Analysis and discussion of outsourcing of the human resource function
4.0 Introduction
This section presents an analysis of different case studies, seeking to distinguish why and how some companies outsource the human resource function. It also explores the relative theories adopted in evaluating the outsourcing decision and draws best practices on how a company can successfully manage the changes required during the outsourcing of the human resource function.
The sections contained in this chapter thus includes the tools used in evaluating the case studies and secondary data. The chapter subsequently discusses case studies in the manufacturing, IT, hotel, and service industries in India, Malaysia, Switzerland, and Lithuania. The chapter concludes with a summary of best practices that a company can use to successfully manage the changes required through outsourcing of the HR function.
4.1 Content Analysis
Content analysis is a type of research tool that a researcher uses to determine the presence and use of specific words or concepts in an article. According to White (2006), content analysis helps the researcher to analyze, quantify, and qualify the underlying meaning and relationship between words and phenomena, which can be inferred to the concept under study.
This paper identified and synthesized qualitative and quantitative information obtained from previous research, case studies, and peer-reviewed articles. Aguezzol (2014) suggests that one of the best approaches is reading and understanding the words used in those journals and phrases about human resource outsourcing activities. Consequently, to gain a better understanding of the study, the researcher used keywords such as Outsourcing, Human Resource Outsourcing, effects of human resource, employee motivation, company culture, and change management.
While conducting the research, the following key terms and their meaning were used;
Outsourcing
According to Adelye (2011), outsourcing involves the technique of companies delegating part or whole of their operational functions to a contracting third party.
Human Resource Outsourcing
Human resource outsourcing is the process through which a company contacts part or whole of its human resource function to an external party (Halim, 2007).
From the reviewed literature, the researcher adopted four theories; transaction cost economic theory (Hafeez,2014), the Theory of core competencies(Management Study Guide, 2020), knowledge-based Theory (Zack,2010) and resource-based economic Theory (Sameera, 2018).
4.3. Case Study of human resource outsourcing in India
India is one of the oldest and best outsourcing hubs in the world. The growth in India’s outsourcing model has transformed the economy from an agricultural-depended economy to a knowledge-based economy. Jyoti (2015) contends that India’s human resource outsourcing has grown because of several factors; availability of cheap labor, presence of a well-developed Information Technology sector, excellent telecommunication infrastructure, Internet facilities, and good command of English language as a medium of negotiation. As a result, India has become one of the top outsourcing service providers to many US-based firms (Greece, 2006). The business process outsourcing sectors have also become a growth and development catalyst to the Economy of India.
According to a survey conducted by NASCOM (2011), India has shifted from a rural and agriculture-led economy to a knowledge-based economy, establishing itself as a top outsourcing destination. Jyoti (2015) also suggests that India outsourcing gives it a comparative advantage as the sector creates employment and contributes to foreign direct investment.
According to Jyoti (2015), a study to determine the effect of human resource outsourcing o performance of organizations conducted in India among 64 medium scale organizations in Jammu province revealed that companies outsourced non-core activities and non-core critical activities. Consequently, the surveyed companies indicated increased organizational performance due to increased financial revenues and the availability of quality time to focus on core activities. The Transaction Cost Economic Theory (Hafeez, 2014) postulates that firms seek external human resource function service providers if their costs are minimal. Mouhammed (2008) also asserts that companies have turned to outsource the non-core function of their human resource function to cut costs and gain competitive advantage.
In a separate study by Makkar et al.,(2007), most organizations in India outsource the human resource function to motivate its workforce and focus on the activities that contribute towards attaining an organization’s desired objective. Through their study, Makkar further notes that the role of the human resource function is evolving. Companies opt to strategically align themselves if they are to remain competitive and reap the benefits of a global market. Notably, the role of HR has evolved from merely providing staff with the necessities such as food, clothing, and shelter to motivating staff through fair appraisal and compensation schemes and most recent to be a strategic partner that fosters change and innovation. The figure 1 below illustrates the changing role of human resource within an organization;
Figure 1: Source Makkar 2007
Makkar also notes that most companies in India outsource not only the human resource function but also other non-core functions within their operations. He asserts that historically, companies have been motivated by the urge to reduce operating costs (outsourcing reduces cost by between 30% and 40%), but this notion has since changed. Currently, companies continue to embrace outsourcing to access best practices, acquiring the latest technology, and a fast rise in performance. Accordingly, 87% of budgeted funds among small and medium companies go to the routine transaction, and they spend almost twice on maintaining the human resource headcount, unlike large enterprises.
Mansor (2014) argues that companies outsource their human resource function with the motivation to achieve cost-effectiveness, acquire economies of scale, leading to higher profitability. Notably, Makkar (2007) and Cicek (2011) agree that most companies in India and globally outsource; payroll administration (such as producing cheques, managing vacations and handling taxes); employee compensation and benefits (such as health insurance processing, cafeteria, and medical claims); employee recruitment, training, and development.
However, data privacy issues are a significant impediment to the adoption of human resource outsourcing from the study and a similar survey conducted by Hewitt Associates. Findings from this case studies indicate that for a company to manage the dynamics associated with outsourcing of the human resource function, it should strategically assess its dependency levels, the risks linked to spillover, build a mutual relationship, and maintain its strategic capacity. Arguably, the outsourcing company should minimize dependence on one service provider, ensure that policies safeguard the privacy and confidentiality of employees, and it should only outsource activities that are not strategic and give it a competitive environment.
4.4 Case Study of Human Resource Outsourcing in Malaysia
Human resource outsourcing spans industries from the service sector, tourism, hotel, IT, manufacturing, and processing industries. According to a survey conducted in the Malaysian manufacturing industry involving local organizations and multinational manufacturing corporations, it was evident that human resource outsourcing plays a crucial role in the internationalization of the sector.
Halim et al., (2007) conducted a mail survey on 232 participants using a detailed questionnaire that tested the adoption, use, and function of the human resource outsourcing. Notably, from the 232 respondents whose data was analyzed using statistical approaches and hybrid methods, 113 of the respondents agreed to have fully adopted human resource outsourcing, while 71 partially outsourced the HR function. It was further evident from this survey that recruitment and training were the most outsourced human resource function at 79% and 69%, respectively. Sameera (2018) argues that an organization that considers outsourcing should consider its internal capacities against what it lacks and the only source for the activities which it cannot sustainably handle.
According to the in-depth survey, multinational enterprises have significant use of human resource outsourcing compared to local manufacturing enterprises in Malaysia. The multinational manufacturing companies agreed that using an external provider with a good understanding of the local environment improves operations efficiency and is less costly than hiring a complete human resource workforce to handle the human resource function of the firm. With a motivation for productivity, expansion, and profitability, multinational enterprise’s demand for outsourcing continues to rise.
In a similar survey in Russia, it was observed that 61% of similar organizations outsourced their HR function, 68% percent of these group outsourced staff hiring, 56% outsourced staff compensation and benefits. In comparison, 61% outsourced the human resource management information system. Further, another survey by Cooke (2006) highlights at least 97% of organizations use third-party providers to support at least one human resource function, with 77% outsourcing staff training, 59 % outsource staff recruitment, 30% outsourcing employee benefits management, and 20% outsourcing work placement function.
A competitive business environment, coupled with globalization and technology, was among the factors contributing to the outsourcing of human resource function. (Scheniederjan 2015). Halim further agrees that companies that outsource the human resource function from well-qualified providers can benefit from the knowledge, competence, and expertise due to the providers’ substantial investment in their practice. According to the Knowledge-based Theory and the Theory of core-competencies (Zack 2010, Mansor 2014), a company that assesses its internal strength as well as core competencies and bridges the deficit through an external party can gain competitive market advantage.
The study findings from the research in the Malaysian manufacturing industry also revealed that culture plays a significant role in shaping human resource management practices within a country. Halim states that cultural variations and institutional differences warrant multinational corporations to adopt human resource outsourcing to conform to local management context relating to factors such as employee contracts, salary, working hours, redundancy policies, and general staffing conditions. Unlike other strategic functions that can be standardized across different countries and regions, the human resource function is bound cultural differences and, therefore, the most vulnerable to any organization’s operations.
It is was further observed that just like in India, most companies in Malaysia outsource partial human resource functions such as payroll, benefits, and human resource information systems due to concerns over data confidentiality and privacy concerns. (Abdul-Halim, 2010). The bureaucracies and procedures necessary for the outsourcing of the human resource function were also a fundamental limitation for the adoption of outsourcing.
4.5 Case Study of Human Resource Outsourcing in Switzerland
A study conducted by Rodriguez (2018), sought to determine how relationship quality affects the human resource outsourcing function in the hotel industry. Specifically, Rodriguez sought to discover how commitment, confidence, shared benefits, shared risks, and resolution of conflicts affect the outsourcing of the human resource function.
According to Rodriguez, in 2015, the hotel industry workforce in Switzerland comprised of 30% outsourced staff. According to him, this number is projected to grow further due to the growing demand by hotels to focus on core functions and gain competitive advantage. The adopted model employed aimed at investigating how outsourcing the human resource function improves financial services, customer service, production, and profitability in the hotel industry.
Notably, he observes that the traditional human resource outsourcing function has been considered in the context of a contract where outsourcing the human resource function relies on the cost of the transaction. However, Rodriguez contends that for hotels and other entities to reap the benefit of outsourcing the human resource function, firms should endear to build a mutual relationship that supports the interaction between the third-party provider and the company involved.
The study analyzed the strategic benefits of the outsourced HR function, and the extent of benefit the hotel managers perceive based on the below illustrated conceptual framework;
Figure 2: Conceptual Framework Source: Rodriguez, 2018
Rodriguez notes that building successful relationships between service providers and hotel managers has been a challenge, contributing to a strained relationship and eventual failure of most human resource outsourced functions. He further highlights that conventionally, according to case studies that have assessed the relationship between sellers and customers, distributors, and manufacturers, two perspectives emerge; these are partnerships and transactional relationships. Rodriguez also contends that unlike transactional relationships, which are based primarily on rules and guidelines with consequences on infringement of any set regulations, partnerships are different. Partnerships occur as seamless agreements with shared risks and benefits and thus are not viewed with the end date in mind. Instead, the relationships exist much longer without the dangers of either party being opportunistic. Hence, both the provider and the outsourcing entity strive to create mechanisms that foster effective operations.
Furthermore, Lahiri et al. (2007) posit that there exist tactical, strategic, and transformational relationships between the supplier and the client in the outsourcing relationship. According to Lahiri, in the strategic relationship, the firm seeks to take advantage of the service provider’s knowledge and experience to gain new valuable resources and capacities. The tactical relationship, on the other hand, is free of competition. These relationships seek to reduce operational costs and improve the quality of the products or services. The transformational relationship, however, aims at minimizing risks, enhancing flexibility, and transforming the business.
According to a survey on success factors in forming strategic alliances, Hoffman et al. (2001) suggest the following five essential stages for establishing a productive client-supplier relationship. First, strategic evaluation of a firm and the decision to form a partnership; two, search for and selection of a suitable partner; three the designing of the partnership relationship; four, implementation and management of the link and five, the termination of the relationship.
Nonetheless, Rodriguez contends that the extension of time does not determine the quality of the relationship. Instead, the merits of a mutually beneficial relationship, business understanding, mutual trust, shared risks and benefits, commitment, and conflict resolution mechanisms play a critical role. Also, Narus and Anderson (Rodriguez, 2018) propose that communication, trust, and management of cooperation determine the quality of the relationship between the client and the service provider.
Therefore, according to Rodriguez, a company that contemplates human resource outsourcing from the strategic viewpoint should consider; the internal core competencies, the chain of operations, and the client-supplier relationship. Notably, as a best practice, the outsourcing company should focus on its inner strengths in terms of what it can do best and designate its deficit skill to a competent supplier. This way, the outsourcing company can acquire not only the cost-efficiencies but also flexibility and improvement in the quality of products and services due to concentration on the firm’s core activities.
Notably, the analysis of results from the survey shows that a given level of outsourcing has the potential to increase transaction costs, which can hamper the benefits accrued from outsourcing the human resource function. Hence, developing a mutual relationship built on trust can minimize transaction costs, which often require relational administrative mechanisms. Also, Rodriguez asserts that the higher the outsourcing company, the higher the risks that the outsourcing company faces. Thus, having a mutually beneficial relationship with the service provider could mean a higher level of confidence in the provider delivering the outsourced function. Such circumstance, he notes, also imposes responsibility on the companies involved to maintain the relationship and superior market advantage.
Furthermore, as firms maintain healthy mutual relations, they gain a competitive advantage and achieve their goals. Hence, like the resource-based view theory (Sameera, 2018) contends, as the company harnesses valuable resources and capacities that cannot be duplicated or replaced, such as a mutual relationship with the service provider, they gain a competitive advantage over other companies within given markets. Finally, as the hotel establishes a healthy relationship with the service provider, it eliminates opportunism where the provider seeks to take advantage of the hotel for individual benefit.
4.6 Case Study of human resource outsourcing in the service sector in Lithuania
A survey was conducted in Lithuania (a country in Europe) in 2015 by Rima and Ugne on the services sectors. The study sought to identify management models for human resource outsourcing among service companies. With a target population of 1607 respondents, the study focused on Vilnius, the capital of Lithuania, where there is a high concentration of service companies. Notably, the survey covered 107 hotels, 176 internet service providers, 279 tourism firms, 168 entertainment and leisure firms, 81 cleaning companies, 54 logistics companies, 150 restaurants, 59 information service companies, 170 communications, and telecommunications service companies and 712 business service advisory firms.
According to Rima et al. (2015), human resource has been on the rise though research is not exhaustive due to the complexities and wide variety of the services sector globally. Ok (2011), however, classify the outsourcing into the service sector and the manufacturing sector. Also, Rima contends that insufficiency of detailed, globally harmonized information, especially at the production stage where outsourcing has been utilized, is mostly to blame for lack of a standard method of measuring the HR outsourcing function.
It is also worthwhile noting that outsourcing is measured mostly at the micro-level with under two points of view; the operational level and the strategic level. At the operational level, companies seek to address their short-term challenges while at the strategic level, organizations try to gain long-term benefits from outsourcing the human resource function. Rima further contends that although outsourcing has predominantly been associated with the Information Technology sector, any activity can be outsourced. According to this study, outsourcing covers the business process, information technology, and the manufacturing industry. As such, the following model is deduced from both the categories and the different levels associated with outsourcing;
Figure 3: Outsourcing levels and type of activity (Source: Rima, 2015)
Rima, however, notes that several challenges hinder outsourcing in the services sector. These challenges include technological hindrances, i.e., not all services can be digitized and become distinct from other operational function; some functions require proximity to customers to understand market needs; creative, and innovation demands close interaction and therefore cannot be digitized; marketing, delivery, and maintenance of various activities require the physical presence, and face-to-face is still a key component as far as user experience is concerned.
From the analysis of results from the survey, Rima notes that about 46% of respondents in the services sector outsource non-core human resource activities. Still, 24% of respondents agreed using human resource outsourcing for core activities. It was also observed that the nature of the business determined whether human resource outsourcing was used for non-core or core activities. For instance, for companies such as hotels and healthcare firms that require facial interaction with customers, human resource outsourcing was only allocated to non-core functions such as cleaning, security, catering, and equipment maintenance. Further, the business seasonality also determined the type of outsourcing arrangement, with 33% of the surveyed restaurants and 57% computer-related service only seeking external service providers seasonally. Companies should also carefully assess their operations and determine if partial or complete human resource outsourcing is ideal (Bakanausikiene et al., 2011).
According to Rima, the absence of internationally agreed privacy and data regulation policies is a significant reason for the lack of adoption of human resource outsourcing. He further notes that although most of the geographical limitations such as country-specific legalities exist and hinder outsourcing, technological innovation may soon break this barrier.
4.7 Summary of Analysis and Discussion
From the analysis of the above case studies and other related literature which cover the manufacturing, service, and hotel industries, this study used content analysis and pattern finding to draw best practices on how a company can successfully manage the changes required through the outsourcing of the human resource activities (Objective 2). Case study methodology, according to Crowe (2011), enables the choice of strategic cases that are representative of the scope, hence provide room for comparison and generalization. Content analysis also enabled choice and use of specific words such as human resources, company culture, and outsourcing, which narrowed the scope and enabled a focus on relevant information from the databases, articles, and peer-reviewed journals.
Most notable is that in all the assessed cases, the outsourcing of the human resource function is globally on the rise (Jyoti 2015, Halim et al.,2007; Scheniederjan 2015, Rima 2015 & Rodriguez 2018). The main reasons for outsourcing the HR function range from increasing business performance (86%), concentrating on core functions (59%), achieving business goals more quickly (36%), focusing on product innovation (32%), and boosting firm revenues (22%). Others, however, outsource the HR function to save money and reduce operating cost (56%), to control legal risks and improve compliance (55%), to gain access to superior vendor talents (47%) and to streamline HR operations (45%) (Sriwongwanna 2009, Mansor 2014, Rima 2015)
Also, companies should evaluate their culture and organizational behavior to determine which functions of the human resource should be outsourced. The decision to outsource should be guided by factors such as the desire to achieve cost-effectiveness, superior competencies, or economies of scale. Further, while companies seek to outsource the human resource function, maintaining a mutual relationship with the service providers is critical (Rodriguez, 2018). It enables a company to reduce the transactional costs and risks associated with processes in the value chain. However, the outsourcing company should ensure mechanisms exist for professional management of the contract to minimize opportunistic behavior from service providers.
The reviewed literature and case studies also share consensus on the following steps to follow while outsourcing the human resource function;
First is the evaluation and identification of core and non-core activities. The company then decides on what to be done in-house and what functions to be outsourced. This decision can be informed from the core competency, knowledge-based view, transaction cost, and resource-based view theories. The company focuses on its core abilities, with minimal transaction costs, and only outsources the non-essential functions.
Second, the company sets out to find a suitable service provider who can fulfill the assigned human resource function on behalf of the organization. The company can choose from any of the three categories of human resource outsourcing, including Business Process Outsourcing (BPO), Professional Employer Organization (PEO), and Application of Service Provider (APS). (Makkar 2007, Rima 2015).
Thirdly, the company establishes contact with a suitable provider, initiates the process, and enters into a contract. It then creates contract management to monitor the implementation of the outsourced function. Monitoring and evaluation can be along with flexibility, time, efficiency, costs, and other related parameters. (Rima, 2015 & Rodriguez, 2018 ).
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