Master thesis, MscHRM
University of Groningen, Faculty of Management and Organization
June 18, 2007 LIU , JIN Studentnumber: 1624849 Kornoeljestraat 2, C32 9741 JB Groningen tel.: +31 (0)61-5417416 e-mail: irene_may1981@yahoo.com.cn Supervisor B.S.Kuipers
The Second Supervisor P.H. van der Meer
RESEARCH ON THE STRATEGIC DECISION MODEL OF HUMAN RESOURCE OUTSOURCING
ABSTRACT
While more and more organizations have realized the importance of Human Resource Management (HRM), there is an ongoing trend of outsourcing human resource functions. This dilemma arouses the research on the strategic decision of Human Resource Outsourcing (HRO). By analysing the existing theories and strategic decision models, the present paper proposes a three-dimensional strategic decision model of HRO. Although not a hands-on tool for organizations, by ananlysing the three dimensions, namely value, uniqueness and risk, this model can still be of help in determining HRO decisions. Key word: Human Resource Outsourcing, Human Resource strategy
TABLE OF CONTENTS
1. Introduction………...3
2. Definition of HRO……….3
3. Pros and Cons of HRO………...4
4. Linking HRO with Strategy………...8
5. Analysing the Transaction Cost Theory and the Resource-Based View Theory..10
6. Analysing Human Resource Architecture Model and Competitive Edge and Strategic Vulnerability Model………..12
7. Establishing the Three-Dimensional Strategic Decision Model of HRO……….15
8. Determining HRO Relationship ………..24
9. Conclusion………...27
INTRODUCTION
As competition in business grows more and more fierce, organizations need to be responsive and flexible to survive. The human capital has been recognized as the most precious asset of an organization and if managed effectively, is perhaps the most important in imparting organizational flexibility (Lever, 1997). Thus, it has been widely accepted that, Human resource management (HRM) should seize a strategic position to fully release the power of human capital in an organization (Boxall & Purcell, 2003). However, there is an increasing trend to outsource human resource activities, which was once strictly considered an internal domain (Lever, 1997). In order to understand this trend, the research question about what Human Resource Outsourcing (HRO) is should be answered. Additionally, does this trend weaken the strategic role of HRM or conversely enhance it? Some scholars (Baker, 1996; Caldwell, 1996) support the former argument, while others (Brenner, 1996; Laabs, 1993) agree with the latter one. This debate arouses interest with the rationales and reasons of HRO and provokes another research question as how to make a reasonable and effective decision on HRO.
In order to answer these research questions, this paper first reviews HRO in terms of the definition and commonly perceived pros and cons for outsourcing. By linking the business strategy, human resource strategy and HRO decision, this paper suggests that HRO decision should be strategic. The following is an analysis of basic theories and two decision models on HRO. A new model combining these decision models is presented and illustrated with case support. Finally, this paper suggests some implications of the client-vendor relationship.
DEFINITION OF HRO
TABLE 1
Pros and Cons of HRO
Pros Cons
Reducing cost Increasing total cost
Seeking specialist services and expertise Losing independence and control
liberating HR staff to perform strategic role Damaging employee morale and organizational culture
Providing better service for customer Reducing service quality
Concentrating on core business Losing in-house skills and knowledge Bypassing organizational politics Managing vendor relationship ineffectively Spreading business risks
We can derive the meaning of HRO from this definition. Firstly, HRO is a strategic decision implemented through contracts. Secondly, HRO is opposite to internal procurement performed by in house employees of an organization. Thirdly, some scholars (Atkinson, 1984; Pollert, 1987; Torrington & Mackay, 1986) suggest that the HR activities that can be outsourced should be non-strategic, more specifically, non-core, for the organization. However, considering the right relationship with outsourcing vendors, even some core activities can be outsourced in a proper way. Finally, while some scholars (Lever, 1997; Laabs, 1993) argue that outsourcing entails a stable, long-term relationship between buyer and supplier, others (Quinn & Hilmer, 1994) prefer to treat the relationship between parties as diverse and flexible.
Thus I define HRO as the strategic decision that entails either stable or flexible contracting of mostly non-core HR activities to an external supplier in order to gain potential competitive advantage.
PROS AND CONS OF HRO
TABLE 2 Reasons for HRO
Reason for HRO Perrin’s Towers
Survey %
SHRM’s
Survey % Accenture’s Survey %
Lower costs 37 56 88
Access to expertise 47 82
Free up HR department to focus on broader issues (e.g. strategy) 23 30 66
Improve service quality 14 33
Allow focus on core business 42
Source: 1 Towers Perrin 2005 study of HRO effectiveness; 2 Society for Human Resource Management (SHRM) Human Resources Outsourcing Survey Report, July 2004; 3 HR Outsourcing: Benefits, Challenges and Trends, April 2004
Pros
There are several reasons for HRO, and they are seen as the main advantages of HRO. Some of them are from a macro perspective, such as seeking to increase productivity, profitability and growth (Cooke, Shen, & Mcbride, 2005), while others are at the operational and strategic level. Several main reasons are indicated by three recent surveys conducted by Towers Perrin, SHRM and Accenture respectively (see Table 2). The survey conducted by Towers Perrin in the first quarter of 2005 collected data from 47 organizations with large-scale HRO deals. SHRM’s survey in July 2004 is based on a random sample of 298 HR professionals from SHRM’s membership. Accenture also conducted a survey among executives at more than 120 organizations in North America and Europe with annual revenues of at least US $1 billion.
The increasing complexity of HR activities requires specialized expertise. Outsourcing vendors may have specialized technology and staff to provide complex HR services (Cook, 1999; Greaver, 1999; Greer et al., 1999). Some firms that lack the in-house talents to implement effective HR activities may reap the benefit of outsourcing providers’ investments and capabilities. Otherwise it could be expensive and difficult to produce these activities in-house.
While HR strives to become “strategic”, the reality frequently remains primarily at an operational-level. HRO is seen as a way to free HR professionals inside an organization in order to take a more strategic role (Ulrich, 1998; Greer et al., 1999). A survey conducted by the American National Foreign Trade Council and SHRM Global Forum in 2004 shows that 36% of large firms indicate that their organizations outsourced to allow HR staff to focus on strategy. By outsourcing some transactional HR functions, HR staff can transfer their role into real business partnership and become the instructor, innovator and promoter of an organization. They may participate in the decision making and implementing of strategic planning and coordinate with different HR services from the outsourcing provider and the remaining HR function.
Some firms treat their employees as internal customers, and see HRO as a way to provide more satisfying services to their employees. Specialized outsourcing vendors make sure employees acquire information faster or get instant response to inquiries. Employees receive better training and payroll services via outsourcing (Gilley, Greer, & Rasheed, 2004). This is helpful to retain talents.
HRO also helps the organization to concentrate its limited resource on core business (Shen, Cooke, & McBride, 2003). A firm as a whole is like a person who is not good at every aspect. For example, a chemical company might be strong in technology while lacking in HR expertise. Thus, it should transfer the mundane HR tasks to specialized outsourcing providers, with the aim of deploying most resources to technological research. In this way, the company may gain competitive advantage and outlive its competitors.
Outsource some HR activities which are related to personal benefit, such as compensation, may impede the improper behavior. Outsourcing provider may play an objective role without bias to any party involved in office politics.
Organizations may also spread their business risk by outsourcing some of the HR function (Curson, 1986). For example, it would be expensive and time-consuming for a firm itself to recruit a high level executive, even more importantly; the firm will be fully responsible for the quality of this candidate. However, by outsourcing this activity to some qualified consultancy, the firm would spread its risk to the consultancy thus avoiding certain responsibility.
Cons
As listed in Table 1, while there are many benefits of HRO, some pitfalls also require careful analysis.
As noted earlier in this paper, cost reduction is seen as a main motive to outsource HR function, in reality, there is a possibility of no actual cost savings or even cost increases. For example, an underdeveloped market where only a few vendors dominate leads to no cost savings by outsourcing (Greer et al., 1999). Laabs (1996) argues that improper HRO leads to higher costs since it may be cheaper to implement HR activities in house. Another possibility is that high demand of information technology and tailored services may increase costs (Friel, 2003). In addition, the cost of monitoring and changing the contract is often neglected (Siegel, 2000). For example, if the quality of outsourcing service fails to reach the anticipated level, and the firm decides to change vendor, the switching costs may be high, thus leading to higher total cost.
Although some authors suggest that a stable, long-term contract relationship helps to make supplier a strategic partner (Mol, Van Tulder, & Beije, 2005; Quélin & Duhamel, 2003), there might be a risk that the company will lose flexibility and become dependent on suppliers. In other words, the company may lose control over its important HR function due to large dependence on the vendor.
contact with employees. The inefficient communication between HR executives and employees may decrease morale among them(Shen, Cooke, & McBride, 2004). They may also be afraid of being transferred to a supplier or even losing their jobs. This may adversely affect the organizational culture.
For the firms that operate in the upper end of the product market, HRO may lead to a decline in quality of service (Shen et al., 2003).
There is also a risk of losing critical or cross-functional skills and knowledge, since the organization might rely heavily on outsourcing venders. The organization may lose its in-house expertise and competitiveness (Shen et al., 2004).
In addition, since outsourcing is still at the beginning stages of development (Friel, 2003), suppliers and clients lack experience; it is often hard for them to manage a successful relationship.
LINKIING HRO WITH STRATEGY
components that are integrated to form business strategy. Boxall and Purcell (2003) take a “strategic choice” perspective, and consider the strategies of firms as sets of strategic choices, including choices about HR strategy. In other words, HR strategy is a sub-set of business strategy. Bax (2003) indicates the interrelationship between business strategy and HR strategy. On one hand, “HR strategy follows the business idea and must adjust to fit with the business strategy (Bax, 2003)”. On the other hand, firms should build their business strategy given the existing HR strategy. In other words, HR strategy and business strategy should be highly consistent and perfectly matching.
Now it comes to the point of figuring out how the business strategy and HR strategy influence the HRO decision. Porter (1985) argues that in order to successfully obtain competitive advantage, firms should choose suitable competitive strategies, namely, cost leadership, differentiation, or focus (a “niche play” in cost or differentiation). Miles and Snow (1984) divide firms into four categories, which are defenders, prospectors, analysers and reactors, and the first three types are consistent with Porter’s competitive strategies. The prospector highly appreciates innovation thus tends to take a differentiation strategy, which leads to a certain HR strategy, taking results-oriented performance appraisal and focusing on externally competitiveness pay policies. This kind of firm may treat recruitment as its core HR activity and outsource some other HR activities, which are not essential to implement differentiation strategy and the following HR strategy. To the contrary, the analyser tends to follow the innovator and compete with low costs, thus it often chooses cost leadership strategy and follows a HR strategy that helps to maintain balance between stable and proactive. In such an organization where mechanical regime and hard contracts are most suitable, a process oriented performance appraisal might be core HR activity, which should be kept away from outsourcing. Lastly, the defender often takes a “niche play” role and focuses on either differentiation or cost leadership. If the defender chooses to focus on differentiation strategy, the fitting HR strategy should fall into an organic regime and emphasize on soft contracts. On the other hand, the firm choosing to focus on cost leadership in a niche market is better to combine the mechanical regime and hard contracts to implement a suitable HR strategy. As a result, the HR activity considered core varies from firm to firm.
thus makes HRO decision of great strategic importance. In addition, there is a very important notion that HRO decision differs from firm to firm since each organization has its distinct business strategy and HR strategy.
ANALYSING THE TRANSACTION COST THEORY AND THE RESOURCE-BASED VIEW THEORY
In order to outline important rationales for HRO, this paper reviews the existing literature and briefly summarizes two theories related to HRO in the following. By analysing these theories, a solid theoretical foundation will be built thus helps to further discuss the strategic decision of HRO.
The Transaction Cost Theory (TCE)
The TCE (Williamson, 1975; Coase, 1937) has been seen as one of the most influential theoretical explanation of outsourcing over decades. Many scholars have supported and developed TCE (Anderson & Schmittlein, 1984; Joskow, 1988; Lyons, 1995; Masten, 1984; Monteverde & Teece, 1982; Murray, Kotabe, & Wildt, 1995; Walker & Weber, 1984, 1987).
The main idea of TCE is whether to “buy” or to “make” dependent on the costs of production and transaction. There are three types of transaction costs, namely, information costs, negotiation costs and control costs. All the production and transaction costs must be considered when deciding which activities should be outsourced and which should be kept in house. If the total cost is higher inside the firm compared with an outside vendor, the activity should be outsourced and vice versa.
better to outsource regardless of the degree of complexity and uncertainty.
Although TCE contribute much in the outsourcing theoretical field, it receives some criticism as well. Some authors point out that TCE relies solely on the economic approaches thus ignoring other aspects of organizational behavior (Espino-Rodríguez & Padrón-Robaina, 2006). TCE also overly emphasizes the cost reduction as the main concern of outsourcing (Borg, 2003).
Resource-Based View Theory (RBV)
As an alternative theory to TCE, RBV analyses outsourcing from a more strategic perspective supported by many authors (Barney 1986, 1991, 1992; Ulrich, 1996;Collis and Montgomery 1995; Day and Wensley 1988; Dierickx and Cool 1989; Grant 1991; Itami 1987; Penrose 1959; Peteraf 1993; Prahalad and Hamel 1990; Wernerfelt 1984). The RBV focuses on the internal study of the firm’s idiosyncratic characteristics and conceives the firm as a set of resources and capabilities. The unique, valuable, and hardly substitutable resources enable the firm to achieve sustained competitive advantage (Wernerfelt, 1984; Grant, 1991). This uniqueness equals firm specificity (Williamson 1991) or rarity in the external market. Therefore, firm may find it costly and ineffective to rely on external vendors to develop firm-specific relationships when outsourcing idiosyncratic activities. Moreover, a firm should focus on its most valuable and unique resources that help to gain core competencies and outsource those which are not valuable and those which are duplicable resources.
In order to fully understand RBV, we need to answer what exactly core competency and core activity are. According to Prahalad and Hamel (1990), core competency provides access to a variety of markets, makes significant contribution to customer benefits, and is difficult to imitate. In other words, core competency is the company’s ability to deliver fundamental advantages for the customer.
transformational work that creates unique value to employees, customers and investors (Ulrich, 1998). Some scholars argue that the HR core activities include top-level strategy, HR policies, employee relations, and line management responsibilities, while the non-core activities include specialist activities, routine personnel administration, relocation, and professional HR advice (Finn, 1999; Lepak & Snell, 1998).
However a careful analysis is needed when deciding whether the activities are core or periphery, since there are many grey areas that appear to be transactional but turn out to be transformational. There is no one-fits-all solution for dividing core and non-core activities, firms should make tailored analysis and responsive changes to maintain flexibility.
To sum up, although both TCE and RBV determine the organizational boundaries such as whether to outsource or keep in-house, they differ in their approaches. TCE explains the negative outcome of outsourcing specific activities, while RBV focuses on the positive side of internalizing those activities (Rodríguez & Robaina, 2006). While TCE focuses on the economic strategy and tactical and operational decision of HRO, RBV recognizes the need to focus on core competences and retain the strategic resources (Prahalad & Hamel, 1990). In a word, TCE and RBV complement each other while offering research ideas for decision-making models of HRO.
ANALYSING HUMAN RESOURCE ARCHITECTURE MODEL AND COMPETITIVE EDGE AND STRATEGIC VULNERABILITY MODEL
Based on the theories discussed in the former section, several scholars build their strategic decision models, which can be used as instructions for HRO decision-making. The following paragraphs analyse these models and serve as the basis of the combined strategic decision model of HRO.
Human Resource Architecture Model
FIGURE 1
Human Resource Architecture Model
High
Uniqueness
Low
Low High Value
dimensions - value and uniqueness - that serve as strategic criteria for classifying the many different HR activities that a firm deals with (see Figure 1).
Lepak and Snell (1998) conceive of value as the strategic benefits derived from a particular HR activity relative to the costs associated with its deployment. In other words, HR activities, which help firms to achieve competitive advantage or develop core competencies, are perceived as highly valuable. However, there are HR activities with low value that may be primarily administrative or transactional in nature.
On the other hand, the uniqueness of HR activities can be thought of in terms of firm-specificity (Williamson, 1991) or scarcity in the external market (Barney, 1991). For example, the idiosyncratic HR activities, which are rare in the market thus extremely costly to acquire are considered highly unique. In contrast, HR routines that are generic or standardized may be thought of as not highly unique.
By combining the dimensions of value and uniqueness, Lepak and Snell categorize HR activities into four types, namely core, traditional, idiosyncratic and peripheral. They suggest that the core HR activities should always be conducted internally and the other types may be candidates of outsourcing.
Idiosyncratic
HR activities activities Core HR
Peripheral
FIGURE 2
Competitive Edge versus Strategic Vulnerability Model
Competitive Edge and Strategic Vulnerability Model
Quinn and Hilmer (1995) develop two dimensions for determining which managerial activities should be outsourced and which should be kept in house, namely the potential for competitive edge and the degree of strategic vulnerability (see Figure 2). The matrix divides three types of managerial activities and suggests corresponding relationship with outsourcing suppliers.
According to Quinn and Hilmer (1995) the dimension of potential for competitive edge is equal to the potential ability of an organization to perform an activity cheaper, better, and timelier on a continuing basis. On the other hand, they consider an immature external market, information anomalies and asset specificity as major vulnerabilities of an organization.
The model of Quinn and Hilmer suggests that when the potential for both dimensions is high, the organization should keep these activities in house or make long-term contracts with the supplier. Moderate potential for competitive edge and strategic vulnerability requires moderate control, usually entailing special venture or contract arrangements. If the potential for both dimensions is low, the degree of control needed could be low and
Low control needed (buy off the shelf)
Strategic control needed (produce internally)
Moderate control needed (special venture or contract arrangements)
Degree of strategic vulnerability Potential
For Competitive
the organization could buy these activities off the shelf.
However, this model fails to reveal all possibilities. What if there are activities that are high on competitive edge dimension and yet low in terms of strategic vulnerability, and vice versa?
In summary, the above models highlight several important determinants of HRO strategic decision. This paper bases the analysis of strategic outsourcing on these models and tries to integrate them and develop a more comprehensive perspective.
ESTABLISHING THE THREE-DIMENSIONANL STRATEGIC DECISION MODEL OF HRO
FIGURE 3
Three dimensions of the Strategic Decision Model of HRO
Uniqueness
Value
Risk
following paragraphs are going to elaborate more about the risk dimension. Value
According to Lepak and Snell (1998), the value of an HR activity depends on its ability to help firms achieve competitive advantages. In other words, if an HR activity helps the firm to gain competitive edge, it can be considered as valuable to the firm. In addition, the impact of internal transaction costs should be noticed as well when considering outsourcing decisions.
The internal transaction costs is harder to identify than the explicit transaction costs of dealing with vendors, thus it is often neglected by managers (Quinn & Hilmer, 1994). These internal transaction costs may diminish the value generated from a certain in-house HR activity and influence the outsourcing decision.
In order to determine whether a certain HR activity is valuable or not, HR professionals should first identify if the HR activity benefit the customers of the firm as a whole. “The greater the benefit to the customer, the greater the value of the activities (Lepak & Snell, 1998)”. In addition to benefits, the costs especially the internal transaction costs should also be considered. If the costs are too high for a certain HR activity, its value may be diminished.
Uniqueness
According to resource based view, valuable resources possessed by large numbers of competing firms cannot help firms to achieve sustained competitive advantage (Barney, 1991). In other words, uniqueness is another factor to gain competitive advantage. From the perspective of transaction cost economic, asset specificity refers to the extent to which the assets are generally available or specific to the firm (Boxall & Purcell, 2003). Lacity and Hirschheim (1993) divide the asset specificity into three categories, namely, site specificity, physical asset specificity, and human asset specificity. Site specificity refers to costly transactions that are available at a certain location thus hard to relocate. Physical asset specificity refers to the uniqueness of the equipment to complete the transaction. Human asset specificity refers to the unique knowledge and skill required to complete the transaction. Williamson (1979) categorizes asset specificity into three types in terms of the extent of the uniqueness; they are non-specific, idiosyncratic, or mixed. When the transactions do not require specialized knowledge and play a supportive role, they are classified as generic or non-specific specificity. Conversely, when the specialized knowledge is required, the transactions can be classified as idiosyncratic. Lastly, the mix type refers to transactions that require both generic knowledge and specialized knowledge. When the activities are of non-specific asset specificity, it may be easy for the firm to outsource them, since there are many alternatives to rely on if the vendors do not perform well. To the contrary, if the activities are of mixed or idiosyncratic asset specificity, firms are better keeping them in-house since it may be hard to change vendors once outsourcing is underway.
Risk
HRO decisions like any other business decisions entail risks. The success of the HRO is unlikely to happen without careful risk assessment. In view of the risks associated with the HRO decision, firms must be cautious when considering outsourcing options. The model of Quinn and Hilmer (1994) suggests strategic vulnerability as one of the two factors affecting HRO decision. This model also argues that number of suppliers, access to information and three types of asset specificity are major reasons that cause strategic vulnerability. However, the notion of strategic vulnerability is seen as part of risk in this paper. According to Aubert and his colleagues (1998), there are great amount of definitions of risk, these definitions can be categorized into two types. One is the general expression that refers to negative outcomes; another refers to the factors leading to negative outcomes. This paper discusses the cons of HRO earlier. They are exactly the negative outcomes of HRO. These undesirable outcomes are consequences of the risk factor, which is the third dimension of the combined model. An extensive literature review has identified four important risk factors.
Uncertainty. According to TCE, uncertainty refers to the degree to which the
activity can be easily defined, structured and made predictable (Boxall & Purcell, 2003). There are two types of uncertainty, one is demand uncertainty, and another is measurement uncertainty (Aubert et, al, 1998). For instance, if the activity to be outsourced is hard to define or predict future user needs, it would be difficult to write contracts of outsourcing such activity (Williamson, 1985). Another example is that, when it is difficult to evaluate the quality of activity or service being outsourced, client may tend to prefer internal governance. In a word, high level of uncertainty increases transaction costs and the potential for opportunism, thus discourages the outsourcing activity.
Opportunism. According to agency theory, the opportunism is an inherent
opportunistic behavior may lead to undesirable outcomes. For example, since it is hard for principle to tell whether a problem is the responsibility of the agent or is due to unforeseeable event, the agent can always blame the latter.
Expertise and experience. Lacking the expertise and experience in the activities to be
outsourced or in managing outsourcing contracts may lead to adverse outcomes (Aubert et,al., 1998). This risk factor can be bilateral. On one hand, since the HRO vendor may overvalue the expertise and experience it possesses, it might not reach the requirements of clients (Earl, 1996). On the other hand, when the client lacking the expertise and experience in the activities to be outsourced, the consequence of outsourcing such activities often turns out to be negative (Lacity et,al., 1995).
Maturity of market. The maturity of HRO market depends on several factors, such as
the number of suppliers and the development of legal system. If there are adequate vendors in the market, the client may have a great deal of choices and the possibility that outside vendor is more effective than the potential buyer is much higher than when there is only a limited number of vendors (Quinn & Hilmer, 1994). Conversely, when there are few vendors in the market, the client may face a narrow scope of choices and the lock-in problem, since it is hard to find alternative suppliers (Nam, Rajagopalan, Rao, & Chaudhury, 1996). The development of legal system is another factor that influences the maturity of market. In countries where the legal system is not well developed, such as China, the market of HRO tends to be immature. When lacking the regulations and legal constraints in the HRO market, the vendors may take advantage of the legal loophole to harm client with the aim of obtaining profit. Such risk is relatively seldom under a well-developed legal system.
FIGURE 4
The Three-dimensional strategic decision model of HRO
factors is highly risky, the total risk level is considered high. Firms should carefully analyse each of these risk factors by collecting data and information within organizations and from outside market in order to identify the risk level of each factor. When the risk levels of all the factors are considered low, the total risk level of HRO is low for the firm. Otherwise, any factor that is highly risky deserves great caution. What worth mention is that although the risk assessment requires objective perspective, firms may differ in their attitudes toward risk, either be willing to take risk or be relatively conservative. The different attitudes lead to different results of risk assessment.
As shown in Figure 4, by combining the dimensions of value, uniqueness, and risk, a three-dimensional strategic decision model of HRO can be constructed. This model is composed of eight cubes. The following paragraphs explain the meaning of each cube. Cube A & Cube B
The HR activities that fall within Cube A and Cube B are called core activities, which with high competitive value and uniqueness thus are preferred to be kept in-house (Lepak
& Snell, 1998). When the level of both the value and uniqueness are high, the activities are not suitable to be outsourced even the risks are limited. For instance, even if there are plenty of vendors with great expertise and experience in a mature market, it is not wise for a firm to outsource its HR planning function since it requires high level of firm-specific contribution and is the key to achieve competitive advantages. However, as mentioned earlier in this paper, different HR strategy leads to different concentration on HR activities. Miles and Snow (1984) define three types of strategic behaviour, which are different in managerial characteristics. The firm with a prospector strategy tends to focus on innovation and flexibility with the aim of obtaining prime mover advantages, therefore its HR strategy emphasizes on recruitment. On the other hand, firms following the defender strategy tend to maintain relatively stable services and concentrate on operating efficiencies. This kind of firm is inclined to see internal training and development as its core HR activities.
Cube C & Cube D
lacking global relocation expertise, ST made a contract with EDS - a leading global technology services company since 1996 to obtain the global relocation services (EDS website). The long-term partnership with EDS helped to reduce the risk ST faces and made its international staffing approach a big success.
Cube E & Cube F
The HR activities that are unique but not substantial for obtaining competitive advantage can be viewed as idiosyncratic (Lapark & Snell, 1998). In the three-dimensional model, there is distinction between such activities in terms of risk level. The idiosyncratic HR activities with low risk are more appropriate for outsourcing than highly risky ones. For example, Firms may gain consultancy services such as personnel research from professional consulting firms instead of keeping in-house researching staff (Lapark & Snell, 1998). However, for other firms that facing risky circumstance, stable relationship and careful supervision is key for a successful outsourcing program. For example, the long-term partnership between BP Canada Energy Company and EDS on electronic payroll processing and HRIS functions reduced costs by more than 50 percent during the first contract period (EDS website). The PeopleSoft software developed by EDS helped BP Canada to implement more effective payroll processing. Since the software is tailor made and the uncertainty of the future needs for technology is rather high in this case, BP Canada decided to maintain a long-term partnership with EDS and set up an integrated team of BP’s HR employees and EDS staff to ensure the continuous software updating and highly control over outsourced activities. BP Canada recently renewed its IT contract with EDS for 10 more years. This example proves the necessity of long-term partnership for outsourcing idiosyncratic but risky HR activities.
Cube G & Cube H
functions such as unemployment claims administration and employment and income verification services to TALX, a St. Louis-based business process outsourcer (Banham, 2005). Since the risk for Shell to outsource such periphery activities is relatively low, it relies on only one vendor. To the contrary, some firms facing more uncertain situation and feeling that they would be hostage to single vendor would prefer a more flexible relationship. The Schneider Electric North America selected more than 20 vendors to provide transactional services such as employee self-service tools, 401(K) administration and affirmative-action record keeping and all the vendor relationships are multi-year (Marquez, 2007). This solution helped Schneider Electric to maintain control and flexibility over the outsourcing activities at the same time.
consistent with these strategies. Based on the evaluation results, each HR sub-function or HR practice can be filled in the combined model. Finally, the recommended types of relationship with vendors should be carefully examined. Facing various business situations while having different strategies, firms need to make adjustment on the options provided by the three-dimensional model and establish their specific HRO solutions.
DETERMINING HRO RELATIONSHIP
As mentioned earlier in this paper, HRO decision is not only about what parts of HR activity to choose but also about what kind of relationship to maintain with outsourcing vendors. Jeffay, Bohannon and Laspisa (1997) divide three distinct roles HR plays within a firm, namely, provider, designer/strategist and business partner. Each role is broader but more nebulous than the previous one. Different firms are likely to outsource different roles HR activities play. For example, one firm may only outsource the provider role, while some startup or spin-off firms without mature HR organizations may decide outsourcing more roles or even all three. When outsourcing all the HR roles, including business partner role that is usually considered to be the core HR role, a highly interrelated partnership is required.
TABLE 3
The Outsourcing Decision and Corresponding Relationships of the Strategic Decision Model of HRO
Value Uniqueness Risk Outsourcing decision Outsourcing Relationship A High High Low
B High High High
Keeping in-house or outsource
with great caution Or Business partnership Full Ownership C High Low Low Outsource
D High Low High Outsource with higher caution E Low High Low Outsource
F Low High High Outsource with higher caution
Partial ownership, Joint development,
Retainer,
Long-term contract (Multiple vendors, Single or few vendors)
Call option
G Low Low Low Outsource
H Low Low High Outsource with higher caution
Short-term relationship Contingent relationship
Less control
there are two different options, dealing with multiple vendor or single BPO provider. Some firms may choose multiple vendor since they are cautious about vendor dependency, however, others may rely on single BPO provider to leverage the cost saving and greater efficiencies. When the firm decide to cultivate a single outsourcing partnership, a clear understanding of each other’s goals and desired outcomes is essential. After picking a right vendor, firms need to set up an oversight team composed of specialists from various disciplines, and oversee the outsourcing project carefully. In a word, regardless how many vendors firms are dealing with; the outsourcing relationship should be managed with caution. Table 3 shows the options of outsourcing relationship for each cube in the three-dimensional model. The following paragraphs take recruitment process as example to further illustrate the vendor relationships indicated by the three-dimensional model,
decision makers.
Searching the desired candidates in management and executive level is valuable for some firms to gain competitive advantage. Since the process of such recruiting activity is rather generic, it is often seen as traditional recruitment activity and can be candidate of outsourcing. However, different risk level leads to different contractual relationships. When the risk level is relatively low, some firms may choose to hire agencies on a contingent basis to implement the executive level recruitment. Some firms may find it efficient to work with multiple agencies simultaneously on such recruiting activities. On the other hand, firms that sense high level of risk may tend to keep an exclusive partnership with retained search agencies. The relatively stable relationship enables search firms to take a comprehensive and collaborative approach and bring to the table customized solutions based on thorough understanding of organizational cultural and strategy.
The unique recruitment activities that are relatively less instrumental for a firm to gain competitive advantage are also tend to be outsourced. Similarly, there are different relationships considering different risk levels. For example, assessment activity in the recruiting process needs customization but is not considered as the central factor of hiring decision. Facing lower risk level, such activity is often outsourced to vendors providing assessment services. The relationship between vendor and client is relatively flexible and requires less control. On the other hand, when the risk level is high, firms tend to maintain a stable partnership with service provider while keeping in-house dedicated resource to participate and supervise outsourced activities.
CONCLUSION
HR outsourcing has become a substantial trend in the empirical world. Although there are adequate literature on outsourcing in general, HRO does not attract much attention in the academic field. It seems that the research on HR outsourcing is still in its early stage of development (Cooke et al., 2005).
From a strategic perspective, business strategy, HR strategy and HRO decision are all interrelated. Since the social and economic context and corresponding strategies of organizations are different from each other, there is no “best practice” for HRO decision. A profound literature review has identified some most important theories related to HRO, however, these theories are all limited and firms need to think beyond them when making outsourcing decisions.
The main contribution of this paper is that it presents a theoretical model based on existing models and divides HR activities into eight cubes. However this distinction is not absolute and varies from firm to firm. In other words, what constitutes each cube in the model is not static and the HRO choices changes over time. This model offers important insights for an organization into why, what, and how to outsource. Further more, as shown in table 3, although there are six out of eight cubes that are suitable for outsourcing, most of them need to be treated with high caution. This indicates that it is wise for many organizations to remain prudent about HRO. However, although the model provides several HRO options, it is not a hands-on tool for firms to apply.
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