Outsourcing and International Human Resource Management

Introduction

The continued trend toward increased globalization is facilitated, in part, by the need for organizations to remain competitive and to increase their market share. With this trend comes a variety of considerations regarding the development and implementation of human resource policies, in an effort to remain competitive in an increasingly demanding marketplace. One strategy human resources (HR) utilizes to enhance 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 provides an overview of outsourcing as a business strategy, followed by a discussion of the implications for international human resource management. The specific disadvantages of outsourcing in relation to human resource management are then examined.

Outsourcing as a Business Strategy

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, two trends could significantly and negatively impact those economies. The first was the emerging shortage of knowledge workers needed to produce intellectual property. The second was the shortening of 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 focus on their core competencies, thereby eliminating activities that do not contribute to the value chain of the organization. Research by Personnel Today found that HR staff spend up to 85 percent of their time managing administrative processes, while only 15 percent 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 its contribution to the organization. Activities that are farther from the organization's core competency are more likely to be outsourced, freeing employees to support the core competency of the organization. Once activities have been selected for outsourcing, clear and practical policies must be established on how to outsource. Vendor selection, contract development, and management of outsourced relationships all have to be carefully defined (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 process efficiency and profitability through outsourcing. Marinaccio (1994) cited a survey of 392 CEOs identified as leading the fastest-growing businesses in America. Sixty-five percent of these businesses were outsourcing, and 78 percent 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, compared to firms that did not outsource.

Implications for International Human Resource Management

In North American firms, Klaas (2008) states that 87 percent of American firms reported relying on outsourcing of human resource functions specifically. This decision is driven by an effort to reduce total transaction costs. Organizations look not only at the immediate costs of obtaining a service or good, but also at the costs associated with managing contractual relationships, monitoring performance, and managing a contingent workforce. In 2006–2007, the outsourcing sector was valued at $47.8 billion, and by 2012 it was anticipated to grow to $150 billion (Ranganathan & Kuruvilla, 2008).

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 results from organizations needing to reduce labor costs, increase flexibility, and obtain expertise not available internally. Outsourcing occurs across a variety of industries and for a variety of business functions. Both the outsourcing vendor and the client firm must adapt their human resources practices to the organizational changes that occur as a result of 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 HRM, given the increased usage of outsourcing as a means of organizational flexibility.

An additional implication for human resources, in response to increased outsourcing, is the increased likelihood that HR functions themselves will be outsourced — alongside the more traditional manufacturing and call center functions with which outsourcing is typically associated. This further increases organizational flexibility. As with any complex set of operations, human resources can be broken down into discrete processes. Benefits, compensation, training, recruiting, and compliance are just some of the functional areas within HR. Although each is 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 its core competencies and other high-value, strategic activities. Klaas (2008) concludes that "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) identify four factors that human resources must consider with outsourced workers and international HRM. The first is the physical location of outsourced workers — with employees sometimes located half a world away, this presents unique HR challenges. The second factor is the temporal nature of the relationship with outsourcers, particularly when the length of the contract is not clearly defined or is short-term. The third factor is the exclusivity an outsourced worker provides a client; if an outsourcer is working with multiple clients, this adds challenges for HR management. The fourth factor is the voluntariness of the outsourced work itself.

Conclusion

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