Outsourcing and HRM

1. Outsourcing and HRM Brian S. Klaas

2. The Market or the Organization • When outsourcing is used, firms are relying on a market-based form of governance to ensure they receive quality goods and services • When firms keep processes in-house, they are relying on organizational governance

3. What Outsourcing Offers • Outsourcing offers benefits that flow from increased economies of scale, the potential for high-powered incentives, and the ability to respond quickly to supply and demand shifts

4. One Problem With Outsourcing • Exposes firms to greater risks from opportunism by the vendor or supplier

5. When Outsourcing is Good • Off-the-shelf products or services are generally viewed as more appropriate for outsourcing arrangements • The company can benefit from economies of scale when limited customization is necessary

6. When Organizational Control is Good • When the product or service demands substantial customization • The firm must make an asset specific investment to use the vendor

7. Contracts Don’t Always Work • Where substantial uncertainty exists regarding what will be needed from the vendor, it is difficult to completely specify all relevant contingencies within the outsourcing contract

8. Why Has Outsourcing Become So Popular • Globalization and labor arbitrage • Technology

9. Globalization and Labor Arbitrage • Within developing economies, investment in human capital and in production capacity has expanded dramatically • The wage differential between developed and developing economies is substantial

10. Globalization and Labor Arbitrage Continued • The wage differential is now so great that firms may be willing to accept the risks associated with vendor opportunism

11. Technology • With developments in technology, a wide range of service activities can be readily outsourced • When combined with vendors operating globally, it allows for increased speed in terms of product development

12. What Should be Outsourced? • Activities or processes that might be viewed as off-the-shelf • Activities that require an asset investment when the labor arbitrage potential is great

13. Core Competencies • Allow firms to gain competitive advantages and relate to a collective knowledge or understanding within organizations about how to perform complex and inter-related sets of activities

14. What Not to Outsource • Core competencies that offer the firm a competitive advantage • Core competencies are rarely compartmentalized within specific parts of the firm

15. What Not to Outsource Continued • Activities that involve high levels of uncertainty or asset specificity that may make the firm subject to vendor opportunism • Activities that the firm is particularly good at and that rely on implicit knowledge within the firm

16. Managing the Outsourcing Relationship • Specify within the contract of the tasks, performance metrics, and penalties for non-performance • Engage in regular benchmarking of the services available from alternative vendors to ensure that contractual terms allow the firm to switch vendors without undue difficulty

17. Managing the Outsourcing Relationship Continued • Assess resources and skills possessed by a firm, relying on information available within the marketplace to assess vendor capabilities

18. Outsourcing in an Uncertain Environment • Typically requires an asset investment • Involves a degree of uncertainty • Can be profitable when companies take specific measures

19. Measures to Take in an Uncertain and Complex Environment • Developing personal ties with the vendor helps in the following ways: • Limits the vendor’s willingness to engage in opportunistic behavior • Increases the reputational cost of violating the contract

20. Specific Approaches to Improve Business Relationships • Align the interest of the vendor and firm via gainsharing mechanisms that allow both parties to benefit from improved performance and efficiency • Tie vendor compensation to broader measures of client performance

21. Moderating Factors of Outsourcing Arrangements • Activity • Firm size

22. The Nature of the Outsourced Activity • Outsourcing for the global firm reduces IT infrastructure costs through economies of scale and by spreading the costs among vendors • The global firm saves through wage differentials

23. The Nature of the Outsourced Activity Continued • Outsourcing arrangements are designed to help improve and standardize business processes as they relate to transactional HR issues • Allow firms to establish metrics that let them monitor and control the quality of services being provided

24. Outsourcing Executive Search • Market governance mechanisms might be effective for search firms: • The level of investment pales in comparison to the investment required to build the network of relationships that is used in conducting the search

25. Outsourcing Executive Search Continued • Other market mechanisms include: • Reputation of the search firm if they find a weak candidate • Quick and effective feedback regarding vendor performance is likely to emerge in this setting

26. Firm Size • For many smaller organizations, gaining access to HR expertise when there is no internal HR staff member is likely to require some form of an outsourcing relationship • For many small organizations, their outsourcing decision is at least in part determined by the value associated with professional HR expertise

27. Building Relationships • For small and medium firms, building relationships with vendors can reduce uncertainty and opportunism

28. Summary In this chapter we have examined: • Reasons for the growth in outsourcing • Why firms outsource • Managing relationships • The nature of the activity • Firm size