Revised-Project-Fatima-Rauf=18-08-2013

HUMAN RESOURCE
OUTSOURCING
Submitted To:
Sir Fida Husain Bukhari
Submitted By:
Fatima Rauf
M09BBA006
BBA (H) Banking and Finance
Semester: 8th
Session: 2009-2013
HAILEY COLLEGE OF BANKING AND FINANCE

Human Resource Outsourcing
UNIVERSITY OF THE PUNJAB
ii

This work is dedicated to
My beloved family members and Respectable teachers
whose tireless efforts, love, care, guidance and
encouragement brought me to this height of knowledge
with the Grace of Almighty Allah.
iii

ACKNOWLEDGEMENT
My thanks are for Almighty ALLAH for His guidance and support. He
enabled me to complete this project.
I am also thankful to my respected teacher Sir Fida Husain Bukhari as
without his support and valuable guidance this research work could not
have been completed.
I am thankful to Mr. Iqbal Younas (Officer at Faysal Bank Lahore) who
provided me an environment saturated with knowledge, his personal
experiences and skills regarding Human Resource Outsourcing.
iv

ABSTRACT
Human resources outsourcing is when a company gets an outside party to perform some or all
of their HR functions. Outsourcing can be used for a number of different HR related
activities. The most commonly outsourced HR functions are background checks, employee
assistance programs, and flexible spending accounts that allow employees to use pre-tax
dollars to cover medical expenses. HR outsourcing is on the rise.
In large companies, outsourcing is typically used for specialized functions. Pension and
health plan administration are two good examples. The third-party vendor is much more
experienced and able to assist the employees with their questions. This allows the HR
employees to focus their energy elsewhere and can make for a more productive workforce.
Some smaller companies choose to outsource the entire HR department. In this case, the
outside vendor handles everything from recruiting to health care administration. This can be
an effective solution, especially when the company is starting up.
Cost savings is the top advantage to outsourcing. Nearly half of the companies surveyed,
reported cost savings as a direct result of outsourcing. Companies will outsource to a vendor
that specializes in the particular service, thereby cutting costs and processing time.
Outsourcing also reduces workloads and allows the company to reduce headcount if needed.
Many companies also will outsource the tedious processing work, so their employees can
focus on the core business values instead. Another outsourcing advantage is the matter of
accountability. If you are paying for a specific service, the vendor is more likely to do a better
job in order to maintain the business relationship.
While cost savings is considered an advantage, cost also can be a disadvantage. Some times
the companies reported their costs had increased due to outsourcing. Another disadvantage is
the loss of face-to-face interaction. Outsourcing can deplete the ability to develop the
company's in-house employees. This, in turn, can lower employee morale. Many of the
companies who participated in the survey, stressed the need to maintain the "human factor"
when dealing with HR issues. The overuse of outsourcing can change a company's culture.
Outsourcing has remained strong during the recent economic turmoil. Even though work
forces are being reduced, HR still has the same issues with which to deal. According to
SHRM, outsourcing service providers have not been immune to the downturn. However, they
have resorted to reducing sales and marketing staff, rather than lay off employees who meet
customer needs.
v

TABLE OF CONTENTS
CHAPTER 1: INTRODUCTION AND BACKGROUND......................................................
1.1 Describing the Outsourcing Phenomenon..........................................................................
1.2 Defining Outsourcing.........................................................................................................
1.3 Types of Outsourcing.........................................................................................................
1.4 Outsourcing as the Natural Outcome of the Division of Labor..........................................
CHAPTER 2: REVIEW OF THE LITERATURE ON OUTSOURCING..............................
2.1 Geographic Scope...............................................................................................................
2.2 Advantages of Outsourcing................................................................................................
2.3 Drawbacks of Outsourcing.................................................................................................
2.4 Business Process Outsourcing............................................................................................
CHAPTER 3: REVIEW OF THE LITERATURE ON HUMAN RESOURCE
OUTSOURCING......................................................................................................................
3.1 Academic Literature Review..............................................................................................
3.2 Review of Business and Consultant Literature...................................................................
3.3 The Evolution of Human Resource Outsourcing...............................................................
3.4 Human Resource Outsourcing Explodes............................................................................
3.5 Growing Pains....................................................................................................................
3.6 Advantages and Disadvantages of Human Resource Outsourcing....................................
3.6.1 The Case for Human Resource Outsourcing...................................................................
3.6.2 The Case against Human Resource Outsourcing............................................................
3.7 Types of Human Resources Activities Outsourced............................................................
3.7.1 Recruiting Process Outsourcing (RPO)...........................................................................
3.7.2 Benefits Administration and Design................................................................................
CHAPTER 4: SCOPE, NEED AND IMPORTANCE OF HR OUTSOURCING...................
4.1 SCOPE................................................................................................................................
4.2 NEED..................................................................................................................................
4.2.1 The Need for Outsourcing...............................................................................................
4.2.2 Reasons Every Small Business Needs to Outsource.......................................................
4.3 IMPORTANCE..................................................................................................................
4.3.1 Importance of Outsourcing..............................................................................................
CHAPTER 5: ACTIVITIES OF OUTSOURCING COMPANIES IN PAKISTAN...............
5.1 Opinion about Outsource Consultants................................................................................
5.2 Introduction of Outsource Consultants...............................................................................
5.2.1 Mission of Outsource Consultants...................................................................................
5.2.2 Vision of Outsource Consultants.....................................................................................
5.2.3 Their sister concerns........................................................................................................
5.2.4 Outsource Consultants' Services......................................................................................
5.2.5 Benefits............................................................................................................................
5.2.6 They are fully equipped...................................................................................................
vi

5.2.7 Professional, Efficient & Cost Effective.................................................................
CHAPTER 6: PROS AND CONS OF HR OUTSOURCING.................................................
6.1 Advantages & Disadvantages of Outsourcing Services.....................................................
6.1.1 Advantage: Upgrades......................................................................................................
6.1.2 Advantage: Certifications................................................................................................
6.1.3 Disadvantage: Company Security...................................................................................
6.1.4 Disadvantage: Quality Control........................................................................................
6.2 The Disadvantages of Outsourced Training.......................................................................
6.2.1 Cost..................................................................................................................................
6.2.2 Control.............................................................................................................................
6.2.3 Productivity.....................................................................................................................
6.2.4 Considerations.................................................................................................................
6.3 Top 6 Outsourcing Disadvantages......................................................................................
6.3.1 Outsourcing Disadvantages: Reasons That Outsourcing is bad for Your Company.......
6.4 The Disadvantages of Outsourcing HR Functions.............................................................
6.4.1 Loss of Human Factor.....................................................................................................
6.4.2 Climbing Costs................................................................................................................
6.4.3 In-House Expertise..........................................................................................................
6.4.4 Change Company Culture...............................................................................................
6.5 Outsourcing Advantages: A Back-Office Operations Illustration......................................
6.6 IT Outsourcing: The Reasons, Risks and Rewards............................................................
6.6.1 The Reasons.....................................................................................................................
6.6.2 The Risks.........................................................................................................................
6.6.3 The Rewards....................................................................................................................
CHAPTER 7: CONCLUSION AND RECOMMENDATIONS..............................................
8.1 CONCLUSION..................................................................................................................
8.2 RECOMMENDATIONS....................................................................................................
BIBLIOGRAPHY....................................................................................................................
vii

CHAPTER 1: INTRODUCTION AND BACKGROUND
An exploratory study of this type benefits from looking at the broader picture of the wider
phenomenon. This chapter begins by comparing definitions of outsourcing followed by a
brief review of the literature on the reasons for outsourcing. Next a recap of both the history
and the geographic scope of outsourcing are presented. Finally, human resource outsourcing
is described with an analysis of the major types of HR activities commonly outsourced.
1.1 Describing the Outsourcing Phenomenon
There is little disagreement in the academic community that outsourcing is an important
management practice and that the level of outsourcing has increased dramatically in the last
decade. Business Week noted that Human Resource Outsourcing has been the fastest growing
area of business process outsourcing. There is somewhat less agreement about the definition
of the term “outsourcing”. Business process outsourcing can include transferring an entire
business function (e.g. payroll), a production process (e.g. ready-to-install windshield
manufacture) or a portion of the related processes (e.g. mailing paychecks, windshield glass
delivery). The decision to outsource may be purely financial, but may also have strategic
implications.
1.2 Defining Outsourcing
The definition of outsourcing found “Outsourcing is subcontracting a process, such as
product design or manufacturing, to a third-party company.” There are dozens of definitions
of the term in the academic literature. Brown and Wilson (2005, p. 24) define outsourcing as
“the act of obtaining services from an external source.” Describing information technology
(IT) outsourcing they state that “outsourcing is the practice of contracting out or selling the
organization's IT assets, people and/or activities to a third party supplier for monetary
payments over an agreed time period.” This framework fits the experience of Human
Resource Outsourcing in that the definition includes the practice of “badge flipping” which is
the term used when an Human Resource Outsourcing provider assumes the employment
responsibility for a share of the new client’s former human resource professionals.
According to McIvor (2005, p. 7), “Outsourcing involves the sourcing of goods and services
previously produced internally within the sourcing organization from external suppliers.” The
1

key point worth noting is that this definition excludes processes never performed internally.
Linder (2004, p. 27) writes that outsourcing is “purchasing ongoing services from an outside
company that a company currently provides, or most organizations normally provide, for
themselves.” This view limits McIvor’s definition by adding the qualification that most
organizations normally provide some services for themselves. Lee and Hitt (1995, p. 836)
provide a much broader definition for outsourcing, as “the reliance on external sources for the
manufacturing of components and other value-adding activities.” This definition could
include nearly any activity so long as it is value-adding.
Kotabe and Mol’s (2006) notion that outsourcing may be viewed as both a process and a state
is helpful. They define the state of outsourcing as “the procurement of goods and services
from external suppliers.” The opposite is vertical integration or the production of goods or
services within the firm. Kotabe and Mol (2006, p. 5) define the outsourcing process as “a
range of actions within a clearly identifiable time-frame that lead to the transfer to outside
suppliers of activities, possibly involving the transfer of assets including people, as well, that
were previously performed in-house or procured from other units within the corporate
system.” The Kotabe and Mol definition encompasses purchasing and subcontracting.
1.3 Types of Outsourcing
Thompson’s categorization describes purchasing as involving a discrete transaction in which
no communication is needed between ordering and delivery (e.g. books ordered for a training
program). Subcontracting is akin to sequential interdependence where the buyer takes the
lead (e.g. a diversity training firm is hired to run a one-day workshop for employees in
Chicago). Strategic outsourcing involves a reciprocal relationship in which the outputs of one
become the inputs of others and a joint relationship may arise (e.g. engaging an HR
outsourcing provider to manage the employee call center handling benefit enrollment,
reimbursement and all related questions and requests).
Defining outsourcing primarily in terms of procurement activities fails to capture the strategic
nature of the issue. Outsourcing is more than a purchasing decision, as every organization
purchases elements of their operations. I argue that the term outsourcing should refer to
processes less common than any purchase and is distinguished from purchasing as
outsourcing represents the decision to reject the internalization of an activity. The definition
used in this study takes the view of Gilley and Rasheed (2000) which states that the decision
2

to outsource is a strategic choice with the potential to cause ripple effects throughout the
entire organization.
Outsourcing may arise in two ways. First, outsourcing may arise through the substitution of
external purchases for internal activities. The use of an internal supplier is discontinued in
favor of procurement from an outside supplier and may be viewed as vertical disintegration.
This seems to be the most commonly understood type of outsourcing. Gilley and Rasheed
(2000) describe a second type of outsourcing that occurs through abstention. Here,
outsourcing need not be limited to activities shifted to external suppliers, but may also arise
when a firm purchases goods or services not provided in-house previously. Abstention-based
outsourcing differs from basic procurement because provision of the good or service
outsourced is within the acquiring firm’s managerial capacity.
Outsourcing is thus the use of outside resources to perform activities traditionally handled by
internal staff and resources. The “make versus buy” decision has a history as long as that of
the trade of goods or services between people.
Companies have long used contractors for very specific types of work or to level out spikes in
their workload. However, subcontracting differs from outsourcing in that subcontracting is
intended to temporarily supplement resources, while outsourcing involves the restructuring of
business activities on a more permanent basis. Mol (2007, pp. 3-4) summarizes the attempt to
define outsourcing by providing three descriptions of outsourcing:
1. Outsourcing refers to those activities that are undertaken by outside suppliers.
2. Outsourcing refers to the transfer of activities and possibly assets from a firm to an outside
supplier.
3. Outsourcing refers to those activities that are undertaken by outside suppliers but could
also be undertaken by the firm.”
Mol (2007) notes that the third definition is not particularly helpful, for if one considers
activities that could technically be performed by an organization, this includes nearly
everything. If, instead, one modifies this definition to include activities that economically be
performed, the reasoning becomes circular. In effect this would be stating that outsourcing
3

includes those activities which are most economically outsourced. This assumes perfect
information about costs and benefits.
Information about the true costs and benefits is precisely what does not exist in most cases of
new outsourcing of business processes. Firms enter into an outsourcing arrangement with the
intention of getting more for less, but given the numerous contextual differences between
firms and providers, in most cases the true costs and benefits cannot be known until after
outsourcing commences and sometimes even then the true impact is cloudy.
Contracting, contracting out and farming out are terms similar in meaning to outsourcing.
The term “out-tasking” used by Friedman (2005) refers to hiring an external provider on a
limited basis for a particular project, such as the design or delivery of a training project. This
term is nearly synonymous with subcontracting. Outsourcing differs from out-tasking in that
outsourcing refers to a long-term decision, not a one-time deal. In the realm of knowledge-
based work, outsourcing is distinguished from consulting in that consultants advise about
“how to do” something and an outsourcing provider “does it”. The line between consulting
and outsourcing can be especially blurry in the domain of business processes. This may
account for the fact that several of the largest Human Resource Outsourcing providers are
part of larger management consulting firms.
The definitions of outsourcing used by many authors often differ in their focus on a particular
context such as information technology or construction. Repackaging of old concepts into
new terminology is a tried and true phenomenon akin to pouring old wine into new bottles.
For this reason a discussion of the development of outsourcing may be of value.
1.4 Outsourcing as the Natural Outcome of the Division of Labor
Outsourcing arose with organizations and its study goes back at least as far as Adam Smith’s
analysis of the division of labor. The division of labor and the subsequent trade of the fruits
of that labor is a basic activity that arose as a cornerstone of civilization. Individuals or
groups of people specialize in some production processes and rely on others to produce and
supply inputs to their production along with other finished goods. The nature of trade is such
that it increasingly requires outsourcing a specialization and the division of labor increases.
4

The industrial revolution was a period of increased outsourcing accompanying radically new
forms of production. Recall Chandler’s Visible Hand (1977) and the role of trust and family
firms in this time of transition. By the 20th century several industries reversed this trend of
atomistic production and consolidation began in the form of a Fordist vertical integration up
until the 1970s.
While Porter (1980) made much of the importance of scale and bargaining power, by the late
1980s decentralization and dismantling of conglomerates became commonplace as keiretsu (a
type of strategic outsourcing) and management practices like “lean production” popularized
by Japanese automakers became the focus of study for practitioners and academics alike. The
decision to outsource, to put it another way, is making decisions about the boundaries of the
firm (i.e. redrawing the boundaries between an organization and its suppliers).
Changes in communication, computing and transportation technologies occurred in the 1980s
which greatly reduced the costs of trade in a variety of services.
Deregulation of phone companies combined with satellite communication systems and the
commercialization of the internet reduced the cost of communicating globally to an
insignificant expense in most developed countries. Enterprise Resource Planning (ERP)
Systems and Electronic Data Interchange (EDI) systems created standard protocols for
exchanging information. Huge amounts of data can now be exchanged between organizations
instantly at almost zero cost. This creates the ability to exchange information about the cost
and quality of an available service at a cost that invites suppliers to enter new markets as well
as creating markets for the externalization of knowledge-based processes that previously had
to be physically co-located with an organization. Containerization technology has lowered
shipping costs so dramatically that production became economic in distant locations like
China.
These technological changes were accompanied by increasingly open trading and investment
regimes. Tariffs and barriers to trade and investment continue to fall.
The end of the Cold War added the human resources of an additional three billion new
capitalists as the workers of China and the former Soviet republics joined the global labor
pool and India shifted its alliance with the Soviet bloc. At the same time several countries
adopted domestic economic reforms which liberalized their economies, facilitating rapid
5

economic growth and expanded trade. As with any technological innovation, a period of time
is needed for managers to change their way of thinking and discover and adapt to and
discover and adapt to the new possibilities available. The change in the belief system of
managers needed to create outsourcing champions occurred in the 1990s with increased
discussion of focusing on one’s core and improving the ability to manage inter-organizational
relationships.
Some organizations have taken the extreme approach of using large-scale outsourcing of
traditional functions to dismantle the organization into a web of relationships between
separate entities, transferring staff to external vendors while redefining the terms of
employment and expectations of existing staff. This creates a new organization form often
labeled a “virtual corporation”. With the potential to bring major organizational change,
outsourcing is a complex and important issue for many organizations.
The dramatic increase in the level of outsourcing of a wide range of business activities
combined with innovations in the types of services now considered to be candidates for
outsourcing has brought a great deal of attention to the phenomenon from the management
community inside and outside of academia. The reaction to outsourcing varies between and
within affected groups such as executives, politicians, employees and unions. For example, in
the United States, a great deal of attention is currently being paid in political and business
circles to outsourcing and its effects on labor markets and global trade.
6

CHAPTER 2: REVIEW OF THE LITERATURE ON OUTSOURCING
A search of the Business Premier database on articles with the term “outsourcing” in their
titles, keyword and abstracts yields more than 2,700 peer reviewed articles and more than
20,000 non-peer reviewed articles appear. At the end of 2008, the Library of Congress had
more than 300 books with outsourcing as a keyword. The topic of outsourcing is by no means
new and the number of research studies published in this area is still growing, so carving out
original research will not become easier. This study focuses on the rapidly growing segment
of Human Resource Outsourcing.
Advantages and disadvantages of the current literature will be reviewed and the current state
of knowledge with respect to performance and context will be discussed.
The use of contingent workers to perform business processes is similar to outsourcing in
some respects as they provide flexibility with respect to work levels and offer the promise of
lower costs due to the lack of benefits provided. Davis-Blake and Uzzi (1993) provide
statistically significant evidence linking five firm traits to the use of contingent and
temporary workers: firm specific training, government oversight, job complexity, the
presence of bureaucratized employment practices and size. Each of these traits was associated
with lower usage of independent contractors. With respect to the determinants of a firm’s use
of contract workers, employee benefit costs had no statistically significant relationship.
However, variable employment levels, bureaucratized employment practices, establishment
size, and the presence of multiple establishments within the organization were statistically
associated with increased use of independent contractors. Industry was an important
determinant of contract work with larger usage of the practice by organizations in
construction, manufacturing and services.
2.1 Geographic Scope
Though the two words are frequently used interchangeably, “outsourcing” differs from “off
shoring” in that outsourcing relates to the restructuring of the firm’s production process while
off shoring is relative to the location of production. It is curious that the term off shoring is
used to describe foreign or global sourcing and is actually inaccurate as a term for trade
between U.S. and Mexican firms or German and Polish firms as there is no “shore” across
which trade is conducted. As the two terms outsourcing and off shoring are not mutually
7

exclusive, it is useful for clarity to refer to domestic outsourcing and non-domestic
outsourcing.
Reductions in tariff and non-tariff barriers to trade, investment and the flow of labor across
national borders combined with developments in information and communication
technologies permit collaboration between people and across distances that were previously
impossible or impractical. Public sector shifts towards privatization have encouraged
outsourcing. These forces are causing organization structures to evolve.
McKinsey & Company (2004) surveyed 7,300 executives worldwide on whether outsourcing
low wage jobs to developing countries is beneficial to the global economy and found that 80
percent of them agreed that it was. This ratio was roughly the same for Europe, Asia and
North America. When asked about whether outsourcing was good for their organization the
agreement varied substantially by country: agreement with the statement was 97 percent for
Indians, 86 percent for Chinese 70 percent for Europeans and 58 percent for Americans.
India-based BPO providers-- such as Infosys, TCS and Wipro have seen their market share
increase to 7 percent of the worldwide market in 2006, from less than 0.5 percent in 2002
according to a study by outsourcing advisory firm TPI. This increase of more than 14 times
compares to the falling share by the “Big Six” global outsourcing majors -- Accenture, IBM,
HP, ACS, CSC and EDS whose market share fell from 71 percent in 2002 to 46 percent in
2006.
Human Resource Outsourcing is quickly becoming global. Total Human Resource
Outsourcing was pioneered in Europe in 1998 with a contract between energy giant, BP and
Exult. After an announcement in 2006 that BP was abandoning its partner, this contract was
renewed in February, 2009. Of the 170 contracts signed globally through 2006, 33 were
European with a total contract value exceeding $5.6 billion. As of 2006, Accenture had 48
percent of the total contract value (24 percent of contracts), Excellerate Human Resource
Outsourcing had 16 percent of the total contract value (9 percent of contracts) and Hewitt had
15 percent of the contract value (6 percent of the contracts). Rounding out the top ten
European Human Resource Outsourcing providers in 2006 are Xchanging, ARINSO, ACS,
Capita, ADP, IBM and Xansa. One of the largest signed European deals is a $1 billion
contract between Accenture and Unilever to provide HR services to its 200,000 plus
employees.
8

The top European cities for Human Resource Outsourcing are London, Paris, Brussels,
Warsaw and Prague. London has the most Human Resource Outsourcing companies
including Accenture, ACS, Alexander Mann Solutions, Brib Outsourced Solutions, Ceridian
and Crystal Human Resource Outsourcing. Glasgow, Scotland houses a Human Resource
Outsourcing center for Hewitt. ARINSO International, Hewitt Associates, Manpower, and
SharedXpertise have offices in Brussels. Paris is home to major offices of Adecco, Boyden,
EADS, and European Human Resource Consultants. Eastern Europe is currently seeing the
fastest growth of new offices.
Hewitt recently opened an HR outsourcing center in Krakow, Poland to gain access to low-
cost multilingual employees who speak French, German and English. Accenture has locations
in Prague and Bucharest, Romania. Staff Poland has a center in Warsaw. ADP has an office
in Prague and ZEST outsourcing has a Ukrainian office in Kiev. Shifting Human Resource
Outsourcing work to a location in Eastern Europe is more palatable than shifting work to
India for many German and French executives where unemployment is a contentious national
issue.
The major Human Resource Outsourcing providers such as Accenture and IBM have
developed large centers in Asian cities such as Mumbai, Delhi, Dalian and Manila. IBM and
Convergys have Human Resource Outsourcing operations in Dalian, China and CDP Group
has a center in Shanghai. IBM, Accenture, DDC Human Resource Outsourcing, and Desktop
Staff have centers in Manila. The Philippines has become a center for off shoring of
recruitment processing outsourcing and Thailand is emerging as a player. Convergys has a
center in Kuala Lumpar, Malayasia, and Inovasia has an office in Jakarta, Indonesia.
Advocacy for radically increased levels of Human Resource Outsourcing or “Total Human
Resource Outsourcing” increased in the late 1990s. The arguments were lower costs, better
service quality and increased access to expertise in specialized areas. Expanding global trade
and investment, information technology advances, and public sector reforms are three forces
driving additional outsourcing. As increasing global competition leads most organizations to
look for greater efficiencies and ways to lower costs, one method is to outsource production
processes that can now be sourced less expensively.
Cheaper computing power combined with global high speed networks enable the delivery of
the output of knowledge-based work to virtually any place at any time. As a result the labor
9

pool for radiology services in a Boston hospital, for example, extends to Bombay and
beyond. As industries are deregulated, new markets are created for services that previously
had to be performed in-house by government employees. The increased number of suppliers
resulting from increased global trade combined with better tools for communicating prices of
goods and services has led many organizations to specialize further on those activities that
they do best and cheapest. Outsourcing has evolved from peripheral activities (e.g. cleaning
by companies like Service Master) to activities that directly interact with customers (i.e.
customer call centers by companies like Sykes) to those that affect the type and quality of
products (e.g. R&D by companies like IDEO). Changing a business support activity, like
security, to an external vendor effects little organizational change. In contrast, transferring the
majority of a firm’s human resource staff to another company certainly changes the
traditional structure of a firm and may affect employee expectations and attitudes.
2.2 Advantages of Outsourcing
Domberger (1998) list five advantages to outsourcing: lower production costs, cost
avoidance, strategic focus, flexibility and relational rents. Burkholder (2006, pp. 49-50) lists
ten advantages of outsourcing:
1. Acceleration of reengineering benefits
2. Access to world-class capabilities
3. Cash infusion
4. Freeing up resources for other purposes
5. Function difficult to manage or out of control
6. Improved company focus
7. Making capital funds available
8. Reducing operating costs
9. Reducing risk
10. Resources not available internally
Lowering the average unit cost of the product or service sold by an organization is the
primary reason most organizations give for outsourcing inputs. Managers asked to explain
why they outsource a particular input sometimes explain the outsourcing decision as enabling
them to better focus on strategy; however, Strassman (1995, p. 2) concluded that “strategy is
not driving outsourcing” and it may be a sign that “they’re in financial trouble.” If high-value
skills are outsourced, over the long-term a loss of core competencies may arise.
10

Outsourcing typically allows an organization to avoid some future costs that are incurred by
the vendor. Outsourcing may also enable a company to redirect energy to its particular core
competencies by making more efficient use of worldwide labor, capital and technology for
non-core work. Outsourcing permits the purchase of intellectual capital that might not
otherwise be available. Outsourcing, provided it is done well, can increase productivity and
contribute to better focus on an organization’s strategic direction. As is often the case with
new business technology, the success of a small number of early movers reported in popular
business magazines too often is taken as universally applicable by managers eager not to be
left behind. Such translations of the actual process undertaken and the true level of financial
returns tend to be sorely lacking in detail with much lost in translation. Outsourcing buyer
group meetings are filled with stories about how companies jumped into outsourcing without
fully understanding the implications of this decision.
The reasons for outsourcing can be condensed into four categories that affect organizational
performance. One reason is cost (another firm can do the activity for less). A second reason is
quality (another firm can do the activity better). A third reason is risk (another firm is better
able to assume the risk of doing the activity). A fourth reason is focus (another firm should do
this activity because it is time consuming and diverts focus). When one considers the
principle agency problem, a fifth reason emerges-- convenience (another firm should do this
because it is hard or otherwise undesirable). One might wonder if this reason is disguised as
focus by HR leaders angling to get a “seat at the table.”
2.3 Drawbacks of Outsourcing
Disadvantages of outsourcing that have been identified include: hollowing out, opportunistic
behavior, transaction costs, reduced learning and innovation. Hollowing out of the HR
function reduces the amount of knowledge about the workforce controlled and owned by the
organization. A sharp cut in the number of HR positions may reduce the ability to attract high
quality HR professionals. Transferring an HR activity to a vendor can take a year or more and
the switching costs may make it very difficult and costly to return the activity in-house.
This can lead the vendor to act opportunistically with respect to reducing service levels and
pricing a contract renewal. Interfacing with another organization on critical business
processes involves transaction costs such as monitoring the agreement, establishing and
renewing the contract and the risk of the vendor being acquired or failing that otherwise
11

would not exist. Finally, any learning and resulting innovations that would provide higher
quality and/or lower cost HR service are captured by the external party.
2.4 Business Process Outsourcing
Mol (2007) identifies three recent waves of outsourcing which accompanied the global
technological changes of the end of the last millennium. The first wave is the outsourcing of
manufacturing processes starting in the mid-1980s driven by the “Japan as #1” frenzy. The
second wave is the outsourcing of information technology (IT) in the mid 1990s followed by
the third wave of business process outsourcing from the late 1990s onward. The rise of BPO
is sometimes called the off shoring movement with India located at the center of activity.
Outsourcing information technology processes led the growth in BPO for two reasons. The
first was the primary technology enabling the rise in IT outsourcing was information
technology itself, thus these managers understood the costs and benefits. Secondly, a
dramatic onetime increase in demand for IT systems and programming work was created by
the Year 2000 scare. The chronic lack of computer programmers and engineers in the US was
so great that utilizing offshore talent was essential. The enormous investment by American
and European companies in certain regions of India such as Bangalore, to complete Year
2000 projects provided the seed money for a whole new industry.
The tipping point for business process outsourcing occurred in 1989 when Eastman Kodak
signed a landmark deal outsourcing IT. This experience was typical of what initially
happened-- the Board of Directors of a large struggling company adopted a complex
outsourcing contract as a last resort during a turnaround effort. The focus was on the 12-15
months it took to negotiate a contract, while less attention was given to managing the
agreement and relationship even though these deals were valued in the hundreds of millions
and involved hundreds of jobs in both organizations. Each deal was treated as an anomaly so
that little effort was made to capture the intellectual capital of negotiating and managing the
outsourcing contract. The fact that distressed companies were the early adopters of IT
outsourcing is worth considering when examining the direction of any relationship between
Human Resource Outsourcing and employee retention.
Greer, Youngblood and Gray (1999) observed that Human Resource Outsourcing decisions
are often a result of overwhelming demand for lower cost HR services, the implication being
12

that financially struggling organizations with poor HR outcomes (such as lower than average
employee retention) might be more likely to choose to outsource HR.
13

CHAPTER 3: REVIEW OF THE LITERATURE ON HUMAN
RESOURCE OUTSOURCING
As noted above the extant literature on Human Resource Outsourcing is heavily weighted
towards work dealing with a description of Human Resource Outsourcing as an emerging
phenomenon and prescriptive advice on how to engage in or increase the level of Human
Resource Outsourcing. This section begins with a review of the empirical literature and
concludes with a summary of the practitioner and business articles.
3.1 Academic Literature Review
Through the end of 2008 the academic journal Human Resource Management had only three
articles dealing primarily with Human Resource Outsourcing and one with professional
employer organizations (PEO). The first study examining the relationship between
organizational characteristics and the decision to outsource HR. This study split Human
Resource Outsourcing into four categories: HR generalist activities, transactional activities
such as payroll, human capital activities such as training and recruiting and selection
activities. They sent surveys to 2,000 randomly selected members of the Society for Human
Resource Management (SHRM) who had the job title Vice President or Director of Human
Resources. They received data from HR executives in 432 organizations and found that the
impact of organizational characteristics varied among the different types of HR activities
outsourced. The primary measure was a rating of the degree of outsourcing using a 7-point
scale for twenty different areas of HR in the design of programs and policies and the
administration of programs and policies. Their factor analysis suggested four factors.
One factor is HR generalist activities such as HR planning, employee relations, performance
appraisal and safety. A second factor is transaction activities such as benefits, HRIS and
payroll. A third factor is human capital building and maintaining activities such as training
and employee assistance. The final factor is recruiting and staffing.
The organizations were measured on the following dimensions. Idiosyncratic HR practices or
the extent to which the organization’s HR practices were seen as unique were measured using
four items. HR strategic involvement was measured using a two item scale. Positive HR
outcomes measured the extent to which the firm was performing well in employee
motivation, cooperation and performance and this was measured using four items.
14

Promotional opportunities were measured using a four point scale and included items on the
availability of opportunities and existence of preferential treatment for internal candidates.
Demand uncertainty measured the predictability of firm performance, product demand as
well as environmental and overall uncertainty using a five-item scale. Pay level was
measured using a dummy variable based on a single item asking whether the firm was
leading the market in terms of pay for its HR staff. Firm size was measured in terms of full
time equivalent employees. Primary industry was measured using 14 categories. Outsourcing
by competitors was measured using a two-item scale.
Idiosyncratic practices were negative related to outsourcing HR generalist and human capital
activities, which would be expected for firms with unique approaches to HR. Firms with
strong HR strategy linkages, outsource more specialist activities such as human capital and
selection activities. A negative relationship was found between the outsourcing of human
capital selection activities and two other dependent variables: positive HR outcomes and
promotional opportunities. The pay level of HR staff was positively related to outsourcing
these same two specialist activities. Demand uncertainty was positively related to outsourcing
transactional activities and generalist activities. No relationship was found with firm size or
HR outsourcing by competitors.
Cooke, Shen and McBride (2005) reviewed the literature on outsourcing HR as a competitive
strategy. This review states that the empirical evidence on the reasons for outsourcing HR
and results of Human Resource Outsourcing are “both fragmented and inconclusive”. Their
review also contrasts the dearth of empirical work with the large amount of prescriptive
literature on the financial and strategic reasons for outsourcing. Their article argues for
applying the resource-based view of the firm and institutional theory in the outsourcing
decision making process. They examine the implications of Human Resource Outsourcing for
the function and groups of people affected by the decision. For example, Human Resource
Outsourcing liberates remaining HR professionals to perform more strategic and consultative
work in line with advocacy for the HR becoming a strategic partner.
The first study on the commitment of HR managers to the initial decision to continue an
existing outsourcing relationship. They created a model of HR manager commitment in
outsourcing relationships testing affective commitment and continuance commitment. They
surveyed a stratified random sample of 478 firms in the Flemish part of Belgium and received
usable responses from 186 HR professionals. This study found that affective commitment
15

(desire for the relationship to continue) was related to the depth and frequency of HR
outsourcing.
Affective commitment was also related to a perception by HR managers that the HR vendors
shared similar values with respect to managing people. Continuance commitment (keeping
the relationship intact) was not related to the continuity of HR outsourcing.
Kabst and Giardini (2008) conducted a study in German to test whether or not RPO has a
negative effect on the perceptions and evaluations of job applicants. In an experimental study
with 160 students they found that the satisfaction with the process, the attractiveness of the
organization and intention to accept a job offer decreased with increasing levels of Human
Resource Outsourcing. Dasborogh and Sue-Chan (2002) collected data from 117 HR
professionals in Australia and found that RPO was associated with trust in the RPO vendor
and with the need to reduce internal labor, but not fixed costs.
Gilley, Greer and Rasheed (2004) studied Human Resource Outsourcing and organizational
performance in manufacturing firms. Their study included results from 94 firms and sought
measures of financial and innovation performance. The findings provided modest evidence
that outsourcing training and payroll was associated with measures of organizational
performance. When firm size, measured by the number of employees, was added to their
model as a moderator the association disappeared.
Two studies reported that the HR services most commonly outsourced fall into one of the
following categories: recruitment and selection, training and development, pay and benefits,
mergers and outplacement, performance appraisal systems, HR planning, and organizational
climate and culture. Through the end of 2008, Human Resource Management Journal had
only had two articles with outsourcing in their titles or abstracts but neither of them dealt with
Human Resource Outsourcing. Through December 2008, Human Resource Development
Quarterly had published only two articles on outsourcing and training.
3.2 Review of Business and Consultant Literature
Business Week issued a report on Human Resource Outsourcing innovation which noted that
while early customers were moderately satisfied, they did not fully realize the anticipated
16

benefits. Most are still waiting for improved business results and innovative process
improvement along with the transformation of HR into a strategic function.
The report concludes that the disappointment is related to an immature business model, the
complexities of global Human Resource Outsourcing and unrealistic expectations. This report
used telephone interviews with CFOs and HR executives in late 2007.
The results of an Equaterra study reported by Business Week show limited success among
clients achieving the expected benefits. On a five-point satisfaction scale where five is the
highest, this is how Human Resource Outsourcing was rated on eight dimensions: focus on
more strategic activities (2.9), cost reduction (2.9), better address compliance/regulations
(2.8), process improvement (2.8), access to external skills/knowledge (2.7),
upgrade/enhance/replace HRIT (2.5), cost savings to fund transformation (2.5), and improve
business results (2.4). Another large area of disappointment is lack of innovation in recruiting
and performance management which is likely because many Human Resource Outsourcing
providers are stabilizing their offerings and still learning to build the infrastructure to meet
the basic service level agreed upon. This leaves few resources to focus on improving the
offering.
There have been successes. Manpower provides most HR services, including compensation,
recruiting, training and labor relations for Motorola Brazil’s 3,000 employees and 5,000
service providers. This partnership has reduced HR costs 40 percent. ADP and SAP have
been using the current dissatisfaction to push clients into accepting greater standardization so
that the providers are supporting a dozen or more infrastructures which erodes the anticipated
profits. The Conference Board and Accenture reported that in a survey of 120 companies
with revenues of at least $1 billion, 76 percent were outsourcing one or more HR functions.
Everest Research Institute focuses on multi-process Human Resource Outsourcing which is
defined as including three or more processes or functions covering more than 3,000
employees. Multi-process Human Resource Outsourcing is contrasted with single process
Human Resource Outsourcing called HR functional processes by Everest. Everest uses a
pyramid to show HR strategy is excluded from Human Resource Outsourcing at the top of
the pyramid and HRIS and employee contact centers are excluded at the bottom. The
following functional services are processes that are outsourced: employee relations,
performance management, regulatory and compliance, global mobility, training and
17

development, recruitment and selection, compensation, benefits, payrolls and employee data
management.
3.3 The Evolution of Human Resource Outsourcing
Human Resource Outsourcing is the fastest growing segment of BPO with 18.2 percent of the
overall BPO market, accounting for global 2006 revenues of $26 billion.
Orion Partners estimated the global size of the Human Resource Outsourcing market to be
over $23 billion with 128 full service deals signed).
The 2009 expenditure on Human Resource Outsourcing was predicted to be $14 billion in
2005 showing projections can miss the mark. Human Resource Outsourcing grew 4.7 percent
in 2006, slowing to 3.8 percent in 2007. Human Resource Outsourcing is maturing in a
manner similar to IT outsourcing. In the late 1990s HR executives at BP Amoco and
consultants at a new company, Exult, pioneered the wide-scale outsourcing of the HR
function with a $600 million Human Resource Outsourcing contract.
3.4 Human Resource Outsourcing Explodes
Human Resource Outsourcing gained traction in the United Kingdom with the decision of
British Petroleum to outsource much of its HR activities to Exult. Other early Human
Resource Outsourcing relationships show the phenomenon has predominantly British roots:
British Aerospace, British Telecom, Nortel, Bank of America, AT&T and CIBC. The United
Kingdom represents 50 percent of the European market and the average contract value is
$300 million. Yet the European market is far from mature with 70 percent of Human
Resource Outsourcing deals being first generation contracts. In Europe 19 percent of Human
Resource Outsourcing deals were signed by public sector organizations.
The Human Resource Outsourcing trend caught on quickly in the U.S. In 2001, Unisys
signed a $200 million, seven year Human Resource Outsourcing contract and International
Paper signed a $685 million, ten year Human Resource Outsourcing contract. Prudential
18

Financial signed a $700 million, 10 year Human Resource Outsourcing contract and Procter
& Gamble signed a $400 million, 10 year contract in 2003. The leaders in providing Human
Resource Outsourcing in 2006 were Hewitt with 33 deals valued at $7.8 billion, Accenture
with 21 deals worth $4.9 billion and ACS with 8 deals worth $2.5 billion. The midpoint of
the first decade of the 21st
century was a period of significant growth. The effects of
competitive pressure are reflected in the pricing of total Human Resource Outsourcing
services with the average price per employee served falling 55 percent from 1998 to $325 in
2006.
Equaterra released a summary of the major Human Resource Outsourcing deals from 2004 to
2006. In 2004, the market explosion was led by Accenture and Best Buy agreeing to a seven
year contract covering 90,000 employees. In 2004, Accenture also signed a ten year
agreement with Sandvik covering 37,000 U.S. and European employees. Hewitt signed a five
year agreement covering Sun Microsystems’ 30,000 employees and ten year agreement with
Capgemini. Convergys signed the first major public Human Resource Outsourcing contract
with the State of Florida for $350 million covering 89,000 state employees. IBM entered the
mega market with a 7.5 year agreement with William Company covering 4,000 employees.
Hewitt’s number of new contracts peaked in 2005 with a 15 year agreement with Rockwell
Automation covering 15,000 employees, a ten year contract with Pepsi-Cola valued at $600
million covering 64,000 North American employees, a 7.5 year contract with Duke Energy
valued at $200 million covering 21,500 employees, a seven year contract with Marriott
International valued at $350 million covering 133,000 employees and a contract with Rohm
& Haas covering 12,000 employees. In 2005, ACS signed a $120 million Human Resource
Outsourcing deal with Delta Airlines for seven years covering 50,000 employees and a $72
million agreement with Chubb & Son covering 10,000 employees in the Americas. IBM
began signing large agreements in 2005, including a seven year deal with Nestle USA
covering 31,900 employees, a ten year agreement with NiSource valued at $500 million
covering 7,800 employees and a $300 million contract with Dana Corporation covering
70,000 European and American employees. Convergys signed the largest deal with a $1.1
billion, 13 year contract covering 60,000 E.I DuPont employees and 102,000 retirees.
Convergys also inked a ten year agreement with Whirlpool covering 68,000 European and
American employees.
19

In 2006, the number of Human Resource Outsourcing deals remained healthy with two large
Hewitt Human Resource Outsourcing contracts. One was a ten year agreement with Catholic
Health Services covering 45,000 employees and the other was with Centrica in the United
Kingdom covering 30,000 employees. Also in 2006, Accenture signed a seven year
agreement with Unilever covering 200,000 employees globally. IBM signed a ten year
agreement with CVS. In 2006 ADP signed an agreement with Synovus Financial covering
13,000 employees and an HR agreement with IKEA covering 90,000 employees worldwide.
Arinso signed an agreement with Bank of America covering 10,000 Canadian and non-U.S.
employees focused primarily on payroll and a similar agreement with Repsol YPF in Spain
covering 20,000 employees in 2006.
The retained HR function after the implementation of total Human Resource Outsourcing
contract experiences major disruption. The lack of clarity around these roles may lead the
remaining staff to double-check the outsourcer rather than shifting to strategic, value
enhancing services. The ratio of HR staff to overall staff measured in full-time equivalencies
may fall from 1:250 to 1:1,000.
3.5 Growing Pains
At the First Annual Human Resource Summit in Tampa, Florida, in 2008, it was noted that
the evolution of such wide scale or “Total” Human Resource Outsourcing is following the
path of benefits anticipated from outsourcing a decade prior. The entrants to the field have
experienced growing pains along with their clients. Hewitt’s Human Resource Outsourcing
practice struggled considerably in 1996-1998. During that period, IBM moved into the space
as a leader along side Accenture and Convergys. In the early days of Human Resource
Outsourcing, capabilities were promised that were not tested on multiple clients or for a
global deployment. However there is little doubt that Human Resource Outsourcing
combined with upgrading HRIT systems has been transforming the HR function, especially
in the largest companies.
As is often the case with best practices, the contextual factors that led different organizations
to be successful at outsourcing were not understood initially and were replaced by vendor
stories of new clients signed. The number of companies failing to realize the expected
benefits or experiencing an outright failure from their experimentation with Human Resource
Outsourcing is growing. The resulting backlash is a normal part of the adoption cycle
20

reminiscent of what was experienced with Six Sigma and business process re-engineering
drives. The flurry of deals signed from 2004 to 2007 gave an illusion of success; but given
the motives of the providers, one ought to question whether the white papers produced during
this initial period were marketing jobs or careful introspective analyses. As Human Resource
Outsourcing has entered a period of rationalization, it is a promising topic for contributing to
our understanding of outsourcing business processes and the evolution of human resource
management (HRM).
3.6 Advantages and Disadvantages of Human Resource Outsourcing
Outsourcing an HRM activity involves both direct and indirect costs and benefits to an
organization. Some of the more obvious direct costs include the personnel costs of time spent
in identifying the HRM activities to be outsourced, selecting a vendor or vendors, and
managing the vendor relationship. In some cases outsourcing entails material and supply
costs, training, travel, new equipment and software. Direct benefits, on the other hand,
include staff time saved and savings from additional operating efficiencies such as lower
material, equipment and software costs.
3.6.1 The Case for Human Resource Outsourcing
Selecting the right outsourcing partner is an ongoing challenge starting with the difficulty in
determining evaluation criteria that satisfy the client organization's objectives for
outsourcing. Some authors identify five types of benefits from outsourcing: financial,
business, strategic, technical and political benefits.
The most common benefit sought is cost savings and cost control. Another financial benefit is
paying a fixed monthly sum for services on a "pay-for-use" basis which is commonly seen in
outsourcing contracts. Business and strategic benefits include process reengineering, the
ability to focus on the client's core competencies, and assisting with a merger or
globalization. Technical benefits typically include increased expertise, improved services,
new technologies, and technological innovation. A political benefit to the organization might
be a reduction in the power of the executive managing the group by reducing the headcount.
21

Some potential indirect benefits of Human Resource Outsourcing are lower overhead and
increased employee satisfaction due to new or improved services. Potential indirect costs
include a reduction in employee satisfaction and engagement due to lower service quality or
dissatisfaction with having to seek services in a new manner. Other qualitative factors that
may have an impact on the organization include: the availability of HRM service, the quality
of HRM service, the impact on organizational reputation with employees, recruits and
customers, and any increase in legal, security and/or technology risks to the organization.
3.6.2 The Case against Human Resource Outsourcing
In a book articulates the case against Human Resource Outsourcing making four points. First,
outsourcing does not provide an organization with a competitive advantage. He argues that
HR should enable the organization to compete head to head with talent competitors and offer
things that differentiate the experience to attract the best talent. A solution to this issue is
requiring an exclusivity agreement from the Human Resource Outsourcing vendor, but this
would reduce the cost benefits accruing from the economies of scale.
Secondly, Human Resource Outsourcing limits the growth, the image and the capabilities of
the HR function and stunts the development of HR Professionals. Outsourcing bad systems
does ensure that the system will be fixed. Engaging consultants to help fix the systems might
be a better way to increase the perceived value of the HR function. Human Resource
Outsourcing will not improve internal image—no positive effect can have huge negative
effect and it limits the ability of the HR team to become global HR function.
Thirdly, in most cases no “actual” cost-savings are realized. There is no data to prove that it
works given the nascent stage of this industry. Vendors are proving value by listing
customers. Sullivan (2004) suggests that Human Resource Outsourcing vendors offer
reductions in costs or penalties, if they don’t meet quality time and cost promises. This advice
was heeded by larger Human Resource Outsourcing customers. The concern that it will not
save you money, if vendors make a profit was also shared with me by a CFO of a large
Minneapolis company experimenting with Finance and Accounting Outsourcing (FAO) in
India as well as creating their own Indian operation to compare the cost savings. Cost savings
are not likely to occur unless a significant economy of scale is present; rather money is
shifted from headcount to a vendor expense for activities essential to the organization.
22

Fourthly, Sullivan (2004) deals with the problem of maintaining company secrets and data
security. Several of the problems Sullivan cited have been experienced by members of the
Human Resource Outsourcing buyers group from 2000-2008. Once your HR staff is gone the
organization is at the mercy of the Human Resource Outsourcing provider. The initial
approach was to under price the contract to get the organization hooked and then increase the
price. Many vendors shifted their focus to the newest client after a deal was signed.
Customization costs have been too high leaving many with “vanilla” HR systems. There have
been complaints about great sales people being replaced by a rookie account manager post
contract signing. Another concern is that in spite of the transfer of the work, outsourcing does
not shift all legal liability to the vendor. Sullivan (2004) concludes that if HR is a true
business leader, it must accept responsibility and stop following fads. There is no evidence
that an HR function is more strategic after signing and implementing a total Human Resource
Outsourcing contract. Eliminating transactions does not automatically enable people to do
strategic work. They could simply do less.
3.7 Types of Human Resources Activities Outsourced
Human Resource Outsourcing varies from outsourcing a single process such a payroll or
administration of a health care benefit plan to the total Human Resource Outsourcing deals
described above. Two previous studies that provided lists of different types of HR activities
outsourced were used to ensure that this analysis was inclusive of the work previously
undertaken. Brown and Wilson (2005, p. 22) list twelve human resources services that are
elements of HR business process outsourcing or Human Resource Outsourcing:
1. Benefits administration
2. Employment process outsourcing
3. Hiring, recruitment
4. HR/Personnel management
5. Payroll
6. Professional employer organizations (PEOs)
7. Recruitment process outsourcing (RPO)
23

8. Staffing services
9. Talent and human capital outsourcing
10. Training and staff development
11. Workforce consulting and management.
This list omits several other HRM activities, such as performance management and employee
relations. Some authors have studied Professional Employment Organizations (PEOs). PEOs
are companies that hire employees and lease them to other organizations. This study avoids
the case of PEOs though this could be considered the most extreme form of Human Resource
Outsourcing. One way in which this thesis adds to the HRM literature is expanding on Brown
and Wilson’s (2005) list above by exploring the following areas of HRM activities that may
be provided internally or by an external party:
1. Recruiting and selection (Recruiting Process Outsourcing)
2. Training and development (Learning Outsourcing)
3. Benefits design and administration
4. Compensation and salary surveys
5. Performance Management
6. Mentoring and coaching
7. Employee relations/Labor relations
8. Employee assistance programs
9. Corporate relocation
10. Employee communication
11. Organizational design and development
12. HRIS/HRIT
13. Payroll
24

Each of these areas of HRM activities is described in the following section with some notes
on the current level and trends in Human Resource Outsourcing.
3.7.1 Recruiting Process Outsourcing (RPO)
Recruiting and selection activities include placing employment ads, accepting and screening
resumes, initial contact interviews, referral of applicants to managers, and background and
reference checks. The demand for these services can be highly variable and unpredictable
making subcontracting or outsourcing a necessity during periods of rapid growth.
Recruitment process outsourcing (RPO) has a long history and is growing rapidly. A natural
outgrowth of mass purchasing of recruiting services, RPO has matured in terms of size,
scope, and duration of contracts. A global shortage of skilled professionals (Cohen & Zaidi,
2004) is driving the demand for RPO. RPO taps into two core reasons for outsourcing gaining
needed expertise and lowering costs. RPO providers offer expertise on demand by having
retained teams of professional and seasoned recruiters combined with a solid track record of
sourcing a multitude of professional positions, and advances in recruitment process
engineering.
RPO began in the higher volume staffing of non-exempt employees, where specific
investments in technology and standardized processes provided an advantage over in-house
delivery. The market now is solidly a part of exempt, mid-level professional hiring. RPO is
also used in executive search or to find “purple squirrels”.
Nearly 90 percent of new RPO relationships include professionals. This is an area where the
buyer mindset has evolved from outsourcing non-core recruiting functions to absolute critical
recruiting activities.
It is more common for organizations to outsource the entire recruiting function and
implement centralized hubs to drive optimal performance. RPO providers know the business
well enough to increase the number of contractual performance-based service level
agreements (SLAs), which place their fees at risk in the case of bad hires or missed hiring
goals. This comfort level is leading to longer contracts and some major RPO providers
require a three-year minimum contract.
25

These market trends are demonstrated by the number of recently announced second-
generation RPO deals. These relationships are more complex because of the learning
achieved through the first relationship. This trend also tells us that clients believe in this
model and that RPO is not just a quick fix. Another trend is the ability to partner with full-
scale Human Resource Outsourcing providers. These partnerships can add significant value
in terms of the talent management function. Today, 42 percent of the Human Resource
Outsourcing contracts include recruiting and staffing, but the administration services-only
structure remains dominant.
Many organizations outsource only some functions within the recruitment process; while
others are selecting a vendor to manage the entire recruiting process from end to end.
TalentTrack conducted a four-year study comparing partial RPO to RPO involving the entire
process and concluded that a partial approach is more expensive and yields only half as many
hires. TalentTrack divides the recruiting process into three phases: talent planning, talent
acquisition, and talent assimilation.
Value dilution can occur because of the replication of sourcing and pre-qualifying steps,
which is inefficient. Applicant interest and satisfaction may wane when asked the same
questions by internal managers as asked by the RPO vendors and they may become impatient
with delays in the hiring process.
3.7.2 Benefits Administration and Design
This is one of the largest categories being outsourced as it meshes nicely with the providers
of the insurance products that comprise the majority of an employee’s benefit package.
Fidelity is an example of a financial services provider that has offered a complete solution
approach to many of its insurance clients. Jeffay, Bohannon and Laspisa (1997, 41) are three
Hewitt employees who argue that HR outsourcing permits a company “to get better HR
services faster—and possibly cheaper. They claim that if your HR department is not the best
in the world outsourcing is likely to be a better option. This assumes that the fit (or
suitability) of the HR practice is not as important as using the best practice. It is worth noting
that their descriptions view HR professionals as providers, designers and business partners
with little mention of an employee advocacy role. Hewitt has observed that the order of
26

outsourcing in HRM began with benefits, compensation, payroll, training, and staffing. The
current tide is shifting towards Total HR outsourcing.
27

CHAPTER 4: SCOPE, NEED AND IMPORTANCE OF HR
OUTSOURCING
4.1 SCOPE
HR outsourcing is the hottest in the industry and is an emerging trend in the Indian market.
Most of the branded organizations are outsourcing their requirements to outside firms. It is a
big business & almost two thirds of the companies studied for HR outsourcing had adapted to
the same.
HR outsourcing involves necessary administrative tasks such as payroll, benefits,
education/training, recruiting personnel, administration, to realize economies of scale and
achieve standardization of services. The changing business trends, market position and global
competitive pressure have led companies to spend more time focusing on their core business.
The companies have now realized that they cannot be best in everything so the good
companies have decided to go for the thing they are best at and outsource everything else i.e.,
focus on their core competency, and let someone else do the rest in a more efficient and cost-
effective manner.
The number of companies outsourcing HR activities continues to rise, and the scope of
outsourced HR activities continues to expand. HR outsourcing can happen in HR functions,
like payroll administration (producing checks, handling taxes, dealing with sick-time and
vacations), employee benefits (Health, Medical, Life insurance, Cafeteria, etc), human
resource management (hiring and firing, background interviews, exit interviews and wage
reviews), risk management, etc. Outsourcing has become a common response to manage
people and technology resources strategically, enhance services, and manage costs more
effectively.
HR outsourcing generates additional capital by transferring assets to the providers. HR
outsourcing brings about revenue driven modification in an organization helping it to gain
market access & business opportunities via the providers network. HR outsourcing hits the
provider capacity, process & systems and fastens development. It expands the production and
28

sales of a business at times of financial crunches. It exploits the existing skills of an
organization commercially to derive benefits from same.
Being highly beneficial, HR outsourcing is gaining in scope and is expected to rise to much
higher levels, in the coming time.
4.2 NEED
4.2.1 The Need for Outsourcing:
The first and foremost reason why companies outsource their processes is the significant and
even massive cost reduction that results from outsourcing jobs, processes, businesses etc. But
why is it so? Well, outsourcing lets a company to focus on their core expertise like IT, Hotels,
Health etc while letting people manage other peripheral (not necessary services nonetheless)
services like data entry, employee database, housekeeping, customer support and so on. Such
off sourcing allows the company to turn fixed costs into variable ones, reduces the burden of
managing a large workforce and extending them the various company benefits. In fact most
of the top companies prefer low-cost destinations like India for their outsourcing needs,
whether BPO or other, as they can cut back on a lot of overheads like worker benefits,
maximum working hours etc.
Apart from this Business Process Outsourcing (BPO) and other outsourced processes is an
opportunity to get a foot hold in any new country by making new clients (in the form of
service providers), setting up new business offices, understanding the domestic market and so
on.
Outsourcing Types and Process:
Outsourcing or off sourcing is not a straightforward or unidimensional phenomenon rather it
can be of different types and comprises several interrelated steps and events.
Business Process Outsourcing (BPO):
As the name itself suggests in BPO the non-core business like data backup, maintenance may
be outsourced. In fact companies looking to work on a frugal budget and within strict
29

deadlines may even outsource their complete processes like product design, software coding,
testing and maybe even marketing and sales.
Knowledge Process Outsourcing (KPO):
KPO is a relatively new process evolved to outsource knowledge-related work to third party
service providers who are specialised and especially trained in this field. This may involve
customer support including voice and technical, providing logistical support, answering
customer queries, providing answers to specific queries from domain experts and so on.
Finance and Accounts Outsourcing:
This involves off shoring or outsourcing the financial aspects of a company including account
keeping and auditing to professional service providers within or outside one's country.
This list is not exhaustive rather only exploratory in order to scan the vast outsourcing
industry, which has developed over a relatively short span of time. Current figures peg the
global outsourcing industry to be worth US $20 billion and growing largely due to the quick
growth of developing economies like India and China that have a vast resource of talented,
young, energetic, flexible and relatively cheaper manpower who are willing to put in hard
labour and work according to the client country's work hours.
In fact Continuous Development is one of the greatest benefits offered by off sourcing. This
simply means that the development team in the parent country, say UK, can work all day and
in the night while they sleep in the night the off sourced team in India picks up on the
development task, making it continuous making possible faster delivery times and 24/7
support.
4.2.2 Reasons Every Small Business Needs to Outsource
Outsourcing is a relatively old phenomenon that has recently gotten a modern makeover. In
the 90s we used outsourcing to refer to big business sending jobs offshore.
30

Today, outsourcing simply refers to subcontracting an internal business function to an outside
provider. Most small businesses outsource functions such as payroll processing, accounting,
and similar tasks out of necessity rather than desire. Entrepreneurs take pride in being their
own boss, not relying on others, and doing things their own way. However, an increasing
number of entrepreneurs are seeing their businesses (and their bank accounts) grow as a result
of strategic outsourcing.
Outsourcing saves time
Imagine the time you could have to network, grow your business, and spend time with your
family if only you weren’t buried under massive amounts of paper work. Outsourcing
administrative and support functions of your business may be the answer to your prayers.
Virtual administrative assistants such as HiredOffice.com can make travel arrangements,
manage your bookkeeping, update your website, and a host of other administrative duties
giving you time to get back to what’s important… your business! In addition, outsourcing
support functions such as human resource management and payroll slim lines normally
tedious processes such as on boarding new employees, processing background checks, and
administering benefits.
Outsourcing saves money
Let’s do the math. According to salary.com the average Administrative Assistant earns a
median salary of $35,134. Most virtual administrative assistants services rates start as low as
$10 an hour and as an added bonus the more hours your buy the lower the rate. Still not
convinced? The average HR manager for a small business (50 employees or less) earns a
median salary of $61,432. Companies such as Project Personnel, a Virginia based human
resource management firm, allows small businesses to outsource their entire HR department
for monthly retainers as low as $2,000 or $24,000 a year. That’s a savings of over $25,000
per year! And the savings don’t stop there. Outsourcing support functions reduce the cost of
capital expenditures such as additional office space, computers, and software.
Outsourcing expands your knowledge base
Outsourcing gives you access to experts in fields related to your business. Marketing gurus,
certified public accountants, certified human resource professionals, and customer service
31

coordinators are ready and waiting to help you grow your business. Outsourcing puts you in a
unique position to stay informed as well as learn and gather information from industry
experts.
Outsourcing builds your employer brand
Your employer brand is the image of your business. This image is built upon reputation and
accessibility. Perhaps one of the biggest benefits (and often the most overlooked) of
outsourcing is that it gives your business a professional and polished image. Administrative
and support functions are handled in a uniform manner allowing you time and resources to
focus on perfecting your core services.
In addition to these benefits outsourcing can aid in managing a temporary or permanent
increase or decrease in business and can serve as a catalyst for major growth that can not be
achieved alone. But like all business processes outsourcing has its disadvantages. Be sure to
do your homework before partnering with anyone. There are several legal, security and
compliance issues that need to be addressed before entering into any outsourcing agreement.
4.3 IMPORTANCE
4.3.1 Importance of Outsourcing
Business services outsourcing includes a wide variety of businesses that offer services to
other businesses on an outsourced basis that can comprise of accounting, receivables
collection, benefits administration, HR administration, recruiting, training, security and
computer-related services.
This industry is one of the three major industries in the United States that has seen a major
growth in the last decade due to recent technological developments.
As organizations have become more comfortable with the benefits of outsourcing
transactional processes, they have progressively started to outsource higher value-added
services and more comprehensive processes for example, they move from outsourcing just
one, discrete function to outsourcing an entire end-to-end process (from accounts payable to
complete finance and accounting operations, from payroll to entire HR operations).
32

As companies move to more comprehensive outsourcing relationships, they are able to
benefit from greater economies of scale, broader transformation of their processes and an
accelerated speed to value.
Many CFOs have seen BPO as a viable approach for managing discreet processes, thanks to
increasing vendor Expertise, multi-language support and successful delivery with balanced
SLAs for monitoring and control.
As successful outsourcing project experience spreads, they see that substantial operational
efficiencies and cost savings are not only possible but realistically within reach.
When CFOs are considering BPO, we recommend that they evaluate suppliers on their ability
to deliver the following four types of benefits:
1. Rapid and Sustainable Cost Reduction:
India has historically been the offshore location of choice, serving as the pricing benchmark
for outsourced services. With its large, low-cost, English-speaking labour pool, India still
dominates the scene, especially for organizations that value price and English fluency.
2. Strategic Flexibility:
Strategic flexibility means more than just a choice of lower cost locations. Companies
streamlining their Operations with us have the flexibility to:
• Rely on a highly qualified labour pool with access to some of the best trained
resources in the market.
• Leverage an operating model with a truly variable cost base that’s easily scalable to
grow with business requirements.
• Manage the scope of what is outsourced and when, by addressing traditional
processes first and broadening to core business processes at the desired time.
• Offload and improve transaction-based, repeatable processes so Finance can expand
its role to handle more strategic, value added activities that contribute to the
profitability and growth of the business.
3. Compliance and Control:
33

Regulators are watching to ensure that standards of compliance and governance are
maintained, particularly as outsourcing pushes into higher value-add areas that are more
critical to business continuity and where concerns over client confidentiality and data
protection loom large. One of the key issues under discussion is whether to use one or
multiple centers. This issue has become more prevalent as clients require outsource higher
value processes.
4. Service Quality:
The tendency to outsource the more transaction-based processes has led to a commodity
mind-set. With AP and Payments Processing, for example, the focus is very much on cost
reduction and maximizing productivity, a key goal for many insurers when outsourcing back-
office processes. While cost is always important, BPO in financial services provides the
opportunity to generate additional value.
Value can be measured financially, as in a reduction in AR days, but can also be intangible,
such as improved Management Information. Both types of value can be incorporated into an
arrangement with a supplier, but the more intangible the requirements, the more collaborative
the approach to working between client and supplier should be. As can be seen, there are
many variables to consider when thinking about outsourcing elements of the finance function.
Client and supplier should work collaboratively to construct the solution and define their
subsequent relationship.
34

CHAPTER 5: ACTIVITIES OF OUTSOURCING COMPANIES IN
PAKISTAN
5.1 Opinion about Outsource Consultants
Outsource Consultants has provided us the solutions that has made our job of recruitment
much easy. I personally thank Outsource team for its timely assistance & providing guidance
to our HR department. No doubt Outsource team is a professional organization in the market.
(Sheikh Mohammad Aslam, Dawn Foods) (http://www.outsource.com.pk/)
I have worked with Outsource Consultants on several occasions for recruiting team members
etc. The firm operates as a consultancy in the true sense of the word. They provide a 360
degree perspective on all hiring aspects including benchmarking the right individual against
the right job. Sourcing activities are also geared to the both the organization and the
individual's need ensuring that the company's culture is maintained while the individual is the
right fit as a team member. I wish them all the best in their future endeavours. (Mohammed
Azam - A.V.P. Marketing Services, NIB Bank Ltd.)
5.2 Introduction of Outsource Consultants
They believe in developing long term relationships with companies as their HR Consultancy
partners.
Outsource Consultants is HR Consultancy Firm and a proactive wing of People Group of
Companies which has been in existence since 1960’s. The first factory of FMCG was
established in the year 1975 and later Pharmaceutical business was introduced by them.
Outsource Consultants provides HR expertise in meeting the sky-high expectations of the
highly competitive corporate sector of today. They pride their selves in staying ahead of the
35

pack. Their motto - Making desirable tomorrows happen today. No matter what your HR
department needs, they are the people to deliver the desirable shot in the arm. They make the
change for the better.
5.2.1 Mission of Outsource Consultants
"At OUTSOURCE, We are dedicated to providing the highest quality of client care with
compassion and resects. It is our mission, also, to provide opportunities for personal and
professional growth for their staff."
5.2.2 Vision of Outsource Consultants
"To be a leading provider of professional Human Resource service in areas of executive
placement, learning & development and management consultancy."
5.2.3 Their sister concerns
• People Fisheries Pvt. Ltd.
• Metrics Research Pvt. Ltd.
• BioPharma Metrics Inc.
• East West Pharmaceutical Pvt. Ltd.
• Iftikhar Industry
• Bukhari Ice & Cold Storage
• Noorani Ice Factory
• Cubic Packages
• Penta Links Courier
• GetHired.pk
5.2.4 Outsource Consultants' Services
• Executive Placement Services
36

• Contractual Staff Outsourcing
• Staff Payroll Management
• Learning and Development
• HRM Consultancy Services
• Individual & Group Consultancy
• Oracle HRMS Implementation
• IT Consultancy for HR
• Career Portal (Online Job Posting)
5.2.5 Benefits
The use of online job posting and executive placement are the most extensive features of their
service. They provide the most suitable and reliable staff who will be working on their
account for their company.
They will give the appropriate training to their employees according to the nature of their
company. OUTSOURCE is capable of providing long-term consistent service to meet the
challenge of today's fast moving world.
5.2.6 They are fully equipped
They are fully equipped to supply any number and category of manpower and human
resources solutions.
Wealth alone cannot build city of their dreams you need artisans and personnel of high
caliber in all fields. Whatever category, resources required by you, just send us the details and
relax.
37

5.2.7 Professional, Efficient & Cost Effective
Honoring our ends and trust are not mere commodities; it's their way of doing business.
Outsource Consultants will solve your all HR Matters. They provide the best suitable talent
and right choice for your company.
Their selection team comprises highly qualified and experienced personnel. They want you to
discover the benefits, which their experience offers.
• Save your cost.
• Decrease high turnover in employment ratio.
• Focus on your companies strategies.
• Get the right personal in short period of time.
38

CHAPTER 6: PROS AND CONS OF HR OUTSOURCING
6.1 Advantages & Disadvantages of Outsourcing Services
When a company wants to focus its resources on core competencies, it looks to outsource
some of its services. For example, a tennis racket manufacturer may outsource its IT support,
payroll and customer service functions so that it can focus on making the best tennis rackets
possible. A business owner needs to understand the advantages and disadvantages of
outsourcing services before signing an outsourcing agreement.
6.1.1 Advantage: Upgrades
When you outsource your services, the upgrades necessary to provide quality internal support
are not your responsibility. For example, if a new payroll system comes out that makes
payroll functions more efficient, your payroll subcontractor must upgrade her systems to the
new software to provide you with quality service. As a purchaser of services, you always
have the option of taking your business to a provider who will upgrade to offer the most up-
to-date technology to your company.
6.1.2 Advantage: Certifications
IT support professionals often require certification to stay updated on changes to the
networking or operating system software your company uses. When you outsource, the
subcontractor is the one responsible for maintaining updated certifications on all technicians.
You do not have to assume the responsibility of paying for certification classes or take on the
administrative costs of tracking staff training and certification deadlines.
6.1.3 Disadvantage: Company Security
Outsourcing companies sometimes need to be privy to confidential company information
such as payroll, personal employee information and computer business processes. When you
outsource internal services, you are exposing your company's confidential information to
outside elements. A nondisclosure agreement should be in place with all subcontractors, but
when you are allowing access to critical data, maintaining complete security is difficult.
39

6.1.4 Disadvantage: Quality Control
Your company's standards for quality control may differ from that of your outsource
subcontractor. While you are trying to maintain a high level of performance to remain
competitive in the marketplace, you may find the variances in quality control problematic.
For example, if you outsource your customer service function, you are exposing your clients
to a third party that may not adhere to the strict standards for customer interaction that your
company uses.
6.2 The Disadvantages of Outsourced Training
Companies outsource non-core functions to concentrate on their core operations. By
outsourcing training, a small or large business can access the subject-matter expertise,
experience in preparing quality instructional materials and professional presentation and
facilitation skills of an external training services provider. However, outsourcing also has
certain disadvantages.
6.2.1 Cost
Although saving on costs is often one of the reasons cited for outsourcing non-core functions,
outsourced training services can be expensive. Training companies may charge hundreds of
dollars per employee for a one-day training course. Executive training programs tend to be
more expensive. If a company requires training services infrequently, maintaining a separate
training department is impractical and outsourced training would be the only cost-effective
option. Companies that use training services frequently should do a cost-benefit analysis to
determine if they should continue outsourcing or hire training professionals as full-time
employees or as consultants to the human resources department.
6.2.2 Control
Companies lose control when outsourcing support functions, such as customer service and
training. The training services provider decides on the format and content of its training
programs, which typically contain generic examples and case studies. For example, a car
dealership may send its sales representatives to a training course that may contain few
examples on how to convert car dealership visitors to customers. Training companies usually
retain copyright of all training materials, which means that companies may not be able to
40

customize the manuals or presentation slides for future internal training needs. These
restrictions make companies dependent on third parties for creating a skilled workforce,
which is a key success factor for all businesses. It also adds to the training costs if changes in
technologies or regulations make previous training courses obsolete.
6.2.3 Productivity
Productivity suffers when employees leave work to attend training sessions. Although the
core objective of training is to improve long-term performance, companies may take a short-
term hit in terms of schedules and customer service. Project schedules may slip if key
employees are away on training, and customer service may suffer because people are not
available at their desks to respond to customer calls and emails. The training has to be timely
and relevant. For example, if a company is planning to implement an enterprise resource
planning system, it should start the training as the first system modules are being
implemented so that employees immediately have the chance to apply what they have
learned.
6.2.4 Considerations
Internal training does not necessarily mean a separate training department. For example, a
couple of internal subject matter experts could work on the training manuals, attend train-the-
trainer courses to learn the basics of public speaking and facilitating training sessions, and
then conduct the training courses in-house. Outsourcing training or any other function should
not be an automatic decision. Management should authorize outsourcing only if it provides a
significant improvement over current capabilities.
6.3 Top 6 Outsourcing Disadvantages
6.3.1 Outsourcing Disadvantages: Reasons That Outsourcing is Bad for Your Company
As you evaluate your outsourcing choices, keep in mind that there are advantages to
outsourcing and disadvantages of outsourcing. Look at each one of the outsourcing
disadvantages listed below and decide what impact that item would have on your business. If
the outsourcing disadvantages outweigh the advantages of outsourcing, then you should avoid
outsourcing those operations.
41

1. Loss of Managerial Control
Whether you sign a contract to have another company perform the function of an entire
department or single task, you are turning the management and control of that function over
to another company. True, you will have a contract, but the managerial control will belong to
another company. Your outsourcing company will not be driven by the same standards and
mission that drives your company. They will be driven to make a profit from the services that
they are providing to you and other businesses like yours.
2. Hidden Costs
You will sign a contract with the outsourcing company that will cover the details of the
service that they will be providing. Any thing not covered in the contract will be the basis for
you to pay additional charges. Additionally, you will experience legal fees to retain a lawyer
to review the contacts you will sign. Remember, this is the outsourcing company's business.
They have done this before and they are the ones that write the contract. Therefore, you will
be at a disadvantage when negotiations start.
3. Threat to Security and Confidentiality
The life-blood of any business is the information that keeps it running. If you have payroll,
medical records or any other confidential information that will be transmitted to the
outsourcing company, there is a risk that the confidentiality may be compromised. If the
outsourced function involves sharing proprietary company data or knowledge (e.g. product
drawings, formulas, etc.), this must be taken into account. Evaluate the outsourcing company
carefully to make sure your data is protected and the contract has a penalty clause if an
incident occurs.
4. Quality Problems
The outsourcing company will be motivated by profit. Since the contract will fix the price,
the only way for them to increase profit will be to decrease expenses. As long as they meet
the conditions of the contract, you will pay. In addition, you will lose the ability to rapidly
respond to changes in the business environment. The contract will be very specific and you
will pay extra for changes.
42

5. Tied to the Financial Well-Being of another Company
Since you will be turning over part of the operations of your business to another company,
you will now be tied to the financial well-being of that company. It wouldn't be the first time
that an outsourcing company could go bankrupt and leave you holding-the-bag.
6. Bad Publicity and Ill-Will
The word "outsourcing" brings to mind different things to different people. If you live in a
community that has an outsourcing company and they employ your friends and neighbors,
outsourcing is good. If your friends and neighbors lost their jobs because they were shipped
across the state, across the country or across the world, outsourcing will bring bad publicity.
If you outsource part of your operations, morale may suffer in the remaining work force.
6.4 The Disadvantages of Outsourcing HR Functions
Outsourcing human resources functions can save time and money. However, it can also cause
employees to feel disconnected with the company. According to an August 2008 study
conducted by the Society of Human Resources Management (SHRM), the most commonly
outsourced HR functions are background checks, employee assistance programs and flexible
spending accounts. While outsourcing these functions may not cause a disconnect between
employees, companies have the option to outsource other functions that would. When
deciding which functions to outsource, it is important to weigh the disadvantages.
6.4.1 Loss of Human Factor
According to the same August 2008 SHRM study; the loss of face-to-face interaction is
the biggest disadvantage of outsourcing. Employees want a familiar face when they have HR
issues; replacing a human with an 800 number to call is not a positive exchange. For
example, when answering questions of a personal nature or discussing a possible retirement,
most people would feel more comfortable talking face-to-face. Employees want to feel secure
with their personal information and decisions.
6.4.2 Climbing Costs
43

Cost savings is often considered an advantage of outsourcing, however, the August 2008
SHRM study found that 28 percent of the companies reported their costs had increased due to
outsourcing. It can also take more time, especially during start-up. Proposals are accepted and
evaluated, then processes must be outlined and put in place. This transition period can be
costly.
6.4.3 In-House Expertise
Outsourcing HR functions discourages the development of in-house expertise. SHRM's
August 2008 study found that 43 percent of the companies surveyed prefer to develop their
own employees, rather than hire a third-party to do the work for them. Outsourcing important
HR functions such as employee training and development can prohibit your HR employees
from accomplishing their career goals. For example, hiring a third-party to conduct safety or
compliance training could prevent an HR training professional from learning something new
and challenging.
6.4.4 Change Company Culture
Outsourcing can definitely change the company's culture. It can drive a wedge between
HR and the employees, which leads to trust issues. Outsourcing certain staffing functions,
such as background checks, employment verifications or resume screening, may have no
impact on culture. However, outsourcing more personal functions, such as employee training,
new employee orientation or retirement processing, can change the company's vision
drastically.
6.5 Outsourcing Advantages: A Back-Office Operations Illustration
As you evaluate your choices and decisions in outsourcing different components of your
operations, you will need to consider the advantages of outsourcing. When done for the right
reasons, outsourcing will actually help your company grow and save money. There are other
advantages of outsourcing that go beyond money. Here are the top seven advantages of
outsourcing.
1. Focus on Core Activities
44

In rapid growth periods, the back-office operations of a company will expand also. This
expansion may start to consume resources (human and financial) at the expense of the core
activities that have made your company successful. Outsourcing those activities will allow
refocusing on those business activities that are important without sacrificing quality or
service in the back-office.
Example: A company lands a large contract that will significantly increase the volume of
purchasing in a very short period of time; Outsource purchasing.
2. Cost and Efficiency Savings
Back-office functions that are complicated in nature, but the size of your company are
preventing you from performing it at a consistent and reasonable cost is another advantage of
outsourcing.
Example: A small doctor's office that wants to accept a variety of insurance plans. One part-
time person could not keep up with all the different providers and rules. Outsource to a firm
specializing in medical billing.
3. Reduced Overhead
Overhead costs of performing a particular back-office function are extremely high. Consider
outsourcing those functions which can be moved easily.
Example: Growth has resulted in an increased need for office space. The current location is
very expensive and there is no room to expand. Outsource some simple operations in order to
reduce the need for office space. For example, outbound telemarketing or data entry.
4. Operational Control
Operations whose costs are running out of control must be considered for outsourcing.
Departments that may have evolved over time into uncontrolled and poorly managed areas
are prime motivators for outsourcing. In addition, an outsourcing company can bring better
management skills to your company than what would otherwise be available.
Example: An information technology department that has too many projects, not enough
people and a budget that far exceeds their contribution to the organization. A contracted
45

outsourcing agreement will force management to prioritize their requests and bring control
back to that area.
5. Staffing Flexibility
Outsourcing will allow operations that have seasonal or cyclical demands to bring in
additional resources when you need them and release them when you're done.
Example: An accounting department that is short-handed during tax season and auditing
periods. Outsourcing these functions can provide the additional resources for a fixed period
of time at a consistent cost.
6. Continuity & Risk Management
Periods of high employee turnover will add uncertainty and inconsistency to the operations.
Outsourcing will provided a level of continuity to the company while reducing the risk that a
substandard level of operation would bring to the company.
Example: The human resource manager is on an extended medical leave and the two
administrative assistants leave for new jobs in a very short period of time. Outsourcing the
human resource function would reduce the risk and allow the company to keep operating.
7. Develop Internal Staff
A large project needs to be undertaken that requires skills that your staff does not possess.
On-site outsourcing of the project will bring people with the skills you need into your
company. Your people can work alongside of them to acquire the new skill set.
Example: A company needs to embark on a replacement/upgrade project on a variety of
custom built equipment. Your engineers do not have the skills required to design new and
upgraded equipment. Outsourcing this project and requiring the outsourced engineers to work
on-site will allow your engineers to acquire a new skill set.
6.6 IT Outsourcing: The Reasons, Risks and Rewards
As the owner of a small company, you have probably entertained the thought of outsourcing
some aspect of your business. The benefits of outsourcing seem obvious, touted by experts
46

across numerous industries as the answer to cutting costs for business functions ranging from
information technology to accounting, marketing and human resources; it seems possible that
you could run an entire company without ever hiring a single employee.
But is there more to outsourcing than the bottom line? What are the other reasons companies
choose this route? What about ramifications for aspects of your business that is not so easily
quantified?
In this article, we'll discuss the 3 R's of outsourcing: Reasons, Risks and Rewards,
specifically as they relate to information technology (IT). And, as a bonus, we'll provide
some tips to help you manage successful relationships with your IT service providers
(whether they are full-time staff, or outsourced).
6.6.1 The Reasons
According to the Outsourcing Institute's Outsourcing Index 2000, there are many reasons
why companies outsource. Here are some of the top reasons:
• Reduce and control operating costs. When you outsource, you eliminate the costs
associated with hiring an employee, such as management oversight, training, health
insurance, employment taxes, retirement plans etc.
• Improve company focus. It is neither practical, nor possible to be a jack of all trades.
Outsourcing lets you focus on your core competencies while another company
focuses on theirs.
• Gain access to exceptional capabilities. Your return on investment is so much greater
when you outsource information technology to a firm that specializes in the areas you
need. Instead of just the knowledge of one person, you benefit from the collective
experience of a team of IT professionals. Outsourced IT companies usually require
their IT staff to have proper industry training and certifications as well.
• Free internal resources for other purposes. You may have someone in your office that
is pretty good with computers or accounting, but most likely these were not the jobs
he or she was hired to do. If they are spending time taking care of these things, who is
doing what they were hired to do? Outsourcing allows you to retain employees for
47

their highest and best use, rather than wasting their time on things that may take them
longer than someone who is trained in these specific areas.
• Resources are not available internally. On the flip side, maybe you don't have anyone
in your company who can manage your IT needs, and hiring a new employee is not in
the budget. Outsourcing can be a feasible alternative, both for the interim and for the
long-term.
• Maximize restructuring benefits. When you are restructuring your company to
improve costs, quality, service, or speed, your non-core business functions may get
pushed aside. They still need to be handled, however, and outsourcing is an optimal
way to do this. Don't sabotage your restructuring efforts by failing to keep up with
non-core needs.
• Function difficult to manage or out of control. This is definitely a scenario when
outsourcing to experts can make a big difference. But don't make the mistake of
thinking you can forget about the problem now that it's being "handled." You still
need to be involved even after control is regained.
• Make capital funds available. By outsourcing non-core business functions, you can
spend your capital funds on items that are directly related to your product or your
customers.
• Reduce Risk. Keeping up with technology required to run your business is expensive
and time consuming. Because professional outsourced IT providers work with
multiple clients and need to keep up on industry best practices, they typically know
what is right and what is not. This kind of knowledge and experience dramatically
reduces your risk of implementing a costly wrong decision.
6.6.2 The Risks
Anytime you give someone else responsibility for an aspect of your business, whether a full-
time new hire or an outside vendor, there is risk involved. Did I hire the right
person/company to do the job? Will they do what they are supposed to do? How will they
"fit" with existing employees or departments? These are the questions that nag owners of
small businesses when handing over the reigns to a new employee or vendor.
48

According to Yvonne Lederer Anotucci in her article "The Pros and Cons of IT
Outsourcing," business owners who consider outsourcing IT functions need to be aware of
the following risks:
• Some IT functions are not easily outsourced. IT affects an entire organization; from
the simple tasks employees do everyday to the complex automated aspects. Be sure
the outside vendor is qualified to take care of your greatest needs.
• Control may be lost. Critics argue that an outside vendor will never be as effective as
a full-time employee who is under the same management as other employees. Other
concerns include confidentiality of data and disaster recovery. However, a supervisor
that is knowledgeable in managing an IT staff member will usually be required.
• Employee morale may be affected. This is particularly true if you will be lying off
employees to replace their job functions with an outsourced firm. Other employees
may wonder if their job is at risk, too.
Most of these risks can be avoided altogether if you know what to look for in a vendor and
ask the right questions. Wondering how your current or prospective IT service provider
stacks up? These questions will get you thinking about what to ask and what to look for,
whether you want to hire a full-time IT professional on staff, or outsource to a support
provider.
6.6.3 The Rewards
Still not sure whether to outsource or not? According to Anotucci, who provided the list of
risks outlined above, there are many rewards you can expect when you outsource your
company's IT functions as well:
• Access to the latest and greatest in technology. You may have noticed how rapidly
software and hardware becomes obsolete in this industry. How is one staff person
going to keep up-to-date with everything? Outsourcing gives you the benefit of
having more than just one IT professional. And since it's the core competency of the
company, they can give you sound advice to put your IT dollars to work for you.
49

• Cost savings. Outsourcing your IT services provides financial benefits such as leaner
overhead, bulk purchasing and leasing options for hardware and software, and
software licenses, as well as potential compliance with government regulations.
• High quality of staff. Since it's their core competency, outsourced IT vendors look to
hire staff with specific qualifications and certifications. You may not know what to
look for if you're hiring someone to be on staff full-time, so you may hire the wrong
person for the job.
• Flexibility. Vendors have multiple resources available to them, while internal staff
may have limited resources and capabilities.
• Job security and burnout reduction for regular employees. Using an outsourced IT
company removes the burden from your staff who has taken on more than he or she
was hired for because "someone needs to do it." You will establish a better
relationship with your employees when you let them do what they do best and what
they were hired to do.
50

CHAPTER 7: CONCLUSION AND RECOMMENDATIONS
7.1 CONCLUSION
Outsourcing has become a major trend in human resources over the past decade. It's the
practice of sending certain job functions outside a company instead of handling them in
house. More companies whether they are large or small, are turning to outsource as a way to
grow while restraining payroll and overhead costs.
o Clearly form and communicate the goals and objectives of your project or business
relationship.
o Have a strategic vision and plan for your project or relationship.
o Select the right vendor or new hire through research and references.
o Insist on a contract or plan that includes all the expectations of the relationship,
especially the financial aspect.
o Keep open communication with all affected individuals/groups.
o Rally support and involvement from decision makers involved.
Outsourcing human resources functions comes with both benefits and risks. While the benefit
of cost savings and efficiency are easy to detect, the risks might be more difficult to see.
Employers that engage the services of human resources outsourcing providers and
professional employer organizations should closely examine the advantages as well as the
disadvantages that come with the decision to entrust HR functions to another entity.
Expense
The initial cost to outsource human resources functions is generally budgeted into your
organization's operating expenses. However, as their company adds more staff, the cost to
outsource will likely increase unless you’re outsourcing contract locks in an attractive rate
while your company is in its growth phase. Expenses that cannot be avoided include
additional outsourcing fees due to work necessary to comply with new laws that affect
employment. For instance, the American Recovery and Reinvestment Act of 2009 required
51

employers to subsidize terminated employees' health coverage. Companies that outsourced
their benefits administration were, therefore, subject to additional fees to modify their
benefits processes to comply with laws governing the continuation of health insurance
through the Consolidated Omnibus Budget Reconciliation Act.
Accessibility
A human resources error, such as a missing pay check or an inaccurate employee
identification number, can cause an employer's house of cards to collapse. Your company is
among many clients of an outsourcing provider, and if you require immediate assistance, you
might not be first in line. Outsourcing human resources functions may prevent instant access
to data and information needed to resolve HR issues right away. Accessibility and immediate
attention to your human resources functions are risks associated with outsourcing. Employing
qualified human resources professionals to perform certain critical HR functions can
minimize this risk.
Personal Attention
Employees are sometimes reluctant to ask questions about salary and benefits
information unless they can discuss their concerns with an HR staff member whom they trust.
When another entity handles your company's HR functions, employees may feel their issues
aren't being handled directly by the employer. Outsourcing human resources functions has the
potential to affect employees' level of trust in the HR department or the company as a whole.
Human resources professionals work diligently to improve the image and approachability of
their departments. The delicate balance between improving efficiency and maintaining the
human element of your HR department may be at risk when outsourcing HR functions.
Quality
An important consideration in the decision to outsource human resources functions is
quality of service and oversight. Employers engage outsource providers who can deliver
quality services in a number of human resources functions, from compensation and benefits
administration to employee training. However, the employer is ultimately responsible for
these functions, even though another entity is actually doing the work. Strict oversight
requires an in-house expert who can monitor the provider's activities to ensure HR functions
52

are being accurately processed; otherwise, your company risks sacrificing quality for
expediency and cost savings.
7.2 RECOMMENDATIONS
Outsourcing is indeed the new trend of business related operations effectively used at present
with its current trajectory going very well towards the future of a global competitive
environment. A lot of small, mid-range and multilevel companies are using outsourcing as
an integral part of their company operations such that they can move parts of their business
outside their mother company and proceed with dominating the more core aspect of their
competencies in order to give them more advantage over their competitors. One of the many
activities and departments that are popularly outsourced are human resource activities. The
reason for this is simply based on cost efficient, practical and pragmatic results so that
companies can better focus on their primary profit gaining strategies and operations. Human
resource outsourcing costs tends to be widely varied among Human Resource Outsourcing
companies providing such services but regardless of each HR outsourcing company’s core
vision and competencies all of them assert to lower their human resource operations to cut
back on Human Resource Outsourcing savings. This article will discuss several ways how to
further lower Human Resource Outsourcing costs.
Evaluate the total net revenue of your company for the past five years and see whether
outsourcing activities have indeed cut down on the additional costs of human resource
operations. Ideally, it will show a substantial decrease in cost and the primary focus should
therefore be geared to lower down cost even more after a comparable increase in operation
expenditures and taxes.
Management should assess the projected loads in workflow whether planning to go for an
active holiday period, organizing special events and activities or simply balancing optimum
daily work operations. The management level head should then evaluate the company’s
labour needs in order to anticipate which ones need specialized skills to be outsourced or not,
so as to cut back on outsourcing costs.
Remember, although outsourcing personnel to a third party provider may have cut down the
cost of expensive personnel with the same skill set. It is prudent to consider that outsourced
53

personnel will still be paid the same rate if management will have it do underrated work. In
that case it would be wise to consider hiring a 10 year old courier in his bike to deliver a
small package than have the HR find a professional driver do the same errand with a higher
pay having the same result.
By working alongside with accountants and department heads, agree on the exact amount of
working hours needed for productions operations and processes. You can then study which of
the outsourced positions are coming negative of their required output production but still
consume much resources with results of either break even revenue or incur net losses. You
can then decide to relieve such unproductive outsourced positions in order to save and keep
the remaining productive ones working on giving profitable results.
Finally, with every angle of outsourcing savings taken into consideration it is wise to present
the options on how to lower human resource outsourcing costs with a cautious presentation to
middle management heads. The said plans for Human Resource Outsourcing savings may
indeed have negative feedback, doubts and even some form of hostility therefore presenting
cost effective reduction of Human Resource Outsourcing activities should be carefully
approached.
54

BIBLIOGRAPHY
 Brown, D. & Wilson, S. (2005). The Black Book of Outsourcing How to Manage the
Changes, Challenges and Opportunities. New York: John Wiley & Sons, Inc.
 Burkholder, N. C. (2006). Outsourcing: The Definitive View, Applications, and
Implications. Hoboken, NJ: John Wiley and Sons.
 Chandler. A. (1977). The Visible Hand. Cambridge, MA: Harvard University Press.
 Dasborogh, M., Sue-Chan, C. (2002). The Role of Transaction Costs and Institutional
Forces in the Outsourcing of Recruitment [Electronic Version]. Asia Pacific Journal
of Human Resources, Vol. 40, 306-321.
 Davis-Blake, A. & Uzzi, B. (1993). Determinants of employment externalization: A
study of temporary workers and independent contractors. Administrative Science
Quarterly, 38 (2), 195.
 Domberger, S. (1998). The Contracting Organization: A Strategic Guide to
Outsourcing. Oxford: Oxford University Press.
 Friedman, D. (2006). Demystifying Outsourcing: The Trainer’s Guide to Working
with Vendors and Consultants. San Francisco: John Wiley & Sons.
 Gilley, K. M., Greer, C. R. & Rasheed, A. A. (2004). Human resource outsourcing
and organizational performance in manufacturing firms. Journal of Business
Research, 57, 232-240.
 Greer, C., Youngblood, S., & Gray, D. (1999). Human resource management
outsourcing: The make or buy decision. Academy of Management Executive, 13 (3),
85-96.
 Jeffay, J., Bohannon, S., Laspisa, E. K. (1997, Q1). Beyond benefits: The changing
faces of HR outsourcing. Benefits Quarterly, 41-45.
 Kabst, R., Giardini, A. (2008). Recruitment Process Outsourcing (translated title):
Eine Szenariostudie zur Akzeptanz von Outsourcing-Maßnahmen in der
Personalauswahl [Electronic Version]. Zeitschrift für Personalforschung, Vol. 22, Iss.
4, 370-388
 Kotabe, M. & Mol, M. J. (2005). A new perspective on outsourcing and the
performance of the firm. In Global Corporate Evolution: Looking Inward or Looking
Outward, ed. M. Trick. Pittsburgh: Carnegie Mellon University Press.
 Lee, D., & Hitt, M.A. (1995). Strategic restructuring and outsourcing: the effect of
mergers and acquisitions and LBOs on building firm skills and capabilities. Journal
of Management, 21 (5), 835-859.
55

 Linder, J. C. (2004). Transformational outsourcing. Sloan Management Review, 45
(2), 52-58.
 McIvor, R. (2005). The outsourcing process: Strategies for evaluation and
management. Cambridge; New York: Cambridge University Press.
 McKinsey & Company (2004, March). The McKinsey Global Survey of Business
Executives, March 2004.
 Mol, M. J. (2007). Outsourcing. Design, Process, and Performance. Cambridge:
Cambridge University Press.
 Porter, M. (1980). Completive Strategy. New York: Free Press.
 Sullivan, J. (2004) The Strategic case against outsourcing: Four reasons to minimize
outsourcing chapter 12 in Out of Site: An Inside Look at HR Outsourcing. By
Beaman, K. V. Austin, TX: Rector-Duncan.
 http://www.citehr.com/87558-scope-hr-outsourcing-risk-management.html [Accessed
on 21 July 2013]
 The Need for Outsourcing, http://www.roseindia.net/services/outsourcing/what-is-
outsourcing-in-detail.shtml [Accessed on 22 July 2013]
 4 Reasons Every Small Business Needs to Outsource, (July 2, 2011),
http://under30ceo.com/4-reasons-every-small-business-needs-to-outsource/ [Accessed
on 16 July 2013]
 Importance of Outsourcing,
http://www.bookkeepingoutsource2india.com/Importance_Of_Outsourcing
%20_india.html [Accessed on 18 July 2013]
 HR Outsource in Pakistan, http://www.outsource.com.pk/ [Accessed on 17 July 2013]
 Susan M. Heathfield, Outsourcing: A Strategic Solution, Outsourcing: Why and
What, About.com Guide,
http://humanresources.about.com/cs/strategichr/a/outsourcing.htm [Accessed on 18
July 2013]
 Top 6 Outsourcing Disadvantages,
http://operationstech.about.com/od/outsourcing/tp/OutSrcDisadv.htm [Accessed on 20
July 2013]
56

 The Disadvantages of Outsourcing HR Functions,
http://www.ehow.com/list_6500537_disadvantages-outsourcing-hr-functions.html
[Accessed on 21 July 2013]
 James Bucki, Outsourcing Advantages: A Back-Office Operations Illustration,
About.com Guide,
http://operationstech.about.com/od/officestaffingandmanagem/a/OutSrcAdvantg.htm
 Corporate Computer Services, Inc., IT Outsourcing: The Reasons, Risks and
Rewards, http://www.corpcomputerservices.com/articles/outsourcing-reasons
57

Revised-Project-Fatima-Rauf=18-08-2013

More Related Content

What's hot (20)

Viewers also liked (8)

Similar to Revised-Project-Fatima-Rauf=18-08-2013 (20)

Revised-Project-Fatima-Rauf=18-08-2013