HR Outsourcing: Opportunity or Threat - Essay Example

HR OUTSOURCING OPPORTUNITY OR THREAT? HR Outsourcing: Opportunity or Threat? Aim of this study and Research hypothesis: The outsourcing of HumanResource activities is becoming increasingly common in a globalized business environment. One of the most significant reasons why companies tend to move into outsourcing of HR operations is to reduce costs by hiring HR consultants to provide their expertise in areas such as employee benefits and stock options plans. The objective of this research study is to explore whether companies perceive HR outsourcing to be an opportunity or a threat on the basis of achievement of lowering of costs. The research question that is posed in this study is: Is outsourcing perceived to be beneficial in terms of reduction of costs? The null hypothesis states that outsourcing bring about reduced costs; however if the null hypothesis is declared invalid, then the alternative hypothesis will hold good, i.e, outsourcing is not beneficial in terms of costs and should therefore be restored as an in-house activity. Contextualisation: With increasing globalization, the business world is changing and many companies are considering HR outsourcing to be a viable option. Increasing competitive pressure in the global market has forced companies to become aggressive in terms of reducing costs and this is usually achieved through a reduction in the head count. One example is that of Hughes Electronics, which resorted to outsourcing its HR functions such as payroll, hiring and compensation management among other activities, in order to avoid the costs associated with an in-house upgrading of its legacy systems. (www.ebstrategy.com). The Human resource department within a firm is crucial for its success because it helps to promote employee satisfaction and in achieving organizational excellence through the optimum use of human capital. In view of the global competition and an increasingly complex legal environment in terms of employee benefits and employer duties, many firms are finding it difficult to function effectively and resorting to HR outsourcing. One view tends to the belief that such outsourcing of HR operations helps to improve the strategic functioning of the firm by reducing costs and improving efficiency. On the other hand, those who oppose HR outsourcing tend to the belief that outsourcing is in effect, a threat to the internal HR service of the company and may not necessarily achieve the projected cost savings. Literature Review: Jeffay et al (1997) point out that in a study that was conducted in 1996 by Hewitt Associates, 93% of the organizations surveyed outsourced their HR operations while 4% of the group indicated they were actively considering outsourcing. They point out that the reason why most companies go into HR outsourcing is to gain a competitive advantage, to be able to get HR services faster and at a less expensive rate. The most commonly outsourced HR programs are the administration of health and group benefits, defined contribution and defined benefit programs, and its benefits are seen to be in the saving of money and improvement of services, while also making a strategic contribution to the business.(Cabe and Wireless Rings, 2004). The advantage in outsourcing HR functions is that it allows a firm to concentrate on its other core competencies rather than expending resources on developing its HR functions. It allows a Company the opportunity to reduce its costs, since HR is the one area that lends itself to reductions in costs (HRM, 2004). Since the administration of HR services is a fixed cost to the Company, outsourcing enables the fixed cost to be changed into a variable cost, where a Company can purchase just the amount of design and strategy support counseling that is required (Jaffey et al, 1997). HR outsourcing can thus represent an opportunity for companies in enabling it to manage HR functions with reduced costs, enhanced value and increased speed. Another factor that pushes companies to outsource HR operations is the increasing complexity of the regulatory changes taking place in health care, calculation of overtime pay, reforms in pension and stock related compensation. In the complex environment of mergers and take-overs, specialist knowledge in HR operations is likely to be an asset to a firm (HRM, 2004). Other benefits of HR outsourcing are that it enables the company to focus on strategic operations rather than administrative tasks, reduces the bureaucracy of a centralized HR system and allows for a decentralized structure which supports higher levels of innovation. (Greer et al, 1999). Such factors are believed to enhance the strategic contribution of HR operations. Some researchers view HR outsourcing as being the dominant, driving trend in the HR of the future because it helps to build strategy and improve organizational performance, with in house staff at a company performing only strategic activities while the bulk of transactional and administrative activities are left to vendors. (Randall, 1999 :444) Others however, are not favorably inclined towards HR outsourcing. According to Ralph Kimmich, director of compensation and benefits at Southwest Airlines Company, HR outsourcing is not to be recommended because “once you do that, you’re abdicating your role as an employer to lead your people.”(Kochaniec, 1999:1). This view tends to the belief that outsourcing is a threat to the internal HR department, because it is in effect, only a reduction in staff, without much addition to the core competencies of the firm. As a result, Southwest Airlines has been focusing on improving its in-house HR capabilities rather than opting for HR outsourcing. Outsourcing can also create potential risks, for example, companies may find themselves overly dependent on suppliers, or they may find themselves losing their strengths in strategic core competencies. Moreover, HR outsourcing does not always achieve its objective of cost savings. For example, British Telecom outsourced its HR activities to an organization names ePeopleServe, which was jointly set up by British telecom and Accenture, with the share of investment of British telecom being 75 million pounds for 2002. However, rather than savings costs, the HR operation actually resulted in an increase in costs up to 80 million pounds (www.ebstrategy.com). This proves that in some instances HR outsourcing may actually be a threat because it can result in additional costs for the organization. According to Bob Morton of Ciba Specialty Chemicals, HR outsourcing is no more than a “faddish trend”. (HRM 2004). He offers the view that outside consultants are not in a position to know a company’s business as well as in-house personnel. While routine tasks such as payroll may be outsourced, the outsourcing of HR operations results in a Company losing control over its biggest resource – its people. Therefore it poses a danger to the internal HR department. A survey which was conducted in 2001, using 150 medium and large sized companies revealed that most companies perceived a rise in costs and lowering in quality with HR outsourcing, including a loss of control over these processes. These results were borne out in the survey where the Companies expressed a dissatisfaction with HR outsourcing due to the poor levels of quality of service, contractors who had insufficient knowledge and costs that were higher than what had been anticipated.(Lawler and Mohrman, 2003) Proposed Methodology: According to Saunders et al, defining the aims and objectives of the research study is important to generate evidence of the “the researcher’s clear sense of purpose and direction.”(Saunders et al, 2003: 25). This research study seeks to assess whether firms view HR outsourcing as an opportunity in that it bring about reductions in costs, or a threat to in-house HR operations which indicate that it should be restored. The objective is to examine the views of employees and managers at various firms in order to arrive at an answer to the research question. Both qualitative and quantitative research methods were considered for this study. As pointed out by William Trochim (2001), every study has a qualitative as well as a quantitative element to it, since even a numerical response may involve several shades of meaning and even purely verbal responses can be counted. Qualitative methods lend themselves well to those studies where a special understanding of the issues is sought to be achieved and in the generation of a level of information that is very detailed and comprehensive and which is mostly obtained through in depth interviews (Troachim, 2001). A quantitative research method aims to gather larger volumes of data in a numerical format, which can be subjected to statistical analysis and where there is no ambiguity in the data, which is measured on an ordinal scale. (Trochim, 2001). There is a subjective element involved in this study, since it is participant attitudes and underlying perceptions existing at the unconscious level about the extent of their terrorism preparedness that must be assessed. Wiles and Cornwell (1990) have pointed out that since emotion is a multi dimensional phenomenon, verbal reporting tests will provide the best measure, through the development of typologies. Therefore, a survey questionnaire appears to be the best research tool that could serve the purpose of getting answers to the research questions. The proposed study will use a verbal measure that is measured by a numerical value will be ranked at five different levels, like a Likert Type scale, where the respondent will tick one of five answers, such as “Very good”, “good” “Bad” “very bad” or “fair”. An example of this kind of questionnaire is the AIM questionnaire – Affect Intensity measurement Questionnaire. (Larsen and Diener, 1987: 34). This study proposes to administer the survey questionnaire to employees and managers at different firms. As pointed by Kirakowski (no date), a Likert questionnaire consists of questions which have a similar weight in the respondent’s mind and the variables must not overlap with each other to provide a false level of weightage to any particular variable through similarity in two variables. For each variable the response provided by the participant provides an idea of the degree of importance that he/she attaches to it. By averaging out the responses from all the participants, it is possible to obtain an overall idea of how significant a particular variable is from the perspective of the research questions that have been proposed. The participants in this study are employees and managers from ten different companies. It is proposed to select about seven employees and three managers from each company. Random sampling would be ideal in any study because it is based upon proper probability sampling designs and it is possible to estimate the amount of bias in the sample and to offset the effect of that bias and to improve the estimation by finding the optimal bias-variance tradeoff. (Rivers et al, 2003:7). However, random sampling can also be very expensive, because it is based upon the assumption that the probability sample that is drawn is representative of the actual population sample, and this means that the entire sample population that could be potentially impacted by the study must be taken into account. From a practical perspective and in the real world, such sampling would be very expensive, therefore convenience sampling is the method chosen in this study. The firms identified in this study are those which are located in areas fairly close to the researcher but which have resorted to HR outsourcing, in order to facilitate the process of administration of questionnaires. Saunders, Lewis and Thornhill highlight ethical concerns that may arise in a research study, such as the need to maintain the privacy of individuals and to solicit only voluntary participation allowing the right to withdraw any time, the need to maintain the confidentiality of the data and the objectivity of the researcher. (Saunders and Thornhill, 2003:311). Therefore, this study proposes to acquaint all participants with the purpose of this research study and to assure them that the confidentiality of the responses they provide will be assured. Only those participants who voluntarily agree to participate in the study will be included as recipients of the survey questionnaire. Moreover, the participants will not be required to provide their names in order to participate in the study, in this way, their anonymity will be assured and the participants may feel freer to express their views frankly, without fear of retribution from their superior officers. Example of Pilot method: Sample questionnaire: The survey questionnaire would include questions such as: (a) How do you rank the management of HR activities at your firm? (b) How do you rank the management of payroll operations at your firm? (c) How do you rank the management of employee stock options at your firm? (d) How do you rank the levels of innovation at your firm? (e) How do you rank the level of contractor knowledge in provision of HR services? (f) How do you rank the economy of HR operations at your firm? (g) How well do you think HR outsourcing has achieved cost savings at your firm? (h) How do you rank the management of employee benefits at your firm? (i) How do you rank the levels of communication with the HR department? (j) How well do you think HR operations have achieved cost efficiency in your firm? In order to eliminate the problem of respondent bias, it is proposed that this survey questionnaire will first be administered to one employee from each of the ten companies that have been selected to participate in the study. Based upon the responses that are obtained, the questionnaire can then be examined again and any corrections made as necessary, to ensure that the study is free from respondent bias. The researcher will also take care not to allow any personal bias to creep into the interpretation of the responses that are provided by participants to the questionnaire. After the necessary corrections are made to the questionnaire, the majority of the participants will then be contacted, either personally, or via email in order to solicit their cooperation and participation in the survey. Limitations of this study: This study aims to assess whether outsourcing is viewed as a threat or an opportunity in terms of costs. Due to constraints of time and resources, the researcher has chosen to administer the questionnaire to about 100 participants totally. This may not be adequate to gain a real grasp of the problem and the convenience sampling choice of companies may limit the extent to which the results of this study can be applied. However, it may add to the pool of research available on the subject and provide valuable insight into HR outsourcing according to employee and manager perceptions on cost advantages. Bibliography: * Adler, Paul S, 2003. “Making the HR outsourcing decision”, MIT Sloan Management Review, 45(1): 53-60 * “Cable and wireless rings the changes’, 2004. “Human resource Management, 12(5):29-32 * Greer, C, Youngblood, S and Gray, D, 1999. “Human resource Management Outsourcing: The Make or Buy decision”, Academy of Management Executive, 13(3): 85-96. * “BP’s HR outsourcing success: can it work for you?” 2004. Human Resource Management, 12(3): 5-7 * Jaffey, Jason, Bohannon, Stephen and Laspisa, Esther K, 1997. “Beyond benefits: the changing face of HR outsourcing”, Benefits Quarterly, 13(1): 41-8 * “HR Outsourcing Success and Failures,” Retrieved January 5, 2008 from: http://www.ebstrategy.com/bpo/hr/success_failures.htm * Kirakowski, Jurek, No Date: “Likert and the mathematical basis of scales.” [online] available at:http://www.keysurvey.com/likert_and_the_mathematical_basis_of_scales.jsp * Kochaniec, J, 1999. “BO Amoco Outsourcing”, Business Insurance, Dec 13, at pp 1 * Larsen, Randy J. and Diener, Ed, 1987. "Affect Intensity as an Individual Difference Characteristic: A Review," Journal of Research in Personality: 21(1), pp 1-39. * Lawler III, E.E. and Mohrman, S.A., 2003. “Creating a strategic human resources organization”, California: Stanford University Press * Mohrmann, S.A. and Lawler II, E.E., 1999. “The new human resources management: creating the strategic business partnership”, IN “Strategic Human Resource Management” (Randall S edn), Blackwell Publishing. * Rivers, Douglas, Huggins, Vicki and Slotweiner, Daniel, 2003. Combining Random and non random samples Paper presented at the Joint Statistical meetings of the American statistical Association. [online] available at: http://www.knowledgenetworks.com/info/press/papers/combosampling%208-03.pdf * Saunders, M, Lewis, P and Thornhill, A, 2003. “Research Methods for Business Students” (3rd edn), Prentice Hall * Wiles, J.A. and Cornwell, T.B, 1990. “A Review of Methods Utilized in Measuring Affect, feelings and emotion in advertising”, Current Issues and Research in Advertising, 13(2): 241-275 Read More