This is a chapter of dissertation on Human Resource Outsourcing:
In today global business environment, firms are facing the increasing of the competitiveness, new technology and corporate restructuring, such factors force firms to seek and sustain competitive advantages by emphasizing on profitability and productivity of each department. For this reason, today some firms embrace outsourcing concept through outsourcing all or part of HR functions could reduce cost and increase the effectiveness of HR department. Many surveys and academic researches were conducted in the past decade and shows that the use of HR outsourcing is growing and continuing to increase. More firms have started to outsource their HR functions for a variety of reasons. They believe that outsourcing could benefit to organisations such as reducing overhead costs, gaining expertise from outside agencies, minimizing the regular workload of HR staff and improving quality and efficiency of the organisation.
However, does outsourcing really provide a numerous of benefits to the firm and solve all problems without having any negative impacts to the firm? Therefore, it was found that arguments are raised in many strategic HR literatures. In this paper, we will examine a prescriptive article “Beyond Benefits: The Changing Face of HR Outsourcing” and discuss different perspectives on the related issues which are provided by other authors in other SHRM literatures.
Generally speaking, there is a dramatic increase in the use of HR outsourcing in accordance with all surveys. Although there are a lot of surveys showing this trend, it is noted that the research is based on all organisations in US or western countries but less research in the eastern countries such as Singapore, Hong Kong, Japan and Korea, etc. Because of the globalization and increasing environmental complexity, therefore, in my point of view, researchers should not confine to some regions.
Next issue to be discussed in this paper is about whether HR outsourcing is a tool for achieving competitive advantage. As the authors state, firms can gain competitive advantage through outsourcing which could provide better, faster and cheaper the best-in-world HR services (Jeffay, Bohannon and Laspisa 1997, p.42). Switser (1997) also has similar point of view, he pointed out that outsourcing the transaction-based HR activates can free HR managers and other managers to struggle with strategic business issues (Switser 1997). However, Huselid (1995) argues that outsourcing some HR functions may reduce competitive advantage. He points out that some HR functions are seen as cost centers but other may create value as part of a firm’s strategic infrastructure. From a strategic perspective, recruiting and selection are important activities in the firms in order to select talents. If outsourcing these firm-specific skills may hinder the ability of the firms to develop unique competencies within their workforce. Therefore, outsourcing is found to limit the development of distinctive competencies and to create inefficiencies because agencies may be lack of firm-specific knowledge and engage in opportunistic behavior. (Huselid 1995)
In this part, we would discuss whether outsourcing could bring benefits or be harmful to the organisations. In the article, the authors mention there are three benefits of outsourcing that also are reasons for the firms to outsource their HR functions. These benefits include enhanced value of the firms, increase speed to change and reduced costs.
Indeed, these are not only the benefits to the firms. Another benefit does not mention in the article including free sources for other purpose. For example, outsourcing permits the firms to redirect their resources from non-core activities towards other activities then results in focusing on customers’ needs and to provide better customer service. Moreover, if part of HR function, like routine administrative, is being outsourced, the resources of HR could be used on the role of change agent and strategic business partner in the organisations. In addition, outside agencies also could provide specialists and legal advices for such firms in which internal expertise unlikely could be employed due to the high cost. As a result, firms can improve compliance with governmental regulations and minimized penalties (The 2002; Mobley and Maurer 1998).
So far it seems a lot of positive outcomes of outsourcing. However, one of the benefits – cost reduction, which is deemed as the firm desire benefit from outsourcing, is a controversial topic and raise counter-argument in some literatures. A study conducted by Klass (1999) uses transaction-cost economies theory to explain the outsourcing benefits received by the firms and its transaction cost is varying to different organisations. The study indicates that transaction costs could be increased by opportunistic behavior by service providers to which the firm has grown dependent. For example, agencies may increase price at contract renewal, charging more for adjustments or add-on during the contract period. (Klass, Clendon and Gainey 1999)
On the other hand, extra costs may be added to the firms such as managing the relationship between HR department and the agencies (Teems 2003). Besides, if the firms use sole supplier, monitoring costs are added to retain sufficient expertise to supervise and monitor the performance of the supplier in order to avoid the supplier perform inadequately (Siegel 2000). As a result, costs for outsourcing may be greater than the costs if the firm handles HR functions internally. In the case of the Southwest Airlines, the company focuses on excellent customer service and requires its employees have high contact with the customers. Therefore, outsourcing customer service may in turn increase the costs and reduce the level of the quality services. This case is an example that could apply to HR outsourcing (Teems 2003)
In the article, the authors only emphasize on outsourcing benefits rather its disadvantages. Thus, it is necessary to examine another side of the fact. Next, we will discuss the negative impacts which are extracted from other literatures.
According to other literatures, culture fit, lack of control, resistance to change and morale problem are real problems will cause ineffectiveness to the firms (Teems 2003; Siegel 2000; Mobley and Maurer 1998; Prince 2003). In this article, the authors raise a good point that HR consultants need to understand the industry and the specific culture of the firms. In fact, cultural transition can cause problems. Most agencies may not understand the corporate culture or personality, the whole HR system provided by them may not fit in the firm due to some of them only produce one set of the system for all their clients in order to reduce the production costs. Another problem is resistance to change. Internal resistance to the changes is not unusual when outsourcing (Prince 2003). In most cases HR managers are unwilling to adopt the change as well as employees’ morale will decrease owing to the fear of losing jobs. Finally, the problem of lack of control may occur, for example, the firm has to accept inflexible system which is controlled by the agencies. Therefore, management has to pay attention to these negative impacts.
TCE theory concludes that HR outsourcing is related to the form of governance structure and the perceived benefits generated by reliance on idiosyncratic HR practices, uncertainty, size and cost pressure of the firms. This theory is supported by research so that is more convincible compared to the article. Furthermore, one of the popular organisational strategy theories from Miles and Snow (1994) classifies 4 types of organisations which are defender, prospector, analyzer and reactor. Defender would be less reliance on HR outsourcing; however, prospector’s HR strategy is acquiring HR from outside. Similarly, in accordance with Porter’s theory – organisation has innovation strategy would rely on external sources but those have cost-reduction strategy would rely on internal sources. (SHRM Lecture Note)
Finally, the authors believe the outsourcing development will be determined by the paths taken by agencies and firms. Would outsourcing develop quickly? In my opinion, it depends on whether outsourcing benefits weigh the costs. Otherwise, the firms would not consider to outsource even agencies play more aggressive strategy.
In summary, the article clearly provides us an overall concept of HR outsourcing with understandable three roles model. However, the shortfall of the article is lack of in-depth research and supporting evidences. Besides, it does not examine the effects of outsourcing in different aspects such as other outsourcing problems. Unfortunately, the main purpose of the article is to sell the advantages of outsourcing to potential buyers or other HR practitioners in organisations. It may be very convincible to some employers they are considering HR outsourcing. However, it may not be a good article for a student to investigate the issues about strategic HRM. After investigating a number of literatures, there are just a few theoretical and empirical studies and a valid model of HR outsourcing was developed except TCE theory. Due to HR outsourcing is a long term issue in a strategic HRM field, it was suggested to require further studies in every part of the world.
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