Chapter 13 Outsourcing

Outsourcing- occurs when an organization contracts with another organization to provide services or products of a major function or activity. Outsourcing is currently being promoted as one of the most powerful trends reshaping management. Outsourcing differs from alliances, partnerships and joint ventures in the flow of resources is one way, from the provider to the user.

In a study conducted by Hewitt Associates, 94% of those surveryed said they had outsources one or more HR functions.

Outsourcing HR Functions
In HR, the functions most likely to be outsourced are temporary staffing, payroll, training, recruiting, and benefits administration. HR departments are searching to determine which activities add value and who can best do these. Outsourcing is also a response to the demand from executives that HR reduce costs for its services.

While smaller firms might outsource all HR functions, most large firms retain the critical components. Larger organizations rarely engage in 100% outsourcing for 3 reasons. First, the HR function is so critical to the culture and strategic objectives of an organization that it must be closely managed by the organization itself. Second, situations arise that are impossible to predict, such as industrial relations disputes, and this unpredictability makes it difficult to develop a contractual agreement with a vendor. Third is the lack of providers of total HRM services.

Management of Outsourcing
-Managing the outsourcing well is critical.
-Must be subjected to a cost-benefit analysis.
-Involves selecting vendors, negotiating the contract, and monitoring the arrangement

Selecting a Vendor
-Organization should:
-Inform staff of the affected function
-Prepare a Request for Proposal (RFP)
-Invite internal and external bids
-Establish a team to evaluate these bids

Request for Proposal (RFP)describes the responsibilities to be outsourced and invites potential providers to present their proposal for carrying out the job
Negotiating the Contract
-Experts advise that organizations not work with contracts offered by vendors due to lack of performance standards or penalty clauses, payment provisions favour the vendor, and they frequeently want to start the service prior to signing the contract which may lead to excess fees.
-Organization should establish benchmarks with current services listing all relevant criteria.
-Quality measures must be included in contract with penalties for failure to meet standards.
-Contract should include termination clause.
-Organization should hire technical and legal experts to review before entering into contract.

Monitoring the Arrangement
-Most frequent causes of outsourcing problems are:
  • Poor service definition-terms must be clearly defined. The work must be managed by results with clear targets and objectives.
  • Weak management processes-a person needs to be assigned to monitor that expected results are achieved.
-Relationship must be established to ensure that the outsourcer acts in the firm's best interests and has knowledge of unique interests.
-Check references.
-Demand frequent and accurate reporting.
-Conduct internal and external client satisfaction surveys.

If the organization needs experts and cannot afford to hire or train them outsourcing may be a solution. Most organizations want to achieve cost savings or improved services or acess to experts or tech. as the basis for their decision to outsource.

HR Functions That May Be Outsourced:
Compensation: Payroll, benefits, compensation administration and pension
Training: Program delivery, program design and development, training consulting to line departments, training needs analysis, program evaluation, strategic planning for training and development, administration and developing training policy
Recruitment and Selection: Advertisements, screening of applications, testing, reference checking, preliminary interviews, salary negotiations (at executive level), and exit interviews
Health and Safety: Employee assistance programs and wellness programs

Strategic Focus
Employers cannot pursue excellence in all areas.They focus on their core competency, such as customer service or innovation, and move secondary functions, such as benefits administration, to firms in which these functions are a core competency. Core is defined by 4 meanings:
  • activities traditionally performed internally
  • activities critical to business success - core work contributes directly to the bottom line; non-core work doesn't
  • activities creating current or potential competitive advantage
  • activities that will influence future growth or rejuvenation

Core Functions That Should Not Be Outsourced
  • orientation
  • leadship development
  • employee relations
  • final selection
  • performance management
  • succesion management
  • organizational change

The text discussed why it is rare to outsource all of the HR departments functions - HR is critical to the culture and strategic objectives of an organization. HR needs to have a seat at the strategic planning board. However, some companies do outsource critical functions such as risk management. The following article discusses the benefits and risks of doing so: The Benefits and Risks of Knowledge Process Outsourcing

Six Major Reasons for Outsourcing:
1. Financial Savings - 10-20% labour savings and an increase in productivity
2. Strategic Focus - Allows company to focus on core values, critical to success of company
3. Access to advanced technology -Quick and Reliable access new technologies
4. Improved service levels -Best of Breed vendors to optimize service
5. Access to specialized expertise -Employers need not focus on learning laws/regulations, it can be left to those who specialize in it
6. Organizational politics -can be used to get rid of a troublesome department, or just reduce the headcount.

Outsourcing Risks and Limitations:
-Are the anticipated benefits realized?
-What are the risks to service levels?
-What is the effect on employee morale?
-Does outsourcing reduce the value of the organization?

Service Risks
- contractual arrangements dictate which services will be provided
- flexibility is comprised to add new features or changeservice levels
- disruption of service could pose challenges from potential labour relations problems with outsourced organization

Employee Morale?
- form of restructuring that can create displayed, resentful, alienated, and anxious employees
-organization may face backlash from employees
- HR professional tend to stay away from outsourcing for the following reasons s
- losing their jobs
- being forced to work for a vendor
- fear that management believes outsiders are more competent Article on outsourcing HR functions This article was written in 2006, however it outlines the future of outsourcing in the workplace. It's interesting to see how this article written 6 years ago still reigns true today.