Human Resource Outsourcing in the UK
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HUMAN RESOURCE OUTSOURCING: A GENERAL STUDY OF UNITED KINGDOM RETAILERS’ USE OF OUTSOURCED PERSONNEL, REASONS AND BENEFITS.
Human Resource outsourcing is considered an important factor in today’s business world. It is constantly growing, especially in the global world where companies outsource not just within their country but across borders. This research concentrates on Human Resource outsourcing in the retail sector, including both small and medium size firms in the United Kingdom. The ultimate aim of this research is outlined below:
- To find out why companies outsource their Human Resource – their first and foremost reasons.
- To find out what benefits there are in this process.
- To find out if there are any control mechanisms linked to the process.
To find answers to these questions, five retail managers were interviewed: three respondents interviewed were conducted face to face and two were phoned interviewed. Again, fifty questionnaires were sent out to recruitment agencies who are the suppliers of the Human Resource, to confirm if they share the same opinion with retail managers who are their clients. Out of the fifty questionnaires, 30 were retrieved and analysed.
The results revealed that companies do not outsource all of their Human Resource functions. Recruitment is the key function outsourced for the simple reason of convenience and time saving. However, benefits are enormous including cost effectiveness, achieving higher core competency levels, greater flexibility and accessibility to expertise, reducing workload of staff etc. Results also depict two categories of outsourced staff, which are temporary staff and permanent staff with temporary staff being the majority.
1.1There have been many issues surrounding outsourcing of Human Resource. It implications are wide and varied. Though there are many benefits, it is faced with challenges as well. Companies who have managed their challenges well have been successful others on the other hand have redrawn from the process. The topic was chosen because is an issue being discussed currently all over the globe and the retail sector is proving to be a sector that employs a greater percentage of the workforce.
Chapter one gives a definition of outsourcing and discusses what outsourcing is all about. It gives relevant examples of those companies practicing Human Resource outsourcing and the results of their practice. Chapter two is the literature review. The literature review establishes concise framework and reveals various reasons why companies tend to outsource and its subsequent benefits. It also raises the issues of concern and the control outsourcers have over their suppliers.
It discusses people’s opinion about the Human Resource outsourcing giving the pros and cons of the issue. Part two of chapter two gives the factors that drives the process Chapter three is basically about the retail sector and how it operates in the United Kingdom analysing the importance of the Human Resource in retailing. How data was collected is discussed in chapter four and further analysed. Finally findings are reported and conclusion with limitations given in the last chapter.
1.2Background of study
Outsourcing has been defined by Gupta and Gupta (1992) as ‘the concept of hiring outside professional services to meet the in-house needs of an organisation or agency’ another explanation is a managerial approach delegating non-core functions of the organisation to other specialist and efficient services providers. In recent times, many companies are considering outsourcing their Human Resource because it is becoming a viable option. In the United Kingdom (UNITED KINGDOM), the situation has been drastic, especially in the retail sector.
Human Resource indeed is one of the major factors of production and cannot be ignored in anyway for a business success. Human Resource is constantly growing and keeping abreast with the dynamic business world, which relies heavily on the technology advancement and specialist skills.
The term ‘Human Resource’ was once seen in companies operations as a department that issued policies, heard grievances and problems of it staff. As time went on, it then included various aspects of training that benefits administration and staffing. The focus however is gradually changing again, now as a strategic consultant to the main business, trying to match personnel and their skills with the corporate goals of the company with the view of achieving competitive advantage. Human Resource outsourcing is becoming popular due to the perceived numerous benefits with emphasis on cost effectiveness and adding value to the organisation. In the United Kingdom, the growth of Human Resource outsourcing stemmed from increased demand in the public sector but now the private sector is also expressing more interest.
(Winkleman et al, 1995) explained: outsourcing is actually not a new concept because organisations have always hired outside providers services in assisting their operations, especially Information and Communication Technology (ICT). What makes it different today is the range of services organisations are asking for from suppliers and the extent to which it has become politically correct and responses to changing market and corporate conditions.
The rationale for outsourcing is simple and compelling in that contracting part of the operation is seen to be cheaper than the company doing all by itself. (Hendry,1995) in his discussion states that outsourcing not only enable organisation to make gains but also allow them to focus more especially on those activities it can perform better in-house. Even though the cost factor is obvious, (Rubin, 1990) emphasized the point that it is more important to understand the managerial basis of decision-making. Aside its cost effectiveness, it also has a strategic dimension whilst organisations attempt to find the ‘right size to fit a new environment’.
The reason why organisations decide to outsource is the seasonal demand swings where there may be need for more hands on board to meet customer demand.
Analysing the diagram below……, outsourcing could be considered as a continuum in that at one point staff may be needed temporary and at some points may be taken on to perform complete responsibility. Timing is also a key factor in the process. Thus from the diagram, the short-term market exchanges at one point and the long-term relational exchanges at the other.
Operational task to relieve capacity overload
Consultancy, capacity augmentation skill providers
(Stopper, 2005) reported British Petroleum (BP) in 1999 spent $600 million towards its global human resource administration and management, for a contract of seven years. In the year 2000 however, BP’s revenue increased to $22 billion, about 8% of the total amount spent on the Human Resource that year.
BP reduced its ongoing operating costs by at least $15million a year and avoided more than $30million in capital expenditures as a result of outsourcing it Human Resource services. (Dell, 2004) in his research, reported a Conference Board survey of 122 large companies in 2003. The report revealed that 79% of top managers voted cost reduction as the motive for outsourcing Human Resource services. Other research proved among the reasons for outsourcing, the most prevalent, thus 42% voted providing better services to employees and 25% to improve efficiency, effectiveness or productivity. The motive of BP Human Resource outsourcing was to reduce cost but improve efficiency. EXULT, the supplier took total charge of BP’s total Human Resource process, leaving BP dealing with stuff that require more attention, such as their policy .Advocators of Human Resource outsourcing share their views on the grounds that Human Resource has an increasingly complex legal environment, and for success in mergers and or acquisitions, it requires special skills, knowledge and Human Resource attention.
The question is ‘‘will the process work for everyone’’? Is it necessary for every company or an organisation considering outsourcing its Human Resource? There are therefore arguments in support of and against Human Resource outsourcing in this debate. This study seeks to answer the following questions finding out basically why companies will outsource their Human Resource and to what benefits there are for such companies. It also analyses the level of control the company has on the process.
Contrarily to this opinion, (Morton, 2003) argued that Human Resource outsourcing is a faddish trend. His question is, ‘‘would the supplier know one’s business as well as the owner and can he really visualise the exact issue on the ground’’? Again, is it advisable for an outsider to take decisions on your behalf’’? His words are: ‘‘your people are your biggest resource. It is important to keep hold of power over them’’.
Klaas, with his theoretical study on the impact of Human Resource outsourcing also believes that companies should not take things for granted but rather be well aware of the potential dangers of the process of Human Resource outsourcing before engaging in it. His concern, however, is on the variables of Professional Employer Organisations (PEOs). The PEO variables involve staff time cost, administration fees, HR outcomes and compensation cost. These however, vary from one company to the other. He therefore advised that companies should carefully research into these variables and consider whether to outsource or not. The word ‘trust’ is also very important in determining the relationship in any successful outsource.
- What drives the Human Resource outsourcing process?
- To what extent does Human Resource outsourcing help or hinder a firm’s success?
1.4AIM OF THE STUDY:
The ultimate aim of this study is to establish the principal factor associated with the decision to outsource, and the benefits organisations derive from doing so.
1.5OBJECTIVES OF THE STUDY:
- Explore the reasons for Human Resource outsourcing
- Examine and analyse the various benefits derived from outsourcing the Human Resource sector of a company
- Examine how successful Human Resource outsourcing has been
- Provide the essential keys to successful Human Resource outsourcing
- what aspect of the Human Resource function do companies outsource
- what category of staff do companies outsource
1.6 RATIONALE FOR THE STUDY:
1.6.1 History of Human Resource outsourcing in the United Kingdom.
A research by Arthur Anderson concluded that 75% of the top 200 United Kingdom firms believed that personnel administration is a core function and should not be outsourced, 49% also assessed training as a core function whilst 39% agreed to payroll being a fundamental activity to the business. The study however identified a change in perception over the last four years. Functions previously seen as core and for that matter should not be outsourced are now considered eligible for outsourcing.
One of the opinions that the human resource outsourcing has been mainly reactive rather than proactive since it deals with the consequences rather than being involved from the onset. Further argument on core competencies emphasises on the fact that the Human Resource function, importantly has more work to do with fewer resources. The recent development in technology creates more function for the human personnel department. This means that personnel need to work and learn the varying skills and knowledge needed to control such machines. In effect Human Resource professionals have moved away from the conventional way of Human Resource Management whilst they master new and different skills and competencies.
They must therefore exhibit a better and broader understanding of organisational strategies and manage change. Having leadership skills, creatively and being innovative are very important skills in Human Resource outsourcing.
Consultant seeking for business and top management who assure that as far as outsourcing has worked for Information Technology; it must also work for Human Resource. The human resource department in attempt to restructure the entire industries end up as formulators and implementers of downsizing and as targets of downsizing themselves.
As a result, Human Resource managers in the United Kingdom trying to redefine their role from being a personnel and employee relations functions to become a “strategic partner” within the company. This will not stop them from delivering their usual good services to employees and shareholders.
The human resource function is therefore under pressure to compete by being better, faster and more cost-effective. There is also pressure from employees as they seek accurate information and efficiency; again they take increasing responsibility for the choice and cost of various benefits as well as increasing their level of expectation.
1.6.2 The extent of Human Resource outsourcing in the United Kingdom
A survey by magazine ‘Human Resource’ in May 2000 revealed the following results. There were 50 executive interviewees from the Financial Times Stock Exchange top 250. The findings were that despite a long history and noise on Human Resource Outsourcing, more than a third of companies in the United Kingdom does not outsource any of their human resource work. They solely perform all their human resource functions in-house. 58% of respondent retain their benefits work in-house whiles 46% their payroll and then 59% their pensions. It was noted that car fleet management seems to be the only service where large-scale outsourcing takes place. It employs about 46%, taking advantage of services provided by companies such as LEX.
The study suggests that companies engaged in outsourcing do not even outsource the whole process out rather a portion of their main Human Resource functions. About 55% of respondents outsourced part of their recruitment function as compared to only 9% outsourcing it all. In the same way, 61% outsourced some of their training function but no one outsourced the entire function.
The survey also suggested that the level of personnel especially the senior level was a major factor why companies outsource, for instance a third of companies outsource for their senior staff in terms of recruitment as well as training.
The survey revealed that fleet management is most commonly outsourced in its entirety, next is pensions and then payroll, other functions partially outsourced are training, pensions, benefits, recruitment and payroll.
Payroll and personnel –related outsourcing is well practised in the United States (US) and some analysts have predicted United Kingdom following suit but in a modified form sometime to come. The survey showed the figure below
Outsourcing prevalence for different human resource functions
Source: Human Resource HR survey May 2002
There are five competence factors influencing the outsourcing phenomenon
- rapid growth or decline
- increased competition
Theorists Peter and Waterman (1982), promulgated the concentration on what companies “do best” and promoted the idea of sticking to the knitting. Hamal and Prahalad (1990) introduced the core competencies, which is the concentration on the company’s main strategies.
In 1986 Miles and Snow initiate the concept of the network organisation, in this situation the core company focused on its major activities whilst contracting out and managing activities of third party. This theory was further developed by Reich in 1991 stating that western companies would have to concentrate their efforts on ‘knowledge based’ activities to form elements of an enterprise web.
1.6.3 Advantages of Human Resource outsourcing
The main advantages of the Human Resource outsourcing are listed as:
- Enhances time management
- Provides better quality products / services
- Reduces fixed costs
- Better investments through technological advancement
- Support managers to focus in their communicating and integrating Human Resource policy
- Suppliers having dealt with different organisations always have new experience and approaches
1.6.4 Disadvantages of Human Resource outsourcing
Main problems associated with Human Resource outsourcing are:
- Hidden cost is underestimated
- Inadequate knowledge and understanding by suppliers of core business
- Accountability of supports service provided
- Inability of suppliers to maintain quality of service
- Communication problems between the two parties
1.6.5 Limitation of Human Resource outsourcing
Bill Carney in his article identified five key limitations
- Immediate cost savings
- Provider limitations
- Profit maximisation not guaranteed
- Limited customization
- Limited control
- Supplier management
1.6.6 Is Human Resource outsourcing right for everyone?
Human Resource outsourcing is not the solution to all modern Human Resrource and administrative problems. Many companies do not consider the nature of their business to develop a comprehensive sourcing analysis framework. The underlying business needs of reducing cost often done through downsizing of staff may not be realised
One significant disadvantage with the process is the potential misalignment of corporate and Human Resource strategies and priorities. Thus what seems beneficial to one Human Resource manager may not be same in the wider corporate context.
1.6.7 Effective organisational entry practices
To have an effective entry practice, depends on good analysis throughout the sequential process. should an error happen, the whole sequence may be affected and prove more costly to employers, not only in terms of financial loss but will also disrupt the progress of work. This process might also de-motivate established staff and loose out to the competition.
The diagram below shows the stages in the organisational entry process.
Basic stages of the organisational entry process
- Assess the best way to attract the candidates matching the selection criteria
- Determine how the company wants to present itself to recruits
- Link recruitments strategy to the information the company needs to gain in the selection process
- Assess the performance of previous recruitment drivers
- Evaluation of knowledge, skills and abilities required in the short term
- Long-term planning on how job profile may change
- Evaluation of organisational culture/strategy and how it may change
- Review / feedback from each stage of the process to raise the efficiency
- Determine which tools to use to assess if a candidate matches the required criteria/competencies
- Determine the level of flexibility the company can afford in the terms offered to attract the best recruits
- Link selection strategy to information about corporate culture
- Determine what the new employee needs to know to work effectively and fit in as soon as possible
Source: Market tracking international ltd ( MTI)
A survey conducted by the DDI (1991) involving 1000 HR directors from leading United Kingdom companies depicts that ‘hiring the right people’ was rated as the most important issue people may face. The next one is “motivating and retaining employees” with regard to staff turnover costs, the result of the survey showed that 10% of firms incur costs in excess of £5million per annum; and more worryingly, 69% of firms do not bother to calculate the cost of staff turnover.
Further research showed that the 1980s and the early 1990s recession contributed to cost-cutting, downsizing and restructuring in a number of industry sectors.
This led to the change in the employment market and altering the recruitment and selections strategies of organisations. It again suggests that new job opportunities are more likely in the service sector, commonly among highly skilled. Also there has been an increase in the part-time, temporary and contract-work as companies strive to achieve flexibility in order to cope with changing market demands.
The graph below shows how United Kingdom employment sectors are affected by staff shortages
1.6.8 Types of Human Resource outsourcing
Researchers have grouped outsourcing into the following groups:
Total outsourcing: outsourcing is considered as total outsourcing when a company decides to outsource about 70%-80% of a particular function to a single supplier with the aim of concentrating on the company’s core competencies. This “hundred percent” of a personnel service has generated into argument. First of all, it is argued that a major portion of personnel work is so central to the strategic objectives and the culture of the organisation. For this matter the company itself can only effectively carry out the personnel work.
The second argument is certain situations are hard to predict but may require immediate responses example is industrial dispute. For this reason it becomes difficult to contract out such tasks to a supplier who can not guarantee the proper action needed. Further arguments suggest that they have not yet discovered a significant Human Resource supplier for 100% total outsourcing. There exist only few suppliers who are able to take on a complete personnel service.
Multiple / selective outsourcing: companies negotiate with numerous suppliers so as to keep them in a state of healthy competition under short-term contracts. It has an aim of retaining suppliers on larger-term contracts.
Joint venture / strategic: it refers to partnering with other suppliers in executing a particular project so as to share risk and rewards. The outsourcing is the risk factor to the company (client) and the same time maintain strong ownership and control
Temporary outsourcing partnership: is a short-term contract usually 1-2 years for the smaller companies who cannot justly handle external consultancy.
Transformational outsourcing (Information Technology & Information System applications): it is an application within the technology / information system field.
Business process outsourcing (BPO): is considered as the sharpest end of the outsourcing spectrum, it involves outsourcing critical important business processes such as finance and accounting, internal audit and procurement etc. it is actually a rapidly growing area.
Insourcing: this could mean reclaiming of application that had previously been outsourced; it is done in two ways, either hiring consultants to re-engineer the in-house department or through conventional in-house bidding.
Partial outsourcing transfer: is the partial transfer of services and associated resources, it involves outsourcing fairly routine and well established practices such as pay roll and at the same time retaining newer systems in-house. The company remains the managers of the process and takes most decisions.
Asset purchasing: is where the supplier decides to buy the entire set of physical assets from the clients company. It is also a form of cash flow to the company for selling its assets. There is also transfer of personnel from the company to the supplier; however the place of work does not change.
(Lee, 2002) also categorised Human Resource outsourcing into three aspects:
- Professional Employers Organisation (PEO)
– Application Service Provider (ASP)
- Business Process Outsourcing (BPO)
PEOs have a duty of managing a company’s human resources, take charge of employee’s legal issues and undertake basic Human Resource functions as recruitment and selection including performance appraisal.
In most cases PEO form partnership with other suppliers. The PEO concentrate on the Human Resource aspect of the business, the company on the other hand handles the other aspect. Sometimes due to the nature of Human Resource, the company may decide to enter into strategic alliance or joint venture in order to have some level of control over the Human Resource management.
Within the context of Human Resource outsourcing, organisations specific needs and processes vary. Some organisations tend to outsource virtually all of it Human Resource Processes whilst others concentrate on specific areas of the process such as staff recruitment, staff training, payroll or resources.
About 9% outsourced all of it recruitment function while about 55% of respondents outsource part of their recruitment function.
Amstrong (2001) introduced a list of Human Resource areas that are often outsourced. These are: Training, Payroll Management, Health and Safety Monitoring and Advice, Recruitment and finally Employee Welfare and Counselling activities.
More so Workplace Employee Relations Survey (WERS) in 2004 revealed that Training, Payroll and Resourcing of temporary positions are the most common component that companies seek to outsource. It is noted that very few organisations such as British Telecom, Boots the Chemist, Procter & Gamble have outsourced their entire Human Resource functions and the most recently is Unilever.
ASPs: Application Service Providers focuses on software applications. They deal with software processes and rent to users. They have standardised off-the shelf applications and the customised Human Resource software development. It is designed to manage payroll, benefits among others.
BPO: this refers to Business Process Outsourcing, which focuses on outsourcing managerial and operational functions in Human Resource. BPO is also in charge of monitoring the latest information systems.
In the United Kingdom, a change in political ideology after 18 years of conservative government rule is seen as a driver of the outsourcing, as a means of reducing cost and raising efficiency, the use of outsourcing was promoted. This really showed in the public sector through the introduction of market-based instruments and the formation of internal market as in the health service
Different authors have classified outsourcing drivers. According to (Winkleman et al, 1993) there are two basic drivers for outsourcing success; these are cost reduction and strategic shift in how organisations operate. (Grupter et al, 1992) added two more drivers as market forces and technical considerations.
(Hiemstra et al, 1993) also indicated four drivers, which are cost, capital, knowledge and capacity. (Beulen et al, 1994) suggested five main drivers for outsourcing: quality, cost, finance, core-business and cooperation.
1.6.9 Drivers for outsourcing:
( Beulen et al; 1994) outlines the following general drivers for outsourcing:
Quality: actual capacity is temporarily inefficient to comply with demand. The quality motive can be subdivided into three aspects: increased quality demands, shortage of qualified personnel and outsourcing as a transition period.
Cost: outsourcing is a possible solution to control increasing costs and its compatible with a cost leadership strategy by controlling and decreasing costs, a company can increase its competitive position.
Finance: a company has a limited investment budget. The funds must be used for investments in core business activities, which are long-term decisions.
Core-Business: core-business is a primary activity with which an organisation generates revenue. To concentrate on core-business activities is a strategic decision, all subsequent activities are mainly supportive and should be outsourced.
Cooperation: cooperation between companies can lead to conflict. In order to avoid such conflict those activities that are produced by both organisations should be subject to total outsourcing.
However these factors cannot be in isolation, they are not sufficient enough as attention needs to be given to the context in which such decisions are taken. Consideration should be given to the internal and external environment within which the organisation operates. The organisation’s objectives and most importantly its culture may effect the implementation and sustainability of the policy, once made.
Considering the factors that drives and influence outsourcing decisions, Chris Fill in his research established three key emerging issues:
- the contextual factors represented by an organisation’s particular internal and external conditions
- the strategic and structural aspects associated with an organisation’s decision to reconfigure
- the costs associated with the process or activity under review
It is very necessary for managers to consider these three aspects when deciding to outsource.
A framework illustrates the process
A composite outsourcing decision framework
Strategy & Structure
Source: Management Decision vol. 38 No.1, (2000)
2.1 LITERATURE REVIEW:
The most important and cherished asset of any company is its Human Resource – the staff. Even with all the most current technology, personnel are first because without manpower, nothing gets done. The success of every organisation depends on the quality of staff employed. On the other hand it could be disastrous if the right decision is not taken in choosing the right people with the right skills in the right position. The kind of skills employed makes a vast difference between a business success and it failure. In the business environment, some companies may employ solely skilled personnel, others require both skilled and semi skilled personnel and others unskilled labour force. In the retail sector for example, the nature of the work demands both skilled and semi - skilled staff with the semi – skilled dominating. The skilled staff basically are managers such as the marketing and advertising managers, accounting managers, purchasing and supplier managers and general overseers.
The challenge is how to get those people into the right places in order not to under utilise or over utilise their services. For instance, it might not be necessary to employ a professional who is to be paid as a sales assistant to be serving customers, but rather have a responsibility of planning and strategising how to win customers and be ahead of it competitors. In order to make the best decision, the manager would have to take up that task upon himself or rather consider hiring an expert, who does nothing but repeatedly seek the best person for the job. Arguments have therefore developed in support of and against the process of outsourcing.
2.1.1Argument against outsourcing:
This debate was published in the Human Resource Management International Digest in 2005. Gordon Croy, group supplier chain director of NTL, in his argument believe that outsourcing recruitment is not a sensible option. For him, there is one thing the recruitment agency lack, that is having in-depth knowledge and understanding of the business culture and its subtle modifications as the business managers will consider in its recruitment selection. What the recruitment agencies focus on is matching people to job descriptions. He again argued that managers could have gone through much of the process of recruitment rather than spending that time to brief a recruitment agency properly and feel confident that they have grasped the culture to meet their requirement.
Another argument in support of in-house sourcing is the fact that the Human Resource Manager stands the opportunity of knowing the potentials of the applicant after going through the applicant’s Curriculum Vitae. Though the applicant may not be a good match for the current vacancy, he/she might be a perfect fit for another field of the business and such an opportunity might not be skipped. If a recruitment agency is to do this, they might be ignored because they are working towards a specific job description and such a potentially great employee may be lost.
From time management point of view, Gordon Croy further argued that the reason for outsourcing as time management does not really hold in today’s world of business because online advertising and electronic mails saves a lot of time involved with recruitment. Again, initial interview could also be done on phone and would only have to spend time to meet face-to-face with the selected few best applicants.
In the view of cost, Croy argues that recruitment companies cannot guarantee an effective recruitment, yet it will definitely guarantee a sizable cost. Since the recruitment agencies demand a percentage of fee upfront, as well as money for advertising, these monies are not refundable and therefore would not be able to meet the company’s requirement. We should remember that recruitment agencies are also in business to make profit.
2.1.2 Argument in support of outsourcing:
A proponent of outsourcing, Bryan Duggan, head of recruitment at PMMS counters much of Croy’s argument. Talking about cost, he is of the opinion that though outsourcing recruitment seems an expensive option, it may be cheaper in reality. He calculates that taking into consideration two managers’ direct salaries as well as business overheads and revenue missed because their attention is diverted from their usual practice. He estimated about £11,000 a day lost for the involvement of those managers who have shifted away from their prime function.
Aside money though, Duggan argues that the recruitment process is a strategic function and as such should be handled by professionals. In that the cost of hiring a wrong person is far more and could be minimised by using an experienced agency that has access to a lot of candidates and tried and tested methods of screening them to the best effect. They research into and have learned skills of psychology, curriculum vitae reviewing, body language and interviewing. Managers whose specialisms are totally different should not solely handle that.
In the case of volume recruitment, the agencies with their experience, established infrastructure and recruitment processes become most useful. The agency would be in the best position to know how to handle unexpectedly large numbers of responses, how to standardize applicants and run the right tool.
Simon Pettit, a business head of Hudson, adds that finding the right person is not an easy task and is very involving. It means having a deep understanding of the marketplace and creative ideas about the approach to use. A lot goes onto advertising such as using the press, online advertising, leafleting, and posters among others. His tacit point is that the manager will not have all the time, experience and the creative ideas to go the extra mile to find the right people. This limits the chance of getting the right people.
Outsourcing has been a controversy since, and both sides of the debate mount convincing arguments. However Nicholas Pratt offers a real business situation that in a way favours the argument in support of outsourcing. In the area of Information Technology, employment of financial staff is very difficult and that has been attributed to the issue of banks mishandling the recruitment process. In recent times the banks have been noted for hiring Information Technology staff in masses and at the same time firing staff in masses as well. As a result, Information Technology specialists have lost interest in the banking jobs due to lack of job security. Consequently, there are only few Information Technology specialist left in the system. To this regard, banks are now turning to the advice of the recruitment agencies to rectify the situation of hiring reactively and not strategically. The problem however has damaged a whole sector rather than just a company or one position within it. Apparently the cost and time involved to clearing the damage will far outweigh those involved in paying a recruitment agency from the onset.
The literature has been categorised into three sections. The reasons for outsourcing, the benefits and the issue of control.
Traditionally Human Resource activities were performed in-house but now on an increase, being outsourced. This is because it has proven to reduce cost and provide economies of scale, gaining access to expertise, among others. In other instances, as any other discipline, outsourcing among its benefits also stands its limitation of inefficiency because of supplier’s lack of firm-specific knowledge and engages in opportunistic behaviour (Ulrich 1996).
REASONS FOR OUTSOURCING:
2.2.1 Gaining Competitive advantage:
Human Resource outsourcing is a managerial decision, to support managers’ decisions as to outsource Human Resource activities or not, Adler (2003) has classified some major factors to assist organisations in deciding which Human Resource process to outsource. These factors are dependency risks, spillover risks, trust, relative proficiency, strategic capabilities and flexibility. These factors were the base considerations for BP outsourcing deal with Exult Inc. in December, 1999. The impact of this deal was though a success. Achieving competitive advantage was a paramount reason for this decision of outsourcing.
Other Authors, (Becker et al 1998) undertook a research to emphasize the fact that Human Resource system can provide competitive advantage to organisation, in that with the supply of more expertise probably from a different environment with different skills and the know-how can turn the whole organisation around, hence achieving a competitive advantage over it competitors. Managers therefore with this notion of gaining new experience may decide to sort elsewhere. More research has proven the fact that Human Resource is a collective system of activities and has a direct correlation with firm’s performance.
(Switser 1997) explains that Human Resource outsourcing represent a strategic tool for gaining competitive advantage. He mentioned that when Human Resource activities are outsourced, it gives both Human Resource managers and non Human Resource managers’ spare time to deal with strategic business issues. This also provides an alternative argument in support of Human Resource outsourcing.
A second reason of Human Resource outsourcing has been identified as reducing cost. The activist, ( Roberts, 2001) campaigned for outsourcing as substantially lowering costs and risk, while greatly expanding organisational flexibility, innovative capabilities, and opportunities for creating value-added stakeholder returns”. Obviously the target of cutting down cost of production is a primary reason why many companies consider the option of outsourcing. In the United States (US) for example, saving in the cost of labour was a major incentive why many companies tend to outsource. For instance, these facts were given in United State outsourcing article by Vietor and Veytsman (2007). Financial analyst in the US earns about $35 per hour, it costs only about $10 per hour for the same position for a person in India. Similarly, employees in China and Mexico were willing to work $1-$2.50 per hour as compared to $11-$20 per hour in the US. In effect it is convincing enough for a company to outsource rather than provide in-house. However, these reasons are not without challenges. Some of the challenges have been identified as quality of HR services from suppliers, insufficient employee preparation towards the jobs, and lack of proficiency to manage HR outsourcing.
2.2.3Reduces workload of staff:
According to (Klass, 2003) one vital rationale for Human Resource outsourcing has been reducing workload on regular staff. Outsourcing actually takes off some of the heavy schedules on managers and other staff involved with the processes of recruitment. Reducing work overload creates more time and increase flexibility on managers to manage the business effectively. There is less distraction and more concentration on planning, operating and growing the business. It also allows managers to focus on best practice- what they are good at doing best. Staff recruitment is a tedious job and very involving. It is not just about getting the employee to the field but also concerns staff training, logistics and equipping the staff with all the necessary tools needed to do the work effectively. When the company decides to outsource all of its Human Resource, these would be taken care of by the supplier leaving the outsourcer with little or no workload.
2.2.4 Strategic move:
To some organisations, HR outsourcing is a strategic move. The vision is to reduce cost, achieve workforce flexibility, access HR expertise and focus managerial resource and keep up with changing workforce regulations. (Klaas et al, 1998).
Every organisation has its goals and objectives to achieve so as to be successful to remain in business. For the organisation to be successful, it should be strong enough to cope with it competitors. However this could only be achieved through a well-developed strategic process. Strategy in simple terms is the critical plans and decisions taken by an organisation in achieving its targets in business. However if to the organisation, the Human Resource management such as payroll, logistics and recruitment is not of strategic relevance, could ignore outsourcing.
DiRomualdo and Gurbaxani (1998) have identified three strategic intents by businesses. They argue that firms outsource so as to achieve anyone or more of these three. They are strategic improvement (cost reduction and enhancement of efficiency), strategic business impact (improving contribution to companies performance within existing lives of business) and finally strategic commercial exploitation (focus on leveraging technology-related assets).
The strategic literature has basically point out the cost effectiveness as primary reason for outsourcing but has now shifted to other reasons of strategic re-positioning, greater service integration, higher value creation and core competence enhancement
Some researches further argue in support of strategic outsourcing. Outsourcing decision is taken to improve incentives within a firm. That is, the intensity of managerial incentive is a primary motivator since managerial efforts are focused on core competence
According to (Bates, 2002) Human Resource outsourcing continues to grow at a very rapidly pace. He estimated the growth is expected to rise to $100 billion per year. Professional Employer Organisations offer several Human Resource services amongst them are benefit administration, 401k administration and insurance administration. Professional Employer Organisations are “growing about 30% per year” (Hirschman 2000) and is estimated to continue to grow at this pace between 2005 and 2010.
(Ratnam, 2001) describes the strategic aspect of Human Resource sourcing. His argument is that Human Resource outsourcing is a key value differentiator. Perhaps heavy investments as coupled with the issues of today’s dynamic market situation, which means outsourcing which is directed towards strategic supplier partnerships is a key value differentiator.
As the business environment conditions in recent times, he asserts that companies should have flexibility in order to meet it current and future opportunities. This behaviour provides the ability to manage and cope with the changing market situations in order to remain competitive.
2.2.5Achieving core competency:
Another strong case for Human Resource outsourcing has been made by Armstrong (2003). He claims that there has been a drastic shift from the view of Human Resource services as a major responsibility of the organisation, to the stance that it can be contracted to an external body; the excuse for resorting to this exercise is “prove it cannot be subcontracted”.
As stated by the institute of personnel development 1999, (cited in Armstrong, 2003), One major cause in support to increase in outsourcing remains the concept of the organisation which concentrate in-house expertise on it primary activities and outsource any necessary support from range of suppliers.
The point is that Human Resource managers can play more strategic roles by contributing to strategising the company’s future direction rather than spending time on staff payroll or checking on absence records.
Alternative opinion in support of this argument in (Pollit, 2004), discuss a cable and wireless manager, who expressed that after the company’s Human Resource entry-level services were outsourced; management then had enough time and focused more on strategic issues such as change management skills, internal-consulting skills and project management skills. This improvement was believed to be influential, enjoying easy entry to senior people, organising programs and representing senior management in transforming the whole company. He believed that the three functions are very necessary in enhancing the skill capability of Human Resource.
Further explanation on this is (Raynor, 1992) who in his argument mentioned and I quote: ‘after all….. we are not in business of managing compensation claims, hiring people or maintaining a building; rather we are in a business of writing software, or designing batteries or manufacturing automobiles. Why not hire an outside company that is an expert at providing the services that are, for us, essentially a distraction from our primary business?’
The recent trend of technology also contributes to the issue of outsourcing. It creates room for the provision and purchase of outsourcing services. Modern use of technological gargets calls for demand and hence supply of labour to operate them. Most of these equipments require specialised skills and experts to take charge. So therefore organisations in such need would resort to outsource.
In respect to (Mintzberg et al 1995), the overall basis for any outsourcing activity as cited in Allen Colin’s article on Human Resource outsourcing is that, outsourcing provides.
- Greater economics of scale
- Cost effective
- Levels of expertise
- Reduces cost and improves valued-added
The benefits of Human Resource outsourcing are influenced by the organisational characteristics. Research shows that small and medium enterprises (SMEs) benefit more from outsourcing as compared to large-scale organisations. This is because it supports the small and medium enterprise in breaking even in enjoying economies of scale whilst the large-scale organisations have enjoyed already. Outsourcing predominately increase assets and reduce cost in the immediate financial period. There has been a significant savings on operational and capital costs by organisations engaged in outsourcing parts of their in-house operations ( Rimmer, 1991).
Laugen et al (2005) in their research found a correlation between outsourcing best practice and high performing companies. This is clearly explained by the Transaction Cost Economics (TCE ) – the underpinning for make or buy decisions
In TCE the decision as to either to buy or produce in-house are determined by the most cost-effective option. Here the organisation weighs the cost and benefit to determine which process of Human Resource outsourcing will cost them the least should they outsource. To this regard, Marshall (2001) identified differing natures of the outsourcing management processes associated with high, medium and low asset specificity.
Assessment is carried out by the organisation analysing the cost of internal operation as compared to sourcing from a supplier. Based on that, management decision is taken as to outsource or not to outsource. (Freytag and Kirk, 2003; Momme and Hvolby, 2002; Canez et al., 2000) have developed frameworks to this effect, others are (Baines et al., 2005) strategic positioning process for “make” versus “buy” decision-making and outsource supplier selection. (Klaas et al 1999) also used the TCE to develop hypothesis about organisational-level factors that are likely to affect whether reliance on Human Resource outsourcing will produce benefits for the organisation. i.e. idiosyncratic Human Resource practices, uncertainty, pay level, firm size, overall outsourcing emphasis, cost pressures, Human Resource strategic involvement to develop seven hypothesis.
Outsourcing looks beyond just short-term cost savings, another motivating factor is the organisations ability to focus on it “core” activities (Arnold, 2000). Focusing on “core” activities comes with a varying degree of organisational benefits and also improves performance. To this effect, productivity increases as well. (Nohria et al, 2003) find out that a company needs to increase it productivity by twice its average in order to be a leading competitor. Other researches also focus on explaining the relationship between productivity growth and outsourcing. (Abraham et al, 1996) also in their research found out firms ‘contract out’ services with the aim of smoothing production cycles and benefiting from specialisation. (Raa et al, 2001) also found a positive association between the rate of outsourcing and productivity growth in their study.
2.3.1Access to advance technology:
Another important suggestion about this theory is the fact that outsourcing have also proven organisations have an advantage of exploiting more advanced technologies from the suppliers as the supplies are significantly more advanced and use the most effective technologies. Another fact is that as suppliers continue doing their work over and over again, they become more experienced and easily discover the most effective operations. Even though other outcomes are less obvious, it has been claimed by Kerr and Radford (1994) that the outsourcing process in a way has helped to undermine the power of trade unions dominating the United Kingdom workforce in public sectors.
normally when business is booming, what happens is that business owners think of expanding their businesses, but at the same time control cost of production. When done properly it yields the best of results in profit rise. Some areas where firms can achieve profit maximisation are staffing. Employers have the flexibility of contractors supplying those staff only for as long as they need it, helping to cut down cost. The second area is capabilities. In terms of capabilities, outsourcing allows even smallest firms to employ experts such as marketing expert, researchers and other specialist but not necessarily to ‘own’ the person. Firms rather ‘rent’ their skills without adding to their payroll. This helps to achieve its target but at a minimum cost hence increasing profit margin. The third area to increase profit margin is services. Sometimes some services may be cheaper or easier to be handled outside. Such is human resources, which mostly is outsourced. Other functions such as recruiting and payroll management is easier handled outside.
Subsequently, Greaver (1999) classified an improvement in credibility and organisational status as potential benefit of associating with famous providers.
Other recognised benefits though difficult to measure, indicate that outsourcing enhances organisational credibility greater workforce flexibility and preventing being locked into specific assets and technologies.
The Boston consulting Group (1991) researched on over 100 key companies that engages in an extensive outsourcing practice and found out most western companies outsource mainly to save on overhead or induce short-term cost savings.
Subsequent theory revealed, until the 90’s, one of the major drivers for outsourcing was its cost effectiveness. This is because, in a real economic world, a common goal for many if not all businesses are on cost savings and profit maximisation. Every business is in for profit by cutting down cost, choosing the cheapest cost of production which outsourcing is to solve. Others are of the opinion that the growths in indirect overhead costs, which represent “non core competencies”, are commonly being outsourced.
(Lewis et al, 1991) have also discovered another interesting issue; their point is that the outsourcing is a trade-off between lower production cost, i.e. if the supplier possesses lower cost technology and higher monitoring costs.
2.3.4Maximisation of efficiency:
(Domberger, 1998) also gives another important suggestion about this theory, in order to increase efficiency of organisations core value, organisations tend to specialise in such fields and outsource their non core values. An example is Unilever, the Anglo-Dutch group, with a portfolio of 1,600 food, toiletries and household products. September 1999 announced that in order to enhance sales growth and profitability, it would focus on a smaller number of power “brands” (core products) who have worldwide reach, thereby reducing costs and exploiting new channels of distribution, such as the internet as cited in journal of management development, vol. 19, No 8.
flexibility could be analysed in terms of increase in demand and change in demand. Organisations should have the capability of meeting customers demand and also being able to satisfy customer’s preferences at any time. Outsourcing enables organisations avoiding these two constraints. It presents the opportunity for meeting changes in volume of production as well as seasonal changes in response to market conditions of customer’s demands. A situation of the fashion apparel retailing, where companies respond rapidly to industries short life cycles and the quick changes in fashion. This enables the company to achieve delivery of goods to its stores within the shortest possible time of design conception.
(Carney, 1997) has identified the five ‘C’s of Human Resource outsourcing and its benefits. These are:
- COST: reduces service cost, internal fixed costs to a variable, which is more transparent and easier to manage.
- COMPETENCY: greater focus on core business and core competency requirements.
- CHANGE: a vehicle for rapid implementation of change, in terms of technology, organisation and culture.
- CURE: a way to fix difficult problems or deficiencies in service levels.
- CASH: improvement in balance sheet and cash flow eg transferred assets exchange for lump sum payment though rare in Human Resource outsourcing.
2.4 CONTROL OVER THE PROCESS:
Despite all the arguments in support of outsourcing, which seems to be winning, what still puts many companies’ off is the thought of not having control over the process of recruitment. What make managers hesitant in this circumstance are the facts that, taking someone on, especially in team work without having any form of interaction to know the kind of personality they will be dealing with. Knowing that, personal chemistry is as important in team situations as having the right skills on paper. (Lawler et al, 2003) findings in their study of 100 companies revealed the most common problems of Human Resource outsourcing. One meagre services end up being more expensive than promised, contractor’s lack of information about the client and unanticipated resources refined to enhance the relationship. Suppliers should not take for granted the fact that one successful outsourcing should work for all. It should be noted that the various firms operates differently with varying needs and may absolutely have nothing in common, hence may require different procedures from their suppliers. It should be best for the suppliers to assess carefully their clients’ individual operations and treat them as such. Outsourcers are liable for supplier’s actions though the outsourcers have little or no control whatsoever.
Others are compliance violations, contractors not being able to meet the task as expected, loss of positive repute, loss of internal expertise and technical skills.
(Roberts, 2001) explains some risks of outsourcing as “organisations are afraid of losing some control over the delivery of, outsourced services and finding themselves overly dependant on the supplier or liable for the supplier’s action. Outsourcing sensitive information, particularly confidential information, somehow cannot be avoided since it might form part of the client company’s briefing to the supplier. Moreover supplier has inherent liability if information security is breached.
(Shelgren, 2001) in his recent survey, showed that 90% of companies with 50000 or more employees outsourced some part of their Human Resource activities. In this way, some sensitive confidential information could be kept away from the supplier.
Furthermore one important issue organisations turn to consider one way or the other is the people who matter most, that is, the customers. Many customers value the personal touch and the kind of treatment offered them. When this factor is missing, customers end up getting upset. If the outsourcing processes affect customers directly, then it becomes a problem in that it would be difficult for organisations to have a say since the function has been transferred elsewhere, and cannot directly and immediately be controlled.
2.5 RISK AND CONCERNS
Despite all these benefits of outsourcing, it has been found also that some organisations do not realise the expected benefits from outsourcing. The nature of certain task and its risk level is the very reason a firm might outsource. Such task may be expensive, complex to operate, low efficient and difficult. However if the outsourcing process is not carefully handled and thoroughly assessed, can result in severe financial loss causing decreased in shareholder’s value, damaged company reputations, dismissal of staff especially senior management and the worse of all collapse of the business itself. A report quoted in (Londsale, 1999) and (Mclvor, 2000) mentioned that only 5% of companies surveyed realised their expected benefits from outsourcing. Reasons given are highlighted; companies focusing on achieving benefits in the short-terms, lack of formal outsource decision-making processes, such as medium and long-term cost-benefit analyses, increased complexity in the total supply network.
(Beaumont et al, 2004) found out in a survey of outsourcing in Australia, it’s a problem formulating and quantifying requirements. Another concerns is the fact that public sector is losing jobs to the private sector.
(Hays et al, 2000) studied the effect of information systems outsourcing announcement on the market value of contract –granting firms. Empirical evidence was provided from the capital market that outsourcing is considered to be a value- added business exchange for outsourcing firms. The control of risk has been seen as necessary in an outsourcing contract in that controlling the amount of outsourcing value and outsourcing span, the risk can be controlled by the outsourcing firm.
The figure above shows a summary of the benefits and the risk of outsourcing.
This model was used in a research by Jiang and Qureshi (2006)
From figure 2.1 above, the outsourcing action if well controlled leads to cost efficiency which in turn leads to affect the firm’s value where a positive effect takes place. From another angle, the risk controlled leads to higher productivity which is influenced by the know –how (human skills), Economics of scales and morale and consequently affect the firms value. The third implication leads to profitability also influenced by the firm’s competitive strategies, resource and development capability and growth plan and in the same way affect firm’s value. Other benefits of outsourcing are increase in operational flexibility, focus on core activities, access cutting-edge technologies and ensure availability of higher-quality and spread risks.
Berman et al (2007) described retailing as business activities involved in selling goods and services to consumers for their personal, family, or household use. It includes every sale to the final consumer - ranging from cars to apparel to meals at restaurants to movie tickets. Retailing is the last stage in the distribution process.
Retailing in recent time is at a fascinating crossroads, more so the advancement in technology is boosting retail productivity, now rampant is global retailing. Loads of opportunities wait for those yet to start and those to improve on existing ones. This becoming a franchise though faced with numerous challenges.
Retailers are faced with some key issues but if these basic principles of retailing are well addressed and systematically handled can promote a firms success. To resolve these issues, one must ask how best to serve customers while still enjoying a fair profit, how the firm can compete in today's highly competitive market where customers have got so many choices and more so how the firm can grow in the business while retaining a core of loyal customers?
These issues create a whole department within the industry structural for decision makers to come out with solutions. Personnel are recruited for strategic decision making in resolving the issues.
The impact of retailing in an economy is great since it plays a major part in the world commerce. A higher percentage of a nation's population, even in the world population is engaged in retailing and essentially contribute to economic growth, solving the problem of unemployment (eg in the US with a population of approximately 25 million people, about one-sixth of total labour force work in the retail sector) the industry also contribute in terms of sales towards economic growth. According to the department of commerce, the annual sales in the US for example exceed $4 million, which represe
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