HR Outsourcing Its Impacts Commerce Essay


In today's competitive economy every organization is aiming at achieving productivity by enhancing ROI and achieving the economies of scale. In this context, organizations focus only on their core competencies and outsource non critical business activities. HR outsourcing can happen in various areas, this literature review is composed of two parts (i). The first part describes "why businesses outsource", whereas, (ii). The second part describes "the impact of outsourcing on HRM" with respect to Employee Relations, Employee Training and Unemployment. Outside service providers is more efficient and reasonably priced than in-house services which is a key reason for HR outsourcing for many businesses. The impact of outsourcing on HR depends on the form and nature of the outsourcing operation. A key issue in outsourcing is its impact on HR skills and training, because labor force equipped with the proper skills, which is a key to providing workers with the opportunities to continuously upgrade their skills. For high-skilled workers, international outsourcing increases the probability of changing jobs, but has no significant effect on the individual risk of becoming unemployed. So literature states unemployment as another most important impact to outsourcing, which is not new concept and it will continue to grow because of three reasons. First, the cost savings are very large and can be converted into lower prices. Secondly, developing countries like Pakistan & India are only beginning to be used by outsourcing companies and it has great growth potential. Thirdly, service sector productivity in developing countries is rapidly growing where workers have to do what they are told without question.

HR Outsourcing:

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According to Webster's Universal Dictionary Outsourcing refers to a company that provides information; to find a supplier or service, to identify a source. HR Outsourcing refers to the delegation of jobs from internal production to an external entity. Most recently, it has come to mean the elimination of native staff to staff overseas, where salaries are markedly lower (Centipedia, 2005). Elliott and Torkko (1996) define outsourcing as a conscious business decision to move internal work to an external supplier. Lawrence (1994) and Slaughter (2000) define outsourcing narrowly as the quantity of intermediate inputs purchased by a multinational firm from its subsidiaries. Berman, Bound, and Griliches (1994) define outsourcing slightly more broadly to include all intermediate inputs purchased from abroad, not just those purchased by multinationals. Feenstra and Hanson (1996) define outsourcing even more broadly to include goods produced from offshore assembly plants and purchased from subcontractors. The simplest definition of outsourcing is the purchase of goods or services that were previously provided by the organization internally. Therefore, HR outsourcing should be viewed as the purchase of HR services previously provided internally or in-house.

In today's competitive economy every organization is aiming at achieving productivity by enhancing return on investments (ROI) and achieving the economies of scale. In this context, organizations focus only on their core competencies and outsource non critical business activities. Therefore, routine administrative work, although important, can be outsourced to third party. The outsourcing trend started with software development, and back office work in 1980s. It has grown in popularity since the early 1990s, particularly in the USA, where up to 90 per cent of the companies outsource some HRM activity, and Western Europe (Mercer, 2000). But the trend has spread to often more technologically sophisticated, service sectors too. Projections show that in the Asia Pacific region, HR Outsourcing (including, Pay Roll Services, Benefits administration, Education and Training, Recruiting and Staffing, Personnel administration, Other HR functions) will go up to 2560 million dollars (Gartner 2004). HR Outsourcing market is increasing worldwide approximately to $51 billion, which represents approximately 39 percent of the total business process outsourcing revenue. HR Outsourcing also helps the HR professional to play significant role in facilitating access to new ideas and approaches outside the organization (Klass, McClean & Gainey, 1999). If organization doesn't feel comfortable handling all of HR responsibilities or it doesn't require a full range of services, then it may opt for outsourcing selected functions. (Green, Youngblood, & Gary, 1999). HR outsourcing can happen in various areas such as payroll, employee benefits administration, fixed assets administration, network management, receivables management, logistics management, hardware maintenance, telemarketing, call centers and database management etc. Prior research has established that the human resource services that are outsourced can fall into one of the following four categories (i) recruitment and selection (ii) training and development (iii) pay and benefits & (iv) merger-outplacement-downsizing (Papalexandris et al., 2001; Mahoney and Brewster, 2002). Some other services have also been repeatedly mentioned in the literature (i) performance appraisal systems (ii) HR planning & (iii) organizational climate and culture (Cook, 1999). Companies to whom organizations outsource their HR function possess the knowledge and resources to dexterously perform part or all human resources function. Much of the literature available on HR outsourcing demonstrated the pros & cons of HR outsourcing rather than analyzing the impact of outsourcing on HRM. This literature review is composed of two parts (i). The first part describes "why businesses outsource", whereas, (ii). The second part describes "the impact of outsourcing on HRM" with respect to Employee Relations Climate, Employee Training and Unemployment.

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An important question related to the structure of firms is why managers decide to place certain HR function outside the boundaries of the firm. Both research and common sense tell us that, the key reason for this growth is that many businesses realize that the use of outside service providers is more efficient and inexpensive than in-house services. It is certain that HRM services vendors specialize in the services they provide to their clients, they benefit from economy of scale effects and these benefits are transferred to their clients. This effect suggests that smaller companies may benefit more than larger ones from HRM outsourcing, but it is not the true. Most common reasons for outsourcing are to enhance expertise, improve service quality, reduce staff, and streamline process and lower costs [i] (Mitchell, 1998). According to a survey in US, in which approximately 120 most senior level HR professionals participated, 90% of them had outsourced one or more of their HR functions [ii] (Harkins, Brown, Sullivan, 1195), and the reasons for HR outsourcing to use the expertise of specialists, to save time, to save money, to save administrative costs, to focus on more strategic initiatives, function which is not part of core business, responsibilities have increased, staff reductions, budget cuts, to reduce liability. The above findings show that quality and flexibility rather than cost are the most important reasons for outsourcing decisions. Outsourcing may provide a viable strategy if firms aim to save on labor costs (Abraham and Taylor, 1996). Based on literature there are four different reasons for outsourcing; (i) Capacity outsourcing (ii) Specialized subcontracting (iii) Cost reduction (iv) Market discipline [iii] (Harrison, Domberger 1998). Capacity outsourcing refers flexibility to increase existing capacity in response to changes in demand whereas; specialized subtracting refers to a product or process which requires the use of specialized equipment or skills. As for as cost is concerned firms often complete a process or service more inexpensively than producing it in house. Linked to cost reduction, outsourcing is sometimes seen as a way of avoiding the higher costs of unionized labor or paying for statutory employee costs such as taxes, superannuation, leave loadings and entitlements and so on (Harrison, Domberger 1998). The market discipline leads to the purchaser to concentrate on outputs instead of inputs. Mostly researchers argued that, firms undertake outsourcing for the combination of reasons, most importantly the low cost factor. According to a survey carried out in Australia in which approximately 7,500 firms have been studied during 1995-1998, suggested that the main reasons for outsourcing were (i) to achieve better access to skills (ii) improved quality (iii) cost savings [iv] (Mitchell, 1999).

Researchers found that outsourcing has had far limited impacts on HRM. Outsourcing advocates such as Domberger (1998) conclude with statements such as:

"Contracting improves organizational performance by creating change along three principal fronts: reducing staff numbers; introducing new skills and working practices; and modifying individual incentives, employment terms, and attitudes to the workplace. But resistance to change is ubiquitous, and nothing quite resists change like organizational inertia" [v] .

Employee Relations:

The impact of outsourcing on HR depends on the form and nature of the outsourcing operation. The employee relations (ER)/ HR effects will be different, for instance, outsourcing involves the contracting out of an entire function (i.e. Recruiting) where some or all of the existing employees are either made additional or moved over to another location, or situations where some activity may be contracted out. The cost-efficiency referred to not only involves staff achieving higher productivity and outcomes through more effectively targeted effort, but is also often derived from reductions in staff through taking employment outside. What economists refer to as transfers. Innovation and market responsiveness are thought to derive from competition with other providers who may otherwise achieve market dominance through superior service delivery and outcomes. Research has stated that employee relations from a management perspective had improved (Benson & Ieronimo, 1998). The reasons for this development attributed to the elimination of favoritism issues and work restrictions, a reduction in number of unions on site and a cited improvement in shop floor morale. The increase in productivity was due to the decrease in the number of direct maintenance labor needed. Improvements in productivity may arise from simply reducing staff or because employees who are contracted may work harder because their employment is less secure. This raises the question, however, of whether fear is the best incentive for longer-term productivity improvements. Contracting out is therefore a device to capture some of the desirable features of a free market (Webster and Harding, 2000). Fear may lead to increased worker anxiety and unrest, stress and lack of commitment while working, all potentially damaging to productivity and quality in the longer term.

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Zappala, (2000) argued that, much of the HR literature of the 1990s has stressed that to be competitive; firms will need to adopt strategies that enhance employee commitment. It is possible that the use of outsourcing, especially that which involves the use of employees from employment agencies working alongside regular employees of the firm, will create problems of commitment for both groups of workers. Suppose, Dual commitment; Outsourcing creates the possibility of a form of dual commitment, the commitment of employees to the enterprise where they work as well as to the firm that employs them. Outsourced labor may be less committed to the host company than regular employees. If contract workers have little loyalty to their host company they are unlikely to cooperate with regular employees to improve work processes and productivity. As one Silicon Valley manager disgruntled with the outsourced service provider's employees remarked 'mercenary may shoot a gun the same as a soldier, but he will not create a revolution, build a new society, or die for the homeland [vi] ' (Bryce & Useem, 1998). The presence of contractors is associated with lower trust among the firm's regular employees. This is often because the regular employees see the contractors as a threat to their own position and this leads to divisiveness in the workforce [vii] (Pearce, 1993). In some situations, the difference in pay and conditions between agency workers and permanent employees doing the same job causes tension and stress, with little team spirit and teamwork between both groups. This can have a negative impact on employee commitment to both host firm and labor hire firm. Zappala, (2000) concluded, organizations that outsource maintenance functions do not appear to end up with a poorly committed group of contractor employees…It appears that any negative feelings about contract employment tend to affect the relationship with the employer and not the relationship with the host enterprise.


A key issue in outsourcing is its impact on HR skills and training, because labor force having with the appropriate skills is a key to flexible labor market and providing workers with the opportunities to continuously improve their skills. Training is fundamental to assisting jobless workers in finding new jobs. The need to closely involve businesses in training efforts must be emphasized (Kirkegaard, 2005). The probable impact on the skill base or knowledge of a firm will depend on which function has been outsourced. The impact of outsourcing HR or IT is likely to have a greater impact than outsourcing cleaning or canteen facilities. There have been several reports of businesses outsourcing their IT function, only to find that the lack of in-house expertise causes a reversal of the strategy. In contrast, some argue that a major reason for the growth of outsourcing, especially in areas like IT, has been the difficulties certain companies have in attracting the right staff to run these operations in-house (Lawson). IT professionals, for instance, may see their career path in terms of the wider IT industry rather than as IT managers in manufacturing or service sector companies. Training and career structures in professions such as IT, accounting, finance, and HR will depend on the practices adopted by these large outsourcing service providers (Zappala, 2000).


Literature states unemployment as another most important impact to outsourcing. There is no clear link between outsourcing and unemployment at the macro-economic level, there is clearly an impact at the level of the individual firm. In most outsourcing arrangements, employees are transferred to the contractor, placed within the firm, or made redundant. Literature to a great extent available, that empirically evaluating the determinants of job separations. Micro-level studies by authors such as Farber (1999), Beeson Royalty (1998), Zavodny (2003) and Farber (2005) stress the relevance of gender, age, marital status, children, education, unemployment rates and technological change as determinants of job separations. At the same time, authors such as Davidson and Matusz (2005), Klein, Schuh and Triest (2003) and Kletzer (2004) highlight the relevance of export orientation and international competition as determinants of job creation and job destruction. However, the role of international outsourcing has yet remained largely unaddressed in the literature as most empirical studies focus on industry level relative demand effects of outsourcing (Feenstra and Hanson, 1996, 1999 ; Hijzen, Gorg and Hine, 2005; Egger and Egger, 2003, 2005). Exceptional in this respect are the contributions of Kletzer (2000), Egger, Pfaffermayr and Weber (2006) and Munch (2005). Kletzer (2000) calculates industry-level displacement rates from the Displaced Workers Survey and regresses them on changes in exports, import penetration and imported intermediate goods, which arguably correspond to international outsourcing. While the author finds overall import penetration to significantly raise industry displacement rates, imports of intermediate goods are rendered insignificant. Egger et al. (2006) assess the effects of international outsourcing for the transition probabilities of employment. Munch (2005) analyzes the impact of international outsourcing on unemployment, his general finding is that international outsourcing, at least when broadly defined, has a significant but small impact on individual unemployment risks. He finds that international outsourcing increases the risk of becoming jobless, but that the effect is only significant for low-skilled workers.

For high-skilled workers, international outsourcing increases the opportunities of changing jobs, but has no significant effect on the individual risk of becoming unemployed [viii] . A recent Financial Times article reports, that 100,000 UK jobs will have relocated abroad by 2005 as a direct consequence of international outsourcing. The corresponding estimates for Germany and France are 11,000 and 7,000 respectively. Accordingly, offshoring is a particularly burning issue in the island economies of Ireland and the UK (Gorg & Hanley, 2004). Egger et al. (2003) use individual level panel data from Austria to examine in more detail the consequences for workers of increased international outsourcing. As they point out, complete labor placement in response to outsourcing may be a long run goal but the immediate effects of outsourcing may bring unemployment in its wake because people, who are laid off by their current employer, cannot immediately switch into alternative employment. This consistency of unemployment makes it more suitable to investigate short run transition likelihood where individuals can move into and out of unemployment and between different sectors. A well-known fact is that the labor market outcomes of less-skilled workers in the US has steadily worsened over the last two decades, and many observers attribute this to increased trade with developing countries. However, a number of authors have argued that trade with low wage countries could not have been responsible for this trend because increased imports of labor-intensive goods would have adversely affected less-skilled workers by lowering the demand for domestic labor-intensive goods (Lawrence and Slaughter, 1993).

Research Findings:

Several findings can be drawn from this review.

i. The efficiency gains can be massive and big organizations are gaining bigger (because of reduced cost, less transport costs, improved communications, shifting of manufacturing to low cost countries) than expected cost savings from outsourcing.

ii. There is evidence that, apparently to avoid becoming hostage to the outsourcer and to maintain competitive pressures firms go for HR outsourcing for limited time periods.

iii. It has been found that; trend of HR outsourcing has improved during past 10 years. Businesses also appear to increase HR out sourcing intensity as a response to high overhead costs. It has been analyzed from the literature that, comparatively smaller firms appear to outsource to greater extent.

iv. Another finding illustrates that, highly skilled workers often benefited across the globe. Knowledge workers are highly specialized and have enough skills and abilities to attract employers. This occurs because outsourcing has likely to increase the demand for skilled labor.

v. Businesses consider HR as a business partners and recognize the potential of this source, which leads the business not only towards the competitive advantage but also links to the organizations strategies.

vi. Businesses take advantage of economies through outsourcing, which individual firms cannot because of scarce means. The performance of specific functions and finally individual freedom can be enhanced through outsourcing, because comparatively workers have many options than in hierarchical organizational structures.

vii. Huge number of workers especially unskilled loses their job through redundancies or dual job problems. In case of skilled employees, proportion of employees finds alternative employment in a short time.

viii. Businesses has started considering the HR as Business Strategic partner, compared with past, HR has to play a bigger role. It must be enough efficient by not only focusing the individual competencies, also HR staff is required to modernize processes and automate business transaction for better results.


Outsourcing is not new concept and it will continue to grow because of three reasons. First, the cost savings are very large and can be translated into lower prices for consumers. In short, competitor firms will find it hard to compete with such cost savings. There are many skilled persons in world who can take up the work, especially in HR practices, software development, customer support, etc. Secondly, developing countries like Pakistan & India are only beginning to be used by outsourcing companies and it has great growth potential. Thirdly, service sector productivity in developing countries is rapidly growing. It is assisted by low wages workforce, where workers have to do what they are told without question. They have to work for long hours without complaint. With the dramatic reduction in communications costs (e.g. the cost of a phone call from developing counties (Pakistan & India, billing per second) to other developed countries fell by 80 percent between 2001 and 2006, the growth of the internet, etc. it is increasingly easier and cheaper to do business globally.