Human Resource Outsourcing Change the people or change the people

Transcription

1 Human Resource Outsourcing Change the people or change the people The social factors involved in HRO Master Thesis, September 2007 Jeroen de Boer ( ) Supervisors: Dr. Anne Keegan Drs. Stefan Mol Master Business Studies Faculty of Economics and Business University of Amsterdam

2 HRO: Change the people or change the people 2 Human Resource Outsourcing

3 University of Amsterdam Preface Houten, August 2007 Dear reader, You have just started reading my master thesis on human resource outsourcing. I have worked on this thesis for over half a year and I am proud of the final results. The topic of human resource outsourcing to me is a very interesting topic, since I believe this will be the future of HR. Human resource outsourcing is very new and also research to the social factors that are involved in outsourcing is a rather new approach. This gave some problems during my research since I had to reinvent many wheels and make many new bridges. Nevertheless I am proud of the findings and conclusions that I have made during this research and I think the Dutch market of human resource outsourcing (and also the rest of Europe) can learn a lot from experiences in other fields of outsourcing. I want to thank my supervisor Dr. Anne Keegan for her support during my thesis and for putting me back on tracks when I lost sight of my research. I also want to thank all persons and organizations that were willing to cooperate with this research. Without their support, this research would not have been as complete as it is now. For now, I would like to invite you to continue the reading and I hope that you will enjoy it. Kind regards, Jeroen de Boer BSc Human Resource Outsourcing 3

4 HRO: Change the people or change the people Index Preface 3 Index 4 Tables and Figures 7 1 Introduction Research goal and questions Research structure Relevance Limitations 11 2 Human Resources Human Resource Outsourcing (HRO) Possibilities of HR outsourcing 14 Forms of HR outsourcing The role of practices in HRO 16 Sourceability of human resources The role of HR within the organization The outsourcing process 19 Preparation 19 Vendor Selection 20 Due Diligence 20 Transition 20 Evaluation Theoretical overview Social factors 22 Information and communication 22 Dependency Risk 24 Morale Risk Empirical experiences and findings on HRO 25 3 Method of Research Data gathering Research sample 29 HR consultants 29 Outsourcing service providers 29 Outsourcers 29 Outsourcing knowledge institutions Data analysis 30 4 Findings Hogeschool van Amsterdam 31 Important factors in the outsourcing process 31 The role of social factors 32 Social effects of outsourcing 33 4 Human Resource Outsourcing

5 University of Amsterdam 4.2 The Kirkman Company 34 Important factors in the outsourcing process 34 The role of social factors 35 The role of cost factors 35 Forgotten factors in the process 35 Balance between costs and social factors 36 Social effects of outsourcing Balanced Management 37 Important factors in the outsourcing process 37 The role of social factors 37 The role of cost factors 38 Forgotten factors 38 Balance between costs and social factors 38 Social effects of outsourcing Cap Gemini 40 Important factors in the outsourcing process 40 The role of social factors 40 The role of cost factors 42 Balance between costs and social factors 42 Social effects of outsourcing PricewaterhouseCoopers 44 Important factors in the outsourcing process 44 The role of social factors 44 The role of cost factors 45 Forgotten factors 45 Balance between costs and social factors 45 Social effects of outsourcing Accenture 47 Important factors in the outsourcing process 47 The role of social factors 47 The role of cost factors 48 Balance between costs and social factors 48 Social effects of outsourcing Atos Origin 49 Important factors in the outsourcing process 49 The role of social factors 49 The role of cost factors 50 Balance between costs and social factors 51 Social effects of outsourcing Rabobank Nederland 52 Motivation of outsourcing 52 The personnel 52 Cost factors 53 Social effects of outsourcing ABN Amro 55 The European Acquired Rights Directive 55 Important factors in the outsourcing decision 55 The role of social factors 56 Social effects of outsourcing and off shoring Eneco Infra 58 The role of social factors 58 The role of cost factors 59 Social effects of reorganization 59 Human Resource Outsourcing 5

6 HRO: Change the people or change the people 5 Conclusions Analysis 60 Important reasons for outsourcing 60 Important factors during the process 61 The role of cost factors 62 The balance between cost and social factors 63 Social effects Conclusion and recommendations 65 Recommendations 65 References 67 Appendices 70 Appendix 1. List of interviewees 70 Appendix 2. Overview of responses 71 6 Human Resource Outsourcing

7 University of Amsterdam Tables and Figures Figure 1. Research model 10 Figure 2. Outsourcing possibilities 15 Figure 3. The continuum of Human Resource Activities 17 Figure 4. Sourcing decision matrix 17 Table 1. Sourceability of HR practices 18 Figure 5. HR Roles 19 Motivators of outsourcing 21 Demotivators of outsourcing 22 Figure 6. Theoretical overview 22 Figure 7. Information alignment 23 Figure 8. The communication grid of Van Ruler 24 Figure 9. Focussed conceptual model 25 Table 2. Motives of IT outsourcing 32 Figure 10. Cost curve for Human Resources 42 Table 3. Most important findings 64 Human Resource Outsourcing 7

8 HRO: Change the people or change the people 1 Introduction When you talk to people about outsourcing and ask them about the motivation for outsourcing, the pertinent first answer one will hear is to reduce costs. We can read it in the papers, in scientific literature, on the internet and we hear it on the streets. But when we hear it on the streets, the answers are common knowledge and not necessarily the only truth. Bumping into an outsourcing expert in the shopping mall, when asking people to give one reason to outsource, is very unlikely. But why then does everybody focus that much on the cost factors of outsourcing, when there are many more motivations for organizations to engage in outsourcing (see for example: Adler, 2003; Belcourt, 2005; Cooke et al., 2005; Davidson, 2005; Shen et al., 2004). Arguments that are presented in the literature as motivators for outsourcing the HR department are the desire to give the in-house HR department more time and space to concentrate on strategic HR issues and to save costs (AON Consulting, 2006; Belcourt, 2005; Cooke et al., 2005). Organizations also opt for outsourcing in order to use the vendor s specific knowledge on the field of HR and benefits of scope at the side of the vendor. Outsourcing also shifts burdens of risk away from the organization to the vendor (Cooke et al., 2005). Both in the form of necessary lay-offs when economies decline and in the form of a diversion of training costs for the HR professionals (Cooke et al., 2005; Shen et al. 2004). There thus are many motivations for organizations to engage in outsourcing and they all have their pros and cons. Yet that is not the focus of this thesis. When engaging in outsourcing, many factors become important during the process. There are off course the financial and legal factors. These factors are tangible, legal factors can be found in law books and industry regulations and financial factors can be found in year reports, financial analyses and the budget calculations. However, one factor is often overseen in the process and is given only little attention to in the literature; the social factors of outsourcing. Yet this is an important aspect in the process, since it are the employees who make or break the outsourcing case. You can have a perfect business case, but when in the end there are no employees left to do the job, the whole project is doomed to fail (see p. 40; 43). As Vogl (1994) stated, people can no longer be perceived as costs to be reduced but instead must be seen as long term assets to be grown and developed. The aim of this research is to gain more insight in the social factors that are involved in the outsourcing of the HR department. HR outsourcing is an emerging phenomenon on the outsourcing market and is gaining momentum as a tool for transforming the HR department (Mercer, 2006). 8 Human Resource Outsourcing

9 University of Amsterdam This thesis will research the social factors that are involved in HR outsourcing. This has a bit of irony in it, since social factors are often ascribed to human resource management, thus this thesis is in someway about the HR aspects of HR outsourcing. Being the youngest in the outsourcing family, HR outsourcing has a long way to come and gaining knowledge on the social factors that play a role in HR outsourcing in this early stage will be of the interest for all involved parties. Due to the fact that there is not much knowledge on human resource outsourcing, especially not on the Dutch market, the scope of this thesis will be that of an exploratory study. The theoretical analysis relates in a high degree to the experiences of the United States and little to no knowledge is available on the Dutch market of human resource outsourcing. It seems here that a knowledge-practice gap is present. 1.1 Research goal and questions The goal of this research is to gain some insight in the social factors that play a role in HR outsourcing, this research is about HR aspects on HR outsourcing. The influence and role of social factors in general are still underestimated and especially in the field of HR outsourcing, HR aspects may not be overseen. With this research I hope to create an opening and interest for further research on the social factors of (HR) outsourcing, since I personally believe they are very important and given too little attention. The role of social factors will be compared with the cost factors of outsourcing, since for many practitioners, the cost factor usually is the first argument for engaging in the outsourcing decision (see: Borg, 2003 and chapter 4). To get more knowledge on this topic, the following research question will be answered: Are social (risk) factors taken into account in human resource outsourcing decisions and if so, in what ways? In order to be able to answer this question, the following sub questions were derived: What is human resource outsourcing? What factors are considered in HRO decisions? What are the social factors on HRO? Are social factors taken into account in HRO decisions? Besides these questions, the following question regarding cost factors will be answered, to be able to compare the influences of cost factors and social factors. What role do cost factors play in HRO decisions? Human Resource Outsourcing 9

10 HRO: Change the people or change the people 1.2 Research structure This research will be twofold. On the one hand, there will be a literature review on human resource outsourcing in general, mostly based on US research. On the other hand there will be a practical focus on the social factors involved in the outsourcing project in The Netherlands. Topics to be covered will be what HR outsourcing is, what factors play a role in HRO, what the social factors of HR outsourcing are and how they are taken into account. The practical part of my research is based on in-depth interviews with subject mattering experts, such as HR consultants and outsourcing service providers on the Dutch market. A total of 12 consultants, outsourcers, service providers and representatives of knowledge institutions were interviewed for their experiences with social factors in (human resource) outsourcing. Figure 1. Research model Theoretical Research Empirical Research Analysis Research Question & Sub-questions Human Resource Outsourcing Factors motivating outsourcing Social factors in HRO Expert interviews: Consultants Service Providers Outsourcers Knowledge Institutions The relation between the theoretical and empirical findings Conclusion & Recommendation The research model, as shown above, is a schematic overview of my research. The clear distinction between the theoretical parts and the empirical part show the structure of this thesis. The empirical part is oriented by the theoretical research in that certain themes are developed and explored, interview protocols are drawn up based on salient issues and space is left for open questions to surface issues in practice in a Dutch context that are currently under explored or not present in the theory. The analysis of the findings of the empirical research are presented as research results and in the final part of this thesis I will couple the findings from the empirical and theoretical research. Finally there will be a conclusion and recommendations, based on the research problem and questions and the final analysis. 10 Human Resource Outsourcing

11 University of Amsterdam 1.3 Relevance This research will have both theoretical and practical relevance for future research and management. Gaining insight in the Dutch human resource outsourcing market will be very interesting for both the service providers (outsourcing companies, consultants) and for the companies who want to outsource their HR departments. It will give them insight in the benefits and most of all, the risks and will enable them more in making solid decisions in the process of HR outsourcing. The theoretical relevance will be the fact that there is only little research both on the Dutch market of human resource outsourcing and on the effects of social factors on outsourcing in general. Most current literature involves the United States and the United Kingdom. The United States is the predecessor in this field and the UK represents the European market, yet many differences exist between these two and The Netherlands. Further more, recent studies (Mercer, 2003, 2006) show that organizations have a great desire for HR transformation towards a more strategic role of HR within the organization. Outsourcing HR might be the means in achieving these desires. And although it is still very uncommon, outsourcing is gaining momentum as HR functions seek to optimise their servicing capabilities (Mercer, 2006 p. 17). 1.4 Limitations The major limitation to my research is the fact that there is only little knowledge and information regarding the influences of social factors on outsourcing, let alone on HR outsourcing. Social factors that are mentioned in the literature are most of the time presented as arguments against HR outsourcing. Thus there is not much earlier work to continue on or use as a guideline. Besides that, the phenomenon of HR outsourcing on a large scale (that is, full outsourcing of a part of the HR department) is still in its infancy. Especially on the Dutch market, human resource outsourcing is still a rarity and during my research I experienced that only few interviewees were familiar with human resource outsourcing. Therefore, this study will be an exploratory study, with expert interviews and cautious concluding recommendations with respect to the theory and practice. Nevertheless, the lack of empirical research gives plenty of room for further research and this thesis might be a start up or guideline for this further (empirical) research. I expect that there are only little differences between social factors in human resource outsourcing and other outsourcing activities, such as IT outsourcing. It is plausible to assume that the social effects of foregoing outsourcing processes can be seen as important factors in upcoming outsourcing processes, regardless of which part Human Resource Outsourcing 11

12 HRO: Change the people or change the people of the organization was and will be outsourced. Social factors appear everywhere where human capital is changed or transformed. These expectations were confirmed both in the literature (compare for example: Borg, 2003; Delen, 2005) and during the interviews (see p. 32). Research assumption: Social factors are generally applicable to outsourcing processes, regardless of which organizational department is outsourced. Every process that involves the change or transformation of human capital will involve roughly the same social factors. Therefore, interviews are included with not only experts on human resource outsourcing, but also with HR experts on outsourcing in general and since human resource outsourcing has not been applied yet on the Dutch market, interviews with outsourcing organizations involved most of the time IT outsourcing. The results, social factors and effects involved in outsourcing will not differ much between organizational departments. The only likely difference visible here will be the degree of influence of the social factors and the size of its effects. For example, HR departments have employment ratios of 1:100 up to 1:500 employees. An organization with 5,000 employees will therefore have between 10 and 50 employees on HR, while the IT-department can involve 1,000 employees. It is obvious that the social effects of IT outsourcing will be more present than in the case of HR outsourcing. 12 Human Resource Outsourcing

13 University of Amsterdam 2 Human Resources In this chapter, more insight is given on the possibilities of human resource outsourcing and factors that play an important role in the process of HRO. From this general analysis, a focus will be made towards the social factors that play an important role. This focus will be a basis of information for the empirical research. 2.1 Human Resource Outsourcing (HRO) In the 1990 s a new trend in business process handling emerged, called outsourcing (see for example: Delen, 2005, Euroforum, 2004). The shift of simple administrative practices towards external vendors, gave many organizations the possibility to focus on what they do best. New markets emerged for ICT-outsourcing companies, who provided in a fast growing desire for external expertise on the ICT market. ICT outsourcing was seen as a success and many firms benefited from this, there were companies that could outsource activities that they lack the knowledge or fulltime need and vendors saw themselves growing fast (Corbett, 2005). When organizations decide to outsource, they decide to contract an external vendor to acquire their competencies to fulfil in a need for certain services of which the organization thinks they cannot perform best. Therefore, the definition of outsourcing that will be used in this thesis is adapted from Adler (2003): Outsourcing A relationship in which a company contracts with a vendor that rents its skills, knowledge, technology, service and manpower for an agreed-upon price and period to perform functions the client no longer wants to do. Adler (2003, p. 53) As Behr and Faas (2005) argued, the sourcing dilemma always involves at least two organizations, the outsourcer and the vendor. Within this thesis all references towards the outsourcer involve the organization that wants to outsource certain activities and the vendor is the organization that supplies the demanded activities. In most situations, the non-core activities of an organization that will be outsourced, are core activities of the supplier (Borg, 2003). Having seen the successes of outsourcing in ICT, other parts of organizations became enthusiastic about it and followed. Finance, logistics and even production became open for outsourcing. The best example of this is the sports brand Nike, they outsource everything except brand marketing (see: Gilley & Rasheed, 2000). Outsourcing the human resource department was an obvious next step in this trend (see for example: Greer et al., 1990). Payroll was the first item that was open for outsourcing Human Resource Outsourcing 13

14 HRO: Change the people or change the people and with success (see: Davidson, 2005b; Gilley et al., 2004; Intermediair, 2007). Many organizations celebrate the fact that they nowadays lack the administrative burden of payroll and benefits administration. From these successes it is only a small step to decide to outsource even more human resource activities. In this thesis, the outsourcing of human resource activities involves a variable degree of delegation of power and activities. Both the outsourcer and the external vendor can agree upon different degrees of delegation. Sometimes an external vendor is only used for expertise and sometimes a full department is outsourced to the external vendor (see also figure 2, p. 15). Human Resource Outsourcing The outsourcing of human resource practices to an external vendor, of which the degree of delegation of power and activities are variable. 2.2 Possibilities of HR outsourcing The question whether or not to outsource raises a lot of questions that have to be answered before this issue can be addressed. Examples of these questions are the possibilities of outsourcing. Are there enough providers for the service, with what frequency are the practices needed and can they be delivered, the degree of information availability and much more (see also Lepak et al., 2005). In other words, are there enough options for outsourcing. When only one firm provides the service desired, is it then wishful to outsource or will the service provider become a monopoly supplier with too much power? Every company needs to find its own balance between the benefits and risks of outsourcing and they need to conclude for themselves what the most viable option will be. Full outsourcing can be an option, placing the complete HR department, personnel included, at the site of an external provider. A more gentle start is to outsource only parts of the HR department, such as the transactional (administrative) functions of the HR department. A very important statement that Belcourt (2005, p. 273) made is outsource when somebody can do it better than you. I think this statement approaches the essence of the outsourcing decision. Nevertheless prudence is necessary and the interpretation of the word better must be taken in its most broaden sense. Not only need a firm look at the economical capacities, but also the social and organizational influences that are involved in HR practices. It is very likely that an organization is not able to deliver an HR practice at the lowest costs internally, but does decide to keep it in-house because of cultural influences. 14 Human Resource Outsourcing

15 University of Amsterdam Forms of HR outsourcing The degree of delegation of power and activities of HRO are visible in the different forms of human resource outsourcing; knowledge outsourcing, capacity outsourcing, executive outsourcing and result outsourcing, based on (Behr & Faas, 2005). The first form of outsourcing is knowledge sourcing and has no delegation of power and activities. Here external companies are contacted on an ad-hoc and temporary base to fill knowledge gaps in the firm. This form of outsourcing is also known as consultancy. Although many firms use this form of support from an external vendor, they will most often not name this outsourcing. Most of the time, this form of outsourcing will evaporate in time, since the organization gains knowledge and experience in the tasks where help was needed (Behr & Faas, 2005). The second form of outsourcing is capacity sourcing, where a more structural support is needed. External personnel will be implemented in the organization to support them on a more permanent base. In this phase, the organization still has control over time, place and method, resulting in no delegation of power and little delegation of activities. The third form of outsourcing is executive sourcing, where activities can be physically placed outside the company. The external vendor can choose freely where and by who the activities will take place, but the method will still be conform the wishes of the outsourcing organization. Here the first real delegation of both power and activities become visible. The final form of outsourcing is result sourcing, this is complete outsourcing, also known as business process outsourcing (BPO) (see also: Borg, 2003). The organization does not want to be involved in the complete activity, they only want to see the desired results. The external vendor is free to choose method, time and place resulting in full delegation of power and activities to the vendor. Figure 2. Outsourcing possibilities Knowledge Capacity Executive Result Source: Behr & Faas (2005) Human Resource Outsourcing 15

16 HRO: Change the people or change the people 2.3 The role of practices in HRO Human Resource Practices Activities related to the personnel side of organizations, ranging from pay administration to the strategic implementation of human capital. Many researchers divide HR practices into different categories. Many authors make a two way distinction between core an non-core HR practices (Prahalad & Hamel, 1990). Others include a third category of practices where a distinction is made between administrative, practical and strategic HR practices (Carrig, 1997; Snell et al., 1995; Wright et al., 1997). Lepak & Snell (1998) divided the HR practices into four categories, being core, traditional, peripheral and idiosyncratic activities. The core and idiosyncratic activities are highly firm related, where the core activities are activities that give the company a competitive or strategic advantage and idiosyncratic activities are the activities that are important to the firm but do not add value (see also: Lepak et al., 2005). On the other hand there are the traditional and peripheral activities that are more generic. Traditional activities are important for the survival of the firm, but are necessary and used by all firms and therefore create no competitive advantage. Finally, peripheral activities are the most generic activities that are performed on the side (see also: Lepak et al., 2005). The definitions given to HR practices and most of all the number of distinct categories differ a lot. The way they are distinguished is relevant to the practical discussion on outsourcing. For my research I would like to follow a three-way distinction as made by Carrig (1997) and Wright et al. (1997). They make a distinction between transactional, traditional and transformational practices and many of the before mentioned distinctions can also be applied to this distinction. The transactional activities cover the administrative tasks of the HR department such as benefits administration, record keeping and payroll. These activities involve only simple administrative transactions and are currently the most common practices to be outsourced, as can be noted from the AON 2006 National Employee Benefits Trends Survey Analysis (AON Consulting, 2006). The traditional HR activities are personnel related activities such as training, recruitment and performance management. Those activities can, in some cases, be (partly) outsourced. Most of these activities can easily be done by an external vendor, but firm specific knowledge involving strategy and company culture is becoming more important in some of these activities and therefore these activities are rarely outsourced by larger firms (Belcourt, 2005). When outsourcing these activities, this must either occur with a partner who has extended knowledge about the firm or intense communication is necessary. Finally, there are the transformational HR activities. These activities are the activities that can transform the 16 Human Resource Outsourcing

17 University of Amsterdam firm into its next generation, therefore these activities are bound to be performed inhouse. Examples of such activities are strategic alignment and knowledge management (see also: Carrig, 1997; Lepak et al., 2005). Figure 3. The continuum of Human Resource Activities Non-Core Core Administrative Practical Strategic Peripheral Traditional Idiosyncratic Core Transactional Traditional Transformational Benefits Administration Employee Services Training Compensation Knowledge Management Business Partner Record Keeping Performance Management Recruitment Management Development Strategic Planning Communication Employee Relations & Labour Organizational Development Based on: Carrig (1997); Lepak & Snell (1998); Snell et al. (1995); Prahalad & Hamel (1990) Sourceability of human resources The sourceability of human resources depends on the knowledge that is needed in order to fulfil the activities. Activities that are eligible for outsourcing are the activities that require high HR-specific knowledge and low firm-expertise (see also: Delen, 2005). The distinction thus is between the strategic relevance of HR practices on the one side and the effectiveness of the delivery system, hence the degree of HR-specific knowledge on the other side. Figure 4. Sourcing decision matrix Effective internal delivery efficiency Executive sourcing Insource Low strategic relevance High strategic relevance Result outsourcing Capacity sourcing Ineffective internal delivery system Adapted from: Mercer 2003 Human Resource Outsourcing 17

18 HRO: Change the people or change the people Since most of the HR practices involve secondary, supportive activities, that have only little strategic relevance to the firm, most of the HR activities can be assigned to the left half of the decision matrix. When filling the continuum of HR activities into the sourcing decision matrix, an indication can be made with respect to the sourceability of HR activities. Table 1. Sourceability of HR practices Insource / capacity outsourcing Business Partnering Strategic Planning Knowledge Management Organizational Development Management Development Executive outsourcing Performance Management Recruiting Training Result outsourcing Compensation Employee Relations & Labour Employee Services Record Keeping Benefits Administration It is clearly visible that the three way distinction made here between the outsourcing possibilities has high resemblance with the distinction between transactional, traditional and transformational human resource activities. 2.4 The role of HR within the organization Next to the different practices HR performs, HR can operate in different roles. According to Ulrich (1997), the role of the HR department in competitive organizations can be divided into four distinct roles. These roles focus on the process or the people on the one hand and on short term or long term timeframes on the other hand (see figure 5). When focussing on the short term processes, we have the administrative expert. In this role, HR is responsible for managing the infrastructure of the firm, they need to build an efficient infrastructure by reengineering the organizational processes. For example by shared services. If the focus on the short term changes from the processes to the people, we have the employee champion. In this role, HR s tasks are to increase employee commitment and the capabilities of the workforce by providing the employees the resources they need (Ulrich, 1997). 18 Human Resource Outsourcing

19 University of Amsterdam When focussing on the long term processes, HR takes the role of the strategic partner. In this role, HR is responsible for the alignment of HR and the organizational strategy. This is the role that organizations want their HR departments to have nowadays (Mercer, 2003; 2006). Focussing on the people instead of processes, HR becomes a change agent. In this role, HR tries to create a renewed organization by managing employee transformations (Ulrich, 1997). The role of change agents will play an important role in the outsourcing process, since HR transformation is desired (Mercer, 2003; 2006). HRO might play an important role in the HR transformations to a strategic partnership, since HR outsourcing will give the internal HR department time and possibilities to focus on the more strategic aspects of outsourcing (see also: Adler, 2003; Belcourt, 2005). Figure 5. HR Roles Future / Strategic Focus Strategic Partner Change Agent Process People Administrative Expert Employee Champion Day-to-day Operational Focus Source: Ulrich (1997) 2.5 The outsourcing process Outsourcing projects need to follow a solid pathway (see Euroforum, 2004), in order to increase the chance for success of the project. Social factors will play different roles in these phases. The degree of influence that social factors have differ per organization and per outsourcing project, yet generally can be said that the sooner social factors are included in the process, the smaller the negative impact of the social factors will be. Preparation The preparation phase is, obviously, the first phase in the outsourcing process. This phase forms the fundamentals of the complete process and therefore needs to be Human Resource Outsourcing 19

20 HRO: Change the people or change the people taken good care off. In the preparation phase, the organization formulates their goals and wishes in their statement of principles. From this, a business case is made and requests for information (RFI) towards vendors can be made. Here, the first influences of social factors appear, the outsourcing process needs to be viewed from the perspective of change management and legal constraints on the workforce (Wet overgang onderneming). A communication plan needs to be formed as a guideline for the complete process. It is very important to understand the social effects of outsourcing in this stage, since this will increase the chances of success. Vendor Selection When the decision to outsource is made in the preparation phase, the question arises to which vendor to outsource. In the vendor selection phase, this question will be answered. It is important to find a vendor that matches the organization best, not only with respect to performance, but also (and maybe more important) with organizational culture. When at the end of this phase two or three vendors are selected, a request for proposal (RFP) is sent to them, in which social factors can already be included. Due Diligence The phase of due diligence is the phase where the first real interaction with the vendor will take place. The vendor will make an analysis of the difficulty of the migration in order to get a better insight in the costs and length of the project. When all parties agree to the outcome of this phase, one vendor will be selected for the outsourcing project (Euroforum, 2004). With this vendor agreements are made for the transfer of personnel, contracts are signed and the actual transition can start. Here the outsourcing process will become visible for the outside world and organizational social factors such as image become important. Transition The transition is the execution phase of the project. The transfer of personnel will occur in this phase and the activities are transferred from the location of the outsourcer towards the location of the vendor. This process can take up to several years to complete, since it involves very complex activities. In this phase it is of the utmost importance that employees are taken good care off, key-figures in the outsourcing process will be designated that are important for a smooth finish and redundant employees will be transferred. In this phase, social factors play a major role and all preparations that have been made in earlier phases regarding the social factors, will result in less friction here. 20 Human Resource Outsourcing

21 University of Amsterdam Evaluation Finally, periodically or when the outsourcing agreement comes to an end, evaluations need to take place. In this phase, all involved parties can learn from their mistakes and the decision to continue the outsourcing, either at the current vendor or with another vendor, will be made. 2.6 Theoretical overview Companies can have various reasons to decide to outsource (parts of) their HR department (see also: Adler, 2003; Belcourt, 2005; Shen et al., 2004). Most commonly heard arguments are that outsourcing is desired to give the in-house HR department more time and space to concentrate on strategic HR issues and to save costs (see also: AON Consulting, 2006; Belcourt, 2005; Cooke et al., 2005; Lever, 1997). But outsourcing decisions based on cost factors are one of the most complex decisions, since it is very difficult to describe the profits and define the baseline costs (Euroforum, 2004). Another argument is the specialist knowledge that is required nowadays in for example the legal field of HR (see also: AON, 2006; Davidson, 2005). Therefore firms opt for outsourcing in order to use the provider s specific knowledge and benefits of scope. This also shifts the burden of risk away from the company (Cooke et al., 2005). Both in the form of necessary lay-offs when economies decline and in the form of a diversion of training costs for the HR professionals (Cooke et al., 2005; Shen et al. 2004). Motivators of outsourcing Organizational evolution Expertise Cost saving Strategic focus Although outsourcing might sound like the ultimate solution, there are some important adverse consequences of outsourcing. The HR department of a company is that part of the company that deals with personnel information. This information can be confidential and outsourcing this to an external company might raise some objections. This may lead to a loss of employee morale and thus a loss of company effectiveness. The issue of cost saving as an argument in favour of outsourcing is also doubtful. When organizations outsource activities, the external vendor needs to be monitored. These monitoring costs can exceed the cost savings of outsourcing, making the outsourcing decision a financial disaster (Cooke et al. 2005). Human Resource Outsourcing 21

22 HRO: Change the people or change the people Demotivators of outsourcing Hidden costs Confidential information Dependency on the vendor Employee morale Based on the theory above, a broad overview of theoretical issues can be drawn and based on this broad overview, the conceptual model will be derived. Figure 6. Theoretical overview Strategic and competitive value of the activity YES Core activity NO Non-core activity Cost factors ex ante: orientation, preparation, initiation unit costs: internal and external cost of activity ex post: monitoring, evaluating, prolonging or terminating Social factors Confidentiality of information Dependency Loss of skills / knowledge Hidden costs Employee morale In-house The outsourcing decision Knowledge sourcing Capacity sourcing Organizational factors Frequency of need Firm size (lack of) knowledge Individual factors Emotions Egocentric behaviour Values and beliefs Bounded Rationality Situational factors Political context: shift of burden Historical Development: organizational evolution, technological improvements Operational factors: strategic focus, work overload Executive sourcing Result sourcing 2.7 Social factors From the theoretical overview, now a focus is made towards the conceptual model of this research; social factors in human resource outsourcing. Social factors are often presented as demotivators for outsourcing in the US literature (see for example: Adler, 2003; Appelbaum et al., 1997; Cooke et al., 2005) Information and communication The transfer of information bares certain risks. With outsourcing, crucial and confidential information might leak to competitors in the market (Adler, 2003). This can be information regarding business policies, production plans or pay regulations. If competition is aware of the pay structure in an organization, talented employees can easily be bought out by (slightly) exceeding the current salary of employees. 22 Human Resource Outsourcing

23 University of Amsterdam Besides that, information alignment between the outsourcer and vendor is important. Both parties need to have good internal and external communication (see figure 7). If one of the communication lines is missing or incomplete, the project will most likely suffer from delays, hidden costs and even failure to succeed. The complete chain is as a strong as its weakest tie. Figure 7. Information alignment Outsourcer Vendor Management Management Coordination Coordination Operations Operations Source: Euroforum 2004 An important component of communication is the objective that the sender and receiver both understand the message and interpret it the same way. Distortion in the information process is common and can totally vaporize the desired effect of communication. In order to transfer the information correctly and in a good manner, the information grid of Van Ruler is a good guideline (see Euroforum, 2004; Koeleman, 2006). The four basic strategies of communicating are divided into one and two way communication on the one hand and announcing or influencing on the other hand. The first communication strategy is informing (controlled one-way communication to make announcements), this strategy of communicating can be used in the first phases of the outsourcing process, when all involved parties are informed of the upcoming changes. The second one-way communication is to persuade. Here employees can be influenced towards a positive view of the outsourcing project. This phase can be used to guide individuals through the emotional curve. The first form of two-way communication is the dialogue, here an open exchange of ideas and statements is important. This method can be used to achieve (individual) agreements on the execution of the outsourcing process, for example agreements on the date of transfer and compensations. The final form of two-way communication is the formation method. Here the formation of an alliance is important and this method of communication can be used between the outsourcer and the vendor and between their share and stakeholders, such as the board of directives, unions, work councils. Human Resource Outsourcing 23

24 HRO: Change the people or change the people Figure 8. The communication grid of Van Ruler Managed one-way communication Inform Persuade Announcing Influencing Dialogue Form Two-way communication Source: Euroforum (2004) & Koeleman (2006) Dependency Risk When outsourcing activities to an external vendor, an organization can become dependent of the external vendor, which gives the external vendor more power than desired (see also: Adler, 2003; Borg, 2003). This can result in higher costs, loss of control and inflexible contracts. Besides that, internal control of operations can be lost and the in-house knowledge of activities might slip away, which will lead to a loss in competitiveness and skill supply when the outsourced activities are brought back in house (Cooke et al., 2005). Morale Risk When outsourcing activities are implemented, this will always affect employee relations. Since activities are externalized, some labour will be excessive and personnel has to be transferred or laid off. Employees that remain within the company might be afraid to loose their job in the next phase of outsourcing and the feeling of a safe working environment is disrupted (see also: Belcourt, 2005; Borg, 2003; Shen et al., 2004). The emerging wisdom is that outsourcing has a negative impact on people (Kakabadse & Kakabadse, 2000 p. 695). This might lead to a disintegration of the organizational culture, where feelings of self-esteem, participation in a group process and job security are compromised and where employees loose their motivation and trust in management. This is often referred to as the survivors syndrome (Appelbaum et al,. 1997; Kakabadse & Kakabadse, 2000). Besides that, every individual goes through an emotional curve, which is also referred to as the mourning process. This process involves the following phases: denial, anxiety, anger, handling, acceptance and active attitude (Euroforum, 2004). It is important to recognize these phases at the side of the 24 Human Resource Outsourcing

25 University of Amsterdam employees and react to and communicate with them in a proper way for the phase they are in. Important note here is that every individual goes through its own curve. Some reach acceptance fast, others tend to get stuck in the anxiety phase and need active support to overcome this. From this theory, the conceptual model can be drawn as can be seen in the figure below. This research will investigate whether the arrow between the social factors and the outsourcing decision is present at all and if so, what its influences are. Figure 9. Focussed conceptual model Social (Risk) factors Information and Communication Dependency Loss of skills / knowledge Hidden costs Employee morale? The outsourcing decision NO YES In-house Knowledge sourcing Capacity sourcing Executive sourcing Result sourcing 2.8 Empirical experiences and findings on HRO The American Bureau of National Affairs (BNA) conducted a benchmark research in 2004 and came with some important conclusions. They stated that the successes of outsourcing exceed the failures, with 78% of the respondents citing an outsourcing project that exceeded the expectations and only 30% of the respondents could give an example of an outsourcing project that failed to meet the goals (BNA, 2004). With respect to cost saving results, 51% rate their activities as a success in terms of net cost savings, yet a (shocking) 44% rate their success as undetermined (BNA, 2004). Gilley et al. (2004) conclude that outsourcing payroll and training activities have significant positive effects on stakeholder performance and firm innovation. This is also reflected by Dickmann (2004) who concluded in his research that the average annual costs of payroll is 69 per FTE for firms that provide payroll internally and 63 per FTE for firms that outsource payroll. Thus, the question whether outsourcing human resources is suitable can be answered positively, yet we do not know much on the social effects of human resource outsourcing. Many researches that have been done in the past focus on what types of HR practices are outsourced today and with what motives (AON Consulting 2006; Borg, 2003; Kakabadse & Kakabadse, 2005; Lever, 1997; Sako & Tierney, 2005). However, recently a nice example of social aspects in human resource outsourcing on the Dutch market appeared in Intermediair (2007). In this journal, an article was written about the positive effects of human resource outsourcing. In the article, several persons were asked for their experiences about HRO and although one Human Resource Outsourcing 25

26 HRO: Change the people or change the people might expect a negative reaction, everybody was quite positive. The employees that were interviewed were outsourced from two major organizations to a HR shared service centre and they are all quite positive about the results of the sourcing projects. Arguments that were given are the same arguments that can be found in the literature, such as new opportunities of growth, appreciation and being primary process. It is also said that social aspects such as communication and accompaniment of employees is considered important. 26 Human Resource Outsourcing

27 University of Amsterdam 3 Method of Research 3.1 Data gathering In order to gain empirical evidence, many forms of data gathering can be used. Within this, the distinction is made between quantitative and qualitative data. When using quantitative data analyses, data is gathered on the basis of quantity and the data gathering can be achieved by for example surveys or questionnaires. A major benefit of this kind of data analysis is that a large sample group can be reached with standardized answers in response categories (see also Patton, 1987). Limitation of this kind of gathering is that there is little room for innovative input from the respondents and the respondents might be lured into answering the questionnaire in a socially desirable way. Qualitative data gathering on the other hand is the method of analysis that gets the researcher in-depth and detailed information on a restricted number of cases, interviews or issues (Patton, 1987). The character of this research will be that of an exploratory study, since the topics of human resource outsourcing is a relative new topic (see also: Cooke et al., 2005). Therefore, a quantitative analysis is not suitable. There simply is insufficient knowledge to create a useful list of categories that need to be addressed. According to Patton (1987) exploratory studies need to rely on naturalistic inquiry, the collection of qualitative data and an inductive analysis because sufficient information is not available to permit the use of quantitative measures and experimental designs (p. 37). The suitability of qualitative analysis is also confirmed by Rutman (1980) and Wholey (1979). In order to gain as much objective information as possible, a naturalistic approach is chosen for the interviews. Naturalistic inquiries are inquiries based on an evaluation without manipulation. The researcher tries not to influence the answers of the respondents towards a direction that is either desired for the research or expected by the researcher. According to Patton (1987) naturalistic inquiries focus on capturing program processes, documenting variations and exploring important individual differences between various participants experiences and outcomes (p. 14). In order to further improve the objective character of the research, an inductive analysis is used on the gathered data. Here, the researcher analyses the data without expectations on the outcomes of the research (Patton, 1987). Therefore, no research hypotheses are included in this research. To get as much information as possible on this subject, the interview was build up with open-ended questions, no directions towards expectations from the researcher Human Resource Outsourcing 27

28 HRO: Change the people or change the people are used to get an objective answer from the respondents. All respondents were asked to give their own insights on their experiences and thoughts on the topic of human resource outsourcing. The interviews were based on six topics that are of interest for this research. The first topic, important factors in outsourcing was included to get a general insight in what issues arise in outsourcing projects. As a result of the answers that were given, this topic was divided into two subcategories, important factors in outsourcing decisions and important factors in the outsourcing process. It became apparent that this are two very different phases in the outsourcing process with their own important factors and motivations. The second topic, the role of social factors in outsourcing, is the first part of answering the research question of this thesis and included a combined information gathering of social factors at the side of the employee (both leaving and staying) and the employer (organizational social factors). In this category, aspects such as the mourning process, employee morale and organizational culture were present. The third topic is the role of cost factors and is included as a benchmark. The choice for cost factors was made, as already mentioned in the introduction, since this used to be the initial goal of outsourcing and is still one of the most cited arguments in the outsourcing question. Besides that, cost factors still play and will always play a role in outsourcing and therefore it is interesting to compare a new insight on outsourcing, the social aspects, with a well established factor. The fourth topic is one of forgotten factors. This topic has only little relevance for the subject of the thesis, but is included for analytical reasons. Because of the exploratory character of this thesis, magnitude and scale of social factors was unknown. It might be possible that responses in this category shine light to yet unknown social factors that are not yet researched and therefore were not accounted for during the theoretical research. The fifth factor is the balance between cost and social factors. This factor relates the previous two factors with each other and was included to give more insight in the influence of social factors in the outsourcing process. Finally, perceptions of social effects of outsourcing were included to learn from the past. The social effects of the outsourcing projects of yesterday can give us much information on the social factors in the outsourcing projects of tomorrow. 28 Human Resource Outsourcing