HUMAN RESOURCE OUTSOURCING: A GENERAL STUDY OF UNITED KINGDOM RETAILERS’ USE OF OUTSOURCED PERSONNEL, REASONS AND BENEFITS.
Human Resource outsourcing is considered an important factor in today’s business world. It is constantly growing, especially in the global world where companies outsource not just within their country but across borders. This research concentrates on Human Resource outsourcing in the retail sector, including both small and medium size firms in the United Kingdom. The ultimate aim of this research is outlined below:
- To find out why companies outsource their Human Resource – their first and foremost reasons.
- To find out what benefits there are in this process.
- To find out if there are any control mechanisms linked to the process.
To find answers to these questions, five retail managers were interviewed: three respondents interviewed were conducted face to face and two were phoned interviewed. Again, fifty questionnaires were sent out to recruitment agencies who are the suppliers of the Human Resource, to confirm if they share the same opinion with retail managers who are their clients. Out of the fifty questionnaires, 30 were retrieved and analysed.
The results revealed that companies do not outsource all of their Human Resource functions. Recruitment is the key function outsourced for the simple reason of convenience and time saving. However, benefits are enormous including cost effectiveness, achieving higher core competency levels, greater flexibility and accessibility to expertise, reducing workload of staff etc. Results also depict two categories of outsourced staff, which are temporary staff and permanent staff with temporary staff being the majority.
1.1There have been many issues surrounding outsourcing of Human Resource. It implications are wide and varied. Though there are many benefits, it is faced with challenges as well. Companies who have managed their challenges well have been successful others on the other hand have redrawn from the process. The topic was chosen because is an issue being discussed currently all over the globe and the retail sector is proving to be a sector that employs a greater percentage of the workforce.
Chapter one gives a definition of outsourcing and discusses what outsourcing is all about. It gives relevant examples of those companies practicing Human Resource outsourcing and the results of their practice. Chapter two is the literature review. The literature review establishes concise framework and reveals various reasons why companies tend to outsource and its subsequent benefits. It also raises the issues of concern and the control outsourcers have over their suppliers.
It discusses people’s opinion about the Human Resource outsourcing giving the pros and cons of the issue. Part two of chapter two gives the factors that drives the process Chapter three is basically about the retail sector and how it operates in the United Kingdom analysing the importance of the Human Resource in retailing. How data was collected is discussed in chapter four and further analysed. Finally findings are reported and conclusion with limitations given in the last chapter.
1.2Background of study
Outsourcing has been defined by Gupta and Gupta (1992) as ‘the concept of hiring outside professional services to meet the in-house needs of an organisation or agency’ another explanation is a managerial approach delegating non-core functions of the organisation to other specialist and efficient services providers. In recent times, many companies are considering outsourcing their Human Resource because it is becoming a viable option. In the United Kingdom (UNITED KINGDOM), the situation has been drastic, especially in the retail sector.
Human Resource indeed is one of the major factors of production and cannot be ignored in anyway for a business success. Human Resource is constantly growing and keeping abreast with the dynamic business world, which relies heavily on the technology advancement and specialist skills.
The term ‘Human Resource’ was once seen in companies operations as a department that issued policies, heard grievances and problems of it staff. As time went on, it then included various aspects of training that benefits administration and staffing. The focus however is gradually changing again, now as a strategic consultant to the main business, trying to match personnel and their skills with the corporate goals of the company with the view of achieving competitive advantage. Human Resource outsourcing is becoming popular due to the perceived numerous benefits with emphasis on cost effectiveness and adding value to the organisation. In the United Kingdom, the growth of Human Resource outsourcing stemmed from increased demand in the public sector but now the private sector is also expressing more interest.
(Winkleman et al, 1995) explained: outsourcing is actually not a new concept because organisations have always hired outside providers services in assisting their operations, especially Information and Communication Technology (ICT). What makes it different today is the range of services organisations are asking for from suppliers and the extent to which it has become politically correct and responses to changing market and corporate conditions.
The rationale for outsourcing is simple and compelling in that contracting part of the operation is seen to be cheaper than the company doing all by itself. (Hendry,1995) in his discussion states that outsourcing not only enable organisation to make gains but also allow them to focus more especially on those activities it can perform better in-house. Even though the cost factor is obvious, (Rubin, 1990) emphasized the point that it is more important to understand the managerial basis of decision-making. Aside its cost effectiveness, it also has a strategic dimension whilst organisations attempt to find the ‘right size to fit a new environment’.
The reason why organisations decide to outsource is the seasonal demand swings where there may be need for more hands on board to meet customer demand.
Analysing the diagram below……, outsourcing could be considered as a continuum in that at one point staff may be needed temporary and at some points may be taken on to perform complete responsibility. Timing is also a key factor in the process. Thus from the diagram, the short-term market exchanges at one point and the long-term relational exchanges at the other.
Operational task to relieve capacity overload
Consultancy, capacity augmentation skill providers
(Stopper, 2005) reported British Petroleum (BP) in 1999 spent $600 million towards its global human resource administration and management, for a contract of seven years. In the year 2000 however, BP’s revenue increased to $22 billion, about 8% of the total amount spent on the Human Resource that year.
BP reduced its ongoing operating costs by at least $15million a year and avoided more than $30million in capital expenditures as a result of outsourcing it Human Resource services. (Dell, 2004) in his research, reported a Conference Board survey of 122 large companies in 2003. The report revealed that 79% of top managers voted cost reduction as the motive for outsourcing Human Resource services. Other research proved among the reasons for outsourcing, the most prevalent, thus 42% voted providing better services to employees and 25% to improve efficiency, effectiveness or productivity. The motive of BP Human Resource outsourcing was to reduce cost but improve efficiency. EXULT, the supplier took total charge of BP’s total Human Resource process, leaving BP dealing with stuff that require more attention, such as their policy .Advocators of Human Resource outsourcing share their views on the grounds that Human Resource has an increasingly complex legal environment, and for success in mergers and or acquisitions, it requires special skills, knowledge and Human Resource attention.
The question is ‘‘will the process work for everyone’’? Is it necessary for every company or an organisation considering outsourcing its Human Resource? There are therefore arguments in support of and against Human Resource outsourcing in this debate. This study seeks to answer the following questions finding out basically why companies will outsource their Human Resource and to what benefits there are for such companies. It also analyses the level of control the company has on the process.
Contrarily to this opinion, (Morton, 2003) argued that Human Resource outsourcing is a faddish trend. His question is, ‘‘would the supplier know one’s business as well as the owner and can he really visualise the exact issue on the ground’’? Again, is it advisable for an outsider to take decisions on your behalf’’? His words are: ‘‘your people are your biggest resource. It is important to keep hold of power over them’’.
Klaas, with his theoretical study on the impact of Human Resource outsourcing also believes that companies should not take things for granted but rather be well aware of the potential dangers of the process of Human Resource outsourcing before engaging in it. His concern, however, is on the variables of Professional Employer Organisations (PEOs). The PEO variables involve staff time cost, administration fees, HR outcomes and compensation cost. These however, vary from one company to the other. He therefore advised that companies should carefully research into these variables and consider whether to outsource or not. The word ‘trust’ is also very important in determining the relationship in any successful outsource.
- What drives the Human Resource outsourcing process?
- To what extent does Human Resource outsourcing help or hinder a firm’s success?
1.4AIM OF THE STUDY:
The ultimate aim of this study is to establish the principal factor associated with the decision to outsource, and the benefits organisations derive from doing so.
1.5OBJECTIVES OF THE STUDY:
- Explore the reasons for Human Resource outsourcing
- Examine and analyse the various benefits derived from outsourcing the Human Resource sector of a company
- Examine how successful Human Resource outsourcing has been
- Provide the essential keys to successful Human Resource outsourcing
- what aspect of the Human Resource function do companies outsource
- what category of staff do companies outsource
1.6 RATIONALE FOR THE STUDY:
1.6.1 History of Human Resource outsourcing in the United Kingdom.
A research by Arthur Anderson concluded that 75% of the top 200 United Kingdom firms believed that personnel administration is a core function and should not be outsourced, 49% also assessed training as a core function whilst 39% agreed to payroll being a fundamental activity to the business. The study however identified a change in perception over the last four years. Functions previously seen as core and for that matter should not be outsourced are now considered eligible for outsourcing.
One of the opinions that the human resource outsourcing has been mainly reactive rather than proactive since it deals with the consequences rather than being involved from the onset. Further argument on core competencies emphasises on the fact that the Human Resource function, importantly has more work to do with fewer resources. The recent development in technology creates more function for the human personnel department. This means that personnel need to work and learn the varying skills and knowledge needed to control such machines. In effect Human Resource professionals have moved away from the conventional way of Human Resource Management whilst they master new and different skills and competencies.
They must therefore exhibit a better and broader understanding of organisational strategies and manage change. Having leadership skills, creatively and being innovative are very important skills in Human Resource outsourcing.
Consultant seeking for business and top management who assure that as far as outsourcing has worked for Information Technology; it must also work for Human Resource. The human resource department in attempt to restructure the entire industries end up as formulators and implementers of downsizing and as targets of downsizing themselves.
As a result, Human Resource managers in the United Kingdom trying to redefine their role from being a personnel and employee relations functions to become a “strategic partner” within the company. This will not stop them from delivering their usual good services to employees and shareholders.
The human resource function is therefore under pressure to compete by being better, faster and more cost-effective. There is also pressure from employees as they seek accurate information and efficiency; again they take increasing responsibility for the choice and cost of various benefits as well as increasing their level of expectation.
1.6.2 The extent of Human Resource outsourcing in the United Kingdom
A survey by magazine ‘Human Resource’ in May 2000 revealed the following results. There were 50 executive interviewees from the Financial Times Stock Exchange top 250. The findings were that despite a long history and noise on Human Resource Outsourcing, more than a third of companies in the United Kingdom does not outsource any of their human resource work. They solely perform all their human resource functions in-house. 58% of respondent retain their benefits work in-house whiles 46% their payroll and then 59% their pensions. It was noted that car fleet management seems to be the only service where large-scale outsourcing takes place. It employs about 46%, taking advantage of services provided by companies such as LEX.
The study suggests that companies engaged in outsourcing do not even outsource the whole process out rather a portion of their main Human Resource functions. About 55% of respondents outsourced part of their recruitment function as compared to only 9% outsourcing it all. In the same way, 61% outsourced some of their training function but no one outsourced the entire function.
The survey also suggested that the level of personnel especially the senior level was a major factor why companies outsource, for instance a third of companies outsource for their senior staff in terms of recruitment as well as training.
The survey revealed that fleet management is most commonly outsourced in its entirety, next is pensions and then payroll, other functions partially outsourced are training, pensions, benefits, recruitment and payroll.
Payroll and personnel –related outsourcing is well practised in the United States (US) and some analysts have predicted United Kingdom following suit but in a modified form sometime to come. The survey showed the figure below
Outsourcing prevalence for different human resource functions
Source: Human Resource HR survey May 2002
There are five competence factors influencing the outsourcing phenomenon
- rapid growth or decline
- increased competition
Theorists Peter and Waterman (1982), promulgated the concentration on what companies “do best” and promoted the idea of sticking to the knitting. Hamal and Prahalad (1990) introduced the core competencies, which is the concentration on the company’s main strategies.
In 1986 Miles and Snow initiate the concept of the network organisation, in this situation the core company focused on its major activities whilst contracting out and managing activities of third party. This theory was further developed by Reich in 1991 stating that western companies would have to concentrate their efforts on ‘knowledge based’ activities to form elements of an enterprise web.
1.6.3 Advantages of Human Resource outsourcing
The main advantages of the Human Resource outsourcing are listed as:
- Enhances time management
- Provides better quality products / services
- Reduces fixed costs
- Better investments through technological advancement
- Support managers to focus in their communicating and integrating Human Resource policy
- Suppliers having dealt with different organisations always have new experience and approaches
1.6.4 Disadvantages of Human Resource outsourcing
Main problems associated with Human Resource outsourcing are:
- Hidden cost is underestimated
- Inadequate knowledge and understanding by suppliers of core business
- Accountability of supports service provided
- Inability of suppliers to maintain quality of service
- Communication problems between the two parties
1.6.5 Limitation of Human Resource outsourcing
Bill Carney in his article identified five key limitations
- Immediate cost savings
- Provider limitations
- Profit maximisation not guaranteed
- Limited customization
- Limited control
- Supplier management
1.6.6 Is Human Resource outsourcing right for everyone?
Human Resource outsourcing is not the solution to all modern Human Resrource and administrative problems. Many companies do not consider the nature of their business to develop a comprehensive sourcing analysis framework. The underlying business needs of reducing cost often done through downsizing of staff may not be realised
One significant disadvantage with the process is the potential misalignment of corporate and Human Resource strategies and priorities. Thus what seems beneficial to one Human Resource manager may not be same in the wider corporate context.
1.6.7 Effective organisational entry practices
To have an effective entry practice, depends on good analysis throughout the sequential process. should an error happen, the whole sequence may be affected and prove more costly to employers, not only in terms of financial loss but will also disrupt the progress of work. This process might also de-motivate established staff and loose out to the competition.
The diagram below shows the stages in the organisational entry process.
Basic stages of the organisational entry process
- Assess the best way to attract the candidates matching the selection criteria
- Determine how the company wants to present itself to recruits
- Link recruitments strategy to the information the company needs to gain in the selection process
- Assess the performance of previous recruitment drivers
- Evaluation of knowledge, skills and abilities required in the short term
- Long-term planning on how job profile may change
- Evaluation of organisational culture/strategy and how it may change
- Review / feedback from each stage of the process to raise the efficiency
- Determine which tools to use to assess if a candidate matches the required criteria/competencies
- Determine the level of flexibility the company can afford in the terms offered to attract the best recruits
- Link selection strategy to information about corporate culture
- Determine what the new employee needs to know to work effectively and fit in as soon as possible
Source: Market tracking international ltd ( MTI)
A survey conducted by the DDI (1991) involving 1000 HR directors from leading United Kingdom companies depicts that ‘hiring the right people’ was rated as the most important issue people may face. The next one is “motivating and retaining employees” with regard to staff turnover costs, the result of the survey showed that 10% of firms incur costs in excess of £5million per annum; and more worryingly, 69% of firms do not bother to calculate the cost of staff turnover.
Further research showed that the 1980s and the early 1990s recession contributed to cost-cutting, downsizing and restructuring in a number of industry sectors.
This led to the change in the employment market and altering the recruitment and selections strategies of organisations. It again suggests that new job opportunities are more likely in the service sector, commonly among highly skilled. Also there has been an increase in the part-time, temporary and contract-work as companies strive to achieve flexibility in order to cope with changing market demands.
The graph below shows how United Kingdom employment sectors are affected by staff shortages
1.6.8 Types of Human Resource outsourcing
Researchers have grouped outsourcing into the following groups:
Total outsourcing: outsourcing is considered as total outsourcing when a company decides to outsource about 70%-80% of a particular function to a single supplier with the aim of concentrating on the company’s core competencies. This “hundred percent” of a personnel service has generated into argument. First of all, it is argued that a major portion of personnel work is so central to the strategic objectives and the culture of the organisation. For this matter the company itself can only effectively carry out the personnel work.
The second argument is certain situations are hard to predict but may require immediate responses example is industrial dispute. For this reason it becomes difficult to contract out such tasks to a supplier who can not guarantee the proper action needed. Further arguments suggest that they have not yet discovered a significant Human Resource supplier for 100% total outsourcing. There exist only few suppliers who are able to take on a complete personnel service.
Multiple / selective outsourcing: companies negotiate with numerous suppliers so as to keep them in a state of healthy competition under short-term contracts. It has an aim of retaining suppliers on larger-term contracts.
Joint venture / strategic: it refers to partnering with other suppliers in executing a particular project so as to share risk and rewards. The outsourcing is the risk factor to the company (client) and the same time maintain strong ownership and control
Temporary outsourcing partnership: is a short-term contract usually 1-2 years for the smaller companies who cannot justly handle external consultancy.
Transformational outsourcing (Information Technology & Information System applications): it is an application within the technology / information system field.
Business process outsourcing (BPO): is considered as the sharpest end of the outsourcing spectrum, it involves outsourcing critical important business processes such as finance and accounting, internal audit and procurement etc. it is actually a rapidly growing area.
Insourcing: this could mean reclaiming of application that had previously been outsourced; it is done in two ways, either hiring consultants to re-engineer the in-house department or through conventional in-house bidding.
Partial outsourcing transfer: is the partial transfer of services and associated resources, it involves outsourcing fairly routine and well established practices such as pay roll and at the same time retaining newer systems in-house. The company remains the managers of the process and takes most decisions.
Asset purchasing: is where the supplier decides to buy the entire set of physical assets from the clients company. It is also a form of cash flow to the company for selling its assets. There is also transfer of personnel from the company to the supplier; however the place of work does not change.
(Lee, 2002) also categorised Human Resource outsourcing into three aspects:
– Professional Employers Organisation (PEO)
– Application Service Provider (ASP)
– Business Process Outsourcing (BPO)
PEOs have a duty of managing a company’s human resources, take charge of employee’s legal issues and undertake basic Human Resource functions as recruitment and selection including performance appraisal.
In most cases PEO form partnership with other suppliers. The PEO concentrate on the Human Resource aspect of the business, the company on the other hand handles the other aspect. Sometimes due to the nature of Human Resource, the company may decide to enter into strategic alliance or joint venture in order to have some level of control over the Human Resource management.
Within the context of Human Resource outsourcing, organisations specific needs and processes vary. Some organisations tend to outsource virtually all of it Human Resource Processes whilst others concentrate on specific areas of the process such as staff recruitment, staff training, payroll or resources.
About 9% outsourced all of it recruitment function while about 55% of respondents outsource part of their recruitment function.
Amstrong (2001) introduced a list of Human Resource areas that are often outsourced. These are: Training, Payroll Management, Health and Safety Monitoring and Advice, Recruitment and finally Employee Welfare and Counselling activities.
More so Workplace Employee Relations Survey (WERS) in 2004 revealed that Training, Payroll and Resourcing of temporary positions are the most common component that companies seek to outsource. It is noted that very few organisations such as British Telecom, Boots the Chemist, Procter & Gamble have outsourced their entire Human Resource functions and the most recently is Unilever.
ASPs: Application Service Providers focuses on software applications. They deal with software processes and rent to users. They have standardised off-the shelf applications and the customised Human Resource software development. It is designed to manage payroll, benefits among others.
BPO: this refers to Business Process Outsourcing, which focuses on outsourcing managerial and operational functions in Human Resource. BPO is also in charge of monitoring the latest information systems.
In the United Kingdom, a change in political ideology after 18 years of conservative government rule is seen as a driver of the outsourcing, as a means of reducing cost and raising efficiency, the use of outsourcing was promoted. This really showed in the public sector through the introduction of market-based instruments and the formation of internal market as in the health service
Different authors have classified outsourcing drivers. According to (Winkleman et al, 1993) there are two basic drivers for outsourcing success; these are cost reduction and strategic shift in how organisations operate. (Grupter et al, 1992) added two more drivers as market forces and technical considerations.
(Hiemstra et al, 1993) also indicated four drivers, which are cost, capital, knowledge and capacity. (Beulen et al, 1994) suggested five main drivers for outsourcing: quality, cost, finance, core-business and cooperation.
1.6.9 Drivers for outsourcing:
( Beulen et al; 1994) outlines the following general drivers for outsourcing:
Quality: actual capacity is temporarily inefficient to comply with demand. The quality motive can be subdivided into three aspects: increased quality demands, shortage of qualified personnel and outsourcing as a transition period.
Cost: outsourcing is a possible solution to control increasing costs and its compatible with a cost leadership strategy by controlling and decreasing costs, a company can increase its competitive position.
Finance: a company has a limited investment budget. The funds must be used for investments in core business activities, which are long-term decisions.
Core-Business: core-business is a primary activity with which an organisation generates revenue. To concentrate on core-business activities is a strategic decision, all subsequent activities are mainly supportive and should be outsourced.
Cooperation: cooperation between companies can lead to conflict. In order to avoid such conflict those activities that are produced by both organisations should be subject to total outsourcing.
However these factors cannot be in isolation, they are not sufficient enough as attention needs to be given to the context in which such decisions are taken. Consideration should be given to the internal and external environment within which the organisation operates. The organisation’s objectives and most importantly its culture may effect the implementation and sustainability of the policy, once made.
Considering the factors that drives and influence outsourcing decisions, Chris Fill in his research established three key emerging issues:
- the contextual factors represented by an organisation’s particular internal and external conditions
- the strategic and structural aspects associated with an organisation’s decision to reconfigure
- the costs associated with the process or activity under review
It is very necessary for managers to consider these three aspects when deciding to outsource.
A framework illustrates the process
A composite outsourcing decision framework
Strategy & Structure
Source: Management Decision vol. 38 No.1, (2000)
2.1 LITERATURE REVIEW:
The most important and cherished asset of any company is its Human Resource – the staff. Even with all the most current technology, personnel are first because without manpower, nothing gets done. The success of every organisation depends on the quality of staff employed. On the other hand it could be disastrous if the right decision is not taken in choosing the right people with the right skills in the right position. The kind of skills employed makes a vast difference between a business success and it failure. In the business environment, some companies may employ solely skilled personnel, others require both skilled and semi skilled personnel and others unskilled labour force. In the retail sector for example, the nature of the work demands both skilled and semi – skilled staff with the semi – skilled dominating. The skilled staff basically are managers such as the marketing and advertising managers, accounting managers, purchasing and supplier managers and general overseers.
The challenge is how to get those people into the right places in order not to under utilise or over utilise their services. For instance, it might not be necessary to employ a professional who is to be paid as a sales assistant to be serving customers, but rather have a responsibility of planning and strategising how to win customers and be ahead of it competitors. In order to make the best decision, t
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