Outsourcing

1. Introduction

This report aspires to critically analyse the concept, benefits and negative consequences of the outsourcing of HRM functions.

Cook (1999) defines HRM outsourcing as "having a third-party service provider or vendor furnish, on an ongoing basis, the administration of an HRM activity that would normally be performed in-house".

HRM outsourcing started growing in popularity in early 90's in Western Europe and especially in United States where up to 90% of companies outsource some HR function. However, HRM outsourcing was an established practice for a considerable time before that given that companies used to obtain the service of outside parties for training purposes due to the inability of most to employ fulltime service of specialized trainers (Kakabadse and Kakabadse, 2002). As human resource management became increasingly considered as part of the strategic planning process outsourcing of functions increased alongside (Kochan and Dyer, 1994). Evaluation of latest literature and research on company practices suggests that there is an increase of the outsourcing of HRM (Barnes, 2004), particularly in HRM consulting & the design of HRM tools (Banham, 2003; Cook, 1999; Mercer and Cranfield School of Management, 2000). This trend has resulted in the greater use of contractors and a reduction in the number of permanent HR staff (Arnato, 2002)

Everest Research Institute states that the cumulative total contract value of HRM outsourcing transactions to US$21.2 billion in 2006 and predicted to reach US$25.4 billion for the year 2007. Furthermore, it states that HRM outsourcing to increase in 2008 due to the reduction in transaction costs, timeframes and promotion of standardized offerings by the existing vendors (Human Resources Outsourcing Annual Report, 2007).

2. Discussion

2.1 Outsourcing HRM functions

HRM outsourcing can be divided in to three major components (Babcock, 2004)

HR transaction processing, where vendors supply single-point services for large volume transactions (example Ð'- payroll) but management of functions is retained by company.

HR business process outsourcing, where management lies with vendors and they provide a range of single-point to integrated end-to-end services that represent the entire employee lifecycle.

HR business transformation outsourcing is similar to HR business process outsourcing. However, the management of the retained functions is improved due to the reduction of administrative functions of the company and quality of outsourced functions also improves due to vendor speciality.

Evaluation of the current practises suggests that the leading functions that are being outsourced are retirement services, stock option administration, health benefits, payroll, training & development and recruitment (Pollitt, 2004) Furthermore, this study states that in reality most companies deliver the HR services through a blended solution using both internal and external capabilities with multiple vendors.

Prior to outsourcing any HRM function it is imperative that an organization closely evaluates the reasons and benefits of undertaking such an action not only towards the company but also towards its employees.

2.2 Advantages of outsourcing HRM process

The reason behind wide acceptance and growth of HRM outsourcing unsurprisingly, can be attributed to the immense benefits it has passed onto organizations. A study by the Conference Board and Accenture HR Services (2004) claims that HRM outsourcing is one of the world's fastest growing industries not only because of cost savings nor due to the trend but rather due to its results.

Research on HRM outsourcing has identified several benefits to the organization. Among the most recognized are;

Ð'* Enables the organization to focus on core HRM businesses (Stone, 2006; Galanaki and Papalexandris, 2007; Hewitt Research Study, 2004; Oshima, Kao and Tower, 2005; Pollitt, 2004).

Ð'* In most cases is cost efficient than performing operations internally (Stone, 2006; Galanaki and Papalexandris, 2007; O'Reilly, 2006; Oshima et al, 2005; Klaas, McClendon and Gainey, 2001; Shelgren, 2004).

Ð'* Organization obtains expert, specialized HRM knowledge thus increasing the quality of functions (Stone, 2006; Galanaki and Papalexandris, 2007; Oshima et al, 2005; Stroh and Treehuboff, 2003; Jeffay, Bohannon & Laspisa, 1997; Shelgren, 2004). To most organizations to possess such quality expertise is simply impossible either due to its sheer cost or due to the difficulty in attracting and retaining such personnel. Vendors have the ability to pass on new thinking, expertise and practices gained by conducting the same function in large volumes and differing circumstances. Furthermore, outsourcing has proven the potential to align processes by integrating and eliminating internal silos (Oshima et al, 2005). All of these factors enable vendors to provide new and improved services than internal sources.

Ð'* Organization obtains access to improved technology increasing the quality of HRM operations (Stone, 2006; Pollitt, 2004; Shelgren, 2004). The primary reason is the inability of the organization to invest so significantly on HR technology, whereas vendors are in a better-suited position to supply the same as their investment and operational costs are divided amongst many customers.

Ð'* Eliminates the development of potential union problems (Stone, 2006; Kochan and Dyer, 1994; Wheeler and McClenon 1998). With the reduction of the workforce, organizations may not have unions and less personnel regulations to deal with.

Ð'* Enables the organization to become more flexible and responsive to business needs by providing additional capabilities, capacity and unit cost predictability that leads to possibility of rigorous management(Galanaki and Papalexandris, 2007; Oshima et al, 2005).

Whilst these are all valid arguments towards outsourcing, this report aims to evaluate two major benefits which company's reap due to outsourcing of HRM.

2.2.1 Increased focus on core HRM businesses

The key element to ensure in outsourcing is to retain focus on the organization's vital functions and to outsource only non-core activities (Byham and Riddle, 1999). The main reason that some HR processes are considered for outsourcing is due to the non-core, transactional