Outsourcing in Human Resources Management: Determinants, Targeted Activities and Efficacy
University of Montreal - School of Industrial Relations
University of Montreal
December 15, 2000
Relations Industrielles/Industrial Relations, Vol. 55, No. 4, 2000
Outsourcing is a fast-growing phenomenon. Outsourcing not only means handing over an activity to a supplier outside the firm, but also entalls the examination of the possibility of outsourcing some of its production, taking into account factors such as choice of partners, risks, the type of contract involved and the volume of activities to contract out (Poitvin, 1999). According to Lever (1997) and Aubert (1992), outsourcing is a change in organizational design that involves modifying the nature and mechanisms of control over work. Furthermore, outsourcing involves a replacement, or a substitution of skills, knowledge and organizational activities traditionally performed within the firm but thereafter provided through the services of a supplier (Aubert 1992; Harrisson 1996; Lever 1997). To better understand the phenomenon of outsourcing in Human Resources Management (HRM), an analysis of the literature revealed two theoretical approaches regarding the motivation to contract out : the need for firms to reduce costs and the importance of focusing on key skills. A third perspective can be added to these two approaches, the use of outsourcing to gain access to the services of experts.
This article draws on an empirical study to answer three research questions: 1. What are the motives given for outsourcing, either wholly or in part, certain HRM activities? 2. Which of the motives identified explain the intensity or extent of outsourcing? In other words, which motives seem to encourage firms to contract out HRM activities to a greater extent? 3. What are the effects of greater use of outsourcing on the quality and efficacy of HRM services in organizations?
Data were collected in January 1998, using a questionnaire sent to general managers and HRM directors or supervisors of the 750 firms with the largest number of employees in Quebec. One hundred and seventy firms responded to the survey, a response rate of 23%. Ninety of these firms contract out HRM activities and are examined in the present study. Among the firms that contract out HRM activities, 61.4% have 400 or fewer employees.
Small and medium sized firms are therefore strongly represented in the study population. The clear majority (55.8%) of firms that contract out have a human resources department that employs three or fewer people and in 56.7% of firms, the employees are unionized. The results show that, on average, the organizations studied outsource 22% of their HRM activities. Training is by far the activity that is most often contracted out (43.6% of cases). The next most frequent are activities linked to compensation, but this represents a much lower proportion of firms (17.1%). Next come staffing and occupational health and safety management (approximately 15% in each of these cases), followed by activities related to labour relations (12.4%).
In response to the first research question, the results indicate that having access to the services of experts is, on average, the most important motive for outsourcing HRM activities. Outsourcing in order to focus on crucial skills is the second most frequently cited motive. Entrusting certain HRM activities to external suppliers as a means of reducing costs proved to be less important than the first two motives. Contrary to the literature, the present study indicated only a weak relationship between outsourcing HRM activities and budget cuts, staff reductions or a re-engineering process.
As regards the second question concerning the motives underlying more intensive outsourcing of HRM activities, the results show that access to the services of experts is the only motive that has a positive influence on the extent of outsourcing of HRM activities. The literature indicated that this was the second most important motive after cost reduction. Paradoxically, in this study, cost reduction was negatively associated with the extent of outsourcing as firms contract out HRM activities more intensively only in the interests of quality and efficacy. Budget cuts do not encourage organizations to use outsourcing more intensively. In fact, outsourcing is undoubtedly considered to be a costly process in itself. For respondents in the present study, outsourcing can only be justified by the need for external expertise and the avallability of service suppliers on the market.
With regard to the influence of organizational characteristics on the intensity of outsourcing, the role played by the HR department is undeniably important. The more the department's role is perceived as being of a strategic nature, the less organizations contract out HRM activities. On the other hand, these activities are contracted out more when the HR function assumes the role of administrative expert. As might have been expected, the association between an HR department whose mission is to defend employees or act as a change agent and the intensity of outsourcing is not significant. In both cases, given the nature of the role of the HR function, which requires greater involvement with employees, it is difficult to use external resources. Moreover, because the size of the HR department does not explain the enthusiasm for outsourcing, it was not possible to draw a clear portrait of HR departments that are more likely to contract out their HRM activities. A union presence motivates firms to contract out. The fact that in this study population, a union presence is positively associated with manufacturing firms and firms with a large number of employees, and negatively associated with the service sector, suggests that outsourcing is more prevalent in larger unionized manufacturing firms.
The third component of the study examined the effects of outsourcing. Respondents were of the opinion that outsourcing increases both the efficacy of the HR department and the satisfaction of internal clients. On the other hand, no significant link was found between die personal satisfaction of respondents and the extent of outsourcing. This indicates an understandable degree of skepticism on the part of the respondents who are, after all, interested parties who risk losing their jobs or, as the case may be, control over a part of their responsibilities. The results of the present study also show that the growth of outsourcing of HRM activities has a spin-off effect since the firms that contract out more intensively stated that they wish to do so even more in the future.
JEL Classification: M12, M55Accepted Paper Series
Date posted: September 7, 2010
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