advantage with resources and/or capabilities that are “valuable, rare, inimitable and non-substitutable” (p. 88). This speaks to one of the major reasons for outsourcing already discussed: namely, the desire of firms to focus on their core competencies, and the advantage to them of doing so (p. 88). And following the RBV model, one particular type of competency stands out as vital to the achievement of positive outcomes with HR: tacit knowledge (pp. 88-89). Tacit knowledge can neither be observed nor codified: rather, it is knowledge gained through experience, know-how in other words (p. 88). Employees of an organization often gain tacit knowledge over the course of their employment, and this knowledge is often rooted deeply in the organization’s history: particular traditions and processes, rules and even rules for breaking the rules, the sort of social capital that defines any organization of sufficient age and continuity (pp. 88-89). As a result, when HR functions require considerable amounts of tacit knowledge, companies are less likely to outsource them—and of course, they would be best advised to either refrain from outsourcing them, or to outsource them only with especial care and caution (p. 89).
Moreover, firms need to consider strategic, competitive advantage: management needs to understand precisely what competencies and capacities the organization has that are vital for its competitive advantage, whether in the present or in the future (Karthikeyan, Bhagat & Kannan 2011, p. 89). Consequently, organizations need to ensure that before they outsource a given HR function or process, they come to the determination that it is not one that the organization needs to maintain internally in order to ensure its strategic advantage (p. 89). For example, Indian hotel chain Taj is distinguished by its famously, extremely customer-centric organizational culture: “the hotel employees were even willing to risk their lives to save the lives of the guests” (p. 89). Taj achieves these results with an extremely specific recruitment process, one that gives preference to candidates with an abundance of the specific values that the company wants, as well as a very particular training methodology (p. 89). The point here is that in this case, Taj would not be well-served by outsourcing these processes to an HR service provider, precisely because they are responsible for its competitive advantage (p. 89).
This focus upon human capital provides much of the proper framing for when HR functions should and should not be outsourced. Drawing upon secondary data such as company records, and primary data from managers in HR departments, Mahmud, Billah, and Chowdhury (2012) found that one key driver of the decision to outsource HR functions for organizations in the telecommunications sector in Bangladesh was number of employees: organizations with more employees generally felt more of a need to outsource at least some HR functions (p. 77). Unsurprisingly, different HR activities had different values for the degree to which organizations felt they needed to outsource them (p. 79). More interestingly, the organizations were likely to prioritize outsourcing of HR functions and processes that they valued more highly: recruiting and selection, for example, was classed as the most important of the HR functions, as well as the one that organizations most prioritized for outsourcing (p. 79).
In addition to the desire to save money, organizations also expressed a desire to save time and trouble with HR functions with which they were unfamiliar and/or poorly equipped to deal with (Mahmud, Billah & Chowdhury 2012, p. 80). A desire for greater competence and professionalism in the handling of these functions, then, drove many organizations to outsource them rather than keep them in-house (p. 80). In fact, professional competence was the single most important reason that organizations sought to outsource HR functions, followed by the desire to improve quality and save time, and then factors such as saving money and compensating for lack of experience in-house in dealing with HR functions (p. 80). Conversely, these authors also found that there were a number of reasons why organizations did not outsource at least some of their HR functions: organizations that did not outsource often reported self-sufficiency for their own HR departments, and indeed this was the leading cause of not outsourcing (p. 81). Another important reason was that HR outsourcing services were simply not available to them, and this in turn was followed by factors such as “conflict with internal practices, lack of satisfaction with the quality of service offered and cost of service” (p. 81). From all of this, it is clear that organizations are more likely to outsource those functions in which they feel a need for more competence than they can achieve in-house, provided that suitable services are available at a cost they are prepared to pay (p. 81).
But if these factors contribute to the beginning of HR outsourcing partnerships, what ensures that they have staying power? It is all well and good for a firm to sign a promising contract with an HR service provider, but a crucial question is What ensures that the relationship will endure? Lievens and Corte (2008) studied partnerships based on the outsourcing of recruitment and selection (p. 560). They hypothesized that continuance commitment, that is to say, commitment to an established course of action out of a desire to avoid the costs and possible lost investments that would occur as a result of terminating an extant relationship and taking a different course of action, would play a key role in ensuring continuity of relationships (p. 561). They also hypothesized that affective commitment, a type of commitment based on positive affect which is much stronger than mere continuance commitment, would positively correlate with the continuance of HR outsourcing relationships between organizations and their HR service providers (p. 561).
For their study, Lievens and Corte (2012) used data from 478 firms in the Flemish part of Belgium, contacting the HR departments to ask if they outsourced any part of their HR functions (p. 565). What they found was that in fact, continuance commitment had no relation to the longevity of an outsourcing relationship: evidently HR departments in the organizations in question abjured the sunk costs fallacy (p. 570). However, they did find that affective commitment was positively correlated with the longevity of outsourcing relationships, indicating powerful and significant influences from the quality of such relationships.
Successful management of the HR function is never any light thing, and that continues to be true over the course of any decision to outsource it. Outsourcing HR is a potentially very promising decision: it can net considerable savings, as well as increased competence and efficiency, and savings of time and effort, which enable the purchasing organization to concentrate on key capacities. However, it is essential for the organization to have a sound plan, one that involves the HR service provider at every level. In particular, knowledge sharing and teamwork are essential to ensure an effective implementation of HR outsourcing.
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