Achieving Competitive Advantage through Human Resource Strategy - Essay Example

Achieving Competitive Advantage through Human Resource Strategy Introduction As a general concept, HF function outsourcing is not new. A great number of companies has been outsourcing some part of its HR function for years. However, with time the number of such companies has grown, and there even appeared some that decided to outsource the whole human resource function. As Esen (2004) reports, more and more organizations, and especially huge Fortune 500 companies, are outsourcing their entire human resource function. Similarly, has increased the number of HR business vendors who are capable of providing the businesses with comprehensive human resource management services. According to the research conducted by the Bureau of National Affairs for 2012-2013, seven out of ten (that is 69%) HR offices outsourced one activity, as a minimum, in 2012. The same 69% of the companies reported that an activity, once outsourced, was never returned to the in-house HR team. Therefore, the presented above trends raise a number of questions related to the reasons and results of HR function outsourcing in organizational context. In today’s very competitive economy the reasons for taking some component of managing a business out of the organization should be very serious, because a successful organization is the one that is effective and efficient in all of its business processes. For that reason the goal of this paper is to research and analyse the concept of outsourcing an HR function and its benefits and barriers. This work will try to give a clear definition of what HR outsourcing is, what types of HR outsourcing there exist, and what particular components of the HR function should or should not be outsourced. It will review how companies manage HR outsourcing and how beneficial it is for organizations to outsource HR activities in general. In order to fulfil all these tasks it is important to, first of all determine the concept of outsourcing itself. Defining outsourcing According to Norman (2009, p.2), “outsourcing is an important management practice” that means transferring implementation of some aspect of the business to a third party organization. A company may outsource, for instance, a business function, such as payroll, a manufacturing process or a part of business-supporting tasks, such as cleaning, mailing and so on. A very clear and precise definition of outsourcing is provided by Brown and Wilson (2005), who state that outsourcing is obtaining services from outside of the company. However, this definition implies that the company may choose to outsource some function from the very moment of the company’s creation. This contradicts the definition provided by McIvor (2005), who outlines that outsourcing involves sourcing of services that previously were produced internally. So it can be concluded that if the company never fulfilled certain function on its own, obtaining that function from an external source is not outsourcing, but a part of the business structure. A much broader definition of outsourcing is provided by Lei and Hitt (1995), whose opinion is that outsourcing means relying on external sources for providing the company with value-adding activities. From this point of view maintaining that same website with the help of an external company can be defined as outsourcing. Therefore, on the basis of the presented above opinions, it can be generalized that outsourcing is always related to using the services of another organization to support certain business function of the company. Such externally provided services are to assist the company in fulfilling the functions it cannot or chooses not to conduct independently. In addition, such services are always value-adding. HR function outsourcing As for the outsourcing of an HR function, it can be defined as “purchasing by an organisation of ongoing HR services from a third-party provider that it would otherwise normally provide for itself” (Corporate Research Forum, 2006, p.1). In other words, HR function outsourcing means that HR functions are fulfilled by people other than that company’s full-time employees (Madison, 2005). As such, HR outsourcing became wide-spread in 1990s when outsourcing business processes became simpler due to the development of technologies, and IT technologies in particular (Corporate Research Forum, 2006). Similarly, HR outsourcing is frequently associated with electronic service delivery too. As Brown and Hale (2007) indicate, HR outsourcing (HRO) was the fastest growing segment of the global business process outsourcing (BPO) market in 2006. After British Petroleum showed an example of HRO having signed a contract for fulfilling HR activities with Exult, Great Britain has been representing 50% of the European HRO market with $300 million contract value on average (Hunter & Saunders, 2007). The extent to which the trend has grown is huge. For instance, in 2001 International Paper signed a ten year $685 million contract for HR outsourcing with a consulting firm Exult Inc. (Simons, 2001). In 2003 Procter & Gamble entered into a $400 million 10 year employee services outsourcing agreement with IBM Business Consulting Services (IBM.com, 2003). In 2006 alone, Hewitt, one of the leaders in providing HRO services, had 33 contacts estimated at $7.8 billion. The range of HR-related services is also very wide. For example, in 2005 DuPont signed a $1.1 billion 13 -year contract with Convergy. According to that agreement DuPont was to provide Convergy with the following services, to name a few: “organization and employee development; workforce planning and deployment; compensation management; benefits administration; payroll; integrated health services; recruiting; employee and labor relations; HR process support administration; work environment support; performance management; employee data management; vendor management; and HR consultative service” (HRO Today, 2006, pp.48-51). Today the state of things has not changed. In 2011 Unilever hired IBM to manage 27,000 Unilever employees in Latin America. In 2012 HP signed a 12-year HRO contract for providing the 98,000 employees of Unicredit with such HR services as administering payroll, time and attendance, workforce, learning and development, mobility, and ex-pat services (GlassbeadConsulting.com, 2013). The role and structure of the HR function within the organization is the determinant of whether its function should be outsourced or not. Therefore, in order to take such a decision it is important to understand different models of HR service delivery. HR service delivery models The HR function of any organization is heavily influenced by such factors as external environment, company’s management and marketing modes, trade union response and legislative regulations among others (Tyson, 1987). Considering the mentioned above constraints, the whole approach towards the structure and function of HR was changed by Dave Ulrich, who, in 1997, presented a new model of HR services delivery (Ulrich, 1997). ‘Three-legged stool’ model by Ulrich The ‘three-legged stool’ model by Ulrich outlines three major mechanisms of HR service delivery: “HR business partners, HR centers of expertise and shared HR services” (Swift, 2012, p.5). Business partnering means that HR professionals work closely with the company’s management with the purpose of reaching organizational goals. This helps the HR practitioners to become more engaged in the process of managing operations and, thus, bring people management issues closer to the business agenda. A center of expertise is usually a team of HR professionals, whose role is in raising the company’s competitive advantage through changes. Such changes and innovations may be related to managing rewards, learning, knowledge sharing or talent, among other areas (CIPD, 2011). such services are provided either to HR business partners or to line management directly. Shared services refer to a unit that manages routine transactional services. The main goal of this unit is to provide standardized, cheap and effective HR administration services like recruitment, payroll, absence, etc. Within this framework it is easy to assume that external vendors play an important role in this HR community. The overall idea, thus, is to reduce the pressure placed over the HR community and free its resources for more strategic aspects of the function (Lewis, 2009). Strategic contingencies theory Unlike ‘Three-legged stool’ model that implies being suitable for any company, the contingency theory claims that there exists no uniform model can suit every organization. On the contrary, according to this theory, in different circumstances may be appropriate different solutions (Dobák–Antal, 2010). As a result, different circumstances, both internal and external, call for different business structures and models. On this matter Donaldson (1996) writes that no universal model can be applied to every organization. On the contrary, each situation is unique and is determined by a great number of contingency factors. Therefore, even the concept of strategic choice does not make sense because it is nearly impossible to account for all of the affecting factors of each particular organization. For that reason only a general assumption may be made with regards to whether outsourcing will improve organizational performance and operation mode. Economy vs people Still, a decision regarding whether to outsource the HR function should be based on some ground. Lazear (1998), for instance, suggests that such decisions should depend upon economic factors. This suggestion, however, does not consider such factors that influence organizational effectiveness as employees’ morale and commitment (George, 2003). Therefore, when a company decides to outsource its HR function and include an HR subsystem into the company’s structure for economic reasons, the company may get economic benefits, but lose it commitment to managing people. The high-commitment approach towards managing employees, in its turn, is also a factor that influences organizational success (Boxall, 1998). People are the one of the sources of company’s competitive advantage and, therefore, as Boxall, Purcell and Wright (2007) suggest, using outsourced HR function is acceptable to only a limited extent. In any case, it is worth analyzing why companies choose to outsource their HR function. Reasons for outsourcing According to the survey conducted by Esen (2004), more than half of the companies that use HR outsourcing are doing so for economic reasons. For 55% of companies among the major reasons were improved control for legal risk and improved compliance. It is also pretty common among the companies to outsource the HR functions in order to get access to vendor talent and to streamline the HR function. Though in fact, according to the author, outsourcing does not always reduce costs substantially, it helps companies to feel more secure. Ulrich’s (1997) point of view is that HR employees of the company should be more focused on strategy. HR department of an organization should add value and contribute to business performance. For that reason, according to Ulrich, HR should not be too focused on administration and process activities. Following this approach, it can be stated that outsourcing, through freeing HR resources, changes the role of HR within the company from being an administrative, to being a strategic function. This, in its turn, is aimed at improving the overall organizational performance. So, from this perspective, performing such administrative tasks as payroll, staffing policies, benefits administration, training and so on, will be more efficient if outsourced (Hesketh, 2006). According to the research conducted by Chartered Institute of Personnel and Development (2009), the reasons for companies’ using outsourcing can be summarized as follows: access to external skills, knowledge and innovation that otherwise are not available; quality of received services; cost reduction. At the same time, no matter what particular HR tasks the company outsources, it is important for the outsourcing policy to be aligned with the company’s goals and strategic objectives. Companies that have clearly set goals prior to deciding whether to outsource, are said to have much higher chances to achieve those goals (CIPD, 2009). In addition to cost reduction and gaining access to external resources, it is worth mentioning other reasons that guide companies’ outsourcing decisions. They include: Improving company’s focus. When administrative tasks are being regularly and effectively fulfilled by a vendor, the company may focus on more important strategic tasks. Making available capital funds. As the company saves on its HR function, it can spend the fee resources on other profit-generating activities. Managing difficult to manage or out of control function. Sharing risks (Nelson Family of Companies). HR outsourcing on practice BT Group BT (British Telecom) Group is a multinational provider of telecommunication services. The company works on providing its clients with IT and networking, telecommunications services, as well as broadband and internet products and services. The Group consists of three large businesses. They are BT Retail, BT Wholesale and BT Global Services that, all together, employ over 100,000 people (The Climate Group, 2012). The company started to outsource its HR activities long ago. Its first close to outsourcing deal took place in 1997, when BT organized a shared services center to take care of the company’s HR processes and administration. The company decided to make this because they realized that the 4,000 of BT’s HR employees were not able to cope with all of the HR tasks fast enough (Webster Buchanan Research, 2012). The HR management task of BT was also complicated by the fact that the company had several different HR systems that were managed from different locations. So the shared services center was aimed at joining all those scattered HR systems present at BT at that time. With time, however, it appeared that internal resources were not enough for the development of the initiative and the company started looking for an external HR partner. As early as in 1999 BT Group signed a $600 million contract with then a start-up company Exult (Human Resource Management International Digest, 2002). Exult was to re-engineer the HR function of BT, to re-examine its HR competencies, training and development (CIPD, 2000). Today BT is served according to the terms of a 10-year contract with Accenture for $575 million. Accenture is providing HR services to current employees of the company, and is serving 180,000 pensioners in the United Kingdom. Furthermore, Accenture is supporting BT’s HR function not in the UK only, but also in 37 other world countries, where the Group has over 10,000 employees (Accenture, 2005). For itself BT left about 750 people of internal HR. In addition to performing such strategic tasks as transforming and expanding HR activities of BT Group, Accenture is responsible for fulfilling the following functions: payroll, benefits administration, recruitment, performance management, health and safety, customer contact/call center, pension administration and HR advisory and information services. So it can be observed that British Telecom decided to outsource most of its HR tasks because the company got overflown with the scope of HR-related tasks. So, instead of investing into the development of some new approaches or even the growth of the internal HR divisions, BT decided to leave this task to the professionals. As a result, the company got external expertise, technology and resources. According to the BT officials, there was huge resistance to change. However, the company managed to overcome it successfully. The transformation brought many changes that had to be incorporated into the company’s operations. So it was important to not only effectively manage change internally, but to also closely cooperate with the vendor (Webster Buchanan Research, 2012). Nevertheless, through the change process was complex, the benefits were great too. BT got better cost management and higher service level. The company has also noticed that its HR processes have become faster and more efficient. BT also cooperates with Accenture on developing strategic HR activities (ibid). Virgin Media Virgin Media is, just like the BT Group, a UK-based telecommunication services provider. It provides phone, TV and internet services to individuals and organizations. The company employs about t 14,000 people (Sweeney, 2008) and, just like BT, is outsourcing some of its HR functions. However, while BT has chosen to transfer most of its HR activities to a vendor, Virgin Media is outsourcing only a few activities. In particular, recruitment and training. Since 1999 Virgin uses the services of Hays for recruiting temporary workers. In 2008 the company decided to expand the scope of the outsourcing contract for it to include recruiting permanent employees too. For that purpose Hays created special delivery teams that oversee the service levels. These teams are based at both Virgin’s and Hays’ offices. This helps the vendor to be continuously in contact with Virgin and ensure high levels of service. Among the major tasks of these teams are managing the relationships with hiring managers, managing vacancies and suppliers, compliance and information production. This system also uses centralized invoicing, so that back office administration and costs of Virgin have gone down (Gray, 2001). As a result, Virgin has cut costs, sped up the hiring process and improved people’s satisfaction levels. Another HR function outsourced by Virgin is training. The company uses the services of Knowledge Pool for this purpose. The particular activities that are outsourced are leadership development, management, niche, as well as technical and specialist training (Knowledge Pool, 2010). As a result, Virgin saves about 40% of the price of technical training and 28% of the price of other courses. So, just like in the case of BT Group, Virgin Media outsources its HR activities in order to save money. What to outsource As the presented above practical examples show, it is possible, and is effective, to outsource HR functions, whether partially or fully. However, according to Lepak and Snell (1998), outsourced should be only so-called peripheral activities -those HR functions that do not add value, are non-core and routine. On contrast, unique and valuable activities should be performed internally in order to contribute to the competitive advantage of the company. To make it simpler to understand Lepak and Snell (1998) have divided the HR functions into four groups: common, traditional, firm-specific and core HR activities. Common activities include those tasks, that are not unique and do not add value. They include, for instance, payroll administration. Traditional HR activities are those that have the potential to add value, but are not unique. An example of such activities is benefits administration. Firm-specific tasks are company-unique activities that differentiate the company from other organizations. The examples of such an activity are training and performance appraisal, because different companies have different policies and procedures in relation to these aspects of organizational performance. Core HR activities are value-adding and unique, such as developing HR strategy, developing human capital and improving morale. These are the activities that, according to the authors, should not be outsourced, because they are critical for the company’s competitiveness. The reality, however, is different: according to the statistics, 24% of the companies outsource strategy- and policy-related activities (CIPD, 2009). This can be explained by their desire to utilize professional help in the process of developing its HR objectives and policies, especially those related to legislative regulations. However, the most popular tasks to outsource are compensation, benefits, recruitment and selection (ibid). Most companies, no matter how large or small they are, outsource these activities to some extent. A wider list of commonly outsourced HR activities is provided by Brown and Wilson (2005, p. 22). According to these authors, it is worth to outsource the following HR tasks: Payroll Benefits administration Recruiting, hiring and employment HR/Personnel management Talent and human capital outsourcing Training Workforce consulting and management It can be observed that most authors recommend outsourcing mostly common and traditional HR activities. At the same time, it should be remembered that firm-specific and core HR tasks can be outsourced as well. However, in order to make such a decision it is necessary to evaluate all the specifics of the organization and determine whether the benefits of outsourcing particular HR functions will overweight the barriers, which also exist. Disadvantages of outsourcing While HR function outsourcing has many benefits, such as cost and risk reduction, it does have its negative sides. First of all, outsourcing may be a very complex process, success of which depends on a great number of factors, among which is the choice of vendor and assessment of the impact of change (Esen, 2004). While 31% of the companies do not experience any problems when outsourcing, 69% do. These companies are worried about the loss of control over the tasks usually performed internally or about losing HR jobs and staff. As for saving money through outsourcing, only 31% of the companies reported that cost reduction was a direct result of outsourcing (ibid). At the same time, 41% of the company achieved cost reduction, though they didn’t determine for sure that it was 100% related to outsourcing. Therefore, before attempting to outsource HR activities it is important for the company to have a ready and working assessment process. It should have certain goals and standards in order to be able to evaluate the performance of the vendor and the benefits, or their absence, to the company. Furthermore, the company should have a well-developed plan and clearly set goals to be achieved. A detailed analysis of the potential vendor should be performed before deciding to outsource. In addition, the new service should be well-communicated to the staff in order for the innovation to be understood and accepted. So it can be said that if a company is thinking about outsourcing its HR function, the company itself should be strategically ready for this step. At the same time, as Sullivan (2004) outlines, outsourcing does not add to the competitive advantage of the company. According to Sullivan, the HR is the function that should differentiate the company from the others in order to attract the best talent. If, however, this function is to be outsourced, the company should ask the vendor for an exclusive contract which, in its turn, will reduce the cost advantage otherwise received from outsourcing. Another argument against outsourcing is that it limits the growth and development of company’s internal HR professionals. In addition, many companies that outsource HR activities experienced a lack of the face-to-face contact with employees. For this reason many companies outsource the HR function only partially. This enables internal HR staff to be in contact with the employees and assist them directly. Furthermore, as the vendor starts performing the company’s HR functions, the company starts losing its loss of in-house expertise and there is a high risk for the company’s data security (Sullivan, 2004). Conclusion Outsourcing means paying another company for performing certain activities for the organization. These days outsourcing, and especially, HR function outsourcing has become a very popular trend. While some companies outsource its entire HR function, many choose to outsource only certain activities, such as payroll and benefits management, recruiting, hiring and training employees, or workforce consulting. Indeed, outsourcing has many advantages, among which are reduction of operating costs, access to external knowledge and resources, and mitigating risks, among others. On the other hand, however, HR function outsourcing may have a negative effect on the organization as well. In the first place, if the company wants to outsource, it should be ready for this internally. This means it much have a clear strategy, well-defined goals, objectives and expectations. Secondly, it is important to monitor and control the ongoing effects of outsourcing certain functions on the overall effectiveness of organizational performance. It is also important to ensure that the strategic role of HR does not get diminished in the company after it employs a vendor. Therefore, a decision on whether the company’s HR function should be outsources, whether fully or partially, should be company-specific and based on a profound analysis of the current internal and external environment, strengths and weaknesses of the company, as well economic feasibility of such a decision. References Accenture, 2005. BT and Accenture Sign 10-Year Outsourcing Contract to Transform and Expand HR Services. Available at: [Accessed 03 April 2013]. Boxall, P., 1998. Achieving Competitive Advantage through Human Resource Strategy: Towards a Theory of Industry Dynamics. Human Resource Management Review, 8(30), pp.265-88 Boxall, P., Purcell, J. and Wright, P., 2007. The Oxford Handbook of Human Resource Management. Oxford University Press. Brown, D. and Wilson, S. 2005. 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