Should a company hire new workers or outsource an HRM function due to an increase demand of the companys product - Term Paper Example

? Should a company hire new workers or outsource an HRM function due to an increase demand of the company’s product? and number Instructor’s name Date: Executive Summary Outsourcing is an organizational trend practiced by most companies and its primary objective is to reduce costs and shorten workloads. It is economically beneficial to outsource an organizational function instead of hiring new employees. This is one simple way to reduce costs of acquiring additional manpower. Outsourcing is a strategy in business wherein an organizational activity is performed by another organisation. The primary goal of a firm to outsource is to conduct cost-cutting measures while at the same time perform an organizational function. Activities that can be outsourced include production or manufacturing, management functions like payroll system, financial processing, procurement, distribution and logistics, and other general services functions. Almost any kind of organizational activity can be outsourced but it is not advisable to outsource what is called core activity. Most firms in Europe and the United States outsource production and manufacturing activities. (Eltschinger, 2007, p. 25) There are benefits for this kind of activity and arrangement on the part of the two companies but there are also drawbacks, for example, the quality of the product might be jeopardized. Some people judge service quality by comparing the service offered by an outsourcing company with the services that they used to have. There is also the disruption on the continuity of the services over a prolonged period of time, added with problems in the course of outsourcing. But through outsourcing, we can also have an improved operational process, although this is not to mean that we can outsource any activity in the organization in order to reduce costs. Abstract This essay will explain a firm’s choice of applying outsourcing to human resource. Instead of hiring new employees, a firm can hire the services of an outsourcing company to provide HRM functions. This is one of the simplest ways to acquire manpower but at the same time it answers to cost-cutting measures of a firm. With so many expenses a firm has to endure, outsourcing is seen as the answer. Moreover, through outsourcing we can institute changes and innovations and improve operational processes with the help of another organization. The question is: is it all positive? No, there are repercussions and drawbacks. Not all processes and functions can be outsourced. Managers and employees of firms that have experienced outsourcing have warned that there are functions that should be executed by managers and employees who are organic in the company. Another disadvantage is that outsourcing jeopardizes quality. Also, firms that outsource core competencies do not see the importance of focusing on employees’ capability and knowledge considering that there is a relation between contented employees and contented customers. Introduction Firms find outsourcing as an easy way to produce products without much costs of production. Human resource is also another area where outsourcing can be done. Outsourcing is a trend in organizations where partnership of suppliers and businesses are involved, and networking is enhanced. There are hosts of other functions that can be done with outsourcing. But there are negative repercussions if outsourcing is not well planned and studied before it is applied. There may be economic benefits in the short term, but in the long run there can be negative effects, and some of these include cultural factors and cultural integration, continuity of skill of employees, and so on. The negative effects can also result into loss of savings or added expenditures on the part of the firm that applied outsourcing to HRM functions. An example of this negative repercussion is that there could be loss of skill on the employees, and some employees can feel insecure of their job that they opt to resign. If there are losses, then what good is outsourcing? Outsourcing should be properly planned before it can be applied to an organization. 1.1 Definition Outsourcing is an organizational strategy wherein a firm acquires the services of another firm to reduce costs. When a company finds that production is too costly, it may hire another company, commonly called an outsourcing firm, to manufacture the product or to perform some functions for the company. Outsourcing provides opportunities for firms ‘to shift the burden of risk and uncertainty associated with the business to someone else’ (National Economic Development Office (NEDO), as cited in Fang, Cooke, Shen, & McBride, 2005, p. 416). Outsourcing can improve productivity, profitability, and growth because in-house processes may already be outdated and are not too productive for the organization. But overall, outsourcing is the answer to increased expenses in human resources services. There are core activities that should remain a major organizational function and must not be outsourced. Core competencies of an organization should remain. There are times that outsourcing must not push through as a major decision of management. Benefits should exceed the disadvantages in outsourcing. When it comes to production, the firm should decide whether to produce in-house or to outsource depending upon the costs of production and transaction. The question of core competencies has to be answered. At times, outsourcing production processes will provide benefits. Outsourcing companies in Asian countries provide low cost of production. For example, in the automobile industry, automakers outsource auto parts and components produced by other companies at lower costs. These outsourcing companies are found in many Asian countries such as China. A study conducted by Gilley and Rasheed (as cited in Gilley, Greer, & Rasheed, 2004, p. 233) found “no direct effect of outsourcing on performance, they did find that certain types of outsourcing had a positive effect on performance for firms pursuing cost leadership and innovative differentiation strategies.” Therefore, it is important for firms pursuing improvement in management. An example can be cited in the pharmaceutical industry, functions outsourced include human resources (operations or payroll), financial transaction processing (for accounts payable), procurement, distribution and logistics, and clinical data management. (Gilley et al., 2004) 1.2 Factors or costs for a decision to outsource There are explicit reasons for a firm to outsource. Some of these are: a.) A firm may outsource human resource management (HRM) functions if it is for the stakeholders’ cost to outsource and an increase in service for the organization’s stakeholders; b.) Costs can be reduced for some activities and improve quality of service without resorting to hiring new employees; and, c.) Outsourcing some human resource function is an effective way to have administrative work done. There are also implicit reasons for a decision to outsource, and these are: a.) A firm’s performance increases after the decision to outsource; b.) The firm can save instead of training new employees; c.) Employees find themselves in new roles and learn teamwork and accountability. Two factors that are not important to the question of outsourcing are: a.) Satisfied employees not just turn their attention on their organisation out of gratitude but provide good and faithful service to customers as payback to their organisation. The question of employee satisfaction is not important in outsourcing because outsourcing is for cost-cutting measures of management and owner/s of the organization. b.) The question of management is also not important because this is being handled by another company. It is the job of management to look after its own employees and not the employees of the outsourcing company. Factors that are important to answering the question of outsourcing are: 1. The first reason for outsourcing is cost reduction. It enables firms to keep future costs down by selecting the best offer from outsourcing companies. 2. It allows firms to concentrate on ‘core’ activities where they have expertise and relegate other activities to other firms. 3. Outsourcing allows firms to be flexible and be productive by using temporary subcontractors to cover the demand for additional employees. Some of the direct costs that can be reduced are headcount factor and overtime working of employees; while indirect costs include cutting administration and backup costs, saving can be produced on recruitment and training costs, absenteeism costs, and industrial relations problems. (Fang et al., 2005, p. 415) 4. Change management is important in human resource outsourcing. The long term-effects on culture count. Cultural integration can be turned into a positive experience by employees. 5. Cross cultural awareness is a factor in human resource outsourcing since through culture employees share their ‘experiences which are then carried forward from one generation of managers to the next’ (Hendry, 1995, p. 196). 6. Offshore outsourcing requires company restructuring on handling of employees. If an entire department or business function is outsourced, there could be a problem of reallocation of jobs. Employees have to be reoriented, at the same time steps have to be taken to prevent employees from resigning for feeling that their jobs are at risk. There are times that those who are most needed in the job are the ones who first take their leave because of insecurity. Measurement Employees have to adjust and adapt to cultural differences. How they are adjusted to change and innovations determines, in a sense, the success of outsourcing. The first factor is how to deal with change. With outsourcing, employees have to adjust with a new management and a new culture. Firms have to continuously introduce innovations in this age of intense globalization. Innovations have to be applied to the different organizational processes, and employees have to be prepared, trained and developed. Change is a part of business and change management has to have a distinct place in the organisation. Firms that commit to change motivate employees to be involved and the method is continual improvement. Analysis Most of the reasons for outsourcing are on cost reduction. By so doing, firms can focus on capacity building which is related to organizational learning. It is a common belief and this is proven by experience, that outsourcing answers to cost-cutting measures, particularly if a firm wants to add manpower hours without hiring new employees. Outsourcing is also enhanced with the introduction of the internet and information technology. One example is the popularity of business process outsourcing (BPO). Through the internet, there are many organizational functions that can be conducted with the help of another firm. Firms can also improve partnership with contractors and clients that can facilitate learning and improve organizational efficiencies on projects and other operational aspects of business. Firms can also tap on the opportunity of networking. A network can be called a ‘locus of innovation because it provides timely access to knowledge and resources that are otherwise unavailable, while also testing internal expertise and learning capabilities’ (Powell et al., as cited in Fang et al., 2005, p. 417). With outsourcing, there might be changes in the organizational structure. This requires orientation on ‘new and old’ employees. New employees are employees who come from the outsourcing company while old employees are the organic employees of the organization. There is the problem of continuity of skill supply and the retention of knowledge and expertise which are already a part of the organizational knowledge but is in danger of being lost because of the entry of new ‘knowledge’ from the outsourcing company. Also, jobs have to be reallocated. The management has to reorient and motivate their original employees to prevent the ‘old’ ones from resigning because they might feel that their jobs are at risk. Employees who have very important roles in the company may also think of resigning because of feelings of insecurity. Organisations should not rush into outsourcing. The buyer should follow some steps by conducting a feasibility analysis, define the parameters of the contract, and build a strong relationship with the vendor or supplier. Many organisations have improved in their operations. But with the present recession, economies have been affected, unemployment rises and outsourcing is believed one of the culprits. Summary There are advantages created by outsourcing. We can acquire the services of new employees (through the help of another firm) without hiring new employees. As we have weighed down the advantages and disadvantages, we have proved that there are more advantages than advantages, economically, in the short and long terms. But this question of advantages, depends on the organization and the kind of organization that wants to partake in outsourcing. In outsourcing, employees have to work with individuals of another organization or another culture, and their own values and behaviour may change. Employees have to learn the new setting and acquire further training. Outsourcing involving particular non-standard activities requires fine tuning and may create a new niche when the outsourcing process has taken some time and the outsourcing company and the service provider mature in the process. The culture of an organisation is shaped by its history, the leaders and the internal environment.. Conclusion/Recommendation Firms find outsourcing as an easy way to produce products at low cost. In our analysis, we also find that outsourcing is economically important for a firm, especially in the cost-cutting measures. Outsourcing is therefore recommended instead of hiring new employees. As with any change, we always find many uncertainties. It is true with outsourcing, particularly with how employees feel with the organisation to which they identify. During outsourcing, the employees’ feelings are severely put to the test. Outsourced employees will find difficulties into their new employer’s organisation. References Eltschinger, C. (2007). Source code China: the new global hub of IT (Information Technology) outsourcing. New Jersey: John Wiley & Sons, Inc. Fang, L., Cooke, J. Shen, E, & McBride, A. (2005). Outsourcing HR as a competitive strategy? A literature review and an assessment of implications. Human Resource Management, Winder 2005, Vol. 44, No. 4, pp. 413-432. Gilley, K., Greer, C., & Rasheed A. (2004). Human resource outsourcing and organizational performance in manufacturing firms. Journal of Business Research, vol 57 (2004), pp. 232-240, viewed 3 March 2012, doi:10.1016/S0148-2963(02)00304-1. McColl-Kennedy, J. & Schneider, U. (2000). Measuring customer satisfaction: why, what and how. Total Quality Management, Vol. 11, No. 7, 2000, S883-S896 [e-journal], Available through: City University London [Accessed 24 February 2012]. Read More