Flexibility on the International Management of Human Resources
The continued trend towards increased globalization is facilitated, in part, by the need for organizations to remain competitive, as well as increase their market share. With this trend comes a variety of considerations in regards to developing and implementing human resource policies, in an effort to remain competitive in an increasingly competitive marketplace. One strategy human resources utilizes to enhance their flexibility in today's business environment is outsourcing. According to Fitz-enz (2009) outsourcing has been the first, true structural change to human resource management. This has several implications for the international management of human resources. To understand this topic further, this paper will give an overview of outsourcing as a business strategy. This is followed by the implications for international human resource management. The specific disadvantages of outsourcing, in regards to human resource management, will then be discussed.
Outsourcing as a Business Strategy Overview:
Back in 1997, Haines noted that as the developed economies of North America, Europe and Asia transitioned from manufacturing industrial products to information-based and technology services, there were two trends that could significantly and negatively impact economies. The first was the emerging shortage of knowledge workers to produce intellectual property. The second trend was the shortening product development and life cycles, which would result in a paradigm shift for workers. As a result of these business environment changes, many organizations looked to outsourcing as a means of garnering a competitive advantage, in an increasingly competitive world.
As Haines (1997) notes, "Simply stated, outsourcing means to hire an external provider to perform an activity that normally would be performed by employees of the business" (p. 12). It "is one of several human capital strategies for obtaining labor outside the traditional definition of employment" (Fisher, Wasserman, Wolf, & Wears, 2008). Organizations can utilize this strategy to increase their focus on their core competencies, as a means of eliminating activities that do not contribute to the value chain of the organization. Research by Personnel Today found the human resources staff spend up to 85% of their time managing administrative processes, while only 15% is spent on strategic activities. "In best practice companies, these percentages would typically be reversed" ("Transforming HR," 2005, p. 38). Each function or business activity is evaluated regarding their contribution to the organization. Activities that are farther away from the organization's core competency is more likely to be outsourced, thus freeing employees so they can support the core competency of the organization. Once the activities have been selected for outsourcing, clear and practical policies have to be established on how to outsource. Vendor selection, contract development, and management of outsourced relationships all have to be spelled out (Haines, 1997).
Outsourcing gives companies the flexibility they need to meet the demands of increasing pressures and complexity in today's business environment. Organizations can often improve their product quality, while improving their process efficiency and profitability, through outsourcing. Marinaccio (1994) cited a survey of 392 CEOs that were identified as the fastest growing businesses in America. Sixty-five percent of these businesses were outsourcing, and 78% considered outsourcing to be an important factor in their company's growth. These firms used outsourcing to encourage vigorous growth, while planning more capital for investment, when compared to firms that didn't outsource.
In North American firms, Klaas (2008) states that 87% of American firms reported relying on outsourcing of human resource functions specifically. This decision is in an effort to reduce total transaction costs. Not only do organizations look at the immediate costs of obtaining a service or good, but they also look at the costs that are associated with managing contractual relationships, monitoring performance and managing a contingent of employees. In 2006-2007, the outsourcing sector was valued at $47.8 billion. By 2012, it's anticipated to grow to $150 billion (Ranganathan & Kuruvilla, 2008).
Implications for International Human Resources Management:
In the past two decades, according to Fisher, Wasserman, Wolf, and Wears (2008), there has been a dramatic shift toward using outsourced labor. This increase in outsourcing is a result of organizations needing to reduce their labor costs, increase their flexibility, and also to obtain expertise that's not available internally. This outsourcing occurs in a variety of industries and for a variety of business functions. Both the outsourcing vendor and the client firm have to adapt their human resources practices to the changes in the organization that occur due to outsourcing. According to Klaas (2008), the last decade, in particular, has seen outsourcing significantly change how human resource management functions, in several large, North American organizations. This leads to a wide variety of implications for international human resource management, with the increased usage of outsourcing as a means of increased flexibility for organizations.
On the vendor side of the relationship, human resource management needs to concern themselves with attracting and retaining employees, as well as managing employees who will be able to effectively navigate the often complex political climate that exists when international companies partner. Ranganathan and Kuruvilla (2008) argue that there are four interlinked and critical challenges that threaten human resources, both in the short- and long-term. Two of these challenges are 'macro' in nature, as they require government-level interventions of policy. The first macro problem facing human resources is a short supply of skilled human resources personnel. This was a shortage that even Haines (1997) noticed more than a decade earlier. The second macro challenge is the difficulty India, the world's leading outsourcing provider, is facing with their advanced education system and infrastructure for training, as the country is taxed with producing even more highly-skilled manpower. Ranganathan and Kuruvilla surmise that this may be the most critical challenge human resource management faces.
There are also two 'micro' human resource challenges. These two are interrelated, but they are also linked to the macro challenges previously discussed. However, these challenges require primarily firm-level strategies to counter them. The first is the high average turnover rates for employees. In the software segment, in 2007, this turnover rate was approximately 20%. In the business process outsourcing segment, this turnover was a staggering 50 to 60%. These high turnover rates are partially due to the macro challenge of lessening highly-skilled workers, in these sectors. However, in addition to the reduced levels of workers, this high turnover rate is also partially due to "poorly developed firm-level human resource strategies" (Ranganathan & Kuruvilla, 2008). The second micro challenge is the rapidly rising costs of human resources, in the business process outsourcing industry. This is particularly true for low end providers who utilize their low costs as a primary competitive advantage. These costs increases are related to the high turnover rates experienced with the first micro challenge. However, real, lasting solutions will also require macro policy interventions.
Mehta and Mehta (2010) detail another significant implication for international human resource management. This is the high rate of broken contracts in the outsourcing industry. Mehta and Mehta note that for outsourced IT functions, approximately 78% of client-vendor partnerships fail, in the long run. This high rate of failure is intrinsically tied to whether or not the vendor's use the client's human resources. Vendors who utilize the human resource management resources of their client have a much better success rate at maintaining a business relationship with their client. Human resources can help the vendor develop human resources policies, procedures and practices that are world-class. They can provide development and training support. Human resources can also provide consultancy, in exchange for other benefits such as resource sharing. Both client and vendor benefit from improved retention of employees, as well as increased job satisfaction and employee commitment. There are also mutual benefits, for both parties, from the sharing of resources as well.
An additional implication for human resources, in response to increased outsourcing, is the increased likelihood that their human resource functions will be outsourced as well as the more traditional manufacturing, call center, etc. functions with which outsourcing is traditionally associated. This further increases the organization's flexibility. As with any set of complex operations within an organization, human resources can be broken down into a set of processes. Benefits, compensation, training, recruiting, and compliance are just some of the functional areas, in the realm of human resources. Although these are each essential to the organization, they also consume valuable resources. When these are outsourced, as with other non-core competency functions, it allows the organization to focus more on their core competencies, or other high value added, strategic activities. Klaas (2008) surmises "while HR activities that are more strategic in nature or have more opportunity to add value typically remain within the firm, large portions of the traditional HR function are now being delivered via outsourcing arrangements" (p. 1500).
Fisher, Wasserman, Wolf, and Wears (2008) list four factors that human resources need to consider with outsourced workers and international human resource management. The first factor that offers a challenge to human resource management is the physical location of the workers for outsourcers. Obviously, with workers…