HR outsourcing: threat oropportunity?

Jeroen Delmotte and Luc SelsFaculty of Business and Economics, Research Centre for Organisation Studies,

Katholieke Universiteit Leuven, Leuven, Belgium

Abstract

Purpose – The debate on human resource (HR) outsourcing is polarised. HR outsourcing is seen asan opportunity for the HR function by some and as a threat by others. The first view suggests that HRoutsourcing is an instrument creating time for HR to become a strategic partner. The second viewconsiders HR outsourcing as a cost-cutting instrument gradually reducing HR staff. The purpose ofthis study is to examine whether HR outsourcing is a manifestation of a strategic HR focus, acost-cutting HR focus or both.

Design/methodology/approach – The sample is obtained from an economy-wide, cross-sectionalsurvey. The data cover 1,264 organisations with ten employees or more.

Findings – Results indicate that organisations with a strong focus on HR cost-cutting do notoutsource more than organisations with a weaker focus on HR cost-cutting. The analyses show apositive relationship between a strong focus on strategic human resource management (HRM) and thelevel of HR outsourcing.

Research limitations/implications – First, this study examines the breadth of HR outsourcing.Further research might consider the depth of HR outsourcing. Second, as results are based oncross-sectional data we cannot draw causal inferences. Finally, future research might focus on theimpact of HR outsourcing on the organisation of the HR function and internal HR customersatisfaction.

Practical implications – HR outsourcing empowers the HR department. It frees up HRprofessionals to focus on strategic HRM.

Originality/value – HR outsourcing has been heavily debated. Yet, empirical research into theimpact on the HR function is extremely limited. This study helps to fill this gap.

Keywords Human resource management, Outsourcing, Corporate strategy

Paper type Research paper

IntroductionIn Human Resources in the 21st Century, Kanter (2003) sets out her view of the futurefor the human resource (HR) function. According to her, HR may be doomed todisappear as an internal department in the organisation. She does not call into questionthe huge importance of HRM, but suspects that in the future HR tasks will be carriedout elsewhere and in different ways. She distinguishes four developments playing animportant role in the formation of the HR architecture:

(1) the automatisation of HR tasks;

(2) the outsourcing of HR tasks;

(3) the devolution of HR tasks to line managers; and

(4) the integration of HR tasks into shared service centres.

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0048-3486.htm

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Received 26 September 2006Revised October 2006

November 2006Accepted 28 August 2007

Personnel ReviewVol. 37 No. 5, 2008

pp. 543-563q Emerald Group Publishing Limited

0048-3486DOI 10.1108/00483480810891673

These four developments are expected to reduce the range of tasks allocated to the HRdepartment, leading to a type of “HR anorexia” (Greer et al., 1999). In this article, weexamine this issue in greater depth, focusing specifically on HR outsourcing.

The literature contains two different views of HR outsourcing. The first viewapproaches outsourcing as an opportunity for the internal HR department.Outsourcing generates time and resources for tactical and strategic HRcontributions and allows a stronger focus on core activities. In other words, thisscenario assumes that outsourcing of transactional and operational HR activitiesbenefits the strategic position of HRM. The second view considers outsourcing as anHR cost-cutter. In this case, outsourcing is considered synonymous with downsizing orreductions in HR staff which, at first sight, generate little value to the core competenceof the organisation. The main driving force behind outsourcing is believed to be thequest for maximum cost-cutting in the field of HRM. This view approaches HRoutsourcing as a threat.

The purpose of this article is to test these two competing views. In doing so, wewant to examine whether HR outsourcing is a manifestation of a strategic HR focus, acost-cutting HR focus or both. To answer this research question, we rely on surveydata collected from 1,264 Belgian organisations.

The further outline of this paper is as follows. First, we describe the two mostfrequently cited drivers of HR outsourcing and formulate the research hypotheses. Wethen clarify our method, sample and measures and elucidate the results. We close witha discussion and with some suggestions for future research.

Theory and research hypothesesOutsourcing activities or services to external organisations is not a new phenomenon.Organisations have always had to take decisions about what they make and what theybuy (Gross, 1966; Venkatesan, 1992). Outsourcing grew rapidly in the 1980s and 1990s(Kakabadse and Kakabadse, 2002) and has now become an accepted dimension ofcorporate strategy. Cleaning, IT, catering and security are well-known examples ofactivities that are frequently outsourced. Over the past ten years, HR activities havebeen increasingly outsourced as well (Adler, 2003; Cook, 1999; Galanaki andPapalexandris, 2005; Lilly et al., 2005).

A number of empirical studies have tracked this trend of HR outsourcing (Dasboroughand Sue-Chan, 2002; Dickmann and Tyson, 2005; Gainey and Klaas, 2003; Wahrenburget al., 2006). For example, Kakabadse and Kakabadse (2002) studied 747 Europeanorganisations and concluded that, along with basic services (e.g. canteen facilities) and ITactivities, HRM is one of the functional domains affected most by outsourcing. Alarge-scale study carried out in 1999 covering 3964 organisations (each with more than200 employees) in 15 European countries (Vernon et al., 2000) provides further evidence tosupport this finding. The survey found that 97 per cent of the HR departments outsourcesome of their HR activities. According to this study, nearly half of all organisations arereporting an increase in the use of service providers over the last three years. Otherempirical studies point out that HR outsourcing is not restricted to mere transactional HRactivities (e.g. payroll administration, records management, benefit management) (Greeret al., 1999). More transformational and strategic HR activities are also being outsourced(e.g. specific “high impact” training courses, recruitment and selection of coreprofessionals, manpower planning, . . .) (Gainey and Klaas, 2003).

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The aforementioned studies indicate that HR outsourcing has increasedsubstantially over the last decade. However, few academic researchers haveinvestigated empirically the reasons why firms outsource HR activities (Klaas et al.,1999; Lever, 1997). Cooke et al. (2005) rightly say that “the scarcity of this kind ofresearch is in sharp contrast to the burgeoning prescriptive literature on the financialand strategic reasons why organisations should outsource”.

A popular belief is that organisations use HR outsourcing primarily to cut costs inthe HR department. However, some studies caution that cost reduction should not bethe only factor considered in the decision to outsource (Shelgren, 2004; Stroh andTreehuboff, 2003). For example, a study by Beaman (2004) shows that the real payofffrom HR outsourcing is not in reduced costs, but in improved quality. Other drivers ofHR outsourcing are gaining specialised HR expertise, achieving flexibility, reducingrisks and enhancing access to advanced technology (Belcourt, 2006; Lever, 1997;Scott-Jackson et al., 2005).

We recognise that there exist many different drivers for HR outsourcing. Yet, in thisarticle, we only focus on the two most often debated drivers for HR outsourcing: focuson core activities (focusing view) and cost reduction (efficiency view). These twodrivers are closely related to two theoretical perspectives: the resource-based view ofthe firm (Barney, 1991; Prahalad and Hamel, 1990) and transaction cost economics(Williamson, 1975) respectively. We further use the distinction between focusing viewand efficiency view to develop our research hypotheses.

Focusing viewThe strategic driver mentioned most frequently in literature, is the possibility toconcentrate on core activities (Prahalad and Hamel, 1990). The reasoning here is thatorganisations should sharpen their focus on activities generating competitiveadvantage by outsourcing peripheral activities with low added value (Conklin, 2005;Quinn and Hilmer, 1994). By outsourcing the non-core activities, an organisation candirect more resources (time, money and managerial attention) to its core activities(Venkatesan, 1992; Welch and Nayak, 1992). It needs to be remarked that a strongerfocus on core activities does not necessarily have to be strategic. The stronger focuscould also result in simply delivering and performing the activity better, cheaper andfaster. However, most authors start from the idea that the main purpose of a strongerfocus on core activities is strategic.

The resource-based view of the firm suggests that an organisation must focus on thoseactivities that constitute the core competencies and outsource the more peripheralactivities (Prahalad and Hamel, 1990; Quinn and Hilmer, 1994). This perspective helps toidentify those core activities that the organisation must perform in-house. From aresource-based perspective it is the possession of certain resources and capabilities thatdefines what the organisation will do itself and what it can obtain from outside parties(Gilley and Rasheed, 2000). We find a similar line of reasoning in the strategic HRMliterature.

Recent literature on HRM strongly emphasises the strategic involvement of the HRfunction (Lawler and Mohrman, 2003a; Ulrich, 1997). A strategic partnership can beachieved, for instance, by focusing on those activities that are strategically relevant. Byoutsourcing the transactional and administrative HR activities to an organisation forwhich those activities are core, an organisation can redistribute its time and resources

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and focus more on strategic activities (Welch and Nayak, 1992). HR outsourcing canliberate HR professionals from their more routine and administrative tasks to perform amore proactive and strategic role (Adler, 2003; Maurer and Mobley, 1998; Switser, 1997).Moreover, we assume that HR professionals who are more strategically involvedactively consider which activities belong to the core and which are peripheral. Inorganisations where HR is recognised as a strategic partner, there may also be less fearwithin the HR department of the impact of outsourcing on the staff’s own positions andtasks. There are signs that in organisations where HR does not play a strategic role,outsourcing may pose a threat to the role and job security of HR professionals, resultingin an inhibiting influence to outsourcing (Klaas et al., 2001). Based on the aboveargumentation, we predict that organisations emphasising the strategic role of HRwould rely more on HR outsourcing. Thus, our first hypothesis can be stated as follows:

H1. A strong focus on strategic HRM is positively related to the level of HRoutsourcing.

Efficiency viewMuch of the literature concerning outsourcing has its roots in the make or buyarguments elaborated within the transaction cost perspective (Williamson, 1975).According to this perspective, organisations focus on securing the most efficient formof organising an activity. In such a way, this approach encourages the organisation toevaluate whether it is more efficient to make a service in-house or to buy it from themarket. The criterion for deciding where the activity is performed depends on twotypes of cost that must be minimised: the production cost and transaction(coordination) cost. Outsourcing is appropriate when the organization achieves lowercosts by transacting with external agents rather than building the internal capacity fora service (Williamson, 1975).

In many studies, HR outsourcing decisions were found to be a response to anoverwhelming demand for reduced costs in HR services (Greer et al., 1999; Lever, 1997).Intensifying competitive pressures have forced organisations to be more aggressive incutting costs. As a result, HR departments are under increasing pressure to find waysto provide more value at lower cost (Adler, 2003; Cameron, 1994; Yeung et al., 1994).Outsourcing is one potential tool to achieve this. Cost savings can be achieved throughincreased benefits from economies of scale of the providers for whom the provisioningof these outsourcing activities is a core activity (Walker and Weber, 1984). Externalsuppliers can achieve economies of scale by performing the same activity for severalcustomers and consequently lowering the cost per unit (Abraham and Taylor, 1996). Inthis debate, the reduction of labour costs receives particular attention (Erridge, 1995).The staff, previously engaged in carrying out the activity, can be deployed in otherareas, can be transferred to the external supplier or can be laid off (Harris et al., 1998).

Thus, outsourcing can be strongly cost-oriented. Based on the aboveargumentation, we expect that there is a positive relationship between a strongfocus on HR cost-cutting and the level of HR outsourcing. This brings us to a secondhypothesis that competes with the first:

H2. A strong focus on cost-cutting in HR is positively related to the level of HRoutsourcing.

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MethodologySample and procedureThe sample for this study was obtained from the Panel Survey of Organizations(PASO). The objective of this Belgian panel study is to map out contemporary trends inHRM and the organisation of work. The panel survey has been organised on a yearlybasis during three consecutive years (2002, 2003 and 2004) and used adisproportionately stratified sample of Belgian organisations, with industry and sizeas stratification variables.

The targeted respondent was the HR manager or person responsible for HR (forsmaller organisations). While the respondents in this study were well positioned toprovide HR data, it remains possible that a general response bias is affecting theresults. Indeed, asking HR managers about their own function involves measuring apartial perception of reality (Valverde et al., 2006). To reduce the effects of possiblebias, future research might benefit from designs that collect data from multiplerespondents within each participating organisation. For example, it would be valuableto incorporate data from managers other than HR managers.

The questions in the second panel wave (2003) thoroughly examined theorganisation of the HR function and the use of HR practices in specific areas(recruitment and selection, training, careers, compensation, performance managementand participation). Data were gathered from 2373 organisations, representing aresponse rate of 25 per cent. Compared to other studies of similar nature, such aresponse rate seems reasonable (Klaas et al., 1999; Shih et al., 2005).

The PASO sample does not apply any exclusion criteria. This means that allorganisations with at least one employee are taken into account and that all industries(private and public; profit and non-profit) are represented. Yet, in the analyses below,two exclusion criteria are added. The analyses are restricted to organisations having atleast ten employees. Micro organisations fall outside the empirical scope of thiscontribution because we know from research that smaller organisations make less useof HR practices (de Kok and Uhlaner, 2001; Sels et al., 2006). So fewer activities areconsidered for outsourcing in this group.

In addition, two industries were omitted of the analyses because of their specificnature. The agricultural industry is not included due to the limited number oforganisations with ten employees or more. The education industry is excluded becauseof the specific regulations that apply in respect of personnel management. Eventually,this resulted in a database containing 1264 organisations.

Weights were applied when analysing the data. Corrections were made because ofdifferences in the distributions of size and industry between sample and population.All data in this article are weighted to be able to generalise the results.

MeasuresHR outsourcing. Greer et al. (1999, p. 85) refer to HR outsourcing as “the performance,by outside parties on a recurring basis, of HR tasks that would otherwise be performedin-house”. Cook (1999, p. 4) states that HR outsourcing means “having a third-partyservice provider or vendor furnish, on an ongoing basis, the administration of an HRactivity that would normally be performed in-house”. In this article, HR outsourcing isdefined as the transfer to an external vendor, on a recurring basis, of HR activities thatwould normally be performed in-house. The level of HR outsourcing is included in the

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analysis as the dependent variable. For a list of ten HR activities (Table I) therespondents were asked to indicate whether the HR activity in question was beingprovided by an external organisation (value 1 ¼ the HR activity is being outsourced;value 0 ¼ the HR activity is not being outsourced). The responses to thesedichotomous variables were summed to give an overall measure of the firm’s relianceon HR outsourcing. This new variable “HR outsourcing” yielded a value between 0 (noHR activities outsourced) and 10 (all HR activities outsourced). The dependent variable

HR outsourcing 1. Payroll2. Training3. Temporary agency work4. Recruitment and selection of operational and support staff5. Advice in HRM6. Recruitment and selection of managerial staff7. Development of job or wage classification8. Outplacement9. Appraisal

10. Career guidanceHR devolution 1. Developing procedure for selection

2. Implementing selection process3. Choice of candidate to be recruited4. Developing procedure for dismissal5. Decision to dismiss6. Notification of dismissal7. Developing appraisal instrument8. Working out appraisal procedure9. Following up complaints relating to appraisal

10. Deciding on the consequences of appraisals11. Developing training plans12. Detecting training needs13. Evaluating the effects of training

HRM intensity 1. Selection(a) Presence of a procedure for recruitment and selection(b) Use of valid selection techniques

2. Training(a) Provision of training for operational staff(b) Presence of a training plan

3. Career management(a) Opportunities for promotion for operational staff (vertical and/orhorizontal)(b) System of internal career guidance for operational and/or managerialstaff

4. Compensation(a) Application of profit sharing and/or financial participation(b) Application of performance-related and/or development-orientedremuneration schemes

5. Performance management(a) Presence of an appraisal procedure(b) Performance and/or development-oriented appraisal

6. Participation(a) Staff are informed of more than three subjects(b) Presence of progress discussions and/or quality circles

Table I.Summary of HR practicesused to constructvariables

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was tested for normality in order to be used in regression analysis. The test applied(Shapiro-Wilk test) indicated that this was the case.

Instruments to measure the focusing view. Measures relevant for testing the first ofthe competing hypotheses included three variables, which indicate a strategic view ofHRM.

The first indicator is the strategic involvement of HRM. This indicator measures thedegree to which the HR function is being involved in the strategic management ofoverall business issues. This dummy variable obtains value 1 if the HR responsible is amember of the management committee and has power in strategic decision-makingprocesses. If an organisation does not fulfil both conditions, then it obtains value 0. Inother words, if the HR responsible only attends management committee meetings in anadvisory capacity, value 0 is attributed.

A second variable is whether an HR scorecard is used in the organisation. The HRscorecard (Becker et al., 2001) is derived from the balanced scorecard (Kaplan andNorton, 1992). It is a strategic planning and measuring system that can be used toassess the contribution of HRM to the strategic objectives of the organisation. In otherwords, an HR scorecard is designed to provide clarity about areas where HRM can addvalue. In this sense it may be a valuable instrument in defining core activities. Thisvariable is included in the analysis as a dummy variable (0 ¼ HR scorecard notapplied; 1 ¼ HR scorecard applied).

A third indicator is the level of devolution of HR activities to line managers. HRdevolution refers to the extent to which HR responsibilities are devolved to linemanagers. The role of line managers in implementing HR policies and shaping HRpractices has long been recognised in the HRM literature (Cunningham and Hyman,1999; Larsen and Brewster, 2003; McGovern et al., 1997; Renwick, 2003; Whittakerand Marchington, 2003). As line managers become the “owners” of an increasingnumber of HR processes, the devolution of HR activities to line managers has animpact on the position of HR professionals. If some of the operational activities (e.g.people management) can be delegated to line management, the HR department canconcentrate more on strategic and tactical HRM. This is the reason why the level ofHR devolution is taken as an indicator of strategic HRM. The variable “level of HRdevolution” is a 13-point scale, created on the basis of data on the delegation of 13different HR activities (Table I). In developing the HR devolution index we startedfrom the most common HR domains. To capture these domains, we relied on theMichigan model (Fombrun et al., 1984). This model contains the basic HR areas:selection, recruitment and dismissal, appraisal, training and development andrewards. The HR devolution index covers three of the four HR domains presented inthe Michigan model: selection, recruitment and dismissal, appraisal and training anddevelopment. The “rewards” domain was excluded because it is well-known fromthe HRM literature that rewarding is less devolved to line managers (see forexample: Kulik and Bainbridge, 2006; McConville and Holden, 1999). It is importantto note that we prefer to use this rather narrow or “traditional” HR devolution indexbecause it allows for generalisation across organisations, company sizes andindustries. Indeed, each organisation deploys specific HR practices in each of thethree selected HR domains: each organisation has recruitment activities, selectionpractices or at least some appraisal and training activities. For example, diversityplans, competency frameworks or career plans on the other hand, are not so

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frequently deployed (certainly not in smaller organisations). The variable “HRdevolution” has a maximum value of 13 (all HR tasks devolved) and a minimumvalue of 0 (no HR tasks devolved).

Instruments to measure the efficiency view. To test the second of the competinghypotheses, two variables were included in the analyses that indicate a strong focus onHR cost-cutting.

The first indicator is the number of employees in HR positions (HR ratio). Thisvariable is measured as the number of staff in HR positions as a proportion of the totalnumber of employees (Brewster et al., 2006). In the questionnaire a distinction wasmade between the number of full-time personnel officers and the number of part-timepersonnel officers. In calculating the HR ratio, we assigned a weight of 0.60 to thenumber of part-time staff. A lower HR ratio indicates those organisations that haveproportionately less HR staff (i.e. a larger number of employees for each HR employee).A higher HR ratio indicates those organisations that have proportionately more HRstaff (i.e. a smaller number of employees for each HR employee).

The second indicator is the evolution of the HR head count. More specifically, thequestion asked was whether the number of jobs in the HR department increased,decreased or remained the same in 2002. Based on this question, dummy variableswere created. “Remained the same” is used as reference category.

Control variables. Despite the fact that we are interested in the link between thefocus on strategy or cost-cutting, and the level of HR outsourcing, other characteristicsof the organisation can have a significant influence on these relationships. To ensurethat the analyses are not affected by these variables, we control for a number ofvariables.

The first control variable is the size of the organisation (number of employees).Research shows that large organisations outsource more (Klaas et al., 2001). However,the literature indicates that smaller firms in particular have a greater need of externalexpertise due to their limited scale (Gilley et al., 2004a; Klaas, 2003). Indeed, SMEs oftenlack the economies of scale required to build an effective HR system using internalresources (Heneman et al., 2000). The cost associated with in-house delivery of HR islikely to be greater for smaller firms. As a result, SMEs increasingly are outsourcingHR activities to external organisations. In the regression analyses, the logarithm of sizewas included. The logarithm gives an indication of a linear link. The squared term (lnsize)2 was also included. This squared term gives an indication of a non-linearrelationship.

The second control variable was organisational age. Organisational age wasassessed by first asking the respondent to self-report the year in which their employingorganisation was established. Age was then computed by subtracting the reportedyear from the year in which the data were collected. Research shows that olderorganisations are more inclined to outsource HR activities (Gilley et al., 2004b). Gilleyand Rasheed (2000) therefore suggest including organisational age in the analyses. Inthe regression analyses, the logarithm of age was included. The squared term (ln age)2

was also included.The third control variable is industry. Since different industries put different

emphasis on the importance of HRM, they may adopt different amounts of outsourcingin HR activities (Klaas et al., 2001). Therefore, the variable industry is regularlyincluded as a control variable in outsourcing research. Respondents were asked to

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indicate their primary industry. Responses were categorised into eight industries(Table II). These eight industry classifications were used as dummy variables. Thehealthcare sector was used as our point of reference.

The fourth control variable is the employment evolution in the organisation in 2002.As mentioned before, the evolution in the number of jobs in the HR department is takenas an indicator for the focus on cost-cutting in HRM. A fall in this HR head count mayhave two causes. On the one hand, the reduction may be implemented while theworkforce in the organisation remains unchanged or increases, as a result of“rightsizing” in the HR department. On the other hand, it may be a result of a generalreduction in staff numbers in the organisation. To measure the pure effect of theevolution in the HR head count, we therefore included the employment evolution withinthe organisation as a control variable. We calculated this indicator as the net evolutionin employment (outflow – inflow) in proportion to the total number of employees at theend of the year.

Average F-value

Control variablesIndustry 12.02 *

Chemicals, food and energy 3.41Metal and electronics 3.08Other industry 2.91Financial and business services and other services 2.75Trade, distribution and hotel and catering 2.54Healthcare 2.14Public administration and municipal facilities 2.06Construction 1.99

Size (no. of employees) 45.76 *

10-99 2.38100-499 3.59500 or more 4.60

Age (years) 0.690-5 2.496-10 2.5611 and þ 2.63

Focus on strategic HRMStrategic involvement of HRM 18.31 *

No 2.46Yes 2.89

HR scorecard 61.80 *

No 2.53Yes 4.45

Focus on HR cost-cuttingEvolution of the HR head count 7.65 *

Reduced 3.70Remained the same 2.64Expanded 3.50

Notes: General average on ten-point scale: 2.57; * p c 0:001; figures weighted according to industryand sizeSource: PASO (2003)

Table II.Level of HR outsourcing

according to a number ofexplanatory and control

variables

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The last control variable is HRM intensity. If an organisation has a less intensive HRM,fewer HR activities come into consideration for outsourcing. This is why we include avariable controlling for the overall HRM intensity in the organisation. HRM intensity ismeasured by means of an index, consisting in the sum of 12 binary variables. TheHarvard model of HRM (Beer et al., 1984) guided our selection of the variables for theHRM index. We confined ourselves to six HR domains, each representing one of thecentral “Harvard policy areas”. More specifically, we chose selection, training andcareer management as HR domains representing the “HR flow” policy area;compensation and performance management as domains representing “rewardsystems” and participation as the HR domain indicating the “employee influence”policy. We used two HR practices for each of the six HR domains. Each of the 12 HRpractices is constructed in the form of a binary variable, where 0 indicates the absenceand 1 the presence of the practice. These HR practices are represented in Table I. Theresponses to these 12 binary variables were summed to give an overall measure ofHRM intensity. The HRM index ranges from 0 (no HR practices are present) to 12 (allHR practices are present). If an organisation records a lower score on this HRM index,this means that it has a less developed HR policy.

ResultsDescriptive analysesWe begin with a summary of some descriptive statistics. Table III providesinformation on the level of outsourcing of HR activities. The HR activities mostfrequently outsourced to external organisations are payroll (71.8 per cent), training(60.5 per cent) and temporary agency work (52.6 per cent). Activities, whichorganisations outsource less frequently, include determining job and wageclassification (7.6 per cent), outplacement (4.7 per cent), appraisal (4.5 per cent) andcareer guidance (2.0 per cent).

Table IV shows that 89.2 per cent of the organisations outsource one or more HRactivities. 71.8 per cent of the organisations outsource one to three HR activities. One insix organisations (16.9 per cent) outsources one HR activity. The remaining 28 per cent

HR activity Percentage of organisations using

1. Payroll 71.82. Training 60.53. Temporary agency work 52.64. Recruitment and selection of operational and support

staff 20.05. Advice on personnel policy 18.46. Recruitment and selection of managerial staff 15.17. Drawing up of job or wage classification 7.68. Outplacement 4.79. Appraisal 4.5

10. Career guidance 2.0

Note: Figures weighted according to industry and sizeSource: PASO (2003)

Table III.Incidence of HRoutsourcing

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outsource several HR tasks (between four and ten). The results indicate that HRoutsourcing is firmly established in Belgian organisations.

Tables II and V relate the level of HR outsourcing to the various explanatory andcontrol variables. The results are based on variance analyses (for categorical variables)and correlation analyses (for numeric variables).

The results show that there are differences according to industry regarding the levelof HR outsourcing. Based on the analysis, we can distinguish three categories ofindustries concerning the level of HR outsourcing (Table II). The first group (e.g.“chemicals, food and energy”) records high scores. The second group (e.g. “trade,distribution, hotel and catering”) records average scores and the third group (e.g.“construction”) scores very low.

We do not find any significant differences relating to the age of the organisation, butthe level of HR outsourcing does vary according to size. The larger the organisation, thehigher the average level of HR outsourcing. With regard to the employment evolution(Table V), we note that there is no relationship between the employment evolution andthe level of HR outsourcing. Organisations that have reduced their workforce do not havea higher level of HR outsourcing than organisations that have expanded their workforce.Finally, the correlation analysis shows that organisations that record high scores onHRM intensity demonstrate a higher level of HR outsourcing (Table V).

All indicators of a strategic focus on HRM show a positive relationship with thedegree of HR outsourcing. Organisations where the HR responsible hasdecision-making authority on the management committee (strategic involvement)outsource more than organisations where this is not the case (Table II). Next,organisations that use an HR scorecard outsource more than organisations that do notuse this instrument (Table II). Finally, organisations with high levels of HR devolutionalso have high HR outsourcing levels (Table V). These results provide an initialindication of confirmation of the first hypothesis.

The result of the variables relating to the focus on cost-cutting produces a less clearpicture. There is a negative link between the number of HR staff (HR ratio) and thelevel of HR outsourcing (Table V). The more people there are in the HR department, thelower the level of HR outsourcing. Second, organisations where the HR department hasbeen expanded have more or less the same level of HR outsourcing as organisationswhere the head count of the HR department has been reduced. The results relating tothe second hypothesis are, at first sight, not confirmed.

Number of HR activities outsourced % % (HR outsourcing organisations only)

0 10.81 15.1 16.92 26.6 29.83 22.4 25.14 11.9 13.35 7.9 8.96 3.3 3.77-10 2.0 2.3

Notes: Average (on ten-point scale): 2.57; figures weighted according to industry and sizeSource: PASO (2003)

Table IV.Level of HR outsourcing

HR outsourcing:threat or

opportunity?

553

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Table V.Descriptive statistics andcorrelations

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Regression analysesA series of regression analyses (after multicollinearity test[1]) were conducted to testthe hypotheses. The results of these analyses appear in Table VI.

In model 1, only the control variables industry, size, age, employment evolution andHRM intensity are included. The analysis confirms the industry differences observedpreviously. We also observe a positive link between the size of the organisation and thelevel of HR outsourcing. This seems obvious, but as mentioned previously, itcontradicts with a popular belief in the HRM literature that mainly smallerorganisations have more need of external expertise (Gilley et al., 2004a; Heneman et al.,2000; Klaas, 2003). It may also be observed that the squared term (ln size)2 is negative(although not significant). This negative sign indicates that the positive relationshipbetween organisation size and the level of HR outsourcing reaches its limit from acertain size. Regarding age of the organisation, a negative link is observed between theage of the organisation and the level of HR outsourcing. Older organisations are, ceterisparibus, characterised by a lower level of outsourcing. The squared term is positive andsignificant. This indicates that the negative relationship between age and the level ofoutsourcing levels weakens from a certain age. As regards the employment evolution,we observe that changes in respect of workforce are not linked to the level of HRoutsourcing. Finally, model 1 shows that there is a (fairly obvious) significant positivelink between the HRM intensity and the level of HR outsourcing. The aforementionedcontrol variables account for 25 per cent of the variance in the level of HR outsourcing.

In model 2 we include the variables relating to the strategic focus on HRM. Theirrelationship with the level of HR outsourcing can thus be tested under control ofdifferences in industry, size, age, employment evolution and varying scores for HRMintensity. The results indicate a strong significant positive relationship between thestrategic involvement of HRM and the level of HR outsourcing. The regression analysisalso shows a strong positive link between the use of an HR scorecard and the level ofHR outsourcing. This is also the case regarding the third “strategic focus” indicator,the level of HR devolution. A high level of HR devolution goes hand in hand with a highlevel of HR outsourcing. At first sight, HR devolution and HR outsourcing appear tooppose one another. However, research shows that the creation of a more strategicfocus on HRM often conflicts with the fact that HR professionals have to concentratetoo much on purely “transactional activities” and direct “people management” (Greeret al., 1999; Marinaccio, 1994). Many of the transactional activities can be outsourced,while direct people management belongs more within the job profile of line managers.Moreover, people-related practices and employee problems could be equally and insome cases more effectively handled by line managers who bear a direct responsibilitybecause of their closer interaction with and greater understanding of employees’ needsand problems. In any case, the combination of HR devolution and HR outsourcingprovides the HR function more time and resources for strategic HR tasks. In summary,we conclude that model 2 indicates a strong positive connection between a strategicfocus on HRM and the level of HR outsourcing. These results provide support for ourfirst hypothesis that firms emphasising the strategic role of HRM would rely more onHR outsourcing.

Model 3 includes the indicators of a focus on cost-cutting, alongside the controlvariables. The first variable relates to the evolution in employment in the HR

HR outsourcing:threat or

opportunity?

555

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department. Regression analysis shows that changes relating to the workforce in theHR department are not related to the level of HR outsourcing.

The variable that measures the proportion of staff in the HR department (HR ratio)is included in a separate analysis as it proved to be a high non-response item (model 4).Here again, it is remarkable to note that (contrary to the results of the correlationanalysis), there is a positive connection between the size of the workforce in the HRdepartment (HR ratio) and the level of HR outsourcing. Thus, we see that it is preciselythe organisations with a higher HR head count that also outsource in more HR areas.The results of models 3 and 4 do not confirm the hypothesis relating to the focus oncost-cutting. A strong focus on HR cost-cutting is not related to a high level of HRoutsourcing.

In model 5, all variables (indicators of focus on strategic HRM and cost-cutting) areintegrated into a single regression analysis because it may be possible that both typesof outsourcing (focus on cost-cutting in HR and strategic focus on HRM) can occurtogether. Analogous to the previous analyses, this regression does not provideconfirmation for the hypothesis that organisations with a strong focus on HRcost-cutting show a higher level of HR outsourcing. The analysis confirms thatorganisations emphasising strategic HRM outsource more HR activities thanorganisations where this is not the case.

Discussion and conclusionsConclusionTwo divergent perspectives dominate the literature on HR outsourcing. Someobservers approach outsourcing as an opportunity for the HR department. After all,outsourcing creates more time and resources to focus on strategic and value creatingHR activities. Other observers, however, portray outsourcing as a threat for the HRdepartment. In this view, outsourcing is seen as a cost-cutting instrument causing“HRM without HR managers”. The purpose of this study was to examine whether HRoutsourcing is a manifestation of a strategic HR focus, a cost-cutting HR focus or both.

The analyses highlight two main results. First, the results indicate thatorganisations with a strong focus on HR cost-cutting do not outsource more thanorganisations with a weaker focus on HR cost-cutting. The analyses show a positiverelationship between a strong focus on strategic HRM and the level of HR outsourcing.A second important finding is that HR devolution and HR outsourcing are closelyrelated. However, this does not necessarily mean that the HR department is beingeroded. By outsourcing operational HR tasks and delegating people management toline managers, more time and resources can be released for more strategic HRcontributions. In other words, HR devolution and HR outsourcing offer the HR functionthe opportunity to reposition itself and prepare for the role of “strategic businesspartner” (Lawler and Mohrman, 2003b).

Implications for HR managersThree important implications for HR managers can be derived from this study.

First, HR outsourcing is a potentially strong instrument for organisationsattempting to empower their HR function. Outsourcing of transactional andoperational HR activities allows HR managers and departments to focus on strategicactivities that add more value. Hence, it strengthens HR’s potential to make a proactive

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contribution to business success. Therefore, HR outsourcing cannot be merelyconsidered as a danger for the HR department, undermining HR’s power in theorganisation.

Second, HR managers are responsible for a plethora of tasks. They are expected tobe strategic partner, employee champion, change agent and administrative expert atthe same time (Ulrich, 1997). In attempting to meet this multitude of expectations,many organisations are rethinking the organisation of the HR function. There aremany alternative delivery mechanisms that remove the delivery of HR practices fromthe HR department (Lepak et al., 2005). HR outsourcing is not the only option available.There is also some evidence that a greater portion of HR tasks is shifted to linemanagement (Larsen and Brewster, 2003; Whittaker and Marchington, 2003) and thatan increasing number of organisations heavily rely on HR information systems todesign and deliver HR practices (Gardner et al., 2003). For HR managers it is vital toscrutinise these alternative delivery mechanisms, to weigh their pros and cons and toselect the mechanisms that match HR’s objectives, the organisational strategy andstructure.

Third, the combination of several delivery mechanisms affects HR’s competencyprofile. Managing and developing a complex web of relationships with internal andexternal HR providers requires substantial skill in, for example, supplier management,customer service and project management. Even when HR tasks are spread amongseveral actors, HR still has the unique responsibility and accountability to guaranteethat each HR task is fulfilled. For HR departments, it is also important to pay attentionto the impact alternative delivery mechanisms have on internal customer satisfactionwith the HR services provided and to guarantee that outsourcing, devolution to the lineor employee self-service systems result in similar or better service quality.

Limitations of the study and implications for researchersAlthough this study represents an important step in understanding various aspects ofHR outsourcing, it contains a number of limitations that must be addressed in futureresearch.

First, this study only considers the breadth of the HR outsourcing phenomenon (i.e.the number of HR activities outsourced) and consequently only indicates the presenceor absence of external provision in each HR activity. However, outsourcing strategiescan be conceptualised as having two fundamental characteristics: breadth and depth(Gilley and Rasheed, 2000). Depth may be described as the extent to which anorganisation outsources a given activity. According to Gilley and Rasheed (2000), anaccurate picture of the outsourcing phenomenon can only be obtained if it is measuredboth in terms of breadth and depth (Gilley and Rasheed, 2000; Wahrenburg et al., 2006).HR outsourcing is indeed not necessarily a binary decision. An organisation cansimultaneously opt for both outsourcing and insourcing for the same HR activity.Future research efforts that incorporate both breadth and depth will likely provide amore complete understanding of HR outsourcing.

Second, because our results are based on cross-sectional data, we cannot drawcausal inferences. As the level of HR outsourcing can evolve over time, it is importantto use longitudinal data in the future. The analyses discussed above, show a positiverelationship between the strategic focus on HRM and the level of HR outsourcing.However, this cross-sectional analysis cannot be used to distinguish “cause” from

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“effect”. Do organisations applying a strategic focus on HRM outsource more? Or canorganisations that outsource HR activities spend more time to strategic HR matters?We recommend future research designs be longitudinal.

Third, the analyses discussed above show that the HR department can release moretime and resources for more strategic HR contributions by outsourcing operational HRtasks and delegating people management to line managers. If the HR department is totake on a more strategic role, this raises a number of issues as to how it develops andmanages the complex internal and external relationships that relate to its differentroles: managing the relationship with external providers, managing the relationshipwith line managers, providing the in-house HR tasks, being a strategic partner, . . .(Cooke et al., 2005). Managing these relationships requires management time andmanagement expertise. There is a paucity of empirical research in this area, whichleaves a number of unanswered questions. Empirical research is therefore required toidentify how the in-house HR function can manage its multi-sourced functions.

Finally, future research might focus on the impact of HR outsourcing. For example,very few empirical studies have examined the impact of HR outsourcing on theorganisation of the HR function. In addition, further research is also necessary toinvestigate the impact of HR outsourcing on the perceptions of several internalcustomers of the HR function (internal HR customer satisfaction). It would beworthwhile to devote more attention to the nature of these relationships in futureresearch.

Note

1. We tested for the presence of multicollinearity by examining the correlation analyses.Tabachnick and Fidell (2001) indicate that correlations above 0.90 are of serious concern forthe presence of multicollinearity. The correlations in Table V never rise above 0.40,suggesting that multicollinearity was not a problem.

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About the authorsJeroen Delmotte is Researcher at the Research Centre for Organisation Studies of the Faculty ofBusiness and Economics of Katholieke Universiteit Leuven. He is preparing a PhD concerning

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the perceived effectiveness of the HR function. His current research focus is on the features ofstrong HR systems, stakeholder perspectives on the HR function, the relationship between HRMand performance, personnel management in small and medium-sized enterprises and HRoutsourcing.

Luc Sels is full Professor at the Research Centre for Organisation Studies and Vice-Dean ofthe Faculty of Business and Economics of Katholieke Universiteit Leuven. His primarysubstantive research interests center around individual and organisational career management,the measurement of features and content of psychological contracts, the relationship betweeninvestments in HR management and firm performance (ROI) and features of strong HR systems.He has published articles in several high-standard journals such as Human Relations, Journal ofOrganizational Behavior, Journal of Vocational Behavior, Small Business Economics, WorkEmployment and Society. Luc Sels is the corresponding author and can be contacted at:luc.sels@econ.kuleuven.be

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