Outsourcing of Human Resource - Coursework Example

Table of Contents 1.0. Introduction 02 2.0. Outsourcing of Human Resource 02 3.0. Reasons for HR Outsourcing 03 4.0. Disadvantages of HR Outsourcing 04 5.0. Limitations of HR Outsourcing 05 6.0. HR Functions Outsourced 06 7.0. Theories of HR Outsourcing 06 7.1. Resource Based View 07 7.2. Concept of Core Competences 07 7.3. Transaction Cost Economies (TCE) 07 7.4. Agency Theory 08 8.0. Future of HR Outsourcing 09 9.0. Conclusion 09 10.0. References 11 1.0. Introduction The outsourcing phenomenon has been increasingly receiving attention from different business organisations and one form of which has been very widely used by large companies is Human Resource Outsourcing (HR outsourcing). HR outsourcing has been seen as an opportunity for some researchers and as a threat by others. With the increase in globalisation, outsourcing has gained an important business approach for attaining competitive advantage. In this assignment we discuss the major reasons behind outsourcing of human resource by an organisation and also the disadvantages and the further limitations of the same. We study the functions of HR which are outsourced and theories in relevance to the same. Further the future of the phenomenon is discussed and how more and more organisations are turning towards HR outsourcing to cover up various aspects of human resource management. 2.0. Outsourcing of Human Resource Organisations today are looking for every possible avenue to reduce costs and increase efficiency and the human resource department is not immune to this trend. Outsourcing is the work of a company done by the people other than the full time employees of the company (McIvor, 2005). In modern day business, outsourcing has become very complex and companies are outsourcing vendors for numerous reasons and are becoming a very significant factor in today’s business world. Consideration of outsourcing human resources is a part of the growing trend. The HR outsourcing decision has various different challenges which are required to be considered before implementation as outsourcing the non required function is a key challenge and the service providers are to be reimbursed by the companies who contract them (Abdul-Halim and Che-Ha, 2009). 3.0. Reasons for HR Outsourcing Human resource outsourcing has certain advantages and the reasons behind the same are listed as follows: Gaining Competitive Advantage: Outsourcing is a managerial decision and there are some major factors which assist the organisations in taking decisions on human resource management. These factors are dependency risks, spill-over risks, trust, relative proficiency, strategic capabilities and flexibilities. The outsourcing of human resources provides the managers with spare time to deal with strategic business issues (Corbett, 2004). Minimising Costs: Reducing the cost of production is the priority of all profit making companies. Profit maximisation by cutting cost is target of every organisation in this real economic world and this can be attained through outsourcing (Schouker, 2008). Reduces Workload of Staff: Human resource outsourcing helps in reducing the workload on regular staff. It takes off the load of some of the managers and the other staff employed. This reduction of workload helps the managers to concentrate more on the business of the organisation with improved planning, operation and growth of business (Klaas, McClendon and Gainey, 2001). Strategic Move: Outsourcing is a strategic move for some organisations with the vision to reduce costs, achievement of workforce flexibility, access HR expertise and focus on managerial resources. Each organisation has its own goals and objectives, the achievement of which requires a well developed strategic process (Baca, 2009). Technological Advancements: The recent technological advancements have added to the issues of outsourcing as it has created the scope for provision and purchases of outsourcing services. The modern technological gargets demand for supply of labour also requiring specialised skills to run those making organisations to resort to outsourcing for meeting such requirements. Adds Flexibility: Flexibility could be increased demand or change in demand for meeting customer needs and satisfying their demands. Outsourcing enables companies to avoid these two constraints. It also helps in meeting the changes in the volume of production as well as respond to seasonal changes in demand (Mol, 2007). Thus, outsourcing has various benefits for an organisation in today’s business world attracting more and more organisations to take use of human resource outsourcing. 4.0. Disadvantages of HR Outsourcing The major disadvantages associated with HR outsourcing are: Security threat and confidentiality: When any company or group is outsourced, most times the information is also needed to be provided and this creates a security threat as information regarding the payroll record, passwords and other confidential issues are to be comprised (Gilley, Greer and Rasheed, 2004). Lose of managerial control: When any task or function of an entire department is handed over to a third company, the managerial control and power also is required to be transferred. The outsourced company is not concerned with the motives of the main company and are only concerned regarding their own profits and job completion (Belcourt, 2006). Quality Challenges: The function that is contracted always has the fear of quality compromise as the outsourced company is more concerned with profit making rather than the quality. This happens mainly due to the fixed price of the contract which makes the outsourced company to focus on reducing costs to increase profit. Hidden cost: While entering into the contact with the outsourcing company, not all bills are covered and such uncovered bills are called hidden cost which may be in the form of hidden charges, transportation, etc (Norman, 2009). Bad publicity: Publicity and awareness are needed for the growth and development of the organisation. When this factor gets tempered the company growth gets stunned and this requires the companies to get away from the company with a bad reputation as it affects the operation and morale of the remaining workforce. Apart from the above mentioned disadvantages there still are some limitations of the process which are further discussed. 5.0. Limitation of HR Outsourcing There are few key limitations of HR outsourcing which are as follows (Simmonds and Gibson, 2008): Immediate cost saving Provides limitations No guarantee for profit maximisation Restricted customisation Limited control Supplier management 6.0. HR Functions Outsourced The functions that a company outsource to different groups are: i. Recruiting Process Outsourcing (RPO): RPO is a very historical and rapidly growing process. It taps two main reasons for outsourcing gaining which are expertise and lowering of costs. ii. Training and Development: Training matters have been long outsourced by companies and the level in fast increasing. There has been a tedious rise in the number of training projects and the nature of those projects (Lau and Ngo, 2004). iii. Compensation and Salary Surveys: Outsourcing of salary surveys is a unique process to the HRM activity to set prices as per other organisations. The employing organisation often avoids getting deeply into collection market data on pay rates and subcontracts this activity to others (Mobley, 2000). iv. Organisational Design and Development: This area is cultivated by the strategy consultancies and the HR consultancies due to their access to senior organisational leaders required in this activity. v. Payroll: Payroll process is the most transactional and routine activity involved in HR and is thus the most frequently outsourced HRM activity. 7.0. Theories of HR Outsourcing Several concepts and models have been made by different experts over the years regarding the process of human resource outsourcing and some of the predominant theories which have been approved are further discussed. 7.1. Resource Based View This view of outsourcing considers the fact that resources and capabilities vary significantly across different firms. If the resources and capabilities of a firm are mixed and deployed in a correct manner, it can help in creating a competitive advantage for the firm. This view in outsourcing develops a proposition that a firm lacks valuable, rare, inimitable and organised resources and capabilities, which is rather required from an external provider for overcoming such weaknesses. This concludes that the prominent use of the theory is in the preparation phase of the outsourcing process for defining the decision making framework and the selection of the appropriate vendor. The theory has been beneficial in explaining the key issues of managerial relationship and reconsideration phases (Prahalad and Hamel, 2003). 7.2. Concept of Core Competences This concept has been developed on the basis of resource based theory. The core competencies have been defined as the collective learning in the organisation which focuses on the coordination of diverse production skills and integration of multiple streams technologies. The concept has been very popular among researchers and used to develop and test various outsourcing decision frameworks. Learning and communication premises of the concept have made it applicable in the managing relationship and reconsideration phases. The vendor’s competences have been assumed as the most important factor in influencing success of an outsourcing arrangement (Levina and Ross, 2003). 7.3. Transaction Cost Economies (TCE) TCE is the most utilised theory of outsourcing, perceived to provide the best decision making tool which helps the organisations to decide to outsource and prepare themselves for the oncoming outsourcing arrangements. The theory acknowledges the fact that creating, executing, monitoring and enforcing a contract has a specific cost. The theory argues that in the transactions the ‘make’ versus ‘buy’ factors are composed of three key elements: Degree of uncertainty Frequency of the transactions Specification of the activity (Chiang and Shih, 2011). The feature of governance of the theory influences in studying the managing relation phase and the concept of switching costs applies the theory in the reconsideration phase. Even though the theory is exercised extensively, it still has several indulgencies. 7.4. Agency Theory The agency theory has been used to examine the organisational performance and the managerial decision making. The theory focuses on the relationship between the managers and the stakeholders but overtime has spread on to explaining the relationship between two inter-firm subjects. In this context the theory is associated in understanding the relationship between the outsourcer and the vendor. The sources of agency problems, moral hazards and adverse selection are to be resolved through monitoring and bonding. Implication of the agency theory has led to the development of several HRM activities in respect to their level of firm-customisation, level of interdependence and creation of organisational capital for the employees (Elmuti, 2004). The theory is mostly used in the payroll process activity of HRM as it is a good candidate for outsourcing and switching over to an external provider and the most unlikely to result in negative organisational outcome. 8.0. Future of HR Outsourcing HR outsourcing is gaining importance in the current market and the number of companies outsourcing has increased continuously and so has increased the outsourced HR activities. Outsourcing has become a very common response to manage people and technology resource strategically, enhance services and manage cost affairs more effectively (Adler, 2003). The current trend in outsourcing is only restricted to the administrative functions and retaining the important functions like training, staffing and employee management. The HR responsibilities include payroll, benefits, hiring and firing and keeping up to date with state and federal tax laws. Currently only the bigger firms and multinational corporations have only adopted the practice of HR outsourcing and still awaits acceptance by the medium and small sized firms. Surveys have proved that more than 50% of the organisations believe that reducing the HR operating costs is the top most priority for maximum companies (Kakabadse and Kakabadse, 2005). Outsourcing the HR functions is the most effective way to reduce and control the HR operating costs highlighting the fact that more and more companies would employ the process of outsourcing in future. Due to HR outsourcing issue turning to be a more important issue the managers are in need of more robust tools for decision making as there is a lack of logic and consistency and they need more guidance on what to be and how to be done. Thus the prospects are very clear and HR outsourcing has a very big future ahead providing job opportunities to the third parties (Woodall, Gourlay and Short, 2004). 9.0. Conclusion Human resource management is a very big field and HR outsourcing has become a very important issue in this direction. Areas such as retirement plan, recruiting and staffing, compliance and risk management, and many more have been included in this process of outsourcing. HR outsourcing has evolved from various leaps and bounds and the theories discussed in the assignment prove that how it has gained importance to become a part of HR management. The process of HR outsourcing sees a very bright future ahead and the small and medium sized forms are even turning towards the same for improvement in business process and decision making. 10.0. References Abdul-Halim, H. and Che-Ha, N. 2009. ‘The influence of business strategy strategy on the decision to outsource human resource activities: A study of Malaysian manufacturing organizations’, Journal of Human Resource Costing & Accounting, Vol 13(4). Adler, P. 2003. ‘Making the HR Outsourcing Decision’, MIT Slogan Management Review, Fall, Vol 45 (1), 53-59 Baca, F. 2009. Considering HR outsourcing? Consider SaaS, Financial Executive, 25(8), pp.59-60 Belcourt, M. 2006. “Outsourcing - The benefits and the risks”, HumanResource Management Review, Vol. 16, pp.269-279 Chiang, Y-H. and Shih, H-A. 2011. Exploring the effectiveness of outsourcing recruiting and training activities, and the prospector strategy's moderating effect, The International Journal of Human Resource Management, 22(1) pp.163-180 Corbett M.F., 2004. The outsourcing revolution: Why it makes sense and how to do it right, Dearborn Trade Publishing, Chicago Elmuti, D., 2004. “The Perceived Impact of Outsourcing on Organizational Performance”, Mid-American Journal of Business, Vol. 18(2) (33-42) Gilley, K. M., Greer, C. R. and Rasheed, A. A. 2004. Human resource outsourcing and organizational performance in manufacturing firms. Journal of Business Research, 57, 232-240 Klaas, B. S., McClendon, J. and Gainey, T. W. 2001. ‘Outsourcing HR: The Impact of Organizational Characteristics’, Human Resource Management, Summer, 40(2) 125-137 Kakabadse, A and Kakabadse, N. 2005. 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