HR Outsourcing Trends: Advantages and Disadvantages

Introduction: Business Change and Globalization

Throughout the past decade, societies have witnessed undeniable changes across all dimensions of life. Impressive technological advancements have been made and incorporated into daily activities to improve the quality of human life. At a social level, people are becoming better informed and, as such, more responsible consumers and more responsible members of modern society — focusing on environmental sustainability and reducing consumerism.

A major sector revealing the importance and extent of these recent changes is the business community. Within this sector, the past decade has imposed a necessity for economic agents to readdress their business models in order to survive. Contemporaneous managers no longer perceive employees as merely the force operating machines, but regard them as the most valuable organizational asset. Additionally, customers are no longer perceived as a passive force buying whatever the company produces; they now communicate to companies what should be produced and sold. Communities, too, are no longer simple witnesses to organizational endeavors but represent a powerful stakeholder category capable of influencing organizational processes.

All the changes previously mentioned, and several others, have been exacerbated by the occurrence of globalization and market liberalization. The phenomenon is generally understood as the ability of economic, political, social, or technological values to transcend boundaries and become established in other global regions. Globalization has primarily promoted the free circulation of resources such as technologies, capital, commodities, and human resources.

The process of globalization has allowed for the implementation of David Ricardo's theory of comparative advantage through capitalization on national strengths. A particular manifestation of this phenomenon has materialized in outsourcing processes, which have significantly increased in popularity throughout the past decade.

The Evolution of Human Resource Management

As the first factories opened during the Industrial Revolution, people were hired to perform mechanical tasks. They worked twelve-hour days in low-paid jobs under unsanitary and unsafe conditions. They were required to possess few skills and were easily replaceable. Henry Ford reportedly wondered why employees brought their heads to work when the company only needed their hands and feet (Losey, 1998).

As events progressed, workers began to advocate for better working conditions and organized into unions. Employers found it increasingly difficult to retain staff members. Governments stepped in and issued new legislation protecting workers' rights and forcing employers to improve working conditions. By the late 1800s, more and more factory owners recognized that productivity levels were directly linked to employee satisfaction. By 1900, the first efforts in support of employee satisfaction had been made. The lack of employee satisfaction — considered the primary cause of absenteeism and high employee turnover rates — was beginning to be addressed through early personnel administration processes: worker selection, employee training, and compensation.

In 1929, in a sustained effort to increase organizational productivity, leaders offered more extensive personnel programs. New worker compensation schemes included medical coverage, vaccines, housing, and other benefits. The concept of employee motivation emerged as a modern form of personnel management by the 1940s. By the 1970s, a new generation of managers had developed. These leaders were no longer focused exclusively on scientific management but emphasized an improved relationship between employee and employer. They centered on communications, research, and public relations, striving to boost productivity through worker creativity, involvement, and initiative.

Contemporaneous human resource management is a complex set of endeavors focused on creating employee satisfaction and converting it into high levels of productivity. The range of operations used to this end is broader than ever, including processes such as selecting employees who can integrate within the organizational culture or add new value to the company, training staff members, providing extensive remuneration, and offering complementary motivation. "Today, the human resource professional is charged with optimizing employee skills, matching people to jobs and maximizing the potential of employees as valuable resources" (Losey, 1998).

Given this context, companies no longer compete solely for customers but also for staff members. Modern organizations go to great lengths to ensure their staffing needs are adequately met. Yet all these intensive efforts result in increased consumption of financial resources. Since profit generation remains the ultimate aim of any economic agent, today's companies strive to attain their financial objectives through cost efficiencies — including cost efficiencies in terms of personnel.

In a setting of organizational pursuit of cost efficiencies, desired simultaneously with high personnel skill levels, globalization offered the perfect answer: employers could hire low-cost workers in foreign countries — generally less developed ones — and ensure the adequate completion of tasks with reduced financial expenditure. In simplified terms, this describes the process of outsourcing. To better understand it, however, it is useful to examine several definitions from the specialized literature.

Krajewski and Ritzman (2002) define outsourcing as "allotting work to suppliers and distributors to provide needed services and materials and to perform those processes that the organization does not perform itself."

Outsourcing: Definitions, Growth, and Trends

Kovacich and Halibozek (2003) emphasize that outsourcing is not a process suitable for all organizational activities and, most importantly, not for core processes. While some modern situations contradict this view, the two authors insist that outsourcing represents "contracting for outside services that are a necessary part of doing business but are not core functions or core competencies. [...] Outsourcing is a tool, not a cure-all. It allows [the company] to focus on its core functions and let other companies assist by providing the services they perform best." In other words, they argue that outsourcing helps the original company focus more on customer satisfaction by transferring complementary, non-core processes to other entities.

Hirschheim, Heinzl, and Dibbern (2006) argue that outsourcing is most common with information system services, defining the process as "obtaining IS services through external organizations that own some or all the necessary resources and where control and management of the resources and activities reside." Benaud and Bordeianu (1998) offer a simpler definition: "outsourcing is the use of an outside agency to manage a function formerly carried out inside a company."

Regardless of one's perspective on outsourcing, the phenomenon has been gaining increasing popularity. It is most commonly observed in the relationship between developed countries and emerging economies. Specifically, economic agents in highly developed states look to outsource business operations to more cost-effective regions. Companies in emerging and less developed economies sign contracts with foreign companies, obligating themselves to deliver desired outputs. Outsourcing operations are extremely common within the Information Technology field as well as in the manufacturing sector. Nike is a representative example, having retained only its administrative and marketing operations within the United States while outsourcing all manufacturing operations to less developed nations.

Companies engaging in outsourcing cite a series of reasons for their decisions. Schniederjans, Schniederjans, and Schniederjans (2005) argue that the most important of these reasons are:

The general trend has been to outsource manufacturing operations and information technology services. In the United States, for instance, the years between 1996 and 2003 witnessed an astonishing increase in outsourced IT services, from $100 billion to nearly $600 billion (Schniederjans, Schniederjans, and Schniederjans, 2005).

In more recent years, however, a shift has occurred in the types of operations being outsourced. While IT and manufacturing remain the most prevalent, increasing attention is being given to various staff functions such as accounting, pension administration, and tax services. Large organizations are currently outsourcing entire processes rather than isolated operations, and more of these outsourced operations are closer to core business functions. "The trend in large organizations is to outsource entire processes. This will be done with strategic relationships and the transfer of significant decision rights. The providers will have large, sophisticated operations providing value-added services at a level incomprehensible even fifteen years ago. [...] the outsourcing begins with processes furthest from the core and then moves toward it" (Greaver, 1999). This suggests that the international business community could soon observe significant changes in the type and nature of outsourced processes.

In general terms, companies are looking to outsource growing numbers of increasingly complex operations because they are unwilling to assume the associated risks or make the necessary investments internally. They therefore outsource such operations to firms that have already made those investments and absorbed those risks. "Organizations are reluctant to invest in and maintain cutting-edge technology and technical specialists internally, when they know that similar assets exist externally, and were developed with others' investment and risk" (Greaver, 1999).

While companies recognized and capitalized on the benefits of outsourcing, communities identified its limitations. The most common dissatisfaction was linked to the fact that outsourcing transferred jobs away from national workers to foreign ones. In 2003, over 300,000 jobs within the United States were lost to outsourcing, and the figures were expected to maintain an upward trend (Schniederjans, Schniederjans, and Schniederjans, 2005). The real numbers far exceeded initial estimates: by 2007, the total jobs lost in a single year had reached 5.6 million. "According to a study from the Economic Policy Institute, the U.S. lost 5.6 million jobs as a result of the U.S. non-oil trade deficit in 2007 alone. 70% of these jobs were in the manufacturing sector" (Thomas, 2009).

The natural response to these events was increased resistance to outsourcing. Employee groups pressured federal agencies to develop and implement new legislation that would better protect the jobs of domestic workers. Several government officials became involved in anti-outsourcing rhetoric and supported programs for national employment over foreign contracts. In 2004, the state of Tennessee became the first to implement an anti-outsourcing program, revolving around stimulating American companies to hire national contractors for information system services.

Following Tennessee's example, 36 American states developed legislation to reduce the outsourcing phenomenon. Still, most of the approximately one hundred proposed bills had not been enacted and remained under discussion at the federal level. Their existence nevertheless points to a growing trend toward stronger regulation of outsourcing activities, generally aimed at their restriction (Schniederjans, Schniederjans, and Schniederjans, 2005). This trend could be sustained in the near future due to the internationalized economic crisis and might be reinforced by the necessity of creating national jobs and supporting domestic industries in order to overcome financial hardship.