OUT-SOURCING HR A CONCEPTUAL STUDY

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1 OUT-SOURCING HR A CONCEPTUAL STUDY R N Misra Head - HR/IR, Tata Steel Limited rudramisra1@gmail.com In the twenty-first century, the winners will be those who stay ahead of the change curve, constantly redefining their industries, creating new markets, blazing new trails, reinventing the competitive rules, challenging the status-quo. Out-sourcing has thus become one of the most important armories in confronting the market challenges. While there are quote a good number of earlier entrants in the arena, outsourcing HR services have still been a hot subject of debate which needs careful consideration depending upon the organizational need and application to the extent it is needed. INTRODUCTION The emphasis on core-competencies led to the first outsourcing wave to hit global business. The manufacturing operations outsourcing wave in the US in the early 1980s. It took less than a decade for the field of technology to catch on to the trend. By the early and mid 90 s, however, a new phenomenon in outsourcing had arrived i.e., outsourcing of business services, led by the outsourcing of Human Resource ( HR ) operations. The outsourcing of payroll and recruitment is therefore not new. What is new is the fact that companies are outsourcing every aspect of the employment lifecycle, from employee recruitment to training and leadership development to retirement to even outsourcing of the entire Human Resource function. In India, the trend of HR outsourcing was initiated in the 90s primarily to monitor IT professionals who went on assignments abroad for a company and then switched jobs. Companies however, quickly realized that outsourcing other HR functions and processes also had it benefits. In India, the most common HR processes outsourced are related to training, payroll processing, surveys, benchmark studies, and statutory compliance. High quality service vendors have mushroomed (Ma Foi, Team Lease, Ernst & Young Human Capital services to name a few) all over the country, offering not just payroll or recruiting services, but also body shopping and contract employees. Although many companies are still unaware of the processes and procedures of HR outsourcing, very few companies can afford to ignore some of the benefits of HR outsourcing. Global Wisdom Research Publications All Rights Reserved. 31

2 Out-sourcing objective The low-cost, high quality services provided by vendors and he increased emphasis on corecompetencies in Indian companies has suddenly made HR outsourcing a hot topic of discussion in the top management circles in India. The future of HR outsourcing depends on what the decision-makers in companies perceive are the benefits and the costs associated with a decision to outsource HR functions. Apart from analysing the general trends and experiences about outsourcing HR in India and abroad, this article therefore concentrates on finding the perceptions of HR managers and top management about HR outsourcing and in particular the response to the issues. Should HR be out sourced? What are the advantages and disadvantages associated with outsourcing HR activities? What are the factors considered as major deterrents in outsourcing? What are the HR activities deemed suitable for outsourcing What are the profiles of the companies that oppose or are in favour of outsourcing the HR function? This paper also covers some theoretical background to the concept of HR outsourcing and presents the views of earlier research on the topic. However, the emphasis of the study is on finding the views and perceptions of the people who matter most, on a subject that we expect will soon be on the agenda of most decision makers in Corporate India. Since it is believed that the decision on HR outsourcing is one of the most relevant ones currently facing their organization. Conceptual Framework Outsourcing is the process by which employers transfer routine or peripheral work to another organization that specializes in the work and can perform it more efficiently Global Wisdom Research Publications All Rights Reserved. 32

3 Human Resource Outsourcing The HR function is one of the four primary functions in an organization. The Operations function, also called the Production function is the core function in an organization with HR, Finance and Marketing forming the periphery. Figure 1 depicts the traditional model that organizations followed before the outsourcing wave. Human Resources OPERATIONS (Core) Finance Periphery Periphery Figure 1 Functions with Organizations (Traditional Model) Many organizations have lately realised that their competencies lie in the core production function and that some of the peripheral functions are better off when performed by organizations that are experts in those fields. The first indication of this fact was the outsourcing of tyre production by the US auto industry and by the 1980s most U.S. and European multinationals had outsourced significant parts of their manufacturing operations to low labor cost labor spots such as China or Mexico. Next to follow was the outsourcing of technology needs, followed by business services that have been represented as peripheral functions in Figure 1. The latest wave in the outsourcing field is the outsourcing of an organization s HR function. Figure 2 depicts the new model that organizations are moving towards i.e., outsourcing of the non-core functions to external agencies and only retaining the core parts of the non-production functions. Global Wisdom Research Publications All Rights Reserved. 33

4 HR consultants CA firms Non-core HR (payroll, recruitment etc.) OPERATIONS (Core) Non-core Finance (invoicing, Book-keeping etc.) Core HR Core Finance Ad Firms, Market Core Marketing research agencies Non-core Marketing (advertising, Market Research, etc) Figure 2 Functions within Organizations after outsourcing non-core functions Benefits perceived by organizations from outsourcing the HR function include reduced costs, better service quality and access to specialized experts. The spurt in demand for HR outsourcing services has also been attributed to rising costs of regulatory compliance and rapid change in technology. Other benefits that could result out of outsourcing are administrative ease, avoidance of legal requirements, and the countering of the periodicity in requirement of certain HR functions. It is also argued that outsourcing results in greater economies of scale due to multiple clients have similar needs. However, economies of scale will decline if the idiosyncratic HR practices of certain clients require specific investments. HR outsourcing also has its detractors, who argue that outsourcing expose organizations to opportunistic behaviour by contractors, that HR outsourcing will limit the ability of firms to develop distinctive competencies and that it will create inefficiencies because of vendors / service provider s unfamiliarity with their clients strategy and culture. Specific issues that detract organizations from of outsourcing their HR function include: Global Wisdom Research Publications All Rights Reserved. 34

5 Non-conformance with organizational policy/culture Initial high cost of moving to vendor Poor perceived quality of vendors Legal constraints Confidentiality and security Apprehension about employee dissatisfaction Functions within HR HR is a function encompasses several sub-functions, each of which can be outsourced. These can be broadly classified into the following four categories although many companies may choose to further categorize these. Generalist activities (like planning, performance appraisal and benefits); Transactional services (like payroll and personnel administration); Human capital activities (like education, training and ancillary processes); and Recruitment and selection. Whether or not to outsource each of the above functions is often an independent decision that depends upon different criteria which need not necessarily be restricted to cost and administrative ease (see Figure 3) Global Wisdom Research Publications All Rights Reserved. 35

6 Cost Isn t the Only Measurement Is our staff-tomanager Ancillary Payroll How much does it cost per paycheck? What plans do we have to manage retention? Personnel HR Processes Benefits How much do we pay to internally administer 401 (k)s? How long does it Take us to hire? What Are the hard dollar Hiring & Recruitment costs? What kind of turnover do Education and Training How much are we spending on our offsite training courses? Figure 3 HR Processes and Questions to be addressed before Outsourcing Many companies like to draw a line between core and non-core HR functions and outsource the so-called non-core HR functions. Practices such as performance appraisal, training and selection involve either strategic or specialist activities and may directly reflect the organization s unique culture. More routine tasks such as payroll that rely less on organization-specific parameters can be outsourced more easily. Again, different organizations might have completely different motives and reasons for outsourcing their HR functions. For instance, many companies have reportedly outsourced their activities to reduce their over-head expenditure on account of either very less number of persons employed by them or with a view to relocate their time-frame business or till they stand on their own to carry out their activities. Global Wisdom Research Publications All Rights Reserved. 36

7 CONCLUSION Surely therefore, there are organization-specific reasons for outsourcing HR functions and not all reasons can be exhaustively listed. To the degree that there are idiosyncratic practices in organizations, there will be less reliance on outsourcing for HR generalist activities, human capital activities and recruitment and selection activities, but not transactional activities (like payroll). Given that HR outsourcing is still in its nascent phase in India, however, it gives sufficient evidence to state that the companies are upbeat to the idea of HR Outsourcing. Outsourcing HR functions by small companies would imply that they can put their funds in their core area of expertise without going into the intricacies of HR functioning, which in itself can be a Herculean task. The HR function is all the more important in larger and family owned organizations. In these organizations, over a period of time, a unique culture pertaining to the organization is developed and processes are set. The HR role moves into strategic support in developing the business towards its goals. Study shows that in spite of this, a large percentage of these companies are not averse to outsourcing some of their HR functions. It points to the maturity of these companies that they are not being short-sighted by trying to keep HR In-house just for the sake of tradition in lieu of bigger gains like increased efficiency and best practices prevailing in the industry. The company may also view outsourcing as a potential escape clause as it leads to a delegation of responsibility, and thus way to shirk off their responsibilities towards their employees. Certain other issues like Data Protection need to be addressed by the Companies, given the sensitive nature of the data. In fact, protection of data is one of the major reasons which act as a deterrent for the companies to outsource, despite the obvious advantages it gives. Many of the companies are only ready to outsource functions like training and payrolls and not core HR functions from their company. This might be one of the reasons, why government companies don t seem to be keen to outsource their HR functions. Lastly, benchmarking is another issue, which companies can find problematic. If the inhouse function has not been benchmarked previously (which is a likely scenario in most cases), it is very difficult to measure the success or otherwise of HR outsourcing. However, it should be kept in mind that one could resist an invading army but not the change whose time has arrived. Global Wisdom Research Publications All Rights Reserved. 37