Outsourcing Human Resource Functions, Term Paper Example

¨Where do we take cleaners?¨ This is not the question that should preoccupy a CEO of any company. That is why more and more companies are using HR outsourcing as part of their HR strategy (Greer et al., 1999).

What is outsourcing in general and HR in particular? How does personnel outsourcing differ from recruitment, accounting or auditing services, legal advice, training courses, outsourcing services provided by the HR agencies? The main criterion to classify is the duration of the service (Lever, 1997). In other words, if a feature (personnel accounting, recruitment, accrual and payment of wages and so on) are transferred from one company to another on a long-term contract, this contract is outsourced. The duration of a contract is normally from one to five years. If the service is a unique case (for example a one-time search for a specialist for a vacant position) or short term cooperation, then this kind of relationship between the companies is not outsourcing.

Another very important distinguishing point – exclusion of a business process, which the company had passed to the provider, from activities of the company. Prior to the date of the contract the company independently performed this function.

To start outsourcing any company should consider three critical questions, namely:

1. Are the company’s personnel ready? By some employees outsourcing can be viewed as a threat of their job position.
2. Is the function to be outsourced a core function? One of the key points of outsourcing is delegating the functions which do not contribute to company’s competitive advantage over other firms, that is doing not belong to company’s core competencies.
3. Will outsourcing be resource-saving?

Resource saving is the main reason companies do outsource (Linda K. Stroh, 2003), but before going deeper into advantages and benefits, let’s consider what HR functions are core functions and when it can be outsourced (E. E. Lawler, D. Ulrich , J. Fitzenz, J. Madden , R. Maruca, 2004). There are three kinds of HR functions:

Internal HR:

• Developing overall HR strategy
• Preparing reports for management
• Motivational policy
• Developing a compensation package
• Strategic workforce planning and analysis
• Personnel policies including training and development

These are core strategic functions for the company because human capital constitutes up to 70% of total capital of the company and employee motivation and satisfaction have direct and strong impact on the company’s performance. In general, none of these functions should be outsourced.

HR Consulting:

• Labor relations,
• Managing organizational changes
• Managing staff training
• Recruitment
• Assessment of staff
• Certification

The importance of these functions depends on general strategy of the company and role human capital plays in it. In general, some of them can be outsourced without any loss in performance and motivation of the personnel while others should not.

Personnel workflow and payments management:

• Recruitment
• Personnel management system
• Accounting of employee information
• Preparation, collection and processing of primary personnel documents
• Maintenance and storage of archive documents

These functions, although not crucial at all, can take up to 60% of time of human resources department and thus can be easily outsourced.

One of the most important advantages is having high quality human resources services provided at lower costs (Mary F. Cook., 1998). The lower costs are explained by agencies´ returns of the scale and specialization which also explains higher quality. However, the key point for assessing the professionalism of HR-agency is its methods of work with the customer company in terms of prognosis, and most importantly, recruiting and integrating new personnel. If the agency commits only to finding specialists in a timely manner according to requests initiated by the customer, it is very likely that the staff of this agency has a very general idea of the professional approach to management of human resources. The correct way would be for the company-outsourcer together with the leadership of the customer company to develop a plan of projected turnover for the year, which takes into account the specifics of the business, prospects of its development, industry, current macro economic situation, seasonal factors and so on and recruit necessary staff in advance. This will give the stability to the customer’s business and reduce their risk and costs (http://www.allbusiness.com/human-resources/workforce-management-hiring/1084-3.html). As well, a professional agency, in addition to recruiting services, must undertake a preliminary consulting work: audit existing personnel activities, HR document review, interviewing CEO and leading experts, defining socio-psychological climate in the company, participation in HR policies development, monitoring of the outside level of wages and so on. This will not only continue to efficiently fill in vacancies in future, but also enable the management company to use this information to improve the quality of staff performance, to conduct a positive change in the corporate environment, which will reduce turnover, increase loyalty and even eliminate some tax and legal risks.

Besides better quality/price equilibrium, outsourcing allows to save on general expenses like office space, computers, software, licenses, etc.

Another extremely important advantage of outsourcing, though a little bit paradox, is in the need of human resources department to redefine its role in the company and to acquire new skills (E. E. Lawler, D. Ulrich , J. Fitzenz, J. Madden , R. Maruca, 2004). This nearly always means staff training, i.e. investment in staff, strategy and development of the company as innovative and effective HR-strategies can bring significant changes in the financial performance of the company. And the good news is that all is sponsored by the money saved through outsourcing.

Next, by omitting human resources function the company has more resources to focus on core competencies (E. E. Lawler, D. Ulrich , J. Fitzenz, J. Madden , R. Maruca, 2004) – the concept mentioned above. Eliminating of noncore business functions is important to understand what business processes cause the competitive advantage of each company. For example, the success of some companies depends on relationships with customers, while for others the most important are operational activities.

Moreover, significant growth of the company usually requires a significant increase in staff, which in turn leads to bureaucratization. Moreover, growth rate of the infrastructure of the company and its service units does not keep in pace with growth in core business. There is a famous example of Nokia in early 2000: during the period of rapid growth the number of employees was increasing by 1000 per month. When number of employees was close to 80 thousand the company decided to outsource a significant part of services functions. This allowed not only to ensure growth without the complication of the organizational hierarchy, but also weakened the impact of what happened shortly crisis in the industry. In many sectors of the economy which are subject to frequent fluctuations, the validity of such a strategy can not be overemphasized.

Besides, there are many other, less significant advantages of outsourcing that can be divided according to their classification as administrative, economic and legal.

Administrative benefits:

• Absence of HR administration and paperwork,
• No direct employment relation with new staff,
• No communication with trade unions, possibility to enter markets much easier, operational regulation of staff on individual projects, no downtime at production process),

Economic benefits:

•  Saving on taxes, sick leaves and vacations;
• Keeping business relatively small and thus more easily operational and manageable;
• Easier to enter new markets with unknown personnel legislation and mechanisms;
• Maintaining a simplified system of taxation;
• Redistribution of the budget (employees salaries – service);
• Reducing the cost of the overall compensation package;
• Increasing investment attractiveness of a company by increasing production per employee ratio,
• Reducing administrative costs associated with personnel.

Legal advantages:

• Removing most of the legal liability for staff;
• No extra formal obligations under the labor relations with employees, no court disputes, no social obligations, no employees taxes.

References

Edward E. Lawler, Dave Ulrich , Jac Fitzenz, James Madden , Regina Maruca.(2004) Human Resources Business Process Outsourcing: Transforming How HR Gets Its Work Done. San Francisco: Jossey Brass.

Mary F. Cook. (1998).Outsourcing Human Resources Functions: Strategies for Providing Enhanced HR Services at Lower Cost. Vancouver: Amacom.

Scott Lever. (1997) An analysis of managerial motivations behind outsourcing practices in human resources. Human Resource Planning.

Charles R. Greer, Stuart A. Youngblood and David A. Gray (1999). Human Resource Management Outsourcing: The Make or Buy Decision. The Academy of Management Executive.

Brian Becker and Barry Gerhart (1996). The Impact of Human Resource Management on Organizational Performance: Progress and Prospects. The Academy of Management Journal.

Linda K. Stroh & Deborah Treehuboff. Outsourcing HR functions: when–and when not–to go outside. http://www.entrepreneur.com/tradejournals/article/106559610.html

The Benefits of Outsourcing for Small Businesses. http://www.allbusiness.com/human-resources/workforce-management-hiring/1084-3.html