The effect of outsourcing human resources

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According to Gunsauley (2002) more and more US and European companies resort to the practice of HR outsourcing. The present paper will discuss the outcomes of HR outsourcing policy in BT and the way it affected and might be affecting various areas if organisational performance.

The analysis will start with the definition of outsourcing and types of HR outsourcing. Then the factors that induce companies to turn to this practice and the negative consequences of it will be highlighted. Since the notion is relatively new, the review of the advantages and disadvantages of HR outsourcing will provide conceptual boundaries of the BT case study review.

The paper will discuss the factors that triggered BT's decision to outsource the HR function and the way this decision was realised. Besides, the case study will review the outcomes of HR outsourcing. Then the analysis of HR outsourcing on various sides of organisation will be made.

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Of particular concern, the paper will consider the importance of the HR function for the strategic content and process of the organisation. Moreover, since the outsourcing introduced various "soft" and "hard" changes, the paper will review the content of the organisational culture and will explore the issues of organisational change in the context of BT strategic objectives and intended market performance.

Since the topic is quite new and there is not sufficient data about the outcomes of HR outsourcing on global communication industry players the paper will make certain presupposition which will be evaluated on the basis of existing HR theories and practice.

OUTSOURCING

What is outsourcing?

Chaffey (2003) defines outsourcing as "the contracting out of specified services to a third party with a controlled, flexible relationship". He points out that the decision of outsourcing usually takes place when a firm does not want to use its internal resources to build or operate in-house functions; it can hire an external organisation that specialises in providing these services to do the work.

Types of outsourcing

HR outsourcing services generally fall into four categories: PEOs, BPOs, ASPs, or e-services (Lee, 2002).

PEOs

A Professional Employer Organisation (PEO) assumes full responsibility for a company's human resources management. It takes full legal responsibility for a company's employees, and is actively involved in such vital HR functions as recruitment and selection, delayering and performance appraisal. The PEO and a company become partners, essentially, with the PEO handling all the HR aspects and the business handling all other aspects of the company. In other words it is total outsourcing, since all activities are performed by an external company.

Armstrong (2001) introduces the following list of HR areas that are outsourced:

Training

Recruitment

Health & safety monitoring and advice

Employee welfare and counselling activities

Payroll management

Specialist legal advisory services

Occupational health and fitness services.

However, due to the specific features of human resource management and the developing practice of HR outsourcing, PEO might also imply for joint venture/strategic alliance sourcing where certain duties and responsibilities are shared between organisation and a supplier

BPOs

Business Process Outsourcing is a broad term referring to outsourcing of different managerial and operational functions. Specifically in HR, a BPO is designed to ensure that a company's HR system is supported by the latest management information systems, with self-access and HR data warehousing options.

ASPs

Application Service Providers host software on the web and rent it to users-some ASPs host HR software. Some are standardised off-the-shelf applications (People Soft) while others are customised HR software developed by the vendor. These software programs can manage payroll, benefits, and more.

THE RATIONALE FOR HR OUTSOURCING

General rationale for outsourcing

According to Mintzberg et al. (1995) the overall rationale for any outsourcing activity is that outsourcing provides:

Greater economies of scale

Flexibility

Levels of expertise

Cost effective

Reduced costs and improves add-value throughout the value chain.

He states that implementing a function internally that can be bought in more economically compromises competitive advantage. Outsourcing enables concentration on core activities, and reduces internal costs, time delays and political pressures, leading to a more compact organisation, flatter hierarchy, and sharper focus on recruiting, developing and motivating key personnel in terms of core competencies.

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Ratnam (2001) emphasises the strategic dimension of outsourcing. He suggests that heavy investments, coupled with the challenges of a dynamic marketplace, means that outsourcing strategy, which is focused on strategic supplier partnerships, is a key value differentiator. He claims that in the current business environment, which can be characterised as turbulent, every company needs flexibility to meet its current and future opportunities. Outsourcing provides the ability to adjust to changing market conditions to remain competitive.

Rationale for HR outsourcing

Though HR outsourcing is based on similar rationales, it is important to mention that it became possible with recent development of information and communication technologies. According to Wright (2002, cited in Gunsauley, 2002), with the emergence of various management decision support systems and databases, organisations realised the new opportunities of e-HRM. Outsourcing is becoming more and more popular as employees become more comfortable with web-based self-service. New portal technology offers users deep knowledge content, decision-support tools and transaction capabilities in one place.

At the same time, the in-house development of e-HRM applications required sufficient investments and expertise and the cost of owning, maintaining and upgrading technology continues to escalate. Therefore, the decision to outsource became a reduced risk and cost cutting solution.

Armstrong (2003) points out the other important tendency that made a strong case for HR outsourcing. He claims that it has become a widespread tendency of shift from the view of HR services being the business own responsibility, to the stance that it can be purchased from external suppliers, outsourced. At the same time the excuse for resorting to this practice is "prove it can not be subcontracted". (Armstrong, 2003)

According to the Institute of Personnel Development (1999, cited in Armstrong, 2003) the single biggest cause in the increase of outsourcing has been the concept of the core organisation which focuses its in-house expertise on its primary function and purchases any necessary support from a range of sources in its periphery.

This view is supported by the words of Cable & Wireless manager, who pointed out that after some HR entry-level services were outsourced, the firm's management were freed up to focus more on strategic HR issues such as internal-consulting skills, change-management skills and project-management skills (Pollit, 2004). He believed that these three functions were absolutely vital as they enhanced the skill capability of HR. This enhancement was believed to be influential, gaining access and entry to senior people, running projects and representing senior management in changing the entire organisation.

This view is supported by Switser (1997) who argues that HR outsourcing represents a strategic tool for achieving competitive advantage. He states that outsourcing of the transaction-based HR activities frees HR managers and other managers to deal with strategic business issues.

According to Klass (2003) the other major rationales for HR outsourcing are to cut administrative and high transaction cost activities, minimise the workload of regular workers, reduce costs, reap economies of scale, improve quality and efficiency, and gain expertise from outside vendors.

Summing up all the points, the following list of pull factors of outsourcing can be made:

Cost saving - HR costs are reduced because the services are cheaper and the size of the function can be cut back;

Concentration of HR effort - members of the function are not diverted from the key tasks which add value; and

Obtaining expertise - know-how and experience that is unavailable in the organisation ca n be purchased.

THREATS OF HR OUTSOURCING

According to Gunsauley (2002) when managers decide whether to outsource, the need to retain sufficient skills in-house to fulfil the role of vendor-manager and intelligent customer is often overlooked, as is the need to ensure there is a cost-effective exit if the outsourcing arrangement does not work

On the basis of the Information Systems outsourcing Chaffey (2003) draws the following picture:

Loss of control,

Loss or degradation of internal services,

Corporate security issues,

Qualifications of outside personnel,

Negative impact on employee morale.

Stating that outsourcing is driven by a desire to reduce costs while improving the quality of IS and user services, he casts serious doubts over whether these objectives are feasible.

The other important issue is raised by Khatri (1999) who points out that different strategies differ in their requirements for HR practices and may imply varying needs for HR outsourcing.

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From these issues two major points arise:

How to link organisational strategy with outsourced HR functions; and

What shall be the criteria for measuring the adequacy of the expertise of HR service supplier.

Greer & Youngblood (1998) suggest that it is difficult to control the quality since the process of production is external. During an internal process a company can apply quality improvement tools. Receiving an off-the-shelf product or solution a company may face the problems of hidden flaws in quality (so called "floating" flaw or error). With outsourcing, a company may be dependent on its suppliers, which reduces its flexibility capacity.

Another vital point is raised by Armstrong (2003) who speaks about commitment and the survival syndrome. Delayering may lead to "survival syndrome". It may cause the loss of trust and commitment. As a result, the staff turnover may increase and the productivity might decrease significantly.

Morton & Wilson (2003) believe that HR outsourcing is a faddish trend, and will not take off to the extent that has been predicted. They urge firms to question whether an external source can ever know the business as well as the business owner does, and though there may be a place for outsourcing routine tasks like payroll, it is unwise to let a vendor make important decisions for the firm.

BT CASE STUDY

Background information

British Group, formerly known as British Telecom, is one of the leading providers of telecommunications in the UK. With its primary focus in the UK, the company has operations worldwide through partnerships and joint ventures.

British Telecom is working in a changing and competitive environment. The nature of the environment requires innovation because of a short product life cycle. Its principal activities include local, long distance and international telecommunications, internet services, broadband network solutions, and providing web hosting and other IT solutions.

BT outsourcing

BT serves around 21 million customers. These customers represent different customer groups with particular needs. The nature of market and industrial context requires permanent innovation and introduction of new, more sophisticated solutions.

BT is a "heavy hitter" in the outsourcing stakes, sitting in third and fourth position in the overall outsourcing and mega-deal leagues respectively. Those organisations in the FTSE 100 within the telecommunications industry have 16.62% of their operations contracted out to Business Process Outsourcing (Morgan, 2001).

The fundamentals of BT's strategy include customer satisfaction, financial discipline and diverse, skilled and motivated people. Verwaayen (2003) defined BT's strategy value-creation for shareholders, being best provider of communications services globally throughout Europe, through partnership. For this, "BT is planning a new wave of cost cuts and outsourcing" (Moran, 2003). BT has outsourced back-office functions: accounting and financial services; printing and dispatch; HR; Internet Service; their real-estate management; and call centre functions. This is "in line with BT's strategy of maximising shareholder value by focusing on core business" (Livingstone, 2002). Price (2002) explains that these measures will provide BT with costs savings, service quality and development opportunities for BT staff.

BT is retrenching and concentrating on its core business. According to Accentry (2004), their aims for additional value through key partners and suppliers will represent significant financial benefits for BT by outsourcing non-core competencies.

BT HR outsourcing

According to Accenture (2004) the recognition of the need for the transformation of HR services evolved out of fundamental transactional needs of the rapidly changing company. Already in 1991, the functional restructuring of the company, to provide greater focus on customer needs, highlighted a clear need to consolidate the administrative operations separately from the business-unit HR activities. This step was believed to set the basis for rapid realignment of people as the company's evolution continued. After a series of consolidations, the senior management came to the decision of creating a totally consolidated internal transactional service on the basis of a stand-alone subsidiary, joint venture or separate business entity.

To increase shareholder value, sustain progress and cope with the pace of change, BT decided on an entirely new approach to HR in the late 1990s - outsourcing its transactional HR functions: the moves, changes, employment data, employee records, administrative call centre and payroll - as well as the non-transactional recruitment function, part of the training function, and later part of the HR business-partner function.

BT management decided to deal with a single outsourcing provider because it wanted to have a long-term strategic relationship covering a range of HR processes. After considering various options the company signed an agreement with Accenture.

The company started with ASP outsourcing, with the gradual switch to BPO. Besides cost-reduction and the increase of operational efficiency, the company sought the solution that would enable the remaining in-house HR people to focus on much more strategic issues. This solution was expected to free BT's HR executives to focus on strategic people matters, with a secure base of sound transactional services behind them. It was also expected to create a real commercial opportunity - the opportunity to compete and win in the new marketplace for outsourced HR services.

In August 2000 the new step towards PEO outsourcing was taken. BT transferred over 1,000 of its HR people to a new joint venture with Accenture. The partners created a full-scale, end-to-end HR transactional solution that covered the complete employee life cycle, with services in resourcing, learning, managing performance, performance appraisal, employee relations, safety, health and delayering.

BT retained the right to set and implement strategic HR issues related to organisational development, including specialist centres of excellence focused on policy formulation and close-in HR account management in each of its business units.

Accenture's HR service was based on the following principles (Accenture, 2004):

Standardisation: HR solution is tailored from a standard platform of assets and capabilities that implement client-wide processes and systems;

Integration: The provision of "one-stop" HR contact centre with a single point of coordination for third-party offerings;

Centralisation: Delivery of consistent, high-quality HR services through specialised service centres;

Technology: The continuous improvement of information systems

Labour: Delayering solutions;

Discipline: Commercial rigour and discipline to HR, including service processes management and operational management.

In the spring of 2002, BT decided to resort to full-scale PEO outsourcing.

As a result of outsourcing, BT reduced its HR function from 14,500 to 600 HR people. This transformation was delivered entirely through restructuring, process improvement, elimination of duplication and focus on productivity (Accenture, 2004).

Accenture (2004) claims that it succeeded in:

Greater efficiency achieved throughout HR (reduced transaction times for basic HR administrative tasks);

Decreasing amount of time and money lost due to sickness (from 3.81 per centto 3.10 per cent, resulting in $2.22 million savings for BT over the seven-month period);

Increased employee satisfaction ratings (95 per cent of attendees expressed satisfaction following a stress workshop; 95 per cent of employees using the counselling service said they would be pleased to use it again; and 93 per cent of employees reported that counselling made them feel better equipped to manage their challenges.

THE CONSEQUENCES OF HR OUTSOURCING FOR BT

The problem of strategic alignment

The recent decision to outsource 100% of HR functions raises the question of strategic alignment of different strategies. According to Johnson & Scholes (2001) the human resource function is vital for strategic formulation and implementation phases. It comprises the roles and relationships that need to be defined in aligning business and operational activities with strategic issues. Mullins (2001) extends this view claiming that the HR function enables the management to sense the nature of the organisational culture and of the presence of various formal and informal procedures that create communication networks and knowledge chains within the organisations.

The case study does not clearly distinguish the way the outsourced HR function is aligned with the strategy formulation process. Moreover, serious doubts arise regarding the existence of efficient communication and knowledge transfer channels that are necessary to provide the flexibility and responsiveness of the operations.

As Ulrich (1996) argues, where HR services are provided by outside contractors, the strategic alignment is likely to require substantial asset-specific investment in order for service providers to understand strategic issues facing the firm. At the same time, Klaas (2003) points out that, where a firm pays for this investment, it is likely to be at risk of opportunistic behaviour by the contractor. Where the contractor pays for this investment, it risks opportunistic behaviour by the firm and is likely to adjust its fees accordingly. In other words, the probability of opportunistic behaviour can create "perfect prisoners dilemma", where both firms will refrain from commitment to risky investment.

Thus, it becomes clear that BT might face serious problems of aligning HR strategic issues with other organisational functions such as marketing, operations management, and information systems management.

Organisational culture

According to claims of the firm's management BT's "organisational culture is innovative with teams that deal with strategic elements of BT's operations: looking to see how advances in technologies can be applied to benefit BT and its customers and looking at better ways of doing things and implementing them. This represents a culture in which everyone is involved and ready to embrace; a strategy in which everyone works closely together to achieve company aims".

Before speaking about the content of cultural change in BT, it is important to define the notion of organisational culture. Tran (1998) argues that culture is studied as an object to be manipulated to achieve productivity and organisational improvements, culture can thus be changed over time. In this context, culture is something that an organisation has. However if culture is accepted as being "... the basic, taken-for-granted assumptions and deep patterns of meaning shared by organisational participation and manifestations of these assumptions..." (Johnson, 2002) then culture is seen as something an organisation is. In this respect culture is difficult to change as it is ingrained in the psyche of individuals.

To outline the content of cultural context in BT after HR outsourcing, the cultural web will be applied. The following table shows the content of the organisational culture with HR outsourcing.

As it becomes clear from the table the organisational culture impinges collective learning in the organisation. Within this approach the individuals perceive each other as a rival, rather than a partner. Survival syndrome poses the question "who is next?". According to Mullins (2001) this paradigm creates various obstacles for learning within the organisation, that usually arise due to rivalry, power conflicts and absence of network communication channels.

The disadvantage of this power structure is explained by Mullins (2001) who claims that such the approach decrease the effectiveness and efficiency of operations management, as participants are detached from the decision-making.

The new organisational structure is bureaucratic, with the emphasis on standard procedures and operational routines. The new structure might significantly slow down the communication process, with the absence of feedback channels and unnecessary mediatory layers that might increase the "noise" and cause various distortions in the communication process (Graham & Bennet, 1998).

The company puts its employees after revenues. The management does not take into account individual needs of the employees and develops a coercive rather than participative approach. Within this approach people are being treated as liabilities rather than the core elements of the operations management process, where people become the primary determinant of the outcome quality (Armstrong, 2003).

The organisational culture implies for traditional type of performance appraisal system, which utilises various types of monetary techniques. Following the argument of Wright (1993) the utilisation of monetary tools does not provide the development of a higher level of effective commitment or higher degree of intrinsic motivation and provides a blurred understanding of the relationship between their performance and corresponding appraisal.

The communication component is an integral part of all above-mentioned changes. According to McGregor (1960, cited in Mullins, 2001) in order to get people to direct their efforts towards organisational objectives, management must tell them what to do, judge how well they are doing and reward or punish accordingly. There is also an informative and a motivational purpose. He claims that a clear and thorough description of individual duties and rights within the framework of the organisation may prevent the rise of unmet expectations.

As it is obvious from the table, the communication in the company is of a top-down nature, without proper feedback. This type of communication scheme is good for conveyer-type organisations, but is pernicious for innovative market-led companies.

Change management issues

The new requirements for adaptation made it necessary for the company to undertake the reengineering of the whole business process, including both "hard" and "soft" elements. According to Senior (1997) "hard" system change implies "an attempt to use the benefits of a scientific method while recognising that in the real world of business where things are happening fast, there may not be time to be as scientific as one would like". In BT's case, "hard system" change referred to the introduction of new operations management systems, equipment and business facilities, designed to speed up existing operations and reduce the cost per a single transaction. It was designed to maximise the efficiency of every single operation within the business process.

Senior (1997) suggests that "Soft System" changes imply for the change of the organisational culture. It comprises such elements as core vision, mission, actors and structure. The main idea of this approach is listening to the organisation, good communication, developing a shared vision, gaining real commitment to the change and the vision, education and training, and understanding the tools and techniques for the process.

Williams et al. (1993) suggest that to facilitate effective adaptation of the employees to new working conditions, managers shall reduce restraining forces and reinforce driving forces. However, it shall be considered, that not all measures are equally effective. As Hetzberg's maintenance theory (cited in Mullins, 2001) shows, the presence of certain factors may act as a powerful motivating factor, while the absence of other elements may produce slight dissatisfaction. At the same time strategic priorities shall reflect the current organisational aims.

The case study shows that the current goal of the company is to increase productivity in order to reduce costs and improve customer service. The company put great emphasis on hard systems change, keeping soft systems in low profile. The current outsourcing of BT's HR functions has set a centralised decision-making pattern, reduced employees' loyalty and motivation, and removed the creativity enablers. At the same time, the nature of the communication industry environment requires a structure that encourages flexibility, adaptability and responsiveness.

Under such conditions in order to improve the situation and meet objectives (create a better customer focus) the high involvement of senior managers, who act as a link between operational and business levels of the organisation, is required. Senior managers shall act as major change agents. Taking the role of change agents, it is important for senior managers not to ignore, avoid or resist employees' natural resistance to new systems, but to create appropriate incentives to fasten the transitional process from resistance to commitment (Graham & Bennet, 1998). The ignorance of or resistance to changes will introduce different open and latent conflicts, which will significantly worsen the organisation environment affecting its performance level and flexibility. The eventual result of such the scenario can be the failure to raise performance and attract or retain customers. This can translate into significant costs and even reduce the company's chances to survive and succeed in changing market conditions.

Conclusion

The analysis of this case study showed that BT undertook PEO outsourcing of its HR function in order to reduce costs and increase organisational performance.

The analysis of the new management system showed that issues such as trust, motivation and commitment are treated as low priority. Besides, the introduction of new working practices, new organisational structure and organisational change was expected to create natural resistance of employees and reduce their trust in organisational values and commitment to its activities.

The further analysis showed that HR outsourcing created a new context of organisational culture. Instead of fostering innovative, flexible marketing-led culture, new organisational structure introduced the opposite conditions:

profit-led business processes;

top-down bureaucratic communication;

monetary performance appraisal;

coercive leadership.

The discussion of these aspects that comprise BT's organisational culture made it clear that the company might face serious pitfalls in its HR management that could affect overall business performance.

From the analysis it can be concluded, that BT's management put a great emphasis on the change of hard systems. The importance of the soft system approach which deals with encouragement and motivation of people was overlooked. The current organisational culture:

Limits knowledge sharing within the organisations, since people perceive each other as rival;

Stifles the generation of creative approaches and new ideas, thus prolonging problem solving;

Causes slower innovation, decreased customer service, increasing knowledge loss and decreasing productivity/performance.

In order to improve the above-mentioned areas, a company needs to create an environment, which will maximise the human capital effectiveness. As Johnson (2002) states it shall create such conditions, where people willingly maximise the overall intellectual capital of the company. The problem is that much knowledge is embedded in the human mind and can only be retrieved with its holder's consent and free will. That is why the company needs to devise specific human resource measures to motivate people to go the extra mile.