Outsourcing Human Resources Management for SMEs

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1 Outsourcing Human Resources Management for SMEs Xiong huchen Feng qin College of Business and Administration Zhejiang University of Technology, P. R. China, Abstract Human resource management outsourcing is an efficient way for small and medium-sized enterprises (SMEs) to solve the problems related to human resource management by cutting cost off, improving efficiency and offering specialized service. This article firstly explained the meaning, reasons and contents of human resource management outsourcing, then analyzed the advantages and risks that human resource management outsourcing can bring to SMEs on the base of Chinese the actual situation, and finally, discussed several issues that Chinese SMEs should pay attention to in the progress of human resource management outsourcing. Key words SMEs, human resource management outsourcing Preface Chinese SMEs have a pivotal function in our national economy, According to national information center investigation about the development of SMEs in china, at the end of 2001, there were 29.3 million SMEs in china, occupied the total number of enterprises by 99% above, provided 75% of the employment opportunity approximately for 174 million people. In recent years, questions about the reform and the development of SMEs have aroused society's universal interest day by day, along with the state-owned enterprises change of structure, SMEs have played a huge role in aspects of alleviating the employment pressure, guaranteeing social stability, promoting business prosperity, growing demand, drawing folk investment, improving existing economic structure, and so on. However, because of small scale and limited fund, most of the SMEs do not have a special human resource department; do not have a systemic human resource management system, and can not provide a good welfare treatment and training opportunity to the employees. In an word, the ability of human resource management of SMEs is low. [1] (Jan de kok & Lorraine M Uhlaner, 2001)The difficulties in aspect of attracting and retaining the talented person are restricting SMEs development. Researches indicated that, there is a positive correlation between the effective human resource management and the successful enterprise performance in SMEs. American scholar Heneman and Tansky (2002) pointed out, human resource management plays a very important role in the fast development of SMEs, but there is few human resource management theory which suit SMEs. [2] By providing specialized human resource management service, human resource management outsourcing not only can cut the cost, but also can enhance the efficiency. It is an effective way to solve the problem of human resource management in SMEs. 1 Meaning & Reasons of human resource management outsourcing Outsourcing is a new enterprise strategy method which first emerges in the big background when west enterprises implement "returns host, strengthens core business" in 1990s. C. K. Prahnalad & Gary. Hamel s article <The core competence of the corporation>, which is written for "Harvard Commercial Commentary", pointed out the word outsourcing for first time. [3] Although the academe can not reach the agreement in the meaning of outsourcing, most opinions think it means To farm out to an outside provider or manufacturer in order to cut costs and enhance efficiency. We think human resource management outsourcing referring to using outside resource by letting professional service organizations undertake the work related to human resource management partly or completely, in order to liberate the manpower and physical resource from matter-of-fact work to participate in enterprises strategy plan with more time and energy, reduce cost, enhance efficiency, and win the competitive advantage. The reasons which urge enterprises resort to human resource management outsourcing, may trace the Adam. Smith's theory of labor division, he thought the division of labor can enhance worker's skill level, save the time, and reduce the complexity, subsequently enhances enterprises the labor 827

2 productivity. Theoretically speaking, the essence of outside human resource management outsourcing is the further extending of labor division. American scholar Mary F. Cook (2003) believed that, human resource management outsourcing is one of ways to reduce the general affairs and cost, enterprise may obtain the advanced computer and the software from professional organization, dilute e-hr cost through human resource management outsourcing [2]. American Hewitt management & investigation firm s research demonstrate that, the cost pressure, the demand of professional service, the influence of information technology and the function reforger of human resource department are the four factors which urge enterprises resort to human resource management outsourcing [4]. 2 Contents of human resource management outsourcing Theoretically, the scope of human resource management outsourcing is broad, including all human resource management work nearly. But in practice, human resource management outsourcing is generally divided into three kinds of services: affair service, consultation service and flow service. 2.1 Affair service Affair service includes computing and providing salary, computing and paying insurance welfare, managing staff file, and dispatching personnel. Affair service generally do not involve the progress of human resource management in interior of the enterprise, enterprise own human resource department still take charge of management function, service provider do not have any management responsibility. The disposal procedure of this service is unified, service provider does batch processing, and the enterprise can reduce cost from it. 2.2 Consultation service Consultation service includes program human resource strategy, design describe the organizational structure, writing work description, design human resource management flow, design performance and the salary system and staff retain plan, and planning e-hr. These kinds of service do a detailed diagnosis for enterprise, and provide a corresponding solution through professional management knowledge and experience; it also can help the enterprise to establish a human resource management system. The enterprise can obtain the advanced management knowledge and experience. 2.3 Flow service Flow service mainly includes salary management, bonus and welfare management, performance management, employment management and training management. Implementing this kind of service, the two parties should cooperate closely. Supervised by enterprises, the service provider undertakes part or complete technical human resource management function, their responsibility is to make these independent human resource management flows form a relative integrity system. The goal is to enable the enterprise to be concentrated to the strategic human resource management, promote the strategic value of human resource management. 3 Advantages for Chinese SMEs A highly effective human resource management system means the huge cost. The majority official human resource management, including employment, training, the performance appraisal, as well as the work description, all request the quite big cost [5] (Klaas,2000). Deficient finance resource, low prestige, as well as inaccurate position description make SMEs get a lower attraction to talented person than large-scale enterprises. [6][7] (Barber,1999)(Heneman&Berkley,1999). SMEs nearly do not have official training, because it is extravagant for them. (Heneman&Tansky, 2002)Staff's achievements appraisal most relies on the proprietor individual feeling and sentences [8] (Tim Mazzarol, 2003) According to the large-scale enterprises with fund and scale effect, Chinese SMEs human resource management level occupy a lower stage because of the restriction from congenital entrepreneur quality and acquired fund and scale, the concrete manifestations are do not have the systemic the personnel system, can not provide a complete welfare treatment and training opportunities to the staff, do not have the strategic human resource plan, can not attract the high quality person, have a high flow rate of essential person and a low rate of staff s satisfaction degree, which affected SMEs continuing and healthy development directly. Along with of the market competition, the human resource becomes SMEs one of the survival and development keys, correspondingly, it sets a higher level request to 828

3 SMEs human resource management. In this kind of background, human resources management outsourcing, which is a new human resource management tool, is demonstrating its importance and necessity. 3.1 Help to enhance efficiency As a result of restrictions from congenital and acquired factor, it is difficult for SMEs to establish an effective human resource management system; the work could not be standardization and the systematic in the interior of SMEs. But the specialized organizations are good at practical operation; they will do human resource management work more easily and effectively. Human resource management outsourcing not only can save SMEs massive time processing numerous and diverse work, but also enable them to have the opportunity to study the newest management pattern and experience, this "overflow" effect can promote the quality of human resource management personnel in interior of SMEs, can help to establish a consummate human resource management system, finally, enhance the efficiency of the whole human resource management. 3.2 Help to reduce cost The goal of enterprise is to pursue the biggest profit by the smallest cost, because outsourcing improves efficiency of human resource management, so the enterprise needn t continue to invest and maintain a advanced human resource management system and service platform, thus it can reduce enterprise's human resource management cost. According to the Fujitsu research institute measured, although the effect in the different domain is different, outsourcing reduces the cost by 10%-20% equally. Enterprise's major part of costs are cause by human resource management, the personnel recruiting, selecting, hiring and training all need to consume the massive manpower, physical resource and the financial resource. Especially, SMEs, who get a serious staff drain, have to deal with matter-of-fact work like new staff's employment and training frequently. If these work could be outsource to specialized organizes who can offer human resource information and high quality service, first, SMEs can reduce more cost than holding a huge human resource management system by themselves. Second, SMEs can reduce the unnecessary lose from dealing with staff amends unskillfully, and let the specialized organization undertake the risk of this aspect for them, so the reduction of the recessive cost is obvious. Third, SMEs can reduce a series of software and hardware cost, like the reduction of the technology and the equipment expense (for example computer equipment and special software), simplified staff and work place, and so on by human resource management outsourcing. 3.3 Help to select, attract and retain the talented person Compared to the large-scale enterprises, SMEs has insufficient capability to recognize talented persons, but through the specialized human resource management outsourcing service organizes SMEs can recognize talented person by a more professional way, even if it appears the deviation, the specialized organizes also have the responsibility which can not be shirked, the loss will not completely undertaken by SMEs. It is proved that, according to recognize talented person, it is more difficult for SMEs to attract and retain the talented person, because of the distance of salary, welfare and staff training between SMEs and large-scale enterprises. Therefore SMEs find that they can hire the talented person, but sometimes they can t attract and retain them. Specialized organizes who get human resource management experts with professional knowledge, skill and experience can offer more effective human resource management services for SMEs to attract talented persons, enhance staff's satisfaction degree and reduce staff's draining rate through understanding staff s demand better and designing more reasonable human resource policy. 3.4 Help to centralize resources to core business SMEs have a higher risk than large-scale enterprises. In intense market competition environment, because of the restriction from fund, product, market and the proprietors own quality, it is impossible for SMEs to pay the same attentions to each aspect, thus SMEs strategy should have the stress, they must seek competitive advantage on the specific link. After outsourcing the weakness out, SMEs are allowed to use the limited resource fully and concentrate to their core competition to seek the biggest benefit. 829

4 It is indicated in research that matter-of-fact work usually occupy the total human resource management by 65%-76%, and the strategic human resource management work which affected the enterprises long term development directly only occupy by 30%. If these matter-of-fact works are outsourced to human resource management service organization, the human resource department may extricate from the daily executive management responsibility, and then they can centralize core ability to participate in planning high level strategy to enhance human resource management efficiency. 4 Risks for Chinese SMEs The risk of human resource management outsourcing is refers to in the process of outsourcing part or entirely human resource management work, the probability which make the deviation between actual result and the anticipation of outsourcing, because of the complexity of the environment, the limit capability of recognizing core competitive ability, and deficient anticipation of outsourcing. [9] At present, human resource management of SMEs in china is at the stage of exploration. In addition, outsourcing organization's management level is ragged, as well as the laws and regulations are not mature, so if Chinese SMEs want to implement human resource management outsourcing effectively, they must face the risk from outsourcing. 4.1 Risk from own ability The enterprises own ability include the decision ability to decide whether to outsourcing, the adaptation ability to adapt the change from outsourcing, the negotiations ability about contracts, the relationship management ability, and monitoring ability. According to lager-scale enterprise, abilities above of Chinese SMEs are insufficient, which may make them at a passive condition in the progress of outsourcing. It caused SMEs can t monitor and control outsourcing effectively, even caused the fail of whole outsourcing. 4.2 Risk from choosing service provider There is much risk in the choice of human resource management outsourcing service supplier for SMEs. According to the opinion of information dissymmetry, there can be a phenomenon that poor pursuit superior inevitably. The key of a successful human resource management outsourcing is to choose a service provider with certain professional management ability and rich experience that can do the work effectively through a faster and better way. Because of the limitation of fund, it is not impossible for Chinese SMEs to choose a good service provider through inviting a big public bidding like large-scale enterprises. They can only choose through own understanding of service provider s condition, which often can cause the inaccurate information, possibly cause SMEs to make the wrong decision. It affects the entire outsourcing activities, even causes the fail. 4.3 Risk from staffs It is surely that the staffs will pay attention to the human resource management outsourcing. On the one hand, the staff worry about that they will lose job, Specially in the " family type" SMEs, there may be some conflict between management level, thus the work enthusiasm drops and morale reduces; On the other hand, after outsourcing, it is unavoidable that the staff will feel like exterior person control internal person, which is disadvantageous to enterprise's development. 4.4 risk from enterprises culture communication Risk form culture communication is a big barrier in the progress of human resource management outsourcing. An enterprise has own unique culture and value idea, which are decided by enterprise's history as well as enterprise creator s idiosyncrasy. SMEs also have its own enterprise culture, although its establishment period is not long and the scale is not big. If SMEs does want a true development, they must unceasingly strengthen the enterprise culture construction. When the service provider could not understand the enterprise culture enough, it will be some barrier in communication unavoidably, which even can cause the fail. 5 Measures for Chinese SMEs Human resource management outsourcing can bring much superiority for SMEs, but simultaneously it also can bring certain risk. If SMEs can think roundly about exterior and interior facts 830

5 before implementing, implementing and after implementing human resource management outsourcing, they can get huge income with a low level risk. 5.1 Before implementing outsourcing Because of paternalistic type management, there are some malpractices like casualness and blindness in the interior of SMEs in china. To realize a satisfying result, Chinese SMEs must change the proprietor s management attitude to avoid unscientific and reasonless decision in daily human resource management before outsourcing. The main policy-maker in SMEs should prevent to do human resource management work optionally, try to bring it to the right path, and form a standard management system. In additional, unlike large-scale enterprises, different SMEs may have different human resource management work, so SMEs must make sure that what kinds of work they have really got before outsourcing, which helps to make the human resource management outsourcing carried on smoothly. 5.2 Implementing outsourcing When SMEs are implementing to outsource part or whole human resource management, there are two choices they must choose carefully. First, confirming appropriate part of work which will be outsourced. South California University s Professor Adler (2003) pointed out: "When outsourcing any key activity, the enterprise should look before you leap." [10] Therefore SMEs should judge their core ability correctly, analyzing each human resource management function in order to judge which could be outsourced, and which could not. Generally speaking, there are two kinds of human resource management should not be outsourced: some of human resource management work is the enterprise s core ability; and some of the human resource management functions are confidential and particular. SMEs usually only outsource one or two part of human resource management, especially training and salary management. Second, it is the most essential question to choose an appropriate service provider with an abundant strength and a good credit record when implementing outsourcing. SMEs may do not have the abundant financial resource to find such company, but they should make sure the service provider through enough communication, which have got a detailed goal and plan. 5.3 After implementing outsourcing After implementing outsourcing, SMEs sometimes think they do not need to participate in the work which is outsourced; actually it is a wrong idea. SMEs should organize an appraisal group evaluating the outsourcing, including the aspects of quality, price, implementation condition, and so on. Also SMEs should assign a person specially to intendance and connect with the service provider. The most important thing is that the human resource management department should participate in the outsourcing from beginning to the end. They must cooperate with the service provider closely from investigating at the beginning, to planning and implementing, they need to provide the characteristic information about the enterprise promptly. In a word, there must be a sufficient communication between SMEs and service provider after implementing outsourcing. Thus the outsourcing not only can enhance efficiency, but also the ability of human resource management. 6 Conclusions Human resource management outsourcing is just started in China. Like the other rising industries, there must be some difficult in the progress of human resources management outsourcing s development. Regarding to SMEs in china, with limited fund and small scale, it is an important way to promote their competition advantage by human resources management outsourcing. References [1]Jan de kok, Lorraine M Uhlaner. Small Business Economics. Dordrecht, Vol.17,1ss.4,Dec.2001:273 [2]Heneman, Tansky, Human resource management models for entrepreneurial opportunity. In. J.A. Katz & T. M. Welbourne(Eds), Managing people in entrepreneurial organizations: Learning from the merger of entrepreneurship and human resource management. Boston: JAI Press,2002: [3]C. Prahnalad, G. Hamel. The core competence of the corporation. Harvard Business Review, May-June 1990: 79~91 831

6 [4]Mary F Cook. Strategy of Human Resource Management. Beijing :China RenMin University Press,2003:175~182(in Chinese) [5]Brian S. Klaas, John Mc Clendon, Thomas. W. Gainey Managing HR in the Small and Medium Enterprise: The Impact of Professional Employer Organizations. Entrepreneurship Theory and Practice, 25(1), 2002: [6] Barber, Huselid, Becker, Strategic Human Resource Management At Quantum, Human Resource Management, Vol. 38, Number 4, Winter 1999: [7]Heneman, Berkley. Applicant Attraction Practices and Outcomes among Small Businesses. Journal of Small Business Management, 37(1), 1999: [8]Tim Mazzarol. A model of small business HR growth management. International Journal of Entrepreneurial Behaviors & Research, 9(1), 2003: [9]Pengjianfeng. Conspectus of Human Resource Management. Shanghai:Fudan University Press,2003:492~494(in Chinese) [10]Paul S. Adler. Making the HR Outsourcing Decision MIT Sloan Management Review, Fall 2003:53~60 832

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