Outsourcing in Human Resource Management - Essay Example

Outsourcing of Human Resource Management services: the way forward? Introduction Human Resource Management (HRM) may have traditionally included functions like recruitment, retention, training and development, rewards, employee relations, performance appraisals and personnel records. Globalization, internationalization, global strategies, labor market changes and the competitive work environment has posed great challenges. HRM refers to the totality of people management practices found in organizations, and not to a particular approach to the philosophy of people management (Gibb, 2001). Delegating selected business functions to external providers allows organisations to concentrate on their core business activities, utilising external expertise and reducing costs (Jones & Finlayson, 1999). Their change role is expected to bring about innovation, quality enhancement and cost-reduction. HRM has gone through a number of stages and towards the end of the last century its role became strategic, and the concept of strategic human resource management was born (Roos, Fernstrom, & Pike, 2004). (Davis (2006) foresees structural and cultural change as the central strategic task for human resource managers. Emphasis on cultural issues to encourage autonomy and devolve decision making, on personal/organizational development and learning and to be responsive to changing customer needs, has given rise to the concept of outsourcing the HR functions. The rise in outsourcing is confirmed by the Workplace Employee Relations survey that revealed that more than 90 per cent of all workplaces subcontracted one or more services (Walsh & Deery, 2006). Outsourcing of HR functions has consistently been increasing and this requires that HRM professionals look more closely at employees’ perspectives on outsourcing, says Richbell (2001). During downsizing hiring of outplacement specialists takes place. Recruitment is increasingly done over websites. Counseling takes place through telephone helpline sans emails. At times transfer of human resources takes place from the outsourcing company to the vendor but these in UK have to be governed by various Employment Regulations and Rights Acts. The existing terms of service have to be guaranteed by the vendor (Lee, 2000). Stages in outsourcing Organizations segregate non-core activities from core ones and thus activities that are not central and revenue producing are outsourced (Cardy, Gove, & DeMatteo, 2000) but Conklin (2005) contends that this core/non-core dichotomy is not sufficient. Outsourcing of certain HR activities has a positive impact on overall innovation within the company, hence uniqueness is another criteria on which the decision to outsource should be based. At the same time, distinctive or idiosyncratic practices requiring tacit knowledge may suffer if outsourced. The decision to outsource requires five evaluation stages - identifying and weighting performance categories; analysing technical capabilities; comparing internal and external capabilities; analysing supplier organisational capabilities; and determining total acquisition costs (Conklin). Outsourcing may improve a company’s benchmarking and target setting. A successful outsourcing relationship would rest on inter-company processes and structure that foster collaboration and trust. Some others are of the opinion that outsourcing is doomed without top management support for it. An organization can avoid investments in new equipments and skill sets, laying off the risk of fluctuations in workloads, or achieving better quality service for employees. But companies can differ in their analysis of vendor selection, the process and the costs savings. These in turn affect the decision whether to outsource the HR processes. Rationale in outsourcing Sako and Tierney (2005) state that Business Transformation Outsourcing (BTO) is an emerging segment, which focuses on improving the effectiveness of an entire corporate function like the HR. The rationale is to outsource administrative tasks leaving the personnel to focus on strategy formulation using their competencies (Sako & Tierney) and to experience greater flexibility in allocating resources, and greater cost efficiencies (Jones & Finlayson) but Khatri and Budhwar (2002) cite many scholars who argue that human resource can be a source of sustainable competitive advantage for an organization. This implies that all functions related to human resources should be dealt in-house. Research suggests that HR outsourcing is a fad and that would pass. Organizational culture is a major deterrent to outsourcing HR activities. The entire market is fragmented because the vendors lack the expertise to serve a function like HR. without a secure data protection system in place, sensitive employee information can be misused or misinterpreted. Large global firms have complex multi-divisional and regional structures where it is more rational to centralize the HR function as employees are scattered around the globe (Strodtman, 2007). Multinationals are trading in due to which the HR outsourcing faces more variegated national laws making country-by-country rollout a common occurrence. Global companies operating across boundaries know that they have inconsistencies, inefficiencies and duplication in their HR, and a service provider can suggest transformation HR procedures. Medium sized companies find the administrative functions of HR a drain on the organization’s resources. Marketing efforts technology vendors and management consulting firms to infuse more technology into HR services attract the companies to consider outsourcing these functions but internal influences are equally strong contend Florkowski and Olivas-Lujan (2006). Galanaki and Papalexandris (2005) find that companies that outsource HRM are mostly middle-sized as they are unable to offer these services in-house. The smaller companies outsource because they do not find it necessary to have such a department and benefit from the expertise of an experienced person. They do not seek sophisticated services but usually outsource routine tasks like employees surveys. The larger companies are demanding and are willing to pay the price for innovation and experience. A survey in the leading automobile manufacturing units revealed that based on criticality, stability and simplicity of an activity, HRM was one of the four functions that needed to be outsourced with perceived benefits like focus on core competency and enhanced customer satisfaction (Pandey & Bansal, 2003). Information systems, employee services which include relocation, retirement counseling and outplacement, safety programs like compensation, welfare, drug testing, benefits design and testing are prime targets for outsourcing (Cardy, Gove, & DeMatteo, 2000) which encourages managers to re-evaluate business process reengineering (Jones & Finlayson). Advantages and disadvantages in outsourcing Outsourcing HR can have both good and bad effects on the Industrial-Organizational (IO) Psychologist. If an IO Psychologist firms handles the HR functions of an organization, the psychology principles and practices can be easily applied in various functions like recruitment, selection, providing a realistic job preview, offering new employee orientation, and conducting training programs (Harris, 2001). At the same time in-house IO Psychologists could lose their jobs if HR functions are outsourced. The IO psychologists focus on the managerial and the operational aspects while the BPOs focus on strategic decisions. BPOs also have the potential to change the way in-house IO psychologists function. Initial cost savings in outsourcing results largely due to standardization and economies of scale (Sako, 2005) but economies of scale can be built through consolidation; offshore benefits like cheap labour and infrastructure can be reaped through captive shared-service centers or through join ventures, and process expertise acquired through external help, say Bloch and Spang (2003). Outsourcing HR can reduce costs but HR has an increasingly complex environment and the increases in mergers and takeovers requires both specialist knowledge and a much HR attention while the critics of outsourcing challenge if an external source can ever know your business. The contracts drawn up should leave the control in the hands of the firms and the partners should share an atmosphere of mutual trust and rewards (HRM, 2004). Advanced technology today helps to reduce costs and time, the primary reasons for which the HRM functions were outsourced. Consultants may still be required when there is need for brainstorming, deliberating, soliciting feedback, and obtaining an experienced point-of-view. Thus Cassidy (2005) points out that a wise use of consultants in conjunction with advanced technology can ensure the firm reaps benefits of true value-added services but Jones and Finlayson contend that outsourcing can damage the morale of the existing staff apart from reducing flexibility when external providers require long-term contracts. Pharmaceutical and biotechnological companies are increasingly outsourcing HR functions to have access to skills, technology and processes but they cannot tolerate error by the service provider and this fear becomes a deterrent to outsourcing (Kearney, 2004). Biotech and pharma companies also risk losing their competitive edge in outsourcing apart from loosening their grip on the entire enterprise. Uncertainty, firm size and cost pressures seem to influence the outsourcing decisions. Firms with less idiosyncratic practices would benefit more from outsourcing since the service provider could reap economies of scale more easily but Dickmann and Tyson (2006) state that assessing the transaction costs has limitations. Management finds outsourcing increases the strategic focus of HRM through offloading compliance functions. Hence the Internal Audit must recognize that HRM as a non core process might be a candidate for outsourcing. Alternatively, it may be necessary to deploy technology to allow HRM to increase attention to strategic goals (Verreault & Hyland, 2006) but outsourcing, sub-contracting, franchising, supply chain management and interim management all, in different ways, challenge the traditional assumptions of personnel or HR practice (Druker & Stanworth, 2001). Outsourcing is a challenge as it has been seen ‘the abolition of wage labour itself ’. The workers lose benefits and the relative security of employment status in favour of temporary workers. Outsourcing of training and development activities Training and development is also an integral function of the HR department. There has been a noticeable surge of companies seeking to satisfy their learning needs through outsourcing. The motives to outsource training are the same as for other HR functions as far as the organizations are concerned but the benefit goes to the suppliers who can spread the fixed cost over multiple clients. Motorola benefited by partnering with ACS for training as it allowed shifting from rigid hours of classroom training to a flexible blended learning formula that includes an Individual Development Plan created for every employee (Harris, 2003). Learning should be seen as a collective accomplishment and hence outsourcing relationships can create partnerships between contractors and clients that may facilitate learning and cross fertilization between the two firms (Carroll, Cooke, Hassard, & Marchington, 2001). Nevertheless, outsourcing training does not ensure continuity of skills supply which can damage competitiveness. Perkins (2003) cites O’Keeffe who contends that the global economy has brought the realization that the only lasting competitive advantage is the organizations ability to effectively exploit intellectual capital. Thus if companies consider their employees merely as commodities and fail to invest in their training and development, they cannot be said to be practicing human resource management. Training has to involve the environment, the people and the structure of the organization. The most effective method is when managers train their own people, which also reinforces that they understand the principles of TQM (Spenley, 1992, cited by Vermeulen & Crous). Outsourcing training would leave a gap as they do not interact with culture of the organization. Outsourcing – recruitment and selection process In order for organizations to develop an image of ‘employer of choice’, they have to tread carefully in outsourcing recruitment (Thite, 2004). Mills (2002) says it is impossible to run the recruitment process single-handedly while simultaneously developing the core business. It is advisable to outsource the primary candidate selection and the first round of interviews while keeping the final selection decision with the company. Outsourcing recruitment process alleviates the administrative burden of sourcing and screening candidates with the right skills but Fish and Macklin (2004) caution the HRM professionals must ensure that the service providers have knowledge, integrity, conscientiousness, and effectiveness. Managers’ perception of outsourcing HR managers find difficulty in expressing and describing in detail what they require from the vendor (Galanaki & Papalexandris) which can be attributed to lack of experience. Very often the HRM vendors too lack experience and learn on-the-job from the clients. Smaller companies face difficulty because their purpose of approaching consultants is to gain from expertise which the vendors are ill-equipped with. There is lack of maturity in the HRM outsourcing market. Hindle (2005) also agrees that with the market for HR outsourcing set to grow from $19 billion in 2003 to $33 billion in 2008, must be fully aware of what benefits to expect from HR outsourcing. Workforce productivity, leadership development and succession planning are invaluable HR activities are some of the core activities that get neglected in the day-to-day HR activities. BT has reaped large benefits in outsourcing reports Hindle. It has rationalized its training catalogue by 50 percent, reduced training waiting lists by 26 percent and saved $2.2 million in time and money lost due to sickness. Employee satisfaction ratings across training and counseling have increased. Companies should look for one mature vendor with expertise in the field. The change process has to be communicated to the entire workforce. Having the right governance structure in place is equally essential. The transaction cost model suggests that if a particular unit does not make a value-added contribution to the organization when compared to outsourcing, then such services should be bought in (Morley, Gunnigle, O’Sullivan, & Collings, 2006). Thus HR professionals need to prove that they can “deliver value” (Ulrich cited by Mueller & Carter, 2006). Smaller organizations have contracted labour and thus fewer employees to manage which further make outsourcing attractive. UK has an ageing society like Japan and this poses a number of challenges for the HRM. There is a shift in the values of the younger workers towards work and life. People are looking for flexible working arrangements and greater freedom. Diversity management approach would have to be adapted to focus on individual values and provide a wide range of working conditions (Macdonald & Hanaoka, 2000). Thus, before outsourcing HR functions, priority should be given to organizational culture along with strategic issues for sustained success (Ferreira de Sousa, 2003). The HR department should be involved in the outsourcing process and they should also be sensitive to employees’ needs, skills and rights during transfers as according to Rubery, Carroll, Cooke, Grugulis, and Earnshaw (2004) within fragmented and decentralized organizations the effective management of human resources has been increasingly seen as dependent upon a strong organizational culture. Line managers in HR function reduces need to outsource Due to downsizing and devolution of HRM responsibilities, the line managers have assumed key positions by virtue of having knowledge that enables then to influence both strategic and operational organizational priorities (MacNeil, 2003). Added to this are introduction of sophisticated software and the development of smart computer systems, which have further reduced the workload on the HR freeing the key personnel to concentrate on the change agent and strategic partner roles (Larsen & Brewster, 2003). The line managers are not competent in HR work and need to regularly reflect and be critical about their work. They attempt to increase the speed of decision making by wanting to by-pass procedures, which demonstrates that HR should not be outsourced but the HR functions should be expanded (Renwick, 2003). While assessing suppliers before outsourcing, the clients often look for physical competencies like facilities, workforce and technology rather than determine if the suppliers have the capability to deploy these resources to attain the desired output (Fenny, Lacity & Willcocks, 2004). While HR is the responsibility of the line managers and the top managers, and the HR department, certain activities are outsourced to external agents. Strategic decision making, leadership and operational decisions are kept in-house while training delivery and administrative jobs are outsourced (Valverde, Ryan, & Soler, 2006). Consequences of outsourcing One of the consequences of outsourcing is the growth of temporary work agencies (TWA). Temporary work force is in demand from user firms which has led to the surge in TWAs. These TWAs offer a range of human services and offer any kind of temp staffing. For HRM these are sources of conflicts, tensions and contradictions (Burgess & Connell, 2006). Cooke (2001) states that the growing use of flexible form of employment like outsourcing maintenance and routine work in UK shows that ‘best practice’ HRM is not widely practiced in UK. This is the combined effect of intensified global competition and a British short-termist culture entrenched by an imperfect free market system. Research suggests that less than half of the downsized companies achieve a reduction in overall expenditures and less than one quarter show increased productivity. After outsourcing if the management fails to address the issue of staff reduction and corporate structure, it would negate the value of the entire exercise (Embleton & Wright, 1998). In outsourcing, organizations can reap the benefit of the providers’ investments, innovations and capabilities, provide better service to their customers and choose to outsource functions that are usually subject to seasonal demand but due consideration has to be given to the impact on the employees (HRM, 2006). Even if only transactional activities are outsourced and not the strategic ones, there can be resistance from within a firm’s HR department, lack of employee preparation, quality of HR services from vendors may be unsatisfactory, and firms may encounter lack of competencies to manage HR outsourcing. There could also be compliance violations, loss of internal technical skills and expertise, and loss of positive reputation (cited by Kosnik, Wong-Mongji, & Hoover, 2006). In order not to deal with the unpleasantness of redundancies, negative publicity and the legality of employee rights, through outsourcing deals organisations transfer the staff to service providers, who takeover over the entire workforce of as a condition of contract (JMD, 2000). Outsourcing decisions can impact the skills base and its reproduction. In the short-term, when supply of trained labour is in plenty and if the client firm retains managers with wide skills and knowledge, then the outsourcing relationship can be effectively managed but in the long run this skill may diminish. Even the low paid jobs in outsourcing may run into trouble (Rubery et al., 2002). Outsourcing changes the nexus of specific investments and the typology of mutually dependent activities. For better coordination in relationship with the labour market, in-sourcing choice is a necessary due to which the potentiality for conflict can be hierarchically controlled (Gianecchini, Gubitta, & Costa, 2006). Oil major BP’s outsourcing of HR functions since 1999 resulted in absolute chaos and is now a business school case study on how not to outsource. The primary reasons have been attributed to the poor state of documentation of processes and the resistance of the management to change and their unwillingness to cooperate (SD, 2006). Conclusion Study of the literature suggests that there is no single solution that can be applicable to all companies. Those with global operations are most likely to reap the maximum benefits. While it is evident that outsourcing HR has tangible benefits like cost savings, access to skills and expertise, moving HR up the value chain and increasing effectiveness of HR delivery, organizations have to take precautions before deciding. Processes must be clearly understood including the outcome. Today sophisticated software is available which can effectively reduce costs even with in-house operations. The responsibility of HRM should be with a mix of internal and external agents. Number of failures in HR outsourcing does not give the impression of a way forward. Perhaps only the mundane activities could at best be outsourced in the future with areas like training, motivation, recruitment and selection being kept in-house. 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