Galanaki E, Bourantas, D. and Papalexandris, N.

Transcription

1 A DECISION MODEL FOR OUTSOURCING TRAINING FUNCTIONS: DISTINGUISHING BETWEEN GENERIC AND FIRM/ JOB- SPECIFIC TRAINING CONTENT Galanaki E, Bourantas, D. and Papalexandris, N. Last version, as submitted to International Journal of Human Resource Management on December published with few alterations on Dec ABSTRACT Employee training plays a crucial role in the success of most organizations. Due to its developmental aspect, training is closely linked to core competencies and strategic focus. However, it is also one of the most widely outsourced HR functions in most western economies. This paper attempts to illustrate and proposes a decision model for the factors that shape the expected benefits and subsequently the extent of outsourcing training functions. A distinction is made among generic training (for the development of competencies) and job- or companyspecific training (ex. induction training, job specialization etc.). Two decision models are extracted with structural equation modelling. Asset specificity, market availability, in-house development of training and firm size are discussed. The factors shaping the decision to outsource, as well as the perceived benefits from outsourcing employee training, are different for each of the two types of training (generic and specific). The reasons underlying those differences are discussed. For both types of training service it is proposed that the expected quality benefits, not cost ones, induce companies to outsource training. Thus, this study attempts to offer a useful insight into the factors shaping the extent and the expected benefits from outsourcing training services. The outcomes can further assist HRM professionals (managers and providers of HRM services), as well as academics in better 1 Electronic copy available at:

2 understanding the nature of HRM outsourcing decisions in general, and a basic HRM outsourcing practice, i.e. training, in particular. KEYWORDS Training and development, Decision making, Core competencies, Transaction costs, Greece INTRODUCTION In the knowledge economy, where change is constant, speed, flexibility, creativity and innovation are the most crucial determining factors of sustained competitiveness and business success. In this new economic landscape, the intellectual capital, rather than the financial one, forms the basis of a successful strategy (Bartlett and Ghoshal, 2002). In this setting, the capability of companies and organizations to train and constantly develop their people can prove a critical source of competitive advantage. The major theorists of talent management and organizational learning have discussed and adequately documented with relevant empirical evidence the strategic importance of training, which is, however, one of the most traditional functions of HRM. For example, Tichy and Cardwell (2002), in their relatively recent book, by introducing the concept of the teaching organization, underline the strategic importance of training. Several companies invest a considerable amount of assets to employee training and to the development of corporate universities (ex. Motorola University, Crotonville Center of G.E., Trilogy University etc.). Therefore, decisions regarding employee training are of major strategic importance, since they require substantial financial resources and they are related to human capital, a rare strategic resource and a source of competitive advantage. A decision of major strategic importance regarding training is the choice between make- orbuy, which will be the focus of this paper. Concurrently to the traditional academic system, a large industry of employee training services for companies and organizations has developed recently, both in the USA and in Europe. This allows companies to outsource part of their training function. So, together with the internal development of the training infrastructure, activities and 2 Electronic copy available at:

3 deliverables, a significant rise of training outsourcing has been observed, during the last decades, both in America and Europe. (Richman and Trondsen, 2004, DeViney and Sugrue, 2004, Gainey et al., 2002). As a matter of fact, training is one of the mostly outsourced HRM functions (Galanaki and Papalexandris, 2005, Vernon et al., 2000, Cooke et al., 2005, Bachler, 1997, Cook, 1999). Of course, the choice between make- or- buy is the result of a comparison of the benefits from each alternative on several distinct criteria. Up to now, several benefits and motivations for outsourcing training have been offered, such as cost reduction, lack of internal capability, access to best practices and talent, minimization of capital costs, timeliness, focus to core and removal of peripheral training tasks, improvement of quality, measurement and contestability, upgrading of the training function (Richman and Trondsen, 2004, DeViney and Sugrue, 2004, Lawler et al., 2004, Hall and Torrington, 1998). On the other hand, the relevant literature has also made extensive reference to the benefits from internally developing training, such as the development of internal capabilities that may prove a source of competitive advantage (Quinn and Hilmer, 1995), the support of internal bonds and communication through training, the better design of the training program, specificity of training to meet the company s needs, the independence from training provider, as well as the less imperative need to rationalize and justify the ROI from training (DeViney and Sugrue, 2004). Insert Table 1 around here Despite the above argumentation, research over the question make-or-buy on training is still relatively limited and has not yet provided the practitioners with a complete and theoretically sound decision model for this important choice. The present article attempts to cover this gap. More explicitly, we will explore the reasons for which companies choose to outsource training, based on the existing theoretical approaches of Transaction Cost Economics, Resource- Based 3

4 View of the Firm, Economies of Scale Effects and Administrative Innovation Theory. Thus, we will try to examine from the point of view of some traditional economics and business theories the decision to outsource training, thus attempting an explanation which might be of interest to academics. Furthermore, it would be interesting for HR managers, trainers and organizations, as they will gain a clear and documented, both theoretically and empirically, picture of the motives when choosing between make and buy in employee training. The practice of training outsourcing As stated above, employee training is one of the mostly outsourced management functions (Bachler, 1997). While more administrative HRM activities, such as payroll or benefits, are generally deemed as acceptable candidates for outsourcing, it appears that activities such as training, which is more closely tied with the development of core competencies of the firm (Gainey et al., 2002), also account for a large amount of the overall HRM outsourcing. This is often attributed to the fact that firms cannot permanently employ trainers specialized on every single subject, on which training of their employees is needed. Even in the case that people with the necessary expertise and/or instructive competences exist in-house, it often proves unpractical to systematically engage them in training tasks, therefore depriving them from their main tasks. So, most companies are often obliged to turn to the external market to find the people who will either plan or implement their employee training. As training services include more than instruction, by outsourcing training a company may save on the cost of infrastructure (rooms, technical equipment, support equipment), of administration (organization of the program) and of training program development and design (training needs definition, participants, educational method, tools, content development etc). It is even sustained that employee training outsourcing goes from training information systems to training program design, development and delivery, as well as performance-based strategic design of the training program (Richman and Trondsen, 2004). Therefore, it is withheld that when the training topic is 4

5 fairly common, outsourcing can achieve considerable economies (Cook, 1999). As a matter of fact, previous research in the USA has shown that in 64% of the cases of training outsourcing, the major aim is cost reduction, while in 46% outsourcing is dictated by the lack of necessary internal resources (DeViney and Sugrue, 2004). It is important to note that the introduction of innovative training systems and tools, such as distance learning, computer- based, asynchronous training and e-learning have changed the shape of training services provision, since firms often lack the necessary expertise and infrastructure to implement those practices by themselves (Richman and Trondsen, 2004). This has led to the emergence of a new sector of training service provision. It appears from the above that training services can be distinguished in two main categories, i.e. generic or off-the-shelf programs that do not require major adjustments on the part of the provider and asset-specific or tailor-made programs, which demand substantial effort on the part of the training provider to accommodate the customer s precise needs (Gainey and Klaas, 2005). THEORETICAL FRAMEWORK AND RESEARCH HYPOTHESES This paper draws on classic theories that have been used extensively to explain outsourcing decisions in general, such as Transaction Cost Economics (Arnold, 2000, Aubert et al., 1996, Klaas et al., 1999, Poppo and Zenger, 1998, Walker and Weber, 1984), Core Competence and Resource-Based View of the Firm (Barney, 1991, Gottfredson et al., 2005, Lepak and Snell, 1999, Quinn and Hilmer, 1994), Economies of Scale Effects (Kakabadse and Kakabadse, 2000) and Administrative Innovation Theory (Costa, 2001, Loh and Venkatraman, 1992). A.Transaction Cost Economics Transaction Cost Economics (TCE) provides a useful starting point for research, investigation and discussion of the outsourcing phenomenon and has been broadly used to analyze and interpret 5

6 outsourcing decisions. Transaction cost economics, falling within the field of Organizational Economics, places the principal burden of analysis on comparisons of transaction costs (Williamson, 1991b). That is, for TCE, everything that a firm does involves, apart from production costs, transaction costs, i.e. costs of bargaining, formulating and monitoring contracts and agreements. According to Williamson (1975), the main theorist of TCE thinking, transaction costs exist both in the case of internal production and external provisioning and the sourcing choice between carrying out activities in-house and outsourcing them depends on the comparison of the relative costs of transactions and production. From the overall theory of TCE we withhold its premises concerning four service and firm characteristics that affect the perception of benefits from outsourcing, as well as the final decision to outsource. These are the following: Firm Size: According to TCE, small sizes are linked to low negotiation power and they are therefore subject to higher opportunism risk (Williamson, 1975, Williamson, 1991a). Therefore, according to TCE, smaller firms should be more reluctant to outsource. Asset Specificity of Training: Asset specificity expresses the extent to which an asset can be redeployed to alternative uses and by alternative users without sacrifice of its productive value and it is a core concept in TCE. Asset specificity of the service or product is viewed as a major factor increasing the transaction costs, as it allows for opportunistic inclinations to be manifested by both vendor and client, as the high investment realised makes both parties highly dependent on each other (Klaas et al., 1999, Williamson, 1979). Frequency of Training/ Transaction: According to TCE, the frequency of the transaction increases the attractiveness of in-house provision of the function, as the frequency of the transaction increases transaction costs in the case of market provision (Williamson, 1979, Yang and Huang, 2000), because frequency may be connected to repeated re-negotiation of the agreement clauses. 6

7 Availability of Training Services in the Market: The development and contestability of the market for the service, as well as large numbers, according to TCE, is a major factor diminishing the opportunism among the two transacting parties and therefore makes outsourcing less risky for either part of the transaction. This was further developed by the theorists who referred to contestable markets (Baumol et al., 1982, Vining and Goberman, 1999) who sustained that the focus of the analysis should not be posed on the number of firms in a sector, but rather on the availability and ease of switching over to an alternate provider. B.Resource-Based View of the Firm Both Core Competencies and the Resource-Based View of the Firm consider that organizational success depends on the capabilities and knowledge acquired by the firm. Resource-Based View of the Firm considers the Firm as a nexus of resources and capabilities that are not openly available in the market (Wernerfelt, 1984). To the extent that those cannot be copied by competitors, they can be a source for competitive advantage (Barney, 2001, Barney, 1991). Therefore, competitive advantage can be achieved through unique resources that are difficult to copy or replace. Complementary to that, the competency- based view of the firm considers that tacit competencies related to the job are firm- specific and that they develop through long-term interaction between the different resources employed within the company. According to Prahalad and Hamel (1990) core competencies are source of competitive advantage in the sense that they add value, are rare and difficult to copy or replace (Lado and Wilson, 1994, Wright et al., 2001, Wright et al., 1994). From the overall theory of the Core Competencies of the Firm, we withhold its premises concerning two service and firm characteristics that affect the perception of benefits from outsourcing, as well as the final decision to outsource. These are the following: Development of Training In-House, as a result of Investments and existing Expertise: Outsourcing of functions that are characterized by extensive internal expertise and 7

8 development is seen as a risk to abandon a potential source of competitive advantage, as well as a risk to miss an opportunity to develop new core competencies through experiential learning (Quinn and Hilmer, 1995). So, it is generally unadvisable to outsource functions that incorporate important tacit knowledge. Consideration of Training as source of Competitive Advantage: In the same spirit, outsourcing of services that are seen as potential sources of competitive advantage is seen as a risk of missing the opportunity to develop and appropriate the benefits of a potential source of competitive advantage C.Economies of Scale Effects Economies of scale effects were first discussed in the works of the classics, such as Adam Smith (1976), Karl Marx (1974) and Alfred Marshal (1961). According to this proposition, increases in the volume of production of either products or services results in the long-term period in lower cost of production. In the event of external economies of scale, in particular, larger sectors benefit from generally lower costs of production (Krugman, 1980). From this assertion we sustain two claims: Firm Size: Contrary to the relevant claim of TCE on the role of firm size in outsourcing decisions, the Internal Economies of Scale theory considers that outsourcing gives the opportunity to smaller firms to benefit from economies of scale effects achieved by their providers, due to large volume and specialization. Therefore outsourcing should be more appealing for smaller companies that cannot realize such economies of scale effects inhouse. Development of the market for training services: Provision of training services will be more cost-effective for providers in larger markets, due to external economies of scale effects. Therefore, customers of such services will experience higher cost saving benefits when they outsource services for which the market is more developed. 8

9 D.Administrative Innovation Theory Administrative Innovation Theory provides an additional approach to the study of outsourcing decisions. According to Administrative Innovation Theory, the extent of diffusion of innovative administrative practices depends highly on the extent to which the members of a group have already adopted the innovation (Loh and Venkatraman, 1992). In this sense, the extent of diffusion of training outsourcing in companies will depend on the extent of adoption by other companies of the practice of outsourcing training. Therefore, we hold the following claim regarding the development of the market: Development of the market for training services: Development of the market for training services and availability of training services in the market is usually linked to higher diffusion of the practice of outsourcing training services. Firms will be more eager to outsource training services that are already outsourced by their counterparts. From the above presentation of the basic theories on which this research is based, the following 7 hypotheses are extracted: H1: The expected benefits from outsourcing training affect the extent of outsourcing This hypothesis has never been tested before in outsourcing decisions. It lies on the adaptation theory, discussed by marketing theorists, according to whom judgments are affected by previous experience with the general class of incidents (Richard and Gerald, 1981). Put it differently, people form preferences and make decisions based on their past experiences and the way these are confirmed or rejected by practice. In the same way, experienced HR professionals have formed solid beliefs on the benefits they will achieve by outsourcing any HR function and this affects their final outsourcing decisions. 9

10 H2: The size of the firm is related with the expected benefits from outsourcing and indirectly with the extent of outsourcing in training The second hypothesis emanates from Transaction Cost Economics and Economies of Scale Effects. According to TCE, small sizes are linked to low negotiation power and therefore higher opportunism risk (Williamson, 1975, Williamson, 1991a). Therefore, according to TCE, smaller firms are less likely to outsource, because they are more vulnerable to opportunism from the opposite party. On the other hand, contrary to the relevant claim of TCE on the role of firm size in outsourcing decisions, the Internal Economies of Scale theory considers that outsourcing gives the opportunity to smaller firms to benefit from economies of scale effects achieved by their providers, due to large volume and specialization. Therefore outsourcing should be more appealing to smaller companies that cannot realize such economies of scale effects in-house. Therefore, we sustain that the size of the firm will affect the expected benefits and eventually the extent of outsourcing training, but we cannot particularize the direction of this effect. H3: Investment and expertise in training within the company are negatively related with the expected benefits from outsourcing, and the extent of outsourcing in training Under the light of Core Competencies and the Resource-Based View of the Firm, outsourcing of functions that are characterized by extensive internal expertise and development is seen as a risk for the firm to abandon a potential source of competitive advantage, as well as a risk to miss an opportunity to develop new core competencies through experiential learning (Quinn and Hilmer, 1995). So, it is generally unadvisable to outsource functions that incorporate important tacit knowledge. H4: The frequency of training is negatively related with the expected benefits from outsourcing and with the extent of outsourcing in training According to Transaction Cost Economics, the frequency of the transaction increases the 10

11 probability of in-house provision of the function, as the frequency of the transaction increases transaction costs in market provision (Williamson, 1979, Yang and Huang, 2000). That is, the need to frequently renegotiate the terms of outsourcing agreements, with the transaction costs that this involves, makes it comparably more cost-effective to insource training. H5: The treatment of training as source of competitive advantage by the firm is negatively related with the expected benefits from outsourcing and with the extent of outsourcing in training The fifth research hypothesis emanates also from the Resource- Based View of the Firm, as this was discussed above. According to this, outsourcing of services that are seen as potential sources of competitive advantage is seen as a risk of missing the opportunity to develop and appropriate the benefits of a potential source of competitive advantage H6: Asset specificity in training is negatively related with the expected benefits from outsourcing and with the extent of outsourcing in training As discussed above, according to TCE, asset specificity of a service or product increases transaction costs (Klaas et al., 1999, Williamson, 1979), so the more asset specific a service or product is, the less probable it is for a firm to outsource it. H7: Development of the market and availability of training services in the market will be positively related with the expected benefits from outsourcing and with the extent of outsourcing in training Transaction Cost economics, external economies of scale effects, and administrative innovation theory, as discussed above, sustain that larger and more contestable markets, where new practices have been used extensively are more attractive places to buy services and products. As the development of the market for training services and availability of training services in the market is usually linked to higher diffusion of the practice of outsourcing training services, firms will be 11

12 more eager to outsource training services that are already largely outsourced by their counterparts and which can be easily found in the market. Graph 1, below, graphically summarizes the above- mentioned hypotheses. Insert Graph 1 around here RESEARCH METHODOLOGY The data were gathered using a wider questionnaire on HRM outsourcing. The survey was addressed to 100 HR directors in Greece and all questionnaires were completed during face-toface interviews by one of the writers, with the 100 respondents. This method allowed for better understanding by the researchers of the respondents perceptions and beliefs than would be achieved through postal or telephone questionnaire completion and the researchers were able to shape in a better way their initial model. Quota sampling was used and it was attempted for the sample structure to reflect the population structure, in terms of firm activity and size. Graph 2 presents the classification of companies of the sample by sector of activity, whereas Graph 3 presents a classification of sample companies by size (number of equivalent full- time employees). The way in which each variable was measured in the questionnaire and the exact wording of the questions, as well as content reliabilities, where appropriate, are presented in the Appendix, at the end of the paper. Insert Graph 2 around here Insert Graph 3 around here 12

13 Structural Equation Modelling (SEM) was applied for data analysis, using the AMOS5 software. The use of SEM, instead of Simple Multiple Regression, was deemed necessary in order to test simultaneously for the effect of the independent variables on the perceived benefits and the effect of the latter on the extent of outsourcing training. SEM has been repeatedly forwarded as a method for analysis of structural equations of that kind (Shook et al., 2004, Duncan, 1975). This method also allows to conduct confirmatory factor analysis (CFA) and to insert underlying (latent) concepts and measures in the overall analysis. Several fit measures are reported at the end of the analysis, allowing assessing of the goodness of fit of the data to the initially hypothesized model (Byrne, 2001). The hypothesised relations outlined on Graph 1 were tested separately for generic and company/job-specific training. The need for this classification has been proposed in previous research (Gainey et al., 2002) and it is in accordance with the Transaction Costs and Resource- Based View of the Firm approach to outsourcing decisions. Under generic training services we specifically referred to training of employees on general and managerial competencies, which is a rather off-the-self service (Gainey and Klaas, 2005, Bachler, 1997, Gainey et al., 2002). Under specific training we referred to tailored training that is specific to the job of the employee or specific to the company, including for example induction and specific tasks training. FINDINGS A. Outsourcing of Job- and Company- Specific Training Functions (Specific Training) A.1. Measurement Model Graph 4, below, presents graphically the Measurement/ Confirmatory Factor Analysis (CFA) model for the benefits from job- and company- specific training outsourcing. In the same graph 13

14 appears the regression coefficient among the perceived benefits and the extent of outsourcing of this type of training service. Items represented as ellipses are latent/ unobserved variables (factors). Rectangles represent the observed variables. Items in circles represent standard errors. Arrows represent regressions, whereas elliptical, double- headed arrows express the existence of significant correlations. Graph 4 is characterized by very good indices of fit (NFI 1 =.805, CFI 2 =.927), while the regression coefficients and factor loadings are all statistically significant and with minor standardized residual covariances (<2.58) (Byrne, 2001). Insert Graph 4 around here CFA confirms that perceived benefits from outsourcing can be grouped under three major benefit groups, i.e. Cost Benefits, Quality Benefits, and Flexibility Benefits, as was the original outcome of preliminary exploratory factor analysis for all types of HRM services outsourcing. Specifically, Cost Benefits is a latent variable expressed through the observed variables: focus on core functions through time saving (0.65), cost reduction (0.60), and better cost monitoring (0.44). Quality Benefits is a latent variable measured through better quality (0.92), access to external expertise (0.62) and new ideas (0.55). A significant positive correlation (=0,52) is found among Quality Benefits and Flexibility Benefits, but they were finally preferably considered as two different concepts, as there is a significant conceptual gap among the two. 1 Normative Fit Index: It is one of the most widely used indices of fit in Structural Equation Modelling and it shows how well the data fit to the hypothesised model (Byrne, 2001) 2 Comparative Fit Index: This index of fit is taken by NFI, but it takes sample size into account, so that fit is not underestimated in small sizes Values for NFI and CFI range from zero to 1 and a value > 0.90 is generally considered representative of a well-fitting model (ibid.) 14

15 The extent of outsourcing of job- and company- specific training, though exceeding the CFA scope, was found to be more positively affected by Quality Benefits (β=0.52), than by Cost Benefits (β=0.18) and not significantly affected by Flexibility Benefits (β=0,18, P=0,197). Therefore, it appears that firms decide to outsource this particular training function, aspiring mainly to quality benefits, rather than cost. A.1. Structural Model for Job- and Company- Specific Training Graph 5, below, represents graphically the overall structural model for the way independent variables (characteristics of the training function) affect the perceived benefits from outsourcing and subsequently how the latter affect the extent of specific training outsourcing. Insert Graph 5 around here It appears from Graph 5, above, that the factors affecting the perceived benefits from outsourcing job- and company- specific training are as follows (see Table 2, below): Insert Table 2 around here In addition to the above relations, the existence of internal capabilities for providing training inhouse has a direct negative relation with the extent of outsourcing of company- and job- specific training (β= -0,31), regardless of its effect on the perceived cost and quality benefits. In the overall Structural Model, the extent of outsourcing is affected significantly only by quality benefits. In addition to that, the extent of job- and company- specific training is directly affected by the existence of substantial investment and in-house training capabilities. Cost or flexibility benefits do not appear to affect the extent of specific training outsourcing. 15

16 Quality benefits are mostly affected positively by the availability of training services in the market, as well as, negatively, by the size of the firm and the consideration of training as a source of competitive advantage. Bigger companies and companies for which training is of major importance for differentiation are therefore less likely to expect quality benefits from outsourcing specific training, perhaps because they are more demanding vis-à-vis the quality level of training. This is probably due to their in-house substantial capability in offering training services and their overall sophistication in evaluating and producing HRM services in general. Significant positive correlation exists among the difficulty in replacing the resources used for training, and the consideration of training as a source of competitive advantage (0,23), as well as with the existence of substantial capabilities in offering specific training in-house (0,40). The Structural Model, as laid out in Graph 5 has some very good indices of fit (NFI=.850, CFI=1,000), while from the general study of the overall indices, all the regression coefficients were statistically significant, with minor standardized residual covariances (<2.58). B. Outsourcing of Generic Training Functions B.1. Measurement Model Graph 6, below, presents graphically the Measurement/ Confirmatory Factor Analysis (CFA) model for the benefits from outsourcing generic training. In the same graph appears the regression coefficient among the perceived benefits and the extent of outsourcing this type of training. The model laid out in Graph 6 is characterized by very good indices of fit (NFI=.790, CFI=.926), while the regression coefficients and factor loadings are all statistically significant and with minor standardized residual covariances. Insert Graph 6 around here 16

17 As in job- and company- specific training, CFA confirms that perceived benefits from outsourcing can be grouped under three major benefit groups, i.e. Cost Benefits, Quality Benefits, and Flexibility Benefits. Specifically, Cost Benefits is a latent variable expressed through the observed variables: focus on core functions through time saving (0.77), cost reduction (0.35), and better cost monitoring (0.31). Quality Benefits is a latent variable measured through better quality (0.87), access to external expertise (0.62) and new ideas (0.52). Similarly to the case of job- and company- specific training, a significant positive correlation (=0,44) exists among Quality benefits and Flexibility Benefits. In addition to that there is a significant negative correlation among Quality Benefits and Cost Benefits (= -0,20), as well as a lower negative correlation among Quality Benefits and Flexibility Benefits (=0,11). The negative correlation among Cost Benefits and Quality Benefits can be attributed to the dichotomous nature of the Greek market for HRM services, particularly the training services market (Galanaki and Papalexandris, 2005). So, high cost benefits and low quality benefits are achieved when employing the less sophisticated training providers, while the opposite occurs when employing the more expensive and sophisticated providers. The extent of outsourcing of generic training, although exceeding the CFA intend, was found to be positively affected only by Quality Benefits (β=0.34). Therefore, it appears that firms decide to outsource this training function, aspiring mainly to quality benefits, though the low beta value suggests that this is not the sole or major drive to outsource generic training. Perhaps the decision to outsource generic training is then mostly commanded by the impossibility of providing the service in-house. While for the training providers generic training is an off-the-self service that does not require significant adjustment for separate customers, on the side of their clients, inhouse training provision is often impossible. Therefore, the major decision factor for outsourcing generic training is not cost concerns, but rather access to resources that are not available in-house. 17

18 B.2. Structural Model Graph 7, below, expresses diagrammatically the structural model of relations among independent training service aspects, perceived benefits and eventual extent of outsourcing of generic training. The Structural Model, as laid out in Graph 7 has some very good indices of fit (NFI=0,930, CFI=0,975),, while from the general study of the overall indices, all the regression coefficients were statistically significant, with minor standardized residual covariances (<2.58). Insert Graph 7 around here The factors affecting the perceived benefits and the extent of outsourcing of generic training are summarized in Table 3, below. Insert Table 3 around here As in job- and company- specific training, the existence of internal capabilities for providing training in-house has a direct negative relation with the extent of outsourcing of company- and job- specific training (β= -0,21), regardless of its effect on the perceived cost and quality benefits. This negative effect is lower than in the case of job- and company- specific training (β=- 0.31), though. The extent of generic training outsourcing is most affected by perceived quality benefits (β=0,41) and to a lesser extent by flexibility benefits (β=0,12). So, it seems that the main provision when deciding to outsource generic training is better quality and then flexibility, not cost. What is more, the level of development of generic training in-house, is also a very important factor affecting the decision to outsource, but not so critical as in specific training (β=-0,21<-0,31). 18

19 Quality benefits are more affected by the availability of the service in the external market than in the case of specific training, and they are negatively related to the size of the company and the frequency of training. Larger companies and companies that frequently offer generic training to their employees are less likely to expect high quality benefits from outsourcing training, probably because they are more demanding regarding the level of service. It is worth noting that quality benefits from outsourcing generic training are positively correlated with flexibility benefits (0,37), and negatively correlated with cost benefits (-0,14), whereas a minor, yet significant positive correlation exists among flexibility benefits and cost benefits (0,09). Those correlations, but for the one among quality and flexibility benefits did not hold in the case of company- and job- specific training, which proves the difference in the perception of benefits from outsourcing by type of training service. The size of the firm is negatively related both with quality benefits and flexibility benefits. The existence of investments and capabilities in offering generic training in-house affects directly negatively the extent of outsourcing generic training. In addition to that, the frequency of generic training, which is positively correlated with the existence of generic training capabilities in-house, is negatively related with the perceived benefits from outsourcing training. On the other hand, the availability of generic training services in the market has a positive relation with all the perceived benefits from outsourcing of generic training services. This points out the importance of the development of the market for HRM services in general for effectively utilizing and benefiting from HRM outsourcing. DISCUSSION One of the major findings of the current study is that, unlike the common viewpoint expressed in general outsourcing bibliography, which puts the weight of outsourcing decision analysis on cost considerations, outsourcing of training functions appears not to be dictated by aspirations to cost benefits, but rather aiming at quality benefits. Both in the case of generic and of company/job- 19

20 specific training, quality benefits were found to be the main target of firms in outsourcing these services. Perceived cost benefits from outsourcing training do not have significant effect on the extent of outsourcing, as previous studies had sustained (DeViney and Sugrue, 2004). This is probably due to the developmental aspect of training, which proves to be critical for building strategic capabilities and competitive advantage through intangible aspects (i.e. culture and climate), within the company. In this respect, the provision of training services that contribute to this effect is of utmost importance and it surpasses cost considerations. On the other hand, total cost assessment of training provision has traditionally been a problematic area within Human Resource Management (Fitz-Enz, 1995), so companies probably by experience don t expect specific and immediately quantifiable cost benefits when training their personnel, in general. On the other hand, the sole training aspect that directly affects the extent of outsourcing, both in generic and specific training is the existence of substantial expertise and investment for the provision of training in-house. Therefore it appears that to a large extent outsourcing of the training function is ought to the lack of internal resources rather than specific quality or cost considerations, as initially hypothesized. Companies often outsource training simply because they don t have any alternative. Perhaps this is linked to the general lapse in the development of HRM function and profession in Greece, which has been pinpointed in previous researches (Papalexandris, 1992, Papalexandris and Stavrou, 2004). Greece is a country where industrial development has gone at a lot slower pace than many other European countries, as historical, geographical and other circumstances have for long delayed the transition from agricultural to industrial economy. This has also impeded the development and standardisation of the HRM function, at the same pace as in highly industrialised countries. At the same time, the Greek economy is also characterized by a dominance of small and medium enterprises (SMEs) (Observatory of European SMEs, 2002, OECD, 2002), which depend more on outsourcing, in order to find way to resources that they lack in-house. However, the phenomenon of companies that outsource training due to the lack of internal resources, though more pronounced in Greece, 20

21 has proved also to occur in other countries with more developed HRM (Cooke et al., 2005, Vernon et al., 2000). On the other hand, there are a lot of economies in the world, where, like in Greece, HRM is at the stage of professionalisation and there is a dominance of SMEs (Observatory of European SMEs, 2002). Another factor highlighted in the current study is the overall attitude of the customer toward external training services. As discussed above, bigger companies and companies frequently offering training to their employees perceive quality benefits from external training services as generally lower. This was attributed to a somewhat more demanding attitude of those firms in terms of the supplied training service. Experience in offering training services in-house and general internal expertise in training services makes it difficult for those companies to be satisfied by external training services, especially when those are difficult to align with the specific company challenges and requirements. This further supports the above claim that companies outsource training to a large extent when they cannot procure it internally, instead of seeking quality improvements. It should be noted that this effect is contrary to the TCE assertions that larger firms generally benefit more from outsourcing, due to the effect of large numbers, but neither does it agree with the Economies of Scale approach to the size of the firm effect on outsourcing benefits for smaller firms, as size of the firm was not found to be positively related with cost benefits. This further underlines the importance of the customer s overall experience and practice for his/her perception and evaluation of a proposed training service, which is a rather attitudinal than objective effect. Finally, the availability of training services in the external market is an omnipresent factor that increases the perceived benefits from outsourcing training, both in generic and specific training. This unquestionably sustains the initial hypothesis 7, emanating from TCE and Administrative Innovation Theory, regarding the positive effect of the market development for training services on the expected benefits from outsourcing training. 21

22 LIMITATIONS OF THE STUDY The most serious limitation of the current research is the use of perceptual data that are based on single key informants, i.e. the HR director or other most senior HRM person in each company. Though this was deemed necessary, as it was very important for the respondents to be familiarised with all the aspects affecting the decision to outsource training, it still imposes the single key informant weaknesses that hold in any research project using such a data collection technique (Kumar et al., 1993). IMPLICATIONS FOR THEORY As it appears in both Graphs 5 and 7, most of the original research hypotheses were sustained, which further upholds the major underpinnings of the four classic theories that were used in this research. Regarding the effect of the size of the firm on the use of outsourcing for employee training in particular, it appears that, in agreement with the Economies of Scale Effects Theory, larger firms expect lower benefits from outsourcing training. Therefore, conversely to the hypothesis of Transaction cost Economics, the size of the firm negatively affects the adoption of outsourcing for training purposes. Except for the above effect, all other hypotheses emanating from Transaction Cost Economics were sustained in the case of outsourcing training. That is, asset specificity and frequency of the transaction, as well as the development of the external market for training services affect the perceived benefits from outsourcing and therefore the use of outsourcing in the way hypothesized. Moreover, all the hypotheses emanating from the Resource- Based View of the Firm were also sustained by the current data. Actually, it is worth stressing that the (in)ability to develop the function in-house is the major determinant of the extent of outsourcing in training, as it appears to have a significant effect on the decision, irrespective of its effect on the perceived benefits from outsourcing training. 22

23 Finally, both the hypotheses based on Economies of Scale Effects Theory and those based on Administrative Innovation Theory were confirmed. Therefore, all the four Theories used for the current paradigm proved to be very useful for the explanation of the decision to outsource employee training, as expected. This further complements the outcomes of numerous previous pieces of research on the decision to outsource other functions or intermediate products or services, as well as HRM functions in particular (Klaas et al., 1999). IMPLICATIONS FOR PRACTICE Employee training is seen as a vehicle for building competitive advantage by most companies. Apart from developing internal capabilities, which can be a factor of differentiation among companies, training has traditionally proved to strengthen the corporate culture and to increase motivation, job satisfaction and commitment. Companies that want to achieve better fit through training (Brockbank and Ulrich, 2005b, Brockbank and Ulrich, 2005a) and which contemplate the choice among make or buy this particular function might find useful the following discussion. It is preferable to provide training internally and to develop internal training infrastructure and expertise when: There are very specific and idiosyncratic company needs, know how, structures, systems, culture, objectives and strategies that need to be supported through companyspecific training. Internal expertise in providing training is adequately developed and the company has put much effort and resources in order to develop this function in-house The company seeks to facilitate corporate action learning through training Internal teachers act as role models who lead by example and enforce the corporate culture and develop the future leaders (Tichy and Cardwell, 2002) 23

24 Training is seen as a way to develop the managers. The practice of having internal managers to provide training to subordinates or colleagues can prove an effective way for executive self-development of the trainer him/her self Training is used as a tool of the overall change management effort. Change management champions and change agents may find more control and more success over internal change efforts as a result of developing and leading change in the form of training and development. On the other hand, it is advisable to outsource training when: The company seeks to buy in new ideas, scarce expertise, and achieve pluralism and an out of the box thinking through outsourcing Cost and flexibility considerations determine to a large extent the training process. Though this was not sustained through the outcomes of the present study, cost and flexibility considerations are behind a large proportion of outsourcing decisions At this point it should be stressed that the decisions on outsourcing training involve an implicit choice between a short and long term approach to training assets. A short term approach results in a lack of internal capacity and lack of infrastructure for training. This further leads to outsourcing that lacks the necessary fit to the company s expectations (Tichy and Cardwell, 2002). This could be named the vicious cycle of lack of internal capabilities and dissatisfaction from outsourcing, a phenomenon that could be confronted by examining all the advantages and disadvantages of existing options and carefully evaluating training outcomes. REFERENCES Arnold, U. (2000) Dimensions of outsourcing: A combination of transaction cost economics and the core competencies concept. European Journal of Purchasing and Supply Management, 6, Aubert, B., Rivard, S. & Patry, M. (1996) A transaction cost approach to outsourcing behavior: Some empirical evidence. Information & Management, 30,

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28 Appendix 1: Graphs and Tables Graph 1: Outline of Research Hypotheses Size of Firm Investment & Expertise in Training H2 H3 Frequency of Training Training as Source of Competitive advantage H4 H5 H6 Perceived Benefits from Outsourcing Training H1 Extent of Outsourcing in Training Services Asset Specificity of Training H7 Market Development for Training Services Graph 2: Sample Companies by Activity Sector Manufacturing 9% Services 46% Manufacturing & Trade 28% Trade 17% 28

29 Graph 3: Sample Companies by Size (number of equivalent full-time employees) 16% 14% 12% 10% 8% 6% 14% 14% 14% 12% 4% 2% 0% % % 4% 4% 3% 4% % 4% 2% 3% 2% 1% >

30 Graph 4: Measuring model for the way perceived benefits from outsourcing affect the extent of job- and company- specific training (mostly CFA results) err19 err20 err21 DECREASE COST,60 COST ASSESSMENT,44 FOCUS ON CORE,65 err27 COST BENEFITS,18 err26 err22 FLEXIBILITY BENEFITS EXTENT OF OUTSOURCING IN TRAINING,52,52 err28,55 QUALITY BENEFITS,64,92 NEW IDEAS EXTERNAL EXPERTISE BETER QUALITY err23 err24 err25 30

31 Graph 5: Structural Model for factors affecting the extent of outsourcing of Job- and Company- Specific Training err1 COMPANY SIZE err3 RESOURCES USED IN TRAINING ARE NOT EASY TO REPLACE -,15 COST BENEFITS err27,35,23 err2 TRAINING IS SOURCE OF COMPETITIVE ADVANTAGE -,13 -,35,34 -,16 -,18 QUALITY BENEFITS -,31,45 err28 err26 EXTENT OF OUTSOURCING IN TRAINING,40 -,26,47,42 err22 err8 INVESTMENT& SPECIALISATION IN TRAINING FLEXIBILITY BENEFITS,12 err4 TRAINING SERVICES ARE EASILY ABAILABLE IN MARKET 31

32 Graph 6: Measurement model for the perceived benefits from outsourcing generic training err19 DECREASE COST err20 COST ASSESSMENT err21 FOCUS ON CORE 0,35 0,31 0,77 err27 COST BENEFITS 0,11 err26-0,20 err22 FLEXIBILITY BENEFITS EXTENT OF OUTSOURCING IN TRAINING 0,44 0,3 4 err28 0,52 QUALITY BENEFITS 0,62 0,87 NEW IDEAS err23 EXTERNAL EXPERTISE err24 BETER QUALITY err25 32

33 Graph 7: Structural Model for factors affecting the extent of outsourcing of Generic Training err1 COMPANY SIZE -0,26 FLEXIBILITY BENEFITS err22 0,27 err8 INVESTMENT& SPECIALISATION IN TRAINING 0,17-0,14-0,21 0,12 err26 EXTENT OF OUTSOURCING IN TRAINING 0,37 err2 0,41 0,09 TRAINING IS OFFERED FREQUENTLY -0,11 QUALITY BENEFITS err28 err5 0,26-0,14 TRAINING SERVICES ARE EASILY AVAILABLE IN MARKET 0,20 COST BENEFITS err27 Table 1 : Reasons for outsourcing/ insourcing training functions Benefits/ Reasons for Outsourcing Training Benefits/ Reasons for Insourcing Training Cost Reduction Development of Internal Capabilities - Sources of Competitive Advantage Lack of Internal Capability Access to Best Practices and Talent Minimization of Capital Costs Timeliness Support of Internal Bonds and Communication through Training Better Design of the Training Program Meeting Specific Company s Needs Independence from Training Provider 33

34 Focus to Core and Removal of Peripheral Training Tasks Lower Need to Rationalize and Explain the ROI from Training Improvement of Quality Measurement and Contestability Upgrading of the Training Function Table 2: Standardized regression coefficients (β) of structural model for Job- and Company- Specific Training Independent Variable Cost Benefits Quality Benefits Flexibility Benefits Company Size -0,15-0,18 - Training considered as source of competitive advantage +,035-0,13-0,26 Existence of considerable investment and capabilities in -0, offering training in-house Difficulty to replace resources used for the provision of ,17 job- and company- specific training Availability of training services in the external market +0,34 +0,47 +0,12 Table 3: Standardized regression coefficients (β) of structural model for Generic Training Independent Variable Cost Benefits Quality Benefits Flexibility Benefits Company Size -0,14-0,26 Frequency of Generic Training -0,11 Availability of Generic Training +0,20 +0,26 +0,17 Services in External Market Existence of considerable investment and capabilities in offering training in-house Extent of Outsourcing -0,21 34

35 Appendix 2: How variables were measured in the questionnaire Variable Way in which the variable was measured Measuring scale Size of Firm Natural logarithm of Number of Employees (full time equivalent) Continuous -No of employees Investment and The company has invested a lot in developing the training 7- point Likert type expertise in function internally scale * Training The people offering training internally are very specialized in this Frequency of Training Training is offered frequently within the year. (think of it as a portion of the time it takes up from the whole HRM function) 7- point Likert type scale* Training as Source of We see Training as a potential source of Competitive Advantage 7- point Likert type scale* Competitive Advantage Asset Specificity of Training It is difficult to replace the resources that are used for providing training 7- point Likert type scale* Market There are many providers for the training services we seek 7- point Likert type Development for The market for training services is well developed scale* Training Services Benefits from Outsourcing Cost benefits By Outsourcing Training we decreased the cost of Training 7- point Likert type By Outsourcing Training we measure better the cost of scale* Training By Outsourcing Training we saved HRM time for strategically important functions Quality Benefits Outsourcing of Training brought new ideas in the 7- point Likert type organization scale* Outsourcing of Training has given access to external expertise Outsourcing of Training has improved the quality of training Flexibility Benefits By Outsourcing Training we became more flexible 7- point Likert type scale* *the 7 points range from totally disagree (1) to totally agree (7) 35