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A Study on the Impact of Human Resource Outsourcing on Firm Performance

Paper Type: Free Essay Subject: Human Resources
Wordcount: 1474 words Published: 9th Nov 2021

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With the advent of globalization, many business firms are in the verge of expansion. To cope up with the ever-growing competition, outsourcing has been used as a tool and this has become a reality of the business world today. It is undoubtedly one of the fastest growing industries in the developed, developing and under developed economies. The level of outsourcing has increased phenomenally across some of the prominent sectors in the last two decades. Mol (2007) finds three waves of outsourcing which have affected globalization and technological changes:

a) Manufacturing Processes Outsourcing,

b) Information Technology Outsourcing, and

c) Business Process Outsourcing.

Outsourcing of HR activities draws everyone’s attention. Experts see outsourcing as a key trend that is going to shape the future of HR (Cooke et al, 2005). They envision HR as focusing more on the strategic activities of the organization than on mere administrative functions. These administrative and transactional operations which are performed internally can be left to the third party suppliers.

The outsourcing of HRM activities and services, for example payroll management and benefits, has been going on for several years. This study attempted to examine the relationship among organizational characteristics, market variables, Amount of HRO and firm performance by empirically testing the association. The study also investigated which HR activities were outsourced more and at what management level.

Rationale for Outsourcing

Organizations are well aware about the advantages of what they make and what they buy. A number of empirical studies have supported the belief that the HRO trend is beneficial to the organizations (Gainey and Klaas, 2003; Wahrenburg et al., 2006). Some other studies point out that HR outsourcing is not just restricted to mere transactional HR activities like payroll administration, records management, and benefits management (Greer et al., 1999), but many transformational and strategic HR activities like training programs, recruitment and selection of professionals and manpower planning are also outsourced.

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Review of literature

Klaas, McClendon and Gainey (2001) studied the relationship between organizational characteristics and the HRO decision. The eight organizational characteristics included: Idiosyncratic HR practices, HR strategic involvement, Positive HR Outcomes, Promotional Opportunities, Demand Uncertainties, Pay level, Firm size and Outsourcing by competitors. They split the Amount of HRO reliance into four factors using Principal Component Analysis: HR generalist activities, transactional activities such as payroll, human capital activities such as training, and recruitment & selection.

Billah, and Chowdhury (2012) studied the current state of HRO in the telecommunication sector in Bangladesh. They tried to study the issues of when and under what conditions HRO contributes value to the companies by identifying the relationship between environmental and organizational characteristics that affect HR department’s performance and how HRO mediates the relationship in that sector. The results of this study showed partial significance of HRO.

Gaps in Literature

Based on the extensive literature review, the following gaps emerged, which are not only intuitively appealing but also well rooted in the literature.

Not many studies have been empirically conducted using both TCE and RBV theoretical perspectives. Hence, studying these two important theories will give a better picture about the outsourcing of core (strategic) and non-core (transactional) HR activities.

Most of the studies on HRO have focussed only on taking the HR activity as a whole without considering differences at the top, Middle and lower management levels. We are arguing that the basis for outsourcing decisions of HR activities at different levels like top management, Middle management and lower management will vary across and within organizations. Therefore, in this study, we will be focussing on Amount of HRO, i.e., outsourcing of HR activities at the top, Middle and lower management levels.

There are very few studies that empirically investigated the effect of organization characteristics and market variables on HRO. This will be explored in detail in the present study

Objectives of the Study

  • To empirically study the HR outsourcing of core and transactional activities using TCE and RBV theories.
  • To study the influence of organizational characteristics and market variables on HRO.
  • To study the effect of Amount of HRO on performance of firms.

Research Methodology

The research is totally based human resource outsourcing on firm performance.

Sample Selection

The quality of data depends on the quality of the respondents and their responses. It is one of the important attributes of the research to have good quality data for which the respondents are expected to have considerable knowledge on the subject matter (Quesada, 2004). For this study, efforts have been made to ensure that the respondents to whom the questionnaire was sent had sound knowledge in the HRO and firm performance of their organizations


A sample size of 400 HRO respondents was chosen among those who working in organization.

Research Approach

Quantitative approach is used for data Collection


H1: Firms that provide superior promotional opportunities to their HR staff compared to other firms in their industry segment, their reliance on both HRO-Transactional and HRO-Core activities will be lower.

H2: In firms facing substantial labour Demand Uncertainties across seasons, reliance on Amount of HR outsourcing will be higher.

H3: There exists an inverse relationship between firm size and reliance on Amount of HRO

H4: Organizational characteristics are related to the Amount of HRO.

H5: Reliance on HRO will be positively related to the degree to which a firm’s major competitors are seen as relying on HRO.

H6: There exists a positive relationship between Amount of HRO and Firm Performance.


This study has attempted to shed more light on the relationships between dimensions of organizational characteristics viz., strategic HR involvement, demand uncertainties, cost pressures, pay and firm size and amount of HRO – Core and Transactional activities and firm performance viz., financial, innovation and stakeholders’ performance in India. This study has made two significant contributions.

In this study we have successfully made an attempt to bring together the organizational characteristics, amount of HRO and the firm performance in one single model. We have argued that the basis for outsourcing decisions of HR activities at different levels like top management, middle management and lower management will vary across and within organizations.


Mol, M.J. (2007). Outsourcing, Design, Process and Performance. Cambridge: Cambridge University Press.

Cooke, Fang Lee, Shen, Jie, and McBride, Anne (2005). Outsourcing HR as a Competitive strategy? A literature review and an assessment of implications. Human Resource Management, 44(4), 413-432.

Gainey, T.W. and Klaas, B.S. (2003). The outsourcing of training and development: factors impacting client satisfaction. Journal of Management, 29(2), 207-29.

Wahrenburg, M., Hackethal, A., Friedrich, L. and Gellrich, T. (2006). Strategic decisions regarding the vertical integration of human resource organizations: evidence for an integrated HR model for the financial services and non-financial services industry in Germany, Austria and Switzerland. International Journal of Human Resource Management, 17(10), 1726-71.

Gilley, K. Matthew, Greer, Charles R. and Rasheed, Abdul A. (2004). Human Resource Outsourcing and Organizational Performance in manufacturing firms. Journal of Business Research, 57, 232-240.

Klaas, Brain S., McClendon, John. and Gainey, Thomas W. (2001). Outsourcing HR: The Impact of Organizational Characteristics. Human Resource Management, 40(2), 125-138.

Mahmud, Khaled, Billah, Mohammed Msum, and Chowdhury, Syed Mustafizur Rahman (2012). Human Resource Outsourcing: A Study on Telecommunication Sector in Bangladesh. International Journal of Business and Management, 7(10), 74-84.


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