Philips and its
outsourcing choice
Joost Stel, Eindhoven, April 2006
Philips and its
outsourcing choice
Research project in completion of the study Business Administration, Faculty of Management and Organization, University of Groningen.
Specializations: International Business and Finance
Author Joost Stel Studentno. 1359983
Address Alard Du Hamelstraat 43 5622 CC Eindhoven Telephone 06 - 46607009 E-mail JNStel@gmail.com Period May – April 2006
1st supervisor Mr. T. Christiaens 1st supervisor Prof. Dr. D.M. Swagerman 2nd supervisor Mr. N. Orie 2nd supervisor Prof. Dr. A.M. Sorge
Address
Corporate HRM Building SK-1 Glaslaan 2
5616 LW Eindhoven The Netherlands
Address
Faculteit Bedrijfswetenschappen Rijksuniversiteit Groningen Postbus 800
9700 AV Groningen The Netherlands Telephone 040 – 2732889 Telephone 050 – 3633822
E-mail Twan.Christiaens@philips.com
Nico.Orie@philips.com E-mail D.M.Swagerman@rug.nl A.M.Sorge@rug.nl
The author is responsible for the contents of this report; copyrights belong to the author.
Abstract
The thesis ‘Philips and its outsourcing choice’ reports on two researches: a supportive business research and a case research. Central to both researches is the outsourcing of Philips’ administrative HR processes: payroll, time & attendance, compensation & benefits, reward, and employee data management.
Supportive business research: objects for outsourcing
The supportive business research was conducted to resolve the following problem definition:
‘Can, based on criteria derived from management and organizational theory, Philips’
administrative HR processes in France and the Netherlands be considered object for outsourcing?’
To solve this problem definition, the business research took a three-staged approach. The first step concentrated on establishing a theoretical framework and, subsequently, the development of an evaluation model applicable to this research. The three generic theoretical concepts ‘strategic outsourcing’, ‘transaction costs economics’, and ‘theory on dependency and integration’, provide a rationale for outsourcing and/or set initial criteria to the outsourcing object. These three concepts thereby provide the theoretic basis of this research. Application of this theoretic basis to the theory of HR allows sharpening the initial criteria set and verifying the rationale of outsourcing for HR practices. Extending this theoretical framework to the administrative HR processes allows concluding an evaluation model to assess whether the processes can be considered object for outsourcing.
The second step involved the application of the evaluation model to Philips HR practice in general and Philips’ administrative HR processes in France and the Netherlands in particular. By analyzing the strategic direction, the dominant HR role orientation, and assessing the characteristics of the administrative HR processes, a basis was acquired on which conclusions and recommendations can be drawn; the third step of the supportive business research. The conclusions and recommendations that followed from this research can be summarized as follows:
- The administrative HR processes can be considered peripheral to Philips HR. This conclusion clears the path to outsourcing, as both general theory and HR outsourcing theory suggests that peripheral activities can be considered potential outsourcing objects;
- Seen the characteristics of Philips administrative HR processes in both France and the Netherlands, most of the processes can be considered object to outsourcing. Exception in both countries is the local (clock in/clock out) part of time & attendance. It is unlikely that an external supplier can provide this efficiently;
- Considering the administrative HR processes in Philips France, most processes and the process organization are highly integrated. Separating this is not recommended. Philips may therefore want to consider to outsource these processes altogether and to include the training administration into the outsourcing scope;
- Considering the administrative HR processes in the Netherlands, the analysis showed that it is a
complex and diverse process environment. Most of payroll, compensation & benefits, and the
central part of time & attendance are done at a central location (by Cian). As Cian is one
organization, separating these processes is not recommended. This also pleads to include (by
Cian performed) expatriate administration into the potential outsourcing scope;
Philips and its outsourcing choice
VI
- On a local (PD/unit) level, the analysis indicated that the processes performed there (employee data management, reward, and part of time & attendance) show a large diversity and different extents of dependency. If Philips decides to outsource, specific attention should be paid to the harmonization of processes and the coordination and information exchange between the local entities and a potential supplier. Outsourcing deals fairly badly with diversity;
- Furthermore, the analysis indicated that ‘human capital specificity’ (firm/people specific knowledge) is of major concern. Philips should pay particular attention to how this knowledge can be transferred if it decides to outsource. This aspect can be considered the Achilles heel of outsourcing;
- In closing, the pan-European outsourcing market is relatively new and immature. This provides both opportunities and threats to Philips. Close collaboration and good governance is therefore recommended.
Case research: developments in an outsourcing decision process
The case research was aimed at contributing to the theoretical development on outsourcing and HR outsourcing decision processes in particular. In here, specific attention was given to the first phase of the outsourcing decision process, the phase where initial choices about potential suppliers, the design and governance of the outsourcing relation, and choices about the outsourcing scope are made. This research hereby aimed at solving the following problem definition:
Which insights and conclusions can be derived by relating theoretical expectations about the outsourcing decision process to the practice of Philips’ outsourcing project?
The choice for a case research is that such type of research is often perceived as suitable research method for studying complex phenomena within its real-life context (Van der Meer-Kooistra and Vosselman, 2000; Yin, 1989). The theoretical concepts used were predominantly ‘transaction costs economics’, ‘the role of trust’, and ‘the real options approach’. These concepts provide some general insights and expectations to how outsourcing decision processes develop within the firm. Participation in Philips’ outsourcing project allowed acquiring empirical data and findings about an outsourcing decision process in practice. Relating these findings and interpreting the results allowed for forming conclusions and deriving insights to the HR outsourcing decision process. These insights and conclusions can be summarized as follows:
- The theoretical expectations and the empirical findings about the outsourcing decision process largely matched and no substantial differences between an HR outsourcing decision processes and general applicable theory were discovered. It may therefore be concluded that the contingency factors (transaction, the transaction environment and the parties) and the thereto- related control pattern, also provides insights to and guidelines for an HR outsourcing decision process; especially to the elements ‘supplier selection’ and ‘the design and governance of the outsourcing relation’;
- Furthermore, the case research confirmed the expectation that issues of dependency and integration play a decisive role in determining the boundaries of the outsourcing scope. In addition, it was revealed that Philips frames the outsourcing decision and stages flexibility. This result matched the expectations the real options approach suggests. This approach thereby provides some ‘new’ insights to how outsourcing decision processes develops;
- More research after the possibilities, motives, and consequences of framing outsourcing
decisions and staging flexibility is recommended. Specific attention could be given to the game
theory, as it may provide new insights to how firms could frame the outsourcing decision in a
way that fit their purpose.
Preface
‘…Schrijven, dames en heren, is zitten blijven tot het er staat….’
(Kees van Kooten)
With the research project ‘Philips and its outsourcing choice’ an end has come to my study Business Administration at the University of Groningen. During a period of eleven months, I have been working at Philips Corporate HRM and been busy with the potential outsourcing of Philips’
administrative HR processes in France and the Netherlands. Most of time, I was enthusiastic and full of confidence, but, to perfectly honest, sometimes it was hard to imagine that something structured could come out of it. Much time has gone to writing, rewriting, turning around, deleting, trying again, and so on. Now, with the completion of my final thesis, I can say: ‘Writing, Ladies and Gentlemen, is staying put until its ready!’
The realization of this research project was not possible without the support of several people. In the first place, my gratitude goes out to Prof. Dr. Swagerman and Prof. Dr. Sorge, for their critical comments, the new perspectives, and their academic contribution.
Secondly, I like to thank Twan Christiaens, Financial Controller HRM Corporate, and Nico Orie, Project Manager BPO, who led me do this research project and provided the room to participate, observe and learn. Also, my gratitude goes out to Remko van der Honing, for his everlasting support and advise.
Furthermore, I would like to thank everyone from whom I have learned, worked with and who made is possible to conduct this research. I am grateful for their support.
My special thanks goes out to my family and friends, who, in every possible way, have been supporting me during my studies and with the realization of this research project and report.
Eindhoven, April 2006
Joost Stel
Contents
Abstract _______________________________________________________________________ V Preface _______________________________________________________________________ VII Contents _______________________________________________________________________IX 1 Introduction _________________________________________________________________ 1
2 Philips – An introduction ______________________________________________________ 3 2.1 Royal Philips Electronics ___________________________________________________ 3 2.2 HR at Philips _____________________________________________________________ 4
3 General research design _______________________________________________________ 7 3.1 Background of the research project____________________________________________ 7 3.2 Outline supportive business research __________________________________________ 8 3.3 Outline case research_______________________________________________________ 9 3.4 Terms and definitions ______________________________________________________ 9
4 Introduction to the supportive business research__________________________________ 13 4.1 Reason of research________________________________________________________ 13 4.2 Research scope __________________________________________________________ 13 4.3 Research objective and problem definition _____________________________________ 14 4.4 Research methodology and methods __________________________________________ 14
5 Theoretical framework outsourcing ____________________________________________ 17 5.1 Generic theoretical concepts ________________________________________________ 17 5.2 HR outsourcing in theory __________________________________________________ 19 5.3 Application to administrative HR processes ____________________________________ 21
6 Application to France and the Netherlands ______________________________________ 25 6.1 Philips and administrative HR processes ______________________________________ 25 6.2 Philips France ___________________________________________________________ 25 6.3 Philips the Netherlands ____________________________________________________ 29
7 Conclusions and recommendations _____________________________________________ 33
7.1 Conclusions and recommendations ___________________________________________ 33
7.2 Reflection ______________________________________________________________ 34
Philips and its outsourcing choice
X
8 Introduction to the case research_______________________________________________ 39 8.1 Reason for research _______________________________________________________ 39 8.2 Research scope __________________________________________________________ 39 8.3 Research objective and problem definition _____________________________________ 40 8.4 Research methods ________________________________________________________ 40
9 Theory on outsourcing decision processes _______________________________________ 43 9.1 Transaction cost economics_________________________________________________ 43 9.2 The role of trust __________________________________________________________ 45 9.3 The real options approach __________________________________________________ 46
10 The Philips case ___________________________________________________________ 49 10.1 Introduction to Phillips’ outsourcing project____________________________________ 49 10.2 Supplier selection ________________________________________________________ 50 10.3 Design and governance of the outsourcing relation ______________________________ 51 10.4 The outsource scope ______________________________________________________ 52
11 Comparison and interpretation ______________________________________________ 53 11.1 Comparison of findings ____________________________________________________ 53 11.2 Interpretation of findings___________________________________________________ 54
12 Conclusions and insights____________________________________________________ 57 12.1 Conclusions and insights ___________________________________________________ 57 12.2 Reflection ______________________________________________________________ 57
References _____________________________________________________________________ 59
1 Introduction
That outsourcing has gained in popularity and importance seems to be undisputed. In 2000, Fill and Visser already noted that ‘one of strongest and most sustained business trends over the last decade has been the movement towards outsourcing’ (p. 43). Today, this trend has continued. With increasing fervor and conviction, firms are reshaping their organizational boundaries, transferring more and more processes to external suppliers. The possibilities of outsourcing have not been unnoticed at Philips; it is often used business strategy within the product divisions. The potential outsourcing of supportive business processes has also gained Philips’ attention. The outsourcing of administrative HR process in particular, the central topic of this research project and report.
The research project consisted of two researches: a supportive business research and a case research.
At the start of the research project, Philips corporate HRM was contemplating whether the administrative HR processes could be considered object for outsourcing. In here, they felt the need for a supportive research, a research that approached the potential outsourcing of Philips’ administrative HR processes in France and the Netherlands in a scientific manner. The supportive business research addresses this. It hereby aims at providing conclusions and recommendation whether Philips’
administrative HR processes in France the Netherlands can be considered object for outsourcing.
However, during the research project, Philips’ switched position and made their intentions to outsource these processes known. When this could happen is still under debate, yet systematic steps are undertaken. This provided the opportunity to conduct a case research on how an HR outsourcing decision process develops. From an academic point of view, such research could be of interest, as relatively less empiric research has been done.
The structure of this report largely reflects these two researches. In the second chapter an introduction to Philips will be given. Besides a general description of Philips history and organization, this chapter will also provide an introduction to the human resource function at Philips, as this research is closely related to it.
The third chapter will discuss the background of this research project, addresses the reasons for two researches, and provides an overview of terms and definitions used within this report. This chapter hereby serves as general research design of this research project.
The following four chapters present the supportive business research. In chapter four an introduction will be given, describing the research design of the supportive business research. The fifth paragraph will present the theoretical framework underlying this part of the report. Chapter six presents the analysis of Philips’ administrative HR processes. This chapter thereby provides the basis for the conclusions and recommendations formulated in chapter seven.
The last five chapters present the case research. The research design is presented in chapter eight.
Chapter nine discusses theoretic expectations to the development of outsourcing decision processes.
Chapter ten will then present the Philips case. In chapter eleven the theoretical expectations and empirical findings are related and interpreted. Chapter twelve will round up the case research and formalizes the conclusions and insights derived.
1
2 Philips – An introduction
This chapter introduces Philips, one of the world’s biggest and Europe’s largest electronics companies. An outline of Philips’ businesses and organization is given in the first paragraph (§ 2.1).
The second paragraph briefly discusses Human Resource (HR) at Philips, because this research closely relates to it (§ 2.2)
1.
2.1 Royal Philips Electronics
The foundations for what was to become one of the world's biggest electronics companies were laid in Eindhoven (the Netherlands) in 1891. Philips began by making carbon-filament lamps and soon became a multinational player. Since then, Philips has continued to chance and grow; now providing a widespread and varied product range in electronics. Philips is active in over 70 businesses, with products ranging from electric toothbrushes to nuclear medicine and from semiconductors to televisions. Lighting is still an important product group within Philips. The division markets more than 2,500 lighting products to the retail, industrial/commercial, consumer, and original equipment manufacturer markets.
Koninklijke Philips Electronics N.V. (Royal Philips Electronics N.V.) is the parent company of the Philips group (Philips). Its shares are listed on the stock markets of Euronext Amsterdam and the New York Stock Exchange. At the end of 2005, Philips had approximately 140 production sites in 32 countries and sales and service outlets in approximately 150 countries. Philips employed about 161,000 people and recorded sales of over EUR 30.4 billion. The overall company structure is depicted in figure 2.1. The remaining of this paragraph will elaborate on this matrix organization.
Figure 2.1: Outline of the Philips organization.
The activities of Philips are organized in five product divisions, each of which is responsible for the operations management of its business worldwide. The product divisions are: (1) Medical Systems, (2)
1 Information presented in this chapter is derived from: Philips Annual Report 2005 (2006), Philips Company Manual (2005, version 5.9b); Philips HR One Page Strategy and Philips HRM intranet-sites.
2
Supervisory Board
Board of Management
Research
Regions Corporate staff and services Product Divisions Other Businesses
Country organizations
Medical Systems DAP
Consumer Electronics Semiconductors Lightning Legal
HRM Marketing Quality Policy
… Asian Pacific
EMEA South America North America
Corporate Investments Research
Intellectual Property &
Standards CFT
Philips and its outsourcing choice
4
Domestic Appliances & Personal Care, (3) Consumer Electronics, (4) Lighting, and (5) Semiconductors.
Besides the product divisions is Philips organized into four regional organizations: (1) Asia Pacific, (2) Europe, Middle East, and Africa, (3) South America, and (4) North America. Their role is to provide the product divisions with a mix of strategic, administrative and support activities within a specific region. It is their responsibility to coordinate and align common aspects such as financial management, human resource management, and corporate image & brand within the region. They also bear the responsibility for the country organizations. The role of the country organizations is similar to the regions; the main difference is their geographic coverage.
The product divisions and the regions are supported and managed by what is called the Corporate Center. The Corporate Center consists of three parts: the (Top) Management, Corporate Technology, and Corporate Staff & Services. The management of the company is, under the supervision of the Supervisory Board, entrusted with the Board of Management. It is the highest decision-making body of Philips. Corporate Technology forms the second part of the Corporate Center. Its main task is to monitor and stimulate the development and realization of technology across multiple businesses.
Corporate Staff & Services is the third part of the Corporate Center. It consists of several departments, such as Legal, HRM, and Marketing. The overall task of these departments is to provide the Board of Management with support and consult and they are responsible for the ‘corporate core processes’;
common management processes across businesses such as information technology and human resource management.
2.2 HR at Philips
Philips HR vision is that people are the basis for the lasting success of Philips. This is reflected in their mission to:
- Build the strategic people capabilities for the business to perform;
- Offer energizing challenges and development opportunities for people to fully exploit their talent;
- Ensure an effective and efficient HR service delivery, based on a global process design.
The above is deployed in Philips HR’s strategic objectives to:
- Continuously improve the executive bench strength, mirroring the business direction;
- Establish a robust and attractive employee value proposition, which supports diversity and inclusion, provides a free flow of talent and offers best in class development opportunities;
- Support the development of an engaging corporate culture for all people;
- Create a reward policy that ensures competitiveness in the relevant labor markets and which motivates and retains the talent of the firm;
- Provide a customer friendly, efficient, and shared HR-service.
HR in Philips is organized in a matrix organization model, with HR activities being performed in the
product divisions and country organizations. The hierarchical leadership over the HR activities is also
within these entities. The functional leadership, however, lies at Philips Corporate HRM, as
Philips – An introduction
they are responsible for the corporate HR core processes. This HR organization model is depicted in figure 2.2.
Figure 2.2: HR organization at Philips (indicative)
The figure depicted above reveals that HR within Philips is predominantly de-centrally organized, with different hierarchical and functional relationships. This organizational structure is, however, in transition. There appears to be some movement towards a more centrally organized HR, the service organization ‘EMEA Learning Services’ reflect this. Another example is the ‘HRIS Service Redesign’, a department that is responsible for the introduction of a global Human Resource Information System.
It was within this department that this research project was carried out.
Board of Management
Corporate HRM
EMEA HR Region PD HR (Lighting)
Functional HR departments - People & Organization
Development;
- HRIS Service Redesign;
- … Country clusters:
- The Netherlands;
- …
Service organizations:
- EMEA Learning Services;
- …
Country/BG clusters - HRM business
groups;
- HRM other BGs;
- Lighting Country HRM.
Hierarchal leadership Functional relationship
3 General research design
This chapter presents the general research design of this project. The first paragraph introduces the project, discussing the complexities encountered and the reasons for two researches (§ 3.1). The second paragraph will then provide an outline of the supportive business research (§ 3.2); the third paragraph will present the case research (§ 3.3). The fourth and final paragraph provides a list of terms and definitions used in this report (§ 3.4).
3.1 Background of the research project
Outsourcing has been one of the strongest and most sustained business trends over the last fifteen years. With increasing fervor and conviction, firms are reshaping their organizational boundaries, transferring more and more processes to external suppliers. The rationale for this movement makes it sound simple and compelling. By outsourcing those processes to a company that provides them cheaper and/or at higher quality, the firm would not only make efficiency gains, but could also focus more clearly on those processes that it can better perform in-house (Fill and Visser, 2000).
The possibilities of outsourcing have not been unnoticed at Philips. It is an often-used management tool in Philips’ product divisions. Consumer Electronics has, for example, outsourced approximately eighty percent of its manufacturing processes. The potential of outsourcing has also raised the interest of Philips Corporate HRM. The outsourcing of several administrative HR processes in EMEA in particular.
At the start of this research project, Philips Corporate HRM was contemplating whether these processes could be considered for outsourcing. In here, they felt the need for a supportive business research; a research that approached the potential outsourcing of Philips’ administrative HR processes in a scientific manner; the initial reason for this research project and the reason for conducting a supportive business research.
3.1.1 The potential outsourcing of administrative HR processes
Administrative HR processes are within this research used to refer to employee data management, payroll, time & attendance, compensation & benefits, and reward administration
2. Although these processes are common within almost every firm, the scientific literature seems to largely neglect their existence. A literature-scan on these terms in various databases showed very little results and only a few of them mentioned outsourcing. Models to the potential outsourcing of these administrative processes could not be found.
Broadening the search terms to HR activities, HR processes, et cetera, did yield some results.
However, the aggregation level increases substantially. The (HR) theory on outsourcing largely views the outsourcing object in terms of resources, transactions, or practices. From these aggregation levels, all administrative HR processes are treated identical. For this research, such view is not expedient. In dealing with the potential outsourcing of specific processes, the aggregation level should be set
2 For the full definitions, please see § 3.4.
3
Philips and its outsourcing choice
8
accordingly. The research therefore paid specific attention to how the general (HR) theory on outsourcing could be extended to the case at hand.
However, during the research project Philips switched their position and moved from ‘can the administrative HR processes be outsourced’ to ‘when can the administrative HR processes be outsourced
3’. Philips hereby made their intentions to outsource the administrative HR processes in EMEA known. The supportive business research is thereby not of value for the initial decision moment. Nevertheless, it still provides tools, methods, and insights valuable for Philips Corporate HRM when it is evaluating their choice.
3.1.2 Outsourcing the administrative HR processes
Philips shift in position also provided an interesting opportunity. During the research period, Philips’
Board of Management commissioned a project team to:
‘…Assess if, in which scope, and under which conditions an outsourcing of administrative HR processes combined with an implementation of SAP-HRIS provides an alternative route for getting to the next level of best in class HR in EMEA faster and at lower costs….’
It was within this project the researcher was allowed to participate. This provided the possibility to conduct a case research on how an HR outsourcing decision process developed within the firm. From an academic point of view, such research could be of interested, as relatively less empiric research is done after this topic; the reason for the case research.
3.2 Outline supportive business research
The supportive business research was aimed at the following research objective:
‘Providing Philips Corporate HRM with conclusions and recommendations whether Philips’
administrative HR processes in France and the Netherlands can be considered object for outsourcing’
To achieve this objective, the following problem definition stood central:
‘Can, based on criteria derived from management and organizational theory, Philips’
administrative HR processes in France and the Netherlands be considered object for outsourcing?’
To solve the above problem definition the supportive business research took a three-staged approach.
The first phase concentrated on establishing a theoretical framework and, subsequently, the development an evaluation model applicable to the research. This evaluation model hereby extended the line of existing theory on the potential outsourcing of administrative HR processes. In the second phase, the model was applied to Philips’ administrative HR processes in France and the Netherlands.
The insights acquired by this analysis were then formalized into conclusions and recommendations, the third phase of the research.
3 This notion is further discussed in paragraph 10.1 and is reflected by figure 10.1.
General research design
3.3 Outline case research
In the case research, specific attention was given to the first phase of an outsourcing decision process;
the phase where initial choices about potential suppliers, the design and governance of the outsourcing relation, and choices about the outsourcing scope are made. The objective hereby was:
Providing – by relating theoretical and empirical findings about the preparation and contact phase of the outsourcing decision process – insights and conclusions about the HR outsourcing decision process.
This objective was achieved by resolving the following problem definition:
Which insights and conclusions can be derived by relating theoretical expectations about the outsourcing decision process to the practice of Philips’ outsourcing project?
The choice for a case research is that such type of research is often perceived as suitable research method for studying complex phenomena within its real-life context (Van der Meer-Kooistra and Vosselman, 2000; Yin, 1989). The theoretical concepts used were predominantly ‘transaction costs economics’, ‘the role of trust’, and ‘the real options approach’. These concepts provide some general theoretic insights and expectations to how outsourcing decision processes develop within the firm.
Participation in Philips’ outsourcing project allowed acquiring empirical data and findings about an outsourcing decision process in practice. Relating these findings and interpreting the results allowed for forming conclusions and deriving insights to the HR outsourcing decision process.
3.4 Terms and definitions
For reasons of clarity and reference, the most used and most important terms and definitions are stated here:
Administrative HR processes:
- Employee data management: the development, administration, and execution of employee data structures and changes (i.e. new hire / rehire, job data changes, transfers, termination, retirement, personal data change, and mass record changes) in accordance with organizational policies and governmental regulations;
- Reward administration: the administration of non- and discretional salary increase, incentives target setting and realization, general benefits enrolment, and car schemes. All in accordance with organizational policies and governmental regulations;
- Time & attendance administration: the process of collecting information on attendance and time worked, allocating that information to specified reporting categories, and managing employee absence;
- Compensation & benefits administration: the administration and execution of hourly, salaried, and executive compensation. The administration of health and welfare plans, pension plans, savings plans, and related benefits. All in accordance with organizational policies, government regulations, labor contracts and insurance contracts;
- Payroll: the administration and execution of all activities related to the overall payroll operation from data collection up to financial reporting. This includes the payment of salaries and wages in accordance with organizational policies and government regulation.
Formatted: Bullets and Numbering
Deleted: and minimizing
Deleted: (voor NL uitbesteed…)
Philips and its outsourcing choice
10
Outsourcing:
- Outsourcing takes place when an organization transfers the ownership of [part of] a business process to an external supplier (Bendor-Samuel, 2000). In this respect, outsourcing can be perceived as an inter-organizational relationship where the outsourcing firm and supplier(s) are dependent on each other (Van der Meer-Kooistra and Vosselman, 2000).
Outsourcing decision:
- A simple definition of the outsourcing decision is ‘ the decision to acquire products or services from sources that are external to the organization (Lankford and Parsa, 1999). More detailed definitions show the complexities an outsourcing decision can entail. Van der Meer-Kooistra and Vosselman (2000) perceive the outsourcing as an extended make or buy decision and note that ‘an extended make-or-buy decision can be divided into three separate, but interrelated elements. Firstly, the decision to purchase goods or services on a structural basis from third parties or to produce the goods or services in-house. Secondly, in the case of purchasing from third parties, the decision regarding the party or parties contracted. The nature of the party or parties influences the chance, and extent, of relational risks. Thirdly, decisions regarding the design of the internal management control system or the design of the outsourcing relationship’.
In addition to these three elements, the outsourcing decision is also closely interrelated to what to outsource and in which scope.
Outsourcing decision process
- The term ‘outsourcing decision process’ is used to refer to the fact that outsourcing decisions are not taken overnight, take a certain time span and evolve around three successive phases: the preparation and contact phase, the contract phase and the execution phase (Weatherly, 2005;
Franceschini et al, 2003; Van der Meer-Kooistra and Vosselman, 2000).
Supportive
business research
Objects for outsourcing
4 Introduction to the supportive business research
This chapter introduces the supportive business research of this project. In the first paragraph, the reason for this research will be discussed (§ 4.1). The second paragraph provides the delineation of the research scope (§ 4.2). In the third paragraph, the research objective and problem definition are presented (§ 4.3). The fourth and final paragraph discusses the research methodology and methods used (§ 4.4).
4.1 Reason of research
Outsourcing has been one of the strongest and most sustained business trends over the last fifteen years. With increasing fervor and conviction, firms are reshaping their organizational boundaries, transferring more and more processes to external suppliers. The rationale for this movement is simple and compelling. By outsourcing those processes to a company that provides them cheaper and/or at higher quality, the firm would not only make efficiency gains, but could also focus more clearly on those processes that it can better perform in-house (Fill and Visser, 2000).
The possibilities of outsourcing have not been unnoticed at Philips. It is an often-used management tool in Philips’ product divisions, Consumer Electronics has, for example, outsourced approximately eighty percent of its manufacturing processes. The potential of outsourcing has also raised the interest of Philips Corporate HRM. The outsourcing of several administrative HR processes in EMEA in particular.
At the start of this research project, Philips Corporate HRM was contemplating whether these processes could be considered for outsourcing
4. In here, they felt the need for a supportive business research; a research that approached the potential outsourcing of Philips’ administrative HR processes in a scientific manner; the reason for this research.
4.2 Research scope
The EMEA region consists of approximately 45 countries, all in which administrative HR processes are performed. Clearly, such research scope is beyond the possibilities of this research. In joint agreement, the geographical scope was therefore limited to the administrative HR processes in France and the Netherlands.
Administrative HR processes are within this research used to refer to employee data management, payroll, time & attendance, compensation & benefits, and reward administrations
5. Although these processes are common within almost every firm, the scientific literature seems to largely neglect their
4 As indicated, in the course of this research Philips switched their position and made their intentions to outsource the administrative HR processes in EMEA known. Although this supportive business research is thereby not of value for the initial decision moment, it does provide tools, methods, and insights that are valuable for the evaluation of this decision.
5 For the definitions, please see § 3.4.
4
Philips and its outsourcing choice
14
existence. A literature-scan on these terms in various databases showed very little results and only a few of them mentioned outsourcing
6. Models to the potential outsourcing of these administrative HR processes could not be found.
Broadening the search terms to HR activities, HR processes, et cetera, did yield some results. The theory on HR largely clusters HR processes and activities to ‘categories of HR practices’ and considers the administrative HR processes all to be ‘transactional HR practices’ (e.g. Carrig, 1997;
Lepak et al, 2005). Such aggregation level causes a difficulty, as it is not believed expedient to treat the administrative HR processes all the same. To solve this difficulty, this research will extent the theoretical insights found on ‘categories of HR practices’ and outsourcing in general to administrative HR processes, accompanied with some theoretical insights on the organization of tasks and processes within the firm. Such composite approach allows achieving the desired aggregation level: a process view.
4.3 Research objective and problem definition
In line with the previous paragraphs, the research objective of this supportive business research is formulated as follows:
‘Providing Philips Corporate HRM with conclusions and recommendations whether Philips’
administrative HR processes in France and the Netherlands can be considered object for outsourcing’
To achieve this objective, the following problem definition will be central to this report and research:
‘Can, based on criteria derived from management and organizational theory, Philips’
administrative HR processes in France and the Netherlands be considered object for outsourcing?’
This problem definition will be resolved by using three research questions:
1. Which criteria does the management and organizational theory provide to the outsourcing of administrative HR processes and which evaluation model can be concluded?
2. To which results leads the application of this evaluation model to Philips’ administrative HR processes in France and the Netherlands?
3. Which conclusions and recommendations may be drawn?
These questions will be answered per chapter.
4.4 Research methodology and methods
The research questions stated above match the methodology applied within this research. Apart from the preliminary research, the research approach taken therefore also consisted of three parts.
6 The electronic databases consulted were Business Source Premier, Emerald, and Elsevier ScienceDirect;
accessed May 2005. Furthermore, the academic library of the University of Groningen was consulted.
Introduction to the supportive business research
The first part concentrates on establishing a theoretical framework and, subsequently, developing an evaluation model applicable to this research. The theory used within this part is firstly general theory on outsourcing and some theoretical insights to the organization of tasks and processes within the firm.
The preliminary research indicated that the theory on (HR) outsourcing center on two theoretical concepts: strategic outsourcing and transaction cost economics. These theories are also applied within this research, as they provide two rationales for outsourcing and set initial criteria to the outsourcing object. This generic theoretical basis is complemented by some considerations about interdependency of processes and organization (i.e. Thompson, 1967; Galbraith, 1977). This to allow taken in a process view. The insights acquired are then related to the theory on HR outsourcing. Doing so, allows sharpening the initial criteria set and verifying the rationales for outsourcing to some extent. This application thereby forms the theoretical framework that, once related, allows concluding an evaluation model applicable to the administrative HR processes.
The second part applies the evaluation model to Philips administrative HR processes in France and the Netherlands. This part thereby forms the analysis part of this research and is aimed at finding out whether the administrative HR processes can be considered object for outsourcing. The Philips related information required for this analysis is derived by means of three different research methods. Firstly, a desk research and review of the existing (Philips) information. Secondly, some supporting (semi- structured) interviews were conducted to clarify and fill in the information gaps and verify the insights derived. Thirdly, some professional information sources were consulted (e.g. trade magazines) to get an understanding of the outsourcing market and developments.
The insights acquired by this analysis are then translated to form conclusions and recommendations
whether Philips’ administrative HR processes in France and the Netherlands can be considered object
for outsourcing. An indication of the limitations of these conclusions and recommendations are also
element of this third part of the research approach.
5 Theoretical framework outsourcing
This chapter addresses the first research question, ‘which criteria does the management and organizational theory provide to the outsourcing of administrative HR processes and which evaluation model can be concluded?’ To answer this question, the first paragraph provides a review of three generic theoretical concepts that provide a rationale for outsourcing and/or set initial criteria to the outsourcing object (§ 5.1). The second paragraph will discuss the insights acquired from the theory on HR outsourcing (§ 5.2). The third and final paragraph then relates the findings to conclude an evaluation model for the potential outsourcing of administrative HR processes.
5.1 Generic theoretical concepts
Outsourcing and outsourcing decisions are much debated issues in management and organizational literature. There are quite many articles that discuss outsourcing, providing guidelines for and insights to the outsourcing decision and object. Although these insights and guidelines differ, virtually all reviewed articles center on two theoretical concepts: strategic outsourcing and transaction costs economics. The following two sub-paragraphs present these concepts. This is followed by a discussion about the organization of tasks and processes within the firm. These three generic theoretical concepts thereby provide the basis of the theoretical framework and the evaluation model.
5.1.1 Strategic outsourcing
The major trust within recent outsourcing literature is on strategic outsourcing. Inspired by the resource-based view of strategic thinking (see for instance: Peteraf, 1993; Prahalad and Hamel, 1990), Quinn and Hilmer (1994) were one of the first authors who developed this concept. According to them, companies should concentrate their resources on their core competencies and strategically outsource the activities that do not contribute to this (peripheral activities). Doing so would not only enable the firm to concentrate on its core competencies more clearly, but also fully utilize the external supplier’s investments, innovations, and specialized professional capabilities (Ibid). In other words, strategic outsourcing allows firms to create value, because they can enhance their own core competencies and gain access to the core competencies the external supplier might possess.
Strategic outsourcing has gained a lot of attention. It is an often-heard motivation for outsourcing and virtually all reviewed articles embrace the concept. One of the virtues is that it sets an initial criterion to the outsourcing object. Core critical activities – activities that are or constitute the firm’s core competencies – should not be outsourced, as this would limit the firm’s potential to exploit, defend and enhance its core competencies (e.g. Quinn and Hilmer, 1994; Lonsdale, 1999; Fill and Visser, 2000).
5.1.2 Transaction costs economics
Whilst outsourcing core critical activities should not be recommended, the question becomes whether peripheral activities can thus be considered. From a pure strategic outsourcing point of view, this question can initially be confirmed: firms should outsource all peripheral activities (Quinn and Hilmer,
5
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1994). However, this recommendation can only be given under the assumption of perfect or frictionless markets (Ibid.). In frictionless markets, difficulties in using the market do not exist. If a supplier cannot meet the requirements, the outsourcing firm would immediately shift to another supplier or take the activities back in-house without any negative consequences whatsoever.
In the real world, frictionless markets rarely exist. In fact, the often-heard disadvantages of outsourcing are the created dependency on suppliers and the substantial switching costs the outsourcing firm might face (Bendor-Samuel, 2000; Schniederjans and Zuckweiler, 2004). Due to these characteristics, outsourcing does entail risks and this deteriorates the potential value outsourcing might bring. Transaction costs economics (henceforth: TCE) addresses this. It was a groundbreaking theory, because it was the first theory that accounted for potential difficulties of non-frictionless markets in outsourcing decisions
7. TCE is therefore often used in conjunction with strategic outsourcing (e.g. Quinn and Hilmer, 1994; Lonsdale, 1999; Fill and Visser, 2000), as it provides a way to determine whether peripheral activities could be considered for outsourcing.
In brief, the outsourcing rationale TCE brings forth is that firms should choose the most efficient governance structure to handle (economic) transactions/activities (Williamson, 1985; Arnold, 2000).
Governance structure hereby refers to the way a transaction can be organized, either in-house– with the use of hierarchical control mechanisms – or via the market (Ibid.). Outsourcing can be seen as a governance structure that organizes transaction via non-frictionless markets. In such situations, outsourcing firms will need to govern the outsourcing relationship and control mechanisms – like a contract – have to be in place.
To assess which governance structure is likely to be the most efficient, TCE proposes a qualitative heuristic. It centers on the basic assumption that the properties of the transaction eventually determine the relative height of the costs incurred under both alternatives (i.e. in-house versus outsource). The general idea is that the market efficiently handles transactions that are standard by nature
8; the outsourcing alternative could thus be favored. When dealing with non-standard transactions the in- house alternative should be favored. TCE hereby sets another initial criterion to the outsourcing object, non-standard transactions should not be favored for outsourcing.
5.1.3 Interdependency between processes
The previous two theoretical concepts specifically address outsourcing. As indicated there, these concepts view the outsourcing object in terms of resources/activities or transactions. The difficulty with solely such approaches for this research is that they do not address potential interdependencies between processes. Interdependency between processes could interfere in determining specific processes as object for outsourcing. It is not recommendable to separate highly interdependent (i.e.
reciproque or integrated) processes, as this could increase uncertainty, dependency on information, and coordination costs. Moreover, the way these processes are organized within the firm could also influence whether the processes could be considered object for outsourcing.
7 Based on the ideas of Coase (1937) and Commons (1931), it was Williamson who launched this theory in the early nineteen sixties (Arnold, 2000). TCE is also known as transaction cost theory and institutional theory.
8 Standard by nature hereby largely refers to asset specificity. Asset specificity is determined by: (1) site specificity: transactions that are available at a certain location and can only be transported at great costs; (2) physical asset specificity: refers to how specialized the equipment must be to complete the transaction; (3) human asset specificity refers to how specialized knowledge must be to complete the transaction (Williamson, 1985; Arnold, 2000).
Theoretical framework outsourcing
The theoretical basis of these expectations are the well known theories on organizational design (e.g.
Thompson, 1967; Galbraith, 1977). To Galbraith (1977; Jägers and Jansen, 1997) organizational design is all about uncertainty reduction and the balance between differentiation and integration of tasks and processes. As outsourcing by definition entails differentiation, it is key to outsource in such a way that the information exchange between processes and parties are controllable and limited.
Although information technology greatly facilitates the exchange of information, it is recommendable to reduce the information requirements between processes and parties as much as possible. Separating highly integrated processes is therefore not preferred. The distinction Thompson (1967; De Leeuw, 2000) makes between pooled, sequential and reciproque interdependency is therefore believed of much use.
5.2 HR outsourcing in theory
Strategic outsourcing and TCE also dominate the theory on HR outsourcing. The following two sub- paragraphs discuss these applications. Interdependency between processes will not be discussed in detail here. There was one article found that confirms this expectation to some extent: ‘…when activities are highly interdependent a company might be reluctant to outsource any of them separately, but might instead want to outsource them all together’ (Adler, 2003, p 56).
5.2.1 Strategic outsourcing in HR
The concept of strategic outsourcing was received with much enthusiasm in the (academic) HR-world.
Even though HR has historically been a bureaucratic function within the firm, HR managers are often called upon to play a much more strategic role (Lepak and Snell, 1998; Ulrich, 1996). As Alvares (1997, p 9) notes ‘the bottom-line business of human resources must be the delivery and/or development of human capital that enable the enterprise to become more competitive, to operate for maximum effectiveness, and to execute its business strategies successfully’
.This changed perspective has opened the door to HR outsourcing, as outsourcing is often perceived as a primary mean to perform this role (Lepak and Snell, 1998). This makes outsourcing a potentially valuable option in delivering HR practices and the initial criterion strategic outsourcing suggests can also be applied to an HR outsourcing decision (Lepak and Snell, 1998; Lepak et al, 2005; Cooke et al, 2005). From this reasoning follows that HR functions should not outsource HR practices that are core to their (firm’s) competitiveness, yet peripheral HR practices can be considered (Ibid.).
So, what then makes an HR practice core or peripheral to the HR function and the firm’s competitiveness? Lepak et al’s ‘contingency framework for the delivery of HR practices’ (2005, p 146) provides some insights. Based on the ideas of Carrig (1997), Lepak et al (2005) propose that HR activities and processes can be categorized along a continuum ranging from transactional to transformational HR practices. Transformational HR practices are oriented toward contributing more macro or strategic organizational objectives. Transactional HR practices are focused towards the administrative functions of HR, such as record keeping and sustaining the human capital infrastructure (Ibid.). Clearly, for this research transactional HR practices are of interest.
At a general level, Lepak et al (2005) suggest that there is a parallel between transactional HR
practices and the distinction between core critical and peripheral activities. Transactional practices
often offer limited strategic value and Lepak et al (2005) therefore expect that transactional HR
practices can often be perceived peripheral. However, to the firm this may differ. Lepak et al (2005)
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indicate that the contingency factors ‘strategic orientation’ and ‘HR role orientation’ influence whether transactional HR practices can be considered core or peripheral. These relationships between the contingency factors, transactional HR processes, and the distinction between core and peripheral are depicted in table 5.1 (cf. Lepak et al, 2005).
Contingency factor
Sub classification
Core or
peripheral Comments
Cost orientated strategy
Both Firms pursuing a cost oriented strategy are likely to pay specific attention to efficiency. The HR systems will reflect this, being or specifically designed to maximize efficiency (core), or the firm prefers external delivery to fully utilize suppliers’
capabilities (peripheral).
Strategic orientation
Innovative strategy
Peripheral In innovative strategies, firms emphasize flexibility and creativity. Transactional HR processes offer little value to this.
Change agent / strategic partner
Peripheral These role orientations emphasize the contribution to the long- term strategic objectives of a firm. These orientations are therefore likely to place a low strategic value on transactional HR practices.
HR role orientation
Supporter infrastructure / Employee champion
Core Orientations geared toward supporting the firm infrastructure or serving as an employee champion are likely to place more value on efficient delivery of transactional HR.
Table 5.1: Contingency factors to assess transactional HR practices: core or peripheral
5.2.2 HR outsourcing and transaction costs economics
TCE’s qualitative approach to assess the relative costs of the in-house alternative and the outsource alternative is also often used within the theory on HR outsourcing (Conklin, 2005; Cooke et al, 2005;
Lepak et al, 2005; Adler, 2003). Lepak et al’s contingency framework (2005) is hereby preferred, as it
relates TCE most clearly to HR practices, with some modifications. In fact, the distinction between
transactional and transformational HR practices seems to be largely inspired on this. As Lepak et al
(2005) suggest transactional HR practices are often standard by nature, of low asset specificity. This
and other contingency factors influence whether peripheral HR practices can be considered object for
outsourcing, as it allows to anticipate which governance structure is probably the most efficient
(Lepak et al, 2005; Williamson, 1985). These contingency factors and their relation to the favorability
of outsourcing are presented in table 5.2 (cf. Lepak, 2005).
Theoretical framework outsourcing
Contingency factor
Sub classification
Favor
outsourcing Comments
Low Increases Practices characterized by low specificity can be used by different firms with relatively minor adaptation. The external supplier is therefore better able to apply economies of scale and value is increased.
Asset specificity of HR practices
High Decreases High specificity does require customization. The supplier has to make specific investments and cannot utilize economies of scale to the fullest.
High Increases The more suppliers, the more competitive the market.
Value to the outsourcing firm increases.
Availability of delivery options
Low Decreases If there are only a few providers, the chances on opportunistic behavior by the supplier increases (monopolistic position) and the value of outsourcing thus decrease.
High Increases If HR practices are frequently delivered, the supplier can better utilize economies.
Frequency of delivery
Low Decreases Infrequently delivered practices are generally expected to lower the potential value outsourcing might bring.
High Increasing Outsourcing by definition implies differentiation; IT can often serve as integration and coordination tool. Therefore, high access to IT can increase the value potential of outsourcing as coordination/transaction costs drop.
Integrated access to IT
Low Decreasing Given the differentiation by outsourcing, lack of IT access could decrease value.
High Increases
Predictable environmental uncertainty
Low No influence
Lepak et al (2005) distinguish two types of uncertainty.
Predictable uncertainty is, as they argue, not a major concern. Predictable uncertainty in fact increases the value of outsourcing, as this could increase the agility and adaptability of the outsourcing firm when faced with predictable shifts in staffing levels and shifts in demands.
High Decreases Unpredictable uncertainty refers to volatile and turbulent outsourcing markets. The value of outsourcing decreases.
Unpredictable environmental
uncertainty Low Increases In stable environments, the value of outsourcing is increased.
Table 5.2: Contingency factors to assess the value potential of HR practices
5.3 Application to administrative HR processes
The insights acquired in the previous paragraphs will, in this paragraph, be extended to form an evaluation model that allows determining whether the administrative HR processes can be considered object to outsourcing. In terms of core or peripheral, no differences are expected between the administrative HR processes. The contingency factors ‘strategic orientation’ and ‘HR role orientation’
will not change per administrative HR process. The contingency factors Lepak et al (2005) suggest (table 5.1) are therefore copied entirely to form the first step in the evaluation model (table 5.3).
Differences may be expected between the administrative HR processes in terms of favorability of outsourcing. Lepak et al’s (2005) transactional HR practices refer to a higher aggregation level. This is not believed expedient for this research. Although similarities between the administrative HR processes might be expected, differences in, for example, the asset specificity of payroll and time &
attendance could lead to new insights. The evaluation model reflects this in step 2A.
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This also pleads for an assessment of the interdependency between the different processes. For example, reward and compensation & benefits may be so closely knit that separating these processes should not be recommended. Furthermore, attention should be paid to potential affiliated HR processes (‘add-ons’). Analysis could show that these add-ons are so integrated with other administrative HR processes that separating these should not be recommended either. This assessment is shown in the evaluation model by step 2B.
Administrative HR processes
Step 1: Core Peripheral
Strategic orientation
Innovative strategy X
Cost efficiency X X
Role orientation HR
Infra. manager / empl. champion X
Change agent / strategic partner X
Core or peripheral
Step 2A Payroll T&A C&B Reward EDM Add-ons Asset specificity
Availability of delivery options Frequency of delivery Integrated access to IT Predictable env. uncertainty Unpredictable env. uncertainty
Assessment in terms of 1 (disfavors) to 5
(favors)
Favor outsourcing
Step 2B Payroll T&A C&B Reward EDM Add-ons Payroll
T&A C&B Reward EDM Add-ons
Assessment in terms of pooled (P), sequential (S)
and reciproque/integrat
ed (I)
Dependency/integration
Table 5.3: Object for outsourcing: evaluation model administrative HR processes
The evaluation model presented above (table 5.3) follows the line of the identified management and organizational theory on outsourcing, complemented with considerations about interdependency.
Although this model thereby allows differentiating between the administrative HR processes in terms of object for outsourcing or not, the model is limited. For one, the international character is only treated merely:
- How could a country’s privacy and intellectual property rights legislation system influence this distinction?
- Could cultural differences and sustainability influence this distinction?
- Social responsiveness, ethical dilemmas?
Theoretical framework outsourcing
Secondly, outsourcing is often perceived as a one-way path, in which the outsourcing firm can become
quite dependent on the supplier (IOMA’s HR department management report, 2005). In this respect, it
is also worth noticing that the model does not make recommendations about the supplier(s) contracted.
6 Application to France and the Netherlands
The evaluation model concluded in the previous chapter will, in this chapter, be applied to Philips France and the Netherlands. This chapter hereby answers the second research question: ‘to which results leads the application of the evaluation model to Philips’ administrative HR processes in France and the Netherlands?’ The chapter is structured in a similar manner: paragraph 6.1 will discuss Philips’ view on administrative HR processes, paragraph 6.2 will analyze Phillips France, and paragraph 6.3 will analyze Philips the Netherlands.
6.1 Philips and administrative HR processes
As briefly touched upon in the introduction to Philips (chapter 2), Philips is a dynamic organization and quite famous for its technological breakthroughs (for example: radio, televisions and DVD).
Philips has a proven track record as innovative firm, a characteristic that Philips’ considers of paramount importance. Philips’ mission states:
‘We improve the quality of people's lives through the timely introduction of meaningful technological innovations’ (Philips’ annual report 2005, 2006)
