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1 This article was downloaded by:[athens University of Economics] On: 14 September 2007 Access Details: [subscription number ] Publisher: Routledge Informa Ltd Registered in England and Wales Registered Number: Registered office: Mortimer House, Mortimer Street, London W1T 3JH, UK The International Journal of Human Resource Management Publication details, including instructions for authors and subscription information: Internationalization as a determining factor of HRM outsourcing Eleanna Galanaki; Nancy Papalexandris Online Publication Date: 01 August 2007 To cite this Article: Galanaki, Eleanna and Papalexandris, Nancy (2007) 'Internationalization as a determining factor of HRM outsourcing', The International Journal of Human Resource Management, 18:8, To link to this article: DOI: / URL: PLEASE SCROLL DOWN FOR ARTICLE Full terms and conditions of use: This article maybe used for research, teaching and private study purposes. Any substantial or systematic reproduction, re-distribution, re-selling, loan or sub-licensing, systematic supply or distribution in any form to anyone is expressly forbidden. The publisher does not give any warranty express or implied or make any representation that the contents will be complete or accurate or up to date. The accuracy of any instructions, formulae and drug doses should be independently verified with primary sources. The publisher shall not be liable for any loss, actions, claims, proceedings, demand or costs or damages whatsoever or howsoever caused arising directly or indirectly in connection with or arising out of the use of this material.

2 Int. J. of Human Resource Management 18:8 August Internationalization as a determining factor of HRM outsourcing Eleanna Galanaki and Nancy Papalexandris Abstract This paper examines the effect of company internationalization on the practice of outsourcing HRM functions in Greece. It holds the assumption that HRM outsourcing is perceived as an innovative practice and that foreign multinationals (MNCs) will use this practice more than native ones do. In doing that, the study aims at examining whether diffusion of loosely- regulated management practices such as HRM outsourcing, is sustained by foreign multinationals. The findings of the 2000 CRANET survey are presented to show that HRM outsourcing is used to a lesser extent in Greece than other Western economies. Then the hypothesis that MNCs outsource more HRM services than Greek companies do is tested. The analysis draws upon the findings of a survey addressed to HR directors of both foreign multinationals and Greek companies. A significant difference is found in the extent of HRM outsourcing between Greek companies and foreign multinational subsidiaries. This is adequately explained through the comparison of the way HRM is conducted in Greek each type of company, as well as the segregation of the Greek market for HRM services. The paper adds to the discussion on the role of multinationals in the diffusion of innovative managerial practices, as well as to the HRM convergence divergence debate. Keywords Outsourcing; human resource management; multinationals; Greece; convergence. Introduction The difference of management and decision-making in foreign multinational subsidiaries as opposed to national companies is a classic in International Management and International Human Resource Management (Ferner, 1997; Walsh, 2001; Ferner and Quintanilla, 1998; Quintanilla, 2000). The role of multinationals (MNCs) in promoting convergence of organisational forms and practices in varying national settings has been discussed and studied through extensive research (Martin and Beaumont, 1998; Quintanilla and Ferner, 2003; Walsh, 2001). Multinationals are seen as important disseminators of human resource practices and innovations in work organization, under the premise of the institutional background or national business environment of the host country (Quintanilla, 2000). Eleanna Galanaki, Laboratory of Human Resource Management, Athens University of Economics and Business, 12 Derigny Str, Athens 10434, Greece (tel: þ ; [email protected]); Nancy Papalexandris, Laboratory of Human Resource Management, Athens University of Economics and Business, 12 Derigny Str, Athens 10434, Greece ( [email protected]). The International Journal of Human Resource Management ISSN print/issn online q 2007 Taylor & Francis DOI: /

3 1558 The International Journal of Human Resource Management A common management practice that is extensively discussed lately in the management literature, but which has not been viewed under the light of international management and the effect of MNCs is outsourcing of HRM functions. The current paper will attempt to investigate the effect of MNCs on the extent of Human Resource Management (HRM) outsourcing, drawing upon the findings of an indepth Greek survey on HRM outsourcing. Literature review HRM outsourcing HRM outsourcing means having a third-party service provider or vendor furnish, on an ongoing basis, the administration of an HRM activity that would normally be performed in-house (Cook, 1999). HRM outsourcing has grown in popularity since the early 90 s, in Western Europe and particularly in the US, where up to 90 per cent of the companies outsource some HRM activity, (Banham, 2003; Cook, 1999; Mercer and Cranfield School of Management, 2000). In other countries, such as Greece, however, the use of HRM outsourcing is lagging behind (Galanaki and Papalexandris, 2005). Many companies find that the use of outside service providers is more efficient and less costly than hiring full-time staff to handle these functions in-house. Given that HRM vendors provide similar services to many of their clients, they benefit from economy of scale effects, which they transfer to some extent to their clients. Another reason why some companies may turn to outsourcing is that either they lack the necessary expertise, or their internal expertise is so outdated that they need to make significant investments. Most vendors have made major investments in HRM knowledge, which they put in the service of their clients. In this sense, outsourcing permits benefiting of knowledge and competencies which do not exist in-house, or, which are used for other activities. HRM outsourcing as innovation Outsourcing is an historical, well-established practice (Kakabadse and Kakabadse, 2002) and HRM outsourcing, itself, is a quite traditional practice. Outsourcing part of a company s training function, for example, (i.e. a seminar) has been a common management practice for decades, which is only reasonable, given that most companies are not able to employ specialized trainers on a full-time basis. However, recent HRM literature and research has showed a considerable increase in the use of HRM outsourcing, especially in the areas of HRM consulting and the design of HRM tools (Banham, 2003; Cook, 1999; Mercer and Cranfield School of Management, 2000). Alternatively, it can be sustained that the development of the HRM services market goes hand-in-hand with the development of the HRM practice in general (Galanaki and Papalexandris, 2005). More outsourcing of HRM services in a market means that:. The HRM function and language is adequately standardized, for HRM managers and HRM vendors to be able to communicate effectively and manage in collaboration common projects. The HRM profession is developed enough for competent, experienced HR professionals to be out there, offering their services externally. The companies are willing to pay for specialised external HRM services, having already managed to procure basic services in-house, or, alternatively, opting to focus

4 Galanaki and Papalexandris: Internationalization... outsourcing 1559 on their core sources of competitive advantage, by outsourcing administrative tasks (Quinn and Hilmer, 1995). Therefore, one could sustain that outsourcing of HRM services is a manifestation of development of the HRM practice, in general. Consequently, HRM outsourcing will be more common in economies where the HRM practice in general is more developed and sophisticated. Institutional context in Greece HRM, like most management practices and functions, has its roots in high-volume industrial production. Greece is a country where industrial development has gone at a lot slower pace than many other European countries, as historical and other circumstances have delayed the transition from agricultural to industrial economy. This has also impeded the development and standardization of the HRM function, at the same pace as in highly industrialized countries. The slower development of the HRM function and profession in Greece has been pinpointed in relevant previous research on HRM in Greece (Papalexandris, 1992; Papalexandris and Stavrou, 2004). Recently, Greece has experienced a rapid development of its service sector, where total employment has almost doubled since 1990 (Eurostat, 2002; National Statistical Service of Greece, 2003). However, in Greece there is a prevalence of micro companies, with an average size of two employees per company, which is very small, compared to the EU average (Eurostat, 2002). This predominance of small firms in Greece can be considered as an impediment to the development of the HRM practice and HRM outsourcing, because very small companies, no matter how productive or profitable they are, cannot and do not need to develop such managerial functions. HRM outsourcing in Greece The offer of HRM services in Greece has only recently developed. In the past, business services were mostly offered by companies predominantly known for their auditing services. Recently another group of HRM service providers has emerged, namely ex-hr managers with a long professional experience in HRM of large companies, who offer HRM services individually. Both those groups of HRM service providers are a relatively new phenomenon in Greece and they respond to the recent demand for specialized HRM services. Results of the CRANET cross-national survey, run in Greece in 2000, provide information on the extent of use of outsourcing for the provision of HRM services. Question 2b of the 1999 questionnaire identifies four broad categories of HRM services, namely: 1 Pay and benefits 2 Recruitment and selection 3 Training and development 4 Workforce outplacement and reduction. The results reveal that the mostly outsourced HRM function in Greece is training (60.3 per cent), followed by recruitment and selection (34.6 per cent). Pay and benefits also appears to be extensively outsourced (24.3 per cent), while workforce outplacement and reduction is outsourced by fewer companies (4.4 per cent).

5 1560 The International Journal of Human Resource Management Table 1 summarizes the number of countries with a higher ranking in outsourcing of each HR function than Greece. The results suggest that in Greece fewer companies outsource their HRM services. This is most evident in the case of services relative to outplacement and downsizing. Outsourcing of HRM services is lower in Greece than the CRANET median. MNCs and diffusion of HRM outsourcing The common argument for the tendency of convergence in MNC and International Management literature is that market, technological and managerial forces compel MNCs to adopt common strategies and practices, therefore, fostering employment homogenization across borders. According to this view, MNCs are considered to play the role of carriers of globalization, spreading managerial knowledge and techniques internationally and promoting the standardization of management systems (Quintanilla and Ferner, 2003; Martin and Beaumont, 1998; Gooderham et al., 2004). This perspective has its roots in the convergence hypothesis, according to which, as first expressed in the 1950s and 1960s, the best management practices can be copied in all countries (Myloni et al., 2004). However, national differences, based on the institutional background and national culture, were later underlined and it was held that they supersede the forces of globalization (divergence hypothesis). According to this view, the institutional and cultural differences that the MNCs have to face in each host country, demand that they adapt their management practices at the national level and, therefore, counteract to some extent the convergence effect (Ferner, 1997; Quintanilla and Ferner, 2003). HRM practices are generally considered as the most vulnerable to cultural differences and hence least likely to be copied from one country to another (Laurent, 1986, Myloni et al., 2004). However, in terms of the standardization of HRM practices, it is held that nationality manifests itself more in relation to some issues than others (Ferner, 1997: 20). For example, in industrial relations, wage determination, hours of work, forms of work contract and redundancy procedures, MNCs are more bound to follow local institutional arrangements, than, say, in staffing, employee development, internal communication or other HR policies. HRM outsourcing is a management practice loosely regulated at the institutional level, especially in Greece. The outsourcing and subcontracting agreements in Greece are perfectly acceptable, easy to formulate, simple contracts for work and materials, governed by the provisions of the Civil Code, article (European Communities, 1998). Neither is there some sort of a stigma in relation with outsourcing of managerial activities, so long as this is not related with redundancies. Based on the fact that Greece, which operates in a non-restrictive institutional environment regarding outsourcing agreements, lags behind in the use of HRM Table 1 Countries ranking higher in outsourcing than Greece, by HRM service HRM services Training and development Recruitment and selection Pay and benefits Workforce outplacement/reduction Country ranking of Greece in outsourcing (n ¼ 26) 16th 16th 9th 21st

6 outsourcing, it is reasonable to expect that subsidiaries of foreign MNCs in Greece would act as carriers of diffusion of new management practices by importing the practice of HRM outsourcing. Therefore, the research hypothesis is shaped as follows: Research hypothesis Galanaki and Papalexandris: Internationalization... outsourcing 1561 Foreign multinational subsidiaries outsource more their HRM functions than Greek companies, irrespective of their size. Outsourcing contracts conducted at the corporate MNC level should not be included in the analysis, so as not to affect the comparison of the extent of HRM outsourcing among MNCs and Greek companies. Therefore, only outsourcing agreements conducted by the Greek subsidiaries, not at the corporate level, are accounted for as HRM outsourcing contracts, for the purposes of this research. Furthermore, it is imperative to control for the effect of the size of the company on the use of outsourcing, so that any difference in outsourcing among MNCs and local companies is not attributed to size effects. Sample and data The study draws upon the findings of an in-depth survey on HRM outsourcing. The research was conducted in 2004 in Greece and was addressed at 100 HRM directors, working in both foreign multinationals and Greek companies. Companies come from all business sectors, with a slightly higher prevalence in the sample of the service sector, with the sole restriction of them employing at least 50 people. Of the 100 companies that participated in the research, 59 were Greek and the remaining 41 were foreign multinationals from the countries shown in Table 2, although many of them are fully globalized and, therefore, they may have lost their country-oforigin characteristics. We acknowledge the importance of the country-of-origin effect on the adoption of diverse management practices, as this was stressed in the relevant literature (Ferner, 1997) but given the small sample used for the current study, it was not possible to distinguish the use of HRM outsourcing by MNCs original nationality. The data were collected through a more extensive questionnaire on HRM outsourcing. The use of outsourcing was established through two questions:. Have you outsourced part of this HRM function within the last three years? (Yes No binary response.). What percentage of the whole HRM function have you outsourced within the last three years? (Continuous response, ranging from 0 to 100 per cent.) Table 2 MNCs studied, by country of origin Country of origin of MNC Number of MNCs USA 17 UK 6 France 6 Germany 5 Other EU country 6 Other non-eu country 1

7 1562 The International Journal of Human Resource Management The above two questions were posed for each of the following 10 HRM services:. Recruitment and selection of employees. Executive recruitment and selection. Training and development on the company and the particular tasks of the job. Training and development on general and managerial competencies. Pay and benefits design. Payroll. Merger-outplacement-downsizing. Organisational climate and culture. Design of performance appraisal systems. Performance appraisal and assessment centres. The above categorization of HRM services was extracted after a long testing phase with HRM and outsourcing experts in academia and industry, in order to map accurately the practice of HRM outsourcing. Chi-square and t-tests were conducted in order to test the differences among MNCs and Greek companies. Correlations were also computed, in order to establish the relation among some characteristics of the companies and the extent of HRM outsourcing. Findings On the effect of size on the use of HRM outsourcing The size of the company was measured through the natural logarithm of the total number of employees (ln[employees]). This is a commonly used measure for measuring the size of organisations (Klaas et al., 1999). No statistically significant correlation was found to exist among the size of the company and the use of HRM outsourcing (r ¼ 0.013, d f ¼ 954, p ¼ 0.680), neither with the extent of use of HRM outsourcing (r ¼ , df ¼ 954, P ¼ 0.605). On the difference in the number of HR services outsourced by foreign MNCs and Greek companies Moreover, a significant difference was found in the number of HRM services outsourced by each group (foreign multinationals and Greek companies). (t ¼ , df ¼ 98, P ¼ 0.006). Greek companies outsource less HRM services than foreign multinationals do. On the difference of use of outsourcing in Greek and MNCs, by HR service Chi-square tests were conducted to test the existence of a difference in the number of foreign multinationals and Greek companies outsourcing each HRM service. Results are presented in Table 3. A significant difference was found in recruitment and selection of both employees (x 2 ¼ 8.956, df ¼ 1, P ¼ 0.003) and managers (x 2 ¼ , df ¼ 1, P ¼ 0) and in re-engineering/merger/downsizing services (x 2 ¼ 6.454, df ¼ 1, P ¼ 0.011). Significantly more foreign multinationals than Greek companies outsource the above three HRM services.

8 Galanaki and Papalexandris: Internationalization... outsourcing 1563 Table 3 Chi-square tests for the difference in use of individual HRM services between foreign MNCs and Greek companies HR service x 2 value df Asymp. sig. (2-sided) Recruitment Exec. recruitment Training job-company Training competencies Rewards design Rewards Restructuring Culture and climate Performance appraisal design Performance appraisal On the extent of outsourcing in MNCs and Greek companies, by HR service Further, t-tests were run to establish whether the extent of outsourcing of HR functions is different between the two groups. Results are presented in Table 4. The percentage of the total HRM function that is outsourced was found to be significantly different in foreign MNCs from Greek companies in the case of recruitment and selection of employees (t ¼ df ¼ , P ¼ 0.026) and in the case of recruitment and selection of managers (t ¼ df ¼ , P ¼ 0.004). In fact, subsidiaries of foreign MNCs were found to outsource a significantly larger part of their recruitment and selection function (of both employees and executives) than Greek companies do. On the perceived benefits from HRM outsourcing in Greek companies and MNCs Respondents who had outsourced some of the ten HRM services were asked some further questions, in order to measure the perceived benefits from HRM outsourcing. The scales for measuring HRM outsourcing benefits were taken from a previous analysis of Klaas et al. (1999). Table 5 shows the seven different axes on which benefits from outsourcing were measured, as well as how they were factored together to form three distinct factors: Table 4 t-tests for the difference in the extent of use of HRM services, between Greek companies and multinational subsidiaries Recruitment and selection of employees t ¼ , df ¼ , P ¼ Executive recruitment and selection t ¼ 2.975, df ¼ , P ¼ Training and development on the company t ¼ , df ¼ 8,964, P ¼ and the particular tasks of the job Training and development on general and t ¼ 1.754, df ¼ 97, P ¼ managerial competencies Pay and benefits design t ¼ , df ¼ 94, P ¼ Payroll t ¼ 20,824, df ¼ 98, P ¼ Re-engineering outplacement-downsizing t ¼ , df ¼ , P ¼ Organizational climate and culture t ¼ 0.098, df ¼ 84, P ¼ Design of performance appraisal systems t ¼ , df ¼ 90, P ¼ Performance appraisal and assessment centres t ¼ , df ¼ 95, P ¼ 0.498

9 1564 The International Journal of Human Resource Management Table 5 Benefits from HRM outsourcing as factored together Benefits measured Outsourcing has decreased the cost of the service Outsourcing has eased the cost assessment Outsourcing has allowed us to focus on core Outsourcing has brought in new ideas Outsourcing has allowed us to use external expertise Outsourcing has improved the quality of service Outsourcing has made us more flexible. Cost benefits. Improvement benefits. Flexibility benefits. Factored benefits Cost benefits (Cronbach s a: 0.592) Improvement benefits (Cronbach s a: 0.745) Flexibility benefits T-tests were run to establish whether there is a difference of means in the perceived benefits from HRM outsourcing between MNCs and Greek companies. No such difference was found to exist in Improvement Benefits (t ¼ 1.206, df ¼ 358, F ¼ 0.228) or Flexibility Benefits (t ¼ , df ¼ 358, F ¼ 0.267). However, a significant difference was found in Cost Benefits (t ¼ 3.897, df ¼ 358, F ¼ 0), with Greek companies actually reporting higher cost benefits from HRM outsourcing than foreign MNCs do. Table 6 presents those findings. Discussion To summarize, the above-mentioned findings show that there is a significant difference in the use of HRM outsourcing by foreign MNCs as opposed to Greek companies. More specifically, more MNCs appear to be outsourcing their HRM functions and in fact, they outsource more HRM functions than their Greek counterparts do. Therefore, our research hypothesis is sustained by the data. This finding was further supported by a separate part of our research project, which was aimed, through in-depth interviews, at the HRM service providers (Galanaki and Papalexandris, 2005). All of them sustained that the MNCs constitute a particular, good clients group for HRM services. They further said that the subsidiaries of foreign MNCs are more demanding, knowledgeable of their HRM needs and require more sophisticated HRM services, whereas, at the same time, they are more difficult to please (Galanaki and Papalexandris, 2005). It should be pointed out explicitly that in the HRM outsourcing projects included in the current research, HRM outsourcing agreements bounding the MNCs at corporate or wider-geographical level were not accounted for. A gross 35 per cent of all the MNCs that participated in the current survey reported some sort of HRM outsourcing agreement at international level, with some global provider of HRM services, which covered also the Greek subsidiary, through the vendor s local branch. Those projects concern usually pure HRM consulting, such as change management, re-engineering, delayering, succession planning, etc. They were left out of our analysis because the local subsidiary

10 Table 6 t-tests for the difference in the perceived benefits from the use of HRM services, between Greek companies and multinational subsidiaries Flexibility Benefits Cost benefits Improvement benefits Galanaki and Papalexandris: Internationalization... outsourcing 1565 Equal variances assumed Equal variances not assumed Equal variances assumed Equal variances not assumed Equal variances assumed Equal variances not assumed Levene s test for equality of variances t-test for equality of means F Sig. t df Sig. (2-tailed) was not actively involved in the decision to implement them and we were interested in outsourcing decisions taken at the subsidiary, rather than corporate, level. This, however, means that the use of outsourcing for HRM is even higher than reported here. Moreover, the size of the firm did not have any effect on the extent of outsourcing, so the difference in the extent of outsourcing among Greek companies and MNCs cannot be attributed to size differences. Therefore, it can be sustained that the overall more innovative way in which Human Resources are managed by foreign MNCs, makes them more positive towards HRM outsourcing. For example, the managers in foreign MNCs are generally more informed on current trends in HRM and the majority of them have some HRM or business administration academic background (bachelor or master). However, the experience acquired by HR managers of foreign MNCs in locally implementing global outsourcing contracts, could be accounted for their greater openness towards HRM outsourcing. Experience of both parties of an outsourcing agreement in managing outsourcing relations is a crucial success factor for the project, according to the relevant literature (Joskow, 1987; Harris et al., 1998; Masten and Crocker, 1985; Cook, 1999). With relevance to the finding that MNCs outsource more staffing and restructuring, one could offer the following explanations: (a) Staffing in Greek firms is largely depending on the circle of family members or friends. The fact that the majority of Greek firms are family owned and managed justifies the tendency to recruit using rather personal referrals than objective selection tools. Alternatively, MNCs show a strong preference for objectivity in staffing, perhaps as an expression of the Anglo-Saxonization of MNCs (Ferner and Quintanilla, 1998) and this can be better safeguarded with the intervention of an external consultant.

11 1566 The International Journal of Human Resource Management (b) Restructuring is also more outsourced in the case of MNCs because it usually follows a given strategic plan, dictated from abroad and implemented with the assistance of experienced consultants who enjoy credibility for their professionalism. In the case of the Greek family-owned firms, restructuring is usually a matter of internal adjustment, a slow process, during which, the opinion of top managers and family members involved are taken into account. Decisions about restructuring are very crucial to be left to the hands of outsiders, while common practice shows that restructuring may be discussed very often but rarely implemented, in Greek firms. The finding that Greek firms see more cost benefits in outsourcing than MNCs do, has to do with the consultant who provides the service. A MNC will usually employ the services of one of the major HR consultancy firms, which have an international reputation and they are approved by the mother company, irrespective of whether the decision lies at the corporate level. These companies charge much higher rates than local independent consultants who are usually the ones offering their services to Greek firms. Actually, as it has been indicated in a previous study, the Greek market for HRM services is split into two parts, one for upper-quality and more expensive and another for lowerquality, less expensive services (Galanaki and Papalexandris, 2005). Therefore, it is normal for HRM outsourcing to be regarded as a more cost-effective solution by Greek companies. We should like to stress the importance of the institutional environment in HRM outsourcing. Though, as stated above, the loose institutional regulatory environment may be accounted for the import/diffusion of HRM outsourcing by MNCs in Greece, it can influence both ways the use of outsourcing, especially by Greek firms. It can ease transactions among reliable partners, but it can also create problems in case providers lack credibility or professionalism and clients have not a clear idea about what to expect or demand. A sounder institutional framework might be needed for Greek companies to buy more into HRM outsourcing. Limitations and suggestions for future research This paper is but a small part of a major study, which examines various attitudinal and behavioural dimensions of both companies and external providers towards HRM outsourcing, as well as the effective diffusion and implementation of HRM practices. One major dimension, which is in the process of being examined, is the effect of national and organizational culture on outsourcing and whether it can play an important role in its effective implementation. A major limitation of the current research, due mainly to its small sample, is the lack of analysis of the country-of-origin effect, given that this has been largely discussed as a major factor affecting MNCs managerial practices and decisions. Plans for future research include deeper understanding of the link between outsourcing and innovativeness in HRM practices and their contribution to an organization s competitive advantage. References Banham, R. (2003) HR Outsourcing Leads the Way, Outsourcing essentials, 1, online at: Cook, M. (1999) Outsourcing Human Resources Functions.Strategies for Providing Enhanced HR Services at Lower Cost. New York: AMACOM.

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