The Human Resource Outsourcing Pros and Cons

Table of contents


1.0 Introduction

2.0 Research Objective

3.0 Human Resource Outsourcing

4.0 Driving factors for HR Outsourcing

5.0 Outsourcing factors

6.0 Economic benefits of outsourcing

7.0 Strategic Benefits of outsourcing

8.0 Decision of Outsourcing

9.0 Growing importance

10.0 Risks in HR Outsourcing

11.0 Methodology

12.0 Summary
















The Human Resource Outsourcing Pros and Cons

1.0 Introduction:

Outsourcing is a significant that has been one of the most sustained yet controversial trends over the last few years Venkatraman 2004, and therefore researchers have found it attractive. In particular, offshore outsourcing is becoming one of the mainstays of several different research disciplines including international business, strategic management, supply-chain management, and information systems In spite of its growing importance to various disciplines; however, several aspects remain been not clear Ramamurti, 2004. One of these concerns in the making of location decision, which, despite the recent growth in interest, has still received limited attention.

Some researchers and practitioners still create confusion among themselves on basis of conceptual level in off shoring and offshore outsourcing. This is because off shoring as a concept has been used to describe these two similar yet distinct phenomena Pyndt and Pedersen, 2006. In order for a strategy to be referred as offshore outsourcing, two conditions have to be met. Firstly, the location of the activity has to be transferred to a foreign country from homeland. Although the term ‘offshore’ is used to describe the transfer of a production activity, an offshore operation might be wholly owned by the parent company or it may be outsourced to a different specialized provider Hagel and Brown, 2005. In accordance, ‘off shoring’ covers multi modes of foreign involvement located on a market-hierarchy succession. As the research terms, the fundamental difference between offshore outsourcing and other offshore modes is that the former the firm transfer’s its ownership of the process to a vendor.
HR outsourcing almost it’s widely used among all. HR processes like payroll management, human resource management; employee benefits etc are outsourced in quiet times. There are many reasons for outsourcing the processes like low budget, staff reduction or to replace an HR department all together. The HR services could fall into categories i.e. PEO, BPO, ASP and E-Services.
The HR outsourcing industry is wrapping up every year of rapid and significant transformation. Without doubt, 2004 will be remembered as the year of HR outsourcing industry consolidation; and, looking ahead to 2005, the rate of change will likely accelerate further. Diane 2005
HR outsourcing is now the hottest in the industry. Most of the big named firms are outsourcing there requirements to outside firms. It is a huge business & almost two third of the companies studied for HR outsourcing had adapted to the same. In this the most commonly outsourced processes are those of payroll management, pension management, program management, etc. A deeper look these processes would show that these are basically accounting function by their very nature. Thus, it is quite contradictory that most of the functions outsourced are accounting processes more than HR. www.blog.kpoweb.com
Research Objective
The debate on human resource (HR) outsourcing is polarised. HR outsourcing some seen as an opportunity for the HR function by some and as a threat. The first view suggests that HR outsourcing is a tool creating time for HR to become a strategic partner. The second view considers HR outsourcing as a cost-cutting instrument gradually reducing the HR staff. The purpose of this study is to examine whether HR outsourcing is a manifestation of a HR focus in human resource outsourcing, a cost-cutting HR focus. This study examines the breadth of Human Resource outsourcing.
Further research might consider the depth of HR outsourcing secondly might focus on the impact of HR outsourcing on the organisation of the HR function and internal HR customer satisfaction.


2.0 Literature Review
2.1 Human Resource Outsourcing:
Its tough to separate any function that touches the employee’s directly however a reiteration of HR processes it’s developing towards the board room. The basic processes like recruitments, payroll management, pension management etc are outsourced and attention is paid to strategic decision making. As more and more companies are adapting to HR outsourcing not as a fashion but out of choice. www.blog.kpoweb.com
The basic services offered by Human Resource Outsourcing firms may include:

• Overseeing organizational structure and staffing requirements
• Training and development, Recruitments
• Tracking department objectives, goals and strategies
• Benefits administration
• Employees and manager training
Sensing the potential of outsourcing, global BPO players including Fidelity, Exult and Hewitt have begun their process setting up operations in overseas. However, most HR BPO players had not leveraged the offshore advantage as yet, www.financialexpress.com
Companies to whom they organizations outsource their Human Resources function possess the knowledge and resources expertly performing part or all of a clients' human resources function, allowing the clients to streamline their internal processes and concentrate much on generating profit in their core business.
Today, every organization is focusing at achieving productivity by enhancing return on investments and achieving the economies of scale. Therefore, routine administrative work, although it’s important, can be outsourced to third party vendors.
Projections show that much in the region of Asia Pacific, Its estimated HR Outsourcing will go up to 2560 million dollars (Gartner 2002). The projections for mentioned outsourcing HR activities are mentioned below: www.financialexpress.com


Pay Roll Services 761

Personnel administration 167

Education and Training 556

Recruiting and Staffing 348

Benefits administration 536

Other HR functions 192

Total 2560



Driving factors for HR Outsourcing:

There are about five overall drivers that push more companies to outsource some or all of their HR sub-Processes and activities Green 1999:

1. Downsizing
2. Rapid growth (or decline)
3. Globalization
4. Increased competition among companies and for recruiting and retaining employees


From the beginning of 1980’s the term downsizing has been in very common. The HR companies have been both a formulator and implementer of downsizing and have found themselves as a target for downsizing. Frequently, HR outsourcing decisions are initially pursued as a response to a demand for reduced costs for HR services within a company. However, the goal of downsizing is not longer for cost cutting and be more efficient. It is a process in change the competencies of the organization Cappelli 1999.

Most of the companies facing rapid growth need to closely monitor and control costs of HR. Outsourcing of certain HR activities can make it possible for fast growing or waning companies to reduce the cost and the keep the cost control low.


The Globalization of companies may mean that they have to set up new branches or subsidiaries in the foreign countries across the world. This can drive the need for HR Outsourcing services, if the competence and knowledge about the local conditions are not available in-house. One of the issues is to staff those operations with nationals and to comply with local regulations, such as time directives. Other issues is to harmonize salary benefits on a global basis and to move work force across geographical boundaries.

Many companies are paying much attention to and are working deliberately on employee satisfaction, which is often regarded as a key to overall organization success. Proponents of outsourcing argue that it offers the HR department an option to satisfy demand for improved service level among employees.

Some companies use outsourcing as a way to restructure the HR department in order to gain competitive advantage. The restructuring can refocus activities and or re-deploy resources to obtain, as example, a more service and strategy oriented HR department.

Outsourcing factors:

􀂙 Understanding company goals and objectives
􀂙 a strategic vision and plan
􀂙 selecting the right vendor
􀂙 ongoing management of the relationships
􀂙 a properly structured contract
􀂙 Open communication with affected individual or groups
􀂙 senior executive support and involvement
􀂙 Careful attention to personnel issues
􀂙 near term financial justification
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Economic benefits of Outsourcing

Transaction costs analysis provides the economic basis for outsourcing. According to transaction costs analysis, as the costs of transacting across the market may be prohibitive in some instances, such activities are best performed in-house within a vertically integrated organizational structure. The inference to transaction costs analysis is that certain activities that are less efficiently performed within the vertical organization can be transacted out. In the area of information technology, the steady decline in the unit costs of coordinating across the market favours a organization, as compared to a hierarchy. Thus, cheap labour afforded by offshore locations, as well as the steadily declining costs of communication and coordination, favour off shoring as an economically viable alternative. A study by the Off shoring Research Initiative, a joint venture between the Duke University CIBER and Archstone Consulting, has found that 97% of the 104 small and large U.S. firms surveyed designated cost reduction as the main reason for Off shoring Levin & Peeters, 2006. The related rights theory provides additional basis for outsourcing, proposing that transactions performed in-house are generally underinvested when compared to those outsourced. Adequate levels of investments are necessary for innovation and quality improvements. Lee, Miranda, and Kim, 2004 propose that organizations may have fewer incentives to invest in an in-house function than an external partner. Additional research has defined the boundary conditions for outsourcing. Show that lower costs of transactions motivate organizations to develop a value chain
using partners rather than engaging in internal production. A meta analysis by Geyskens, Steenkamp, and Kumar, 2006 revealed strong evidence for the effectiveness of selective outsourcing. In services, it has been established that electronic networks can lower the cost of transactions.

Strategic benefits of Outsourcing

Outsourcing and off shoring also hold meaningful strategic benefits apart from cost reductions Cooke et al, 2005. The main reason is that business process outsourcing at the customer-business interface has strategic implications for the firm. Off shoring provides the flexibility that may be needed to compete in rapidly changing markets. Outsourcing has to be strategic, in the sense that organizations has to focus on what they do best (core competencies) and let other “best in the class” organizations perform business activities much in areas in what they specialize. The definition of core competencies has also been a research focus Kakabadse & Kakabadse, 2005. suggest that core activities can be classified into four categories:

1) those performed in house;
2) those critical to business performance;
3) those which provide competitive advantage; and
4) those that drive growth.

In this regard, Insinga andWerle 2000 suggest that “core versus peripheral categorization” should not be the whole criteria for making outsourcing decisions. Using independent case studies like in banking services, they show that some of the core activities (such as information systems) may be central to operations but fail to provide significant competitive advantage. These core but basic activities then become good candidates for outsourcing. All Businesses constantly look for opportunities to achieve competitive advantage by developing competencies that are difficult to imitate in the short run. Outsourcing and off shoring provide such opportunities. Cost reduction, a traditional method for outsourcing, is short-term, as most competitors copy these strategies. However, opportunities such as flexibility, quality, and control provide a much broader range of options, which increases long-term competitive advantage Quinn & Hilmer, 1994.


Decision of Outsourcing

HR Outsourcing market is increasing day by day worldwide ($51 billion) representing approximately 39 percent of the total business process outsourcing revenue.

HR Outsourcing also helps the HR professionals to play an important role in corporate downsizing efforts and provide access to new ideas and approaches outside the organizations Klass, McClean & Gainey, 1999


The following factors can be critical to making and implementing a successful
Outsourcing decision Laabs, 1993.

 It is important to layout your outsourcing goals clearly before making an
outsourcing decision
 Organisations has to look into the short as well as long term objectives
 Organisations must consider who will control outsourcing decision and why
 It is necessary to find out how well the company’s culture will support an
outsourcing decision
 It has to be decided that it is better for your operation to be centralized or
decentralized before outsourcing.

If an organization deciding to outsource its non-core HR activities, it must not only be guided by the cost factor alone, but also has to look for a cultural fit, and a commitment to quality. One must look into the range of services, which a vendor is going to offer, and what are its expertise, experience in offering such services, resources, and flexibility of its contracts Paul, 2003. Depending on the type of function an organization has to outsource, it can select a professional employer organization or hybrid outsourcing firm.

If the organization wants to focus completely on core business or there is a lack of HR
capability, then PEO is the best decision, which it may help in recruitment and selection, can keep the employees’ record, and administer the benefit program and payroll. If organization doesn’t feel comfortable handling of all HR responsibilities or it doesn’t require a full range of services, then it may go for outsourcing selected functions. Green, Youngblood, & Gary, 1999. It can be seen that before signing the contract with the vendor an organization must consider certain factors in order to make it successful.
Growing importance
Things are however expected to change with many mid-sized companies looking at HR outsourcing. Research proves that the HR market for outsourcing in the APAC region improved from $1.14 billion in 1999 to $2.56 billion in 2004. Although it is not a very huge growth, it has still shown an upward trend.
Some of the major companies which have gone ahead for manpower hiring outsourcing practices are Cisco, GE, Honeywell, Sun, i2, LG Soft India, Escosoft and Legato Systems. While LG Soft India has outsourced its PF management, Escosoft has outsourced payroll processing, execution of training programmes and survey conduction. According to Shubho Kundu-senior general manager HR of LG Soft India, “the company has been able to save a lot in terms of reducing paperwork and interaction with government agencies”. Besides, there are other companies like Xansa, which is planning to take a plunge in HR outsourcing business and offer services to its parent organisation. Binnoo Wadhwa, the head of HR for Xansa India, says that “the move showcases the robustness of the HR department to handle such critical applications”. www.itpeopleindia.com
There are many others companies who do not believe that HR outsourcing is necessarily done. Take the case of Aptech, which has not considered HR outsourcing as the company feels that HRD is strategically linked to its business. “In my view any job or function, which is of strategic importance to the organisation should not be left for outsiders or the so-called outsourcing partners,” he says.

Risks in HR Outsourcing

The Main risks in HR outsourcing where highlighted

- Possibility of no actual cost savings or cost increases.
- When the quality of service is bad and company wants to change vendor, the switching costs may be expensive for the company.
- No or low acceptance from employees if vendor turns to be noticeable third party instead of a seamless extension of the HR function.
- Loss in internal HR Skills may lead to a large dependence in the vendor.
- Communication gap or inefficient communication between HR function and employees may cost high.
- The HR department loses their identity within the company with extreme levels in outsourcing.
- HR anorexia. This happens if key HR activities are outsourced, or hollowed out, from the HR department results in lost capability and poor service quality.
- Learning potential accures much to vendor to the company.

While off shoring provides significant advantages, there are risks associated with outsourcing processes to foreign locations. Quinn and Hilmer, 1994 point out that outsourcing can contribute to

• Transfer of critical skills to supplier and potential competitor;
• Loss of control over supplier when strategic priorities do not match.
• Loss of active interaction between functions performed in house and outsourced, resulting in the loss of cross-functional skills; and

Kern, Willcocks, and van Heck, 2002 suggest that choosing the right supplier should be the most important objective while outsourcing, especially for IT assets. This is because a focus merely on cost savings could attract suppliers who may not work towards the organization's objectives or that may attract suppliers who are themselves concerned with reducing their costs in order to meet their own low functions. As a result, the success and effectiveness of outsourcing operations get suffer.

Selecting the right function to outsource is also crucial. Gottfredsonet al, 2005 argues that processes that are not proprietary and are common across industries are the strongest candidates for outsourcing. At the same time, when the profit model is proprietary and the business process or function is unique in the firm, the firms is
advised not to opt for outsourcing opportunities. Aron & Singh, 2005 offer the view that half of the organizations engaged in off shoring failed to generate the expected financial benefits. This was because
• organizations failed spending sufficient time evaluating which processes to offshore, and finally made the wrong choices;
• organizations did not take into account all the risks involving that in off shoring;
• organizations failed to pursue other relevant intermediate strategies between off shoring completely and executing in house.

Therefore, Aron & Singh, 2005 that firms should offshore only those activities or functions which are of low-ranking in terms of their value-creation and value-capture abilities for the firms. Firms should also identify and manage the various operational and structural risks accompanying off shoring.
Experts believe that in present times HR outsourcing is undergoing a transition phase. It is gripping out from the hands of bigger companies to small and mid-sized organisations. There has also been a transition in the user acceptance, where it has been moving from a corporate sector to PSUs and also the Government sectors. All this reflects on the growth of this sector. However, it would still be some time before we see increased levels of HR activities being outsourced. www.itpeopleindia.com

Methodology

Questionnaire to the companies that have outsourced HR functions

1. Background
A. Tell me about the company (Industry, business, products, and employees
B. Tell me about the HR department in the organization
C. Position and responsibilities at the company?

2. Factors for outsourcing HR (Why?)
A. Describe the situation in company when and why outsourcing issue arose
B. What factors were most important in outsourcing have they changed in timely
Manner?
C. What objectives were set for outsourcing who was the driving force?
D. Are there any arguments in against outsourcing? (Ranking)

3. HR outsourcing decision
A. Who made the decision and how first approach decision made?
B. What made you choose to outsource these particular activities?
C. How much of HR functions have been outsourced?
D. Which of HR activities not outsourced to vendor and why?

4. HR outsourcing characteristics
A. How many employees have been kept in-house?
B. Who manages the relationship and any staff transferred to vendor?
C. Relationship between the vendor is that long term or short term project?
D. Any other parties involved in between?



5. Evaluation of HR outsourcing (Result?)
A. Are you pleased with the way of outsourcing?
B. What form of outsourcing relationship take place (Communication, meetings etc.)
C. What goals have been achieved and any biggest problems faced?
D. What has been achieved like advantages, disadvantages etc.


Questionnaire for the companies which are have not outsourced HR

1. Background
A. Tell me about the company (Industry, business, products, and employees
B. Tell me about the HR department in the organization
C. Position and responsibilities at the company?

2. Factors behind not to outsource (Why?)
A. Describe any situation in company when outsourcing issue came up
B. Which motives were the most against outsourcing (Have they changed
overtime?)
C. Who initiated the outsourcing and what is the driving force?

3. Approach to HR outsourcing decision (what?)
A. Describe the outsourcing analysis and the approach
B. What made you choose to outsource these particular activities?
C. How much of HR functions have been outsourced
D. Who has the decision authority?

4. Evaluation of HR outsourcing (Result?)
A. Do you think you will outsource in near future? Why?
B. What pleased you not to outsource?
C. Have the goals been achieved or might done in differently?
D. Which has been the tough situations faced?


Summary

Two divergent perspectives dominate the literature on HR outsourcing. Some
experts approach outsourcing as an opportunity for the Human Resource department. After all, outsourcing gives more time and resources to focus on strategic and value creating HR functional. Other observers, in other hand, portray outsourcing as a threat for the Human Resource department. In this view, outsourcing is portrayed as a cost-cutting instrument causing “HRM without HR managers”.
The analyses indicate that organisations with a strong focus on HR cost-cutting do not outsource more than organisations with a weaker focus on HR cost-cutting. The analyses show a positive relationship between a strong focus on the level of HR outsourcing. By off shoring operational HR tasks and delegating people management to the line managers, more time and resources can be kept in use for more strategic HR contributions. In other words, HR devolution and HR outsourcing offer the HR function the opportunity to reposition itself and prepare for the role of “strategic business partner”.

From the research done, it is obvious that Human Resource Outsourcing here to stay. But for an organization to decide whether it’s a boon or bane it has to do a thorough study on the outcomes and objectives with regards to the HR functions it would like to outsource. The variable costs are typically lower due to providers’ economies of scale, newer technology, better process efficiencies and enhanced service measurement capabilities. In the case of freelancers or consultants, it’s their efficiency and experience in a particular subject matter that is brought to the table at a cost effective price.

Crucial to success in HR outsourcing is keeping the bigger picture in mind.
What are the business goals of the organization? How will HR outsourcing helps or,
possibly, gives answer to these goals. Organisations must keep these questions at the heart of their decisions about whether to go for outsource HR, or to what extent this business process will be outsourced and which off shore vendor to choose.
Every company’s main vision in outsourcing is to use it as an instrument for continuous improvement in service quality and for effecting sustainable, long term cost reduction.



































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Websites

http://www.blog.kpoweb.com/59/hr-outsourcing-low-budget-staffing-in-india/ Last accessed 14 April 2009.

http://www.itpeopleindia.com/20030428/cover.shtml Last accessed 14 April 2009
http://www.financialexpress.com/news/hr-outsourcing-is-next-big-opportunity-experts/120325/. Last accessed 14 April 2009.