The effect of outsourcing human resources Essay Example

of HR outsourcing services: PEOs, BPOs, ASPs, or e-services (Lee, 2002).
A Professional Employer Organization (PEO) takes full responsibility for a company's human resources management. It assumes legal liability for the company's employees and actively participates in essential HR functions such as recruitment, performance assessment, and restructuring. The PEO and the company form a partnership where the PEO manages all HR aspects and the business handles other aspects of the company. Essentially, it is complete outsourcing, as all activities are performed by an external company.In Armstrong (2001), a list of HR activities that can be outsourced is introduced, including training, recruitment, health and safety monitoring and advice, employee welfare and guidance activities, payroll management, specialist legal advisory services, and occupational health and fitness services. However, due to the unique nature of HR management and the limited practice of HR outsourcing, PEO may also involve joint venture or strategic alliance sourcing where certain responsibilities are shared between an organization and a provider. BPOs (Business Process Outsourcing) is a broad term that refers to the outsourcing of various managerial and operational functions. In HR, a BPO aims to support a company's HR system with the latest management information systems and options for self-access and HR data storage. ASPs (Application Service Providers) host software on the web and rent it to users. Some ASPs host HR software, which can include standardized off-the-rack applications like PeopleSoft or customized HR software developed by vendors. These software programs can manage payroll, benefits, and more. The rationale for HR outsourcing is based on the general principle of outsourcing as proposed by Mintzberg et al.The overall principle for any outsourcing activity, which was

established in 1995, is that outsourcing provides greater economic systems of scale, flexibility, levels of expertise, cost-effectiveness, reduced costs, and improved value throughout the value chain. The implementation of a function internally that can be acquired more economically compromises competitive advantage. Outsourcing enables the focus on core activities and reduces internal costs, time delays, and political pressures, resulting in a more streamlined organization with a flatter hierarchy and a sharper focus on recruiting, developing, and motivating key personnel in terms of core competencies. Ratnam (2001) emphasizes the strategic dimension of outsourcing and suggests that heavy investments and the challenges of a dynamic market place make outsourcing strategy, which focuses on strategic supplier partnerships, a key value discriminator. In the current turbulent business environment, every company needs flexibility to meet current and future opportunities, and outsourcing provides the ability to adapt to changing market conditions to remain competitive. The rationale for HR outsourcing is similar but it is important to mention that it became possible with recent advancements in information and communication technologies.According to Wright (2002, cited in Gunsauley, 2002), as various management decision support systems and databases emerged, organizations recognized the new opportunities of e-HRM. Employees are becoming more comfortable with web-based self-service, making outsourcing increasingly popular. New portal technology combines deep knowledge content, decision-support tools, and transaction capabilities in one place. However, developing e-HRM applications in-house requires significant investments and expertise, while the cost of technology maintenance and upgrades continues to rise. Thus, outsourcing has become a lower-risk and cost-cutting solution. Armstrong (2003) emphasizes another important trend that supports HR outsourcing. He states that there has been a widespread shift from considering HR services

as an internal responsibility to viewing them as purchasable from external providers through outsourcing. The rationale for resorting to this practice is that these services cannot be subcontracted (Armstrong, 2003). The Institute of Personnel Development (1999, cited in Armstrong, 2003) explains that the primary cause for the increase in outsourcing is the notion of core administration, which focuses its internal expertise on its primary function and procures necessary support from various sources on the fringes.- Improved focus on strategic HR issues
- Access to senior people and projects
- Representation of senior management in organizational changes
- Strategic tool for achieving competitive advantage
- Reduction of administrative and high dealing cost activities
- Minimization of workload for regular workers
- Lower costs and greater efficiency
- Access to expertise from external vendors
- Cost savings through reduced hour costs and scalabilityConcentration of HR effort involves ensuring that members of the team focus on valuable tasks and do not get distracted. Obtaining expertise refers to acquiring knowledge and experience that is not available within the organization.

There are threats associated with outsourcing HR. According to Gunsauley (2002), when deciding whether to outsource, it is often overlooked that there needs to be enough skills within the organization to manage the vendor and ensure a cost-effective outcome if the outsourcing agreement fails. Chaffey (2003) highlights the risks of outsourcing Information Systems, including loss of control, deterioration of internal services, corporate security issues, qualifications of outside forces, and negative impact on employee morale. Chaffey also questions whether outsourcing can truly reduce costs while improving quality.

Khatri (1999) raises an important point that different strategies require different HR practices and may have varying needs for HR outsourcing. This raises two

main questions: how to align organizational strategy with outsourced HR functions, and what criteria to use to measure the expertise of HR service provider.

Overall, these issues highlight the importance of carefully considering the implications and potential drawbacks of outsourcing HR.According to Youngblood (1998), commanding quality is difficult because the production process is external. However, when a company uses internal processes, they can utilize improvement tools. When a company purchases a ready-made product or solution, they may face issues with hidden defects in quality, also known as "floating" defects or mistakes. Outsourcing can make a company dependent on its suppliers, which reduces flexibility. Armstrong (2003) raises the point of commitment and the survival syndrome. Delayering can lead to the survival syndrome, resulting in loss of trust and commitment. This can lead to increased staff turnover and decreased productivity. Morton & Wilson (2003) view HR outsourcing as a passing trend that will not reach the predicted extent. They advise questioning whether an external source can truly understand the business as well as the owner does. While outsourcing mundane tasks like payroll may be acceptable, it is unwise to let a vendor make important decisions for the company. British Group, formerly known as British Telecom, is a leading telecommunications provider in the UK with global operations through partnerships and joint ventures (BT CASE STUDY Background information).British Telecom operates in a dynamic and competitive environment, where innovation is necessary due to the short product life cycle. Its main activities include local, long distance, and international telecommunications, internet services, broadband network solutions, and providing web hosting and other IT solutions. BT serves approximately 21 million customers from different groups with

specific needs. To meet the demands of the market and industry, BT constantly introduces new and more advanced solutions. In terms of outsourcing, BT is a major player, ranking third and fourth in overall outsourcing and mega-deal conferences respectively. Among the telecommunications companies in the FTSE 100, 16.62% of their operations are outsourced to Business Process Outsourcing. BT's strategy focuses on customer satisfaction, financial discipline, and a diverse workforce of skilled and motivated individuals. According to Verwaayen (2003), BT aims to create value for shareholders by becoming the leading provider of communication services globally through partnerships. As part of this strategy, BT is planning to implement further cost cuts and outsource various functions such as accounting and financial services, publishing and dispatch, HR, internet services, real estate management, and call center operations.This passage discusses BT's strategy of maximizing shareholder value by focusing on its core business. According to Livingstone (2002), this strategy is in line with BT's goal. Price (2002) explains that by retrenching and focusing on its core business, BT will achieve cost savings, improve service quality, and create development opportunities for its staff. Additionally, Accentry (2004) states that outsourcing non-core competences will provide significant financial benefits for BT through strategic partnerships and suppliers. The need for HR transformation services was recognized by Accenture (2004) due to the rapidly changing nature of the company. In 1991, the restructuring of the company highlighted the need for separate administrative operations from business unit HR activities. This step was seen as a foundation for future realignments as the company continued to grow. After several consolidations, senior management decided to create a fully integrated internal transactional service through

a standalone subsidiary, joint venture, or separate business entity.BT made the decision to outsource its transactional HR functions, such as moves, changes, employment data, employee records, administrative call center, and payroll, as well as part of the training program and HR business-partner function. They chose to work with a single outsourcing provider, Accenture, to establish a long-term strategic relationship that covered a range of HR processes. BT initially started with ASP outsourcing and gradually transitioned to BPO. The main goals were to reduce costs, increase operational efficiency, allow in-house HR personnel to focus on strategic issues, and seize the opportunity to compete in the outsourced HR services market. In August 2000, BT further advanced this process by transferring over 1,000 HR employees to a joint venture with Accenture.The couple developed a comprehensive HR solution that covered all aspects of employee management, including resourcing, learning, performance management, performance assessment, employee relations, safety, health, and delayering. BT was responsible for handling strategic HR issues related to organizational development, while Accenture provided HR services based on standardized processes and systems. These services included a centralized HR contact center, specialized service centers, technology improvements, labor solutions, and discipline in HR management. In 2002, BT decided to outsource its entire PEO function, resulting in a reduction of its HR staff from 14,500 to 600. This transformation was achieved through restructuring, process improvement, elimination of duplication, and focus on productivity.Accenture (2004) claims to have achieved the following through their HR strategies: improved efficiency in HR administration tasks, reduced time and money lost to sickness, increased employee satisfaction ratings. They state that 95% of participants in a stress workshop expressed satisfaction, 95%

of employees using the guidance service were pleased with it and would use it again, and 93% reported feeling better equipped to handle challenges after counseling.

The decision to outsource all HR functions raises concerns about strategic alignment of different strategies. According to Johnson & Scholes (2001), the HR function is critical for strategic planning and execution. It involves defining roles and relationships to align business and operational activities with strategic issues. Mullins (2001) adds that the HR function allows management to understand the organization's culture and the presence of various formal and informal procedures that facilitate communication networks and knowledge sharing within the company.The instance study lacks clarity in explaining how the outsourced HR function is connected to the strategy planning process. Moreover, there are concerns about the existence of effective communication and knowledge transfer channels, which are essential for operational flexibility and responsiveness. According to Ulrich (1996), when HR services are outsourced, there is a need for significant investment in order for service providers to grasp the strategic challenges faced by the company. However, Klaas (2003) argues that if the company bears the cost of this investment, it may be vulnerable to opportunistic behavior by the contractor. On the other hand, if the contractor pays for this investment, it is at risk of opportunistic behavior by the company and may adjust its fees accordingly. In other words, there is a "perfect captives dilemma" where both parties avoid committing to risky investments. Therefore, it is evident that BT may encounter significant difficulties in aligning HR strategic matters with other organizational functions such as marketing, operations management, and information systems management.According to BT's management, the organizational

culture of the company is advanced and is characterized by teams focusing on strategic elements of the company's operations. These teams aim to apply technological advancements to benefit BT and its clients, as well as finding better ways to accomplish tasks and implement them. This culture encourages everyone in the company to be involved and embrace a collaborative approach towards achieving company goals.

Before discussing the specific changes in BT's cultural context after HR outsourcing, it is important to define the concept of organizational culture. Tran (1998) suggests that culture can be viewed as an object that can be manipulated in order to improve productivity and organizational performance. Therefore, culture can be changed over time. In this perspective, culture is considered something that an organization possesses.

However, if we accept the definition of culture as "the basic, taken-for-granted assumptions and deep patterns of meaning shared by organizational members and manifestations of these assumptions" (Johnson, 2002), then culture is seen as something that an organization is. In this sense, culture becomes difficult to alter as it becomes deeply ingrained in the minds of individuals.

To outline the content of the cultural context in BT following HR outsourcing, we will apply the cultural web. The table below presents the specific elements of the organizational culture with HR outsourcing.

According to the tabular array, the organizational culture in the administration hinders collective learning. In this approach, individuals view each other as competitors rather than partners. This mindset creates obstacles for learning within the administration, such as rivalry, power struggles, and a lack of communication channels. This power structure reduces the effectiveness and efficiency of operations management as participants are disconnected from decision-making.

The new bureaucratic organizational structure emphasizes standard procedures and routines. However, this new structure may slow down the communication process due to a lack of feedback channels and unnecessary intermediary layers, leading to distortions in communication. The company prioritizes revenue over its employees. The management disregards the individual needs of employees and adopts a coercive rather than participative approach.The text emphasizes the importance of treating people as the primary determiner of the quality of operational procedures. It suggests that using traditional performance assessment systems, which rely on monetary techniques, does not promote effective commitment or intrinsic motivation. The communication component is crucial in implementing these changes and aligning employee efforts with organizational goals. McGregor also argues that clear and comprehensive descriptions of individual roles and rights within the organizational structure can prevent unmet expectations. However, the current communication strategy in the company appears to be top-down without adequate feedback. This approach may be suitable for conveyor-type organizations but detrimental for innovative market-led companies.The company needed to reengineer the entire business process, including both "difficult" and "soft" elements, due to the new demands for version. Senior (1997) defines "difficult" system change as using a scientific method while recognizing the limitations of time in the fast-paced business world. In BT's case, "difficult system" change involved implementing new operations management systems, equipment, and facilities to improve efficiency and reduce costs. On the other hand, "soft system" changes focus on altering the organizational culture and include elements such as vision, mission, actors, and structure. This approach emphasizes listening to the organization, effective communication, shared vision development, commitment to change and vision, education and training, and understanding the necessary tools

and techniques. Williams et al. (1993) recommend that managers reduce restraining forces and strengthen driving forces to facilitate employees' successful adaptation to new working conditions.Not all steps are equally effective, as stated in Hetzberg's care theory (cited in Mullins, 2001). Certain factors can serve as strong motivation factors, while the absence of other elements may result in dissatisfaction. At the same time, strategic priorities should align with the current organizational goals. In this case study, the company's goal is to increase productivity to reduce costs and improve customer service. The company places a strong emphasis on implementing difficult system changes while keeping soft systems low-key. However, outsourcing HR functions has resulted in a centralized decision-making structure, reduced employee loyalty and motivation, and hindered creativity. Additionally, the communication industry environment requires a flexible, adaptable, and responsive structure. To improve the situation and achieve objectives - such as enhancing customer focus - the active involvement of senior managers is necessary. They should serve as key change agents, bridging the gap between operational and business levels within the organization.It is important for senior managers to not ignore, avoid or resist employees' natural resistance to new systems. They should instead provide appropriate incentives to transition from resistance to commitment (Graham & Bennet, 1998). Ignoring or resisting changes can lead to open and hidden conflicts, negatively impacting the organization's performance and flexibility. This can result in failure to improve performance, attract or retain customers, and can lead to significant costs that reduce the company's chances of survival and success in changing market conditions. In the case study, BT implemented HR outsourcing to reduce costs and improve organizational performance. However, the

analysis of the new management system revealed a lack of priority given to trust, motivation, and commitment. Additionally, the introduction of new working patterns, organizational structure, and change created natural resistance among employees and reduced their trust in organizational values and commitment. The analysis further showed that HR outsourcing had created a new context for organizational culture.Instead of promoting a progressive, flexible, marketing-driven society, the new organizational structure introduced opposite conditions: profit-oriented business processes, hierarchical bureaucratic communication, financial performance evaluation, and coercive leadership. Analysis of these aspects of BT's organizational culture reveals potential pitfalls in HR management that may affect overall business performance. The focus on changing hard systems overlooked the importance of the soft system approach, which addresses motivation and encouragement of employees. The current organizational culture limits knowledge sharing within the company as people see each other as competitors, stifles innovative approaches and new ideas, prolongs problem-solving efforts, hampers innovation, reduces customer service quality, leads to knowledge loss and decreased productivity. To address these issues, a company must create an environment that maximizes the effectiveness of human capital. As Johnson (2002) suggests, this requires creating conditions where individuals willingly maximize the overall intellectual capital of the company. However, a challenge arises as much knowledge is stored in people's minds and can only be accessed with their consent and free will.The company must create specialized human resource measures to motivate employees to go the extra mile.