Outsourcing simply means going outside your organization to get a job done. There are many reasons for outsourcing in a company or an organization. The most common reasons for outsourcing are the needs for expertise, that is due to lack of learning curve and re-creating; manpower, for having not enough staff; time requirements, because of the limited time available to accomplish the job; needed for economics, owing an overall cost savings; shifting of responsibility as for deniability; and removing of stumbling blocks in keeping the work for flowing.
Normally, there are two types of outsourced services, technology and business process. Each can be inert partial to the subsequent areas. The first type of outsourcing is the technology services. This type covers the electronic commerce (e-commerce), infrastructure (networks), software (applications), telecommunications and website development and hosting. The second type of outsourcing is the business process outsourcing. Under this type of outsourcing are customer contacts (customer relations management), equipment, finance / accounting, human resources, logistics, procurement/supply chain management and security.
Information technology (IT) outsourcing is defined as the process of contracting vendors outside the company to perform different IT functions like data entry, application maintenance and development, data center operations, network management and operations as well as disaster recovery. Outside vendors may either be individual information technology professionals, employee leasing companies, consulting firms, CPA firms and full service providers (Antonucci, 1998).
As companies and firms depend more on IT to operate businesses, getting into large market research files to locate new customers and using the Internet as a storefront information technology development and maintenance costs have exploded. Due to this trend, it is no wonder why companies and firms have applied transfer systems of IT assets, leases and staff to outside vendors or third party members.
According to (Ryan, 1996) in his review of the current literature, outsourcing is a trend that will continue. There are many benefits to outsourcing, including freeing up management resources, sharing costs, creating integrated networks, building new organization structures, training staff, and interfacing with other information systems. Outsourcing offers a company functional specialization and flexibility (Economist, 1994, p. 79). On the downside, some of the negatives include difficulties in maintaining confidentiality, retaining control, and confronting transition problems.
White (1996, p. xiv) provides a definition of outsourcing as a “contractual relationship between an external vendor and an enterprise in which the vendor assumes responsibility for one or more business functions of an enterprise”. Outsourcing has expanded through most every industry since the early 1980s (Bernstein, 1995). The primary reason is to conserve staff in all areas of business. While lower wages may not be the prime motive to outsource, they are sometimes the result. Moreover, as the administration of employee benefit plans becomes more complex, companies are looking to outsourcing as a way to meet this challenge (Burzawa, 1995).
Types of outsourcing
In general, HR outsourcing services have four categories: Professional Employer Organization (PEO), Business Process Outsourcing, Application service providers or e-services.
Professional Employer Organization (PEO)
PEO assumes full responsibility of the human resource management of an organization. It takes legal responsibility a firm’s staffs and is actively involved in different important HR functions like recruitment and selection, delayering and performance appraisal. In this manner, a company and PEO become partners, with the PEO managing all the HR aspects and the business controlling all other aspects and operations of the firm. In other words, it is a total outsourcing because all activities are performed by an external organization.
The following are the list of HR areas that are outsourced according to Armstrong (2001):
· Health and safety monitoring and advice
· Employee welfare and counselling activities
· Payroll management
· Specialist legal advisory services;
· Occupational health and fitness services;
However, due to the specific features of human resource management and the developing practice of HR outsourcing, PEO might also imply for joint venture/ strategic alliance sourcing where certain duties and responsibilities are shared between organisation and a supplier.
Business Process Outsourcing
Business Process Outsourcing is a wide term which refers to outsourcing of different managerial and operational functions in an organization. Specifically in Human resources, a BPO is created to make sure that a firm’s HR system is supported by the latest management information systems, which have self-access and HR data warehousing options. Web-based technologies are fundamentally changing the way human resource management is being conducted.
E-hr refers to the data, transactions and tools that organizations use to help manage and provide services for their applicants, employees and retirees. These services can impact every area of human resources including: Recruiting, Selection, Performance Management, Compensation, Benefits, Training and Development, Surveying and human resource research, Employee and manager Self-service to name a few (E-HRM Overview, 2002).
Offshore outsourcing more and more takes the shape of Business Process Outsourcing, where whole business processes (such as support and development) are outsourced. The client is usually free to choose who provides the outsourced business processes, while stock markets press the company to do more for less. This requires that manager’s search out the cheapest sources they can find.
In countries like India and China (primarily Bangalore in India), companies like IBM, Microsoft, Hewlett Packard, and Novell choose to get services from sub-contractors in these countries or move many development and support jobs there. Smaller businesses can also take advantage of freelancing on the Internet to get smaller projects done by offshore developers at minimum cost.
Application service providers
This type of Application service providers host software on the Web and give the use the chance to rent it—some ASPs host HR software. On the other hand, some are standardized off-shelf applications (People Soft) while others are modified HR software which has been developed by the vendor. These software programs can handle payroll, benefits, and more.
HRM is considered as one of the main assets for every organisation. The proper management of Human Resources is significant in determining the success of a certain organisation. Being aware of management value and the ability to manage the human resources in an organisation-wide will have great impact on progress results. Consequently, it is said that the philosophy of HRM is based on the simple belief that human resources are the most important asset in achieving and sustained business success. This realisation became the driving force behind the creation of HRM resulting in organisations taking a strategic technique to manage their human resources (Lipiec, 2001)
Human Resource Management (HRM) is a strategic approach to managing employee relations which emphasises that leveraging people’s capabilities is critical to achieving sustainable competitive advantage, this being achieved through a distinctive set of integrated employment policies, programmes and practices (Bratton & Gold, 2003). Personnel policies, including welfare programs, sports, and recreational activities, are initiated by management unilaterally or in consultation with plant or works committees which are usually separate from the union (McGovern, 1998). With the use of information communication technology, a new approach for HRM context has been developed. i.e. E-HRM.
Electronic Human Resource Management is a web-based tool which aims on automating and supporting HR processes. The use of e-HRM is an opportunity to hand over data entry to the employees and staffs. E-HRM facilitates the utilisation of HR marketplace or E-recruitment and provides more self-service to the employees.
The general role of electronic human resources is to help an organization accomplish its overall mission by ensuring that human resources are managed properly. More specifically HRIS systems may help reduce costs, save time, increase profitability, and improve employee performance (Buhler, 2002). An electronic human resources management system is a core enterprise application for managing administrative and strategic processes related to an organization's most critical asset, its people
Rationale for Outsourcing
Accordingly, the overall rationale for any type of outsourcing is that it provides, flexibility, cost effective, greater economies of scale, and levels of expertise and lower costs and enhances add-value through out the value chain (Mintzberg et al, 1995). Mintzberg and his colleague, states that using these functions internally, may buy in more economical compromises competitive advantages against the rival company.
In addition, outsourcing allows concentration on core activities, decreases internal costs, reduces time delays and prevents political pressures which may lead to a more compact organisational structure, sharper focus in terms of recruiting, complimenting hierarchy, establishing and motivating key personnel in terms of core competencies and competitive advantage. In the study conducted by Ratnam (2001), he emphasises the strategic dimension of outsourcing.
According to him, heavy investments along with the challenges of forceful market place, suggests that the concept of outsourcing strategy, focusing on strategic supplier partnerships can be considered as a is an important value differentiator (Ratnam, 2001). In addition, it is said that in current business environment, that can described as turbulent, each organization needs flexibility in order to meet its current and future opportunities. Hence, outsourcing gives the ability to adjust to rapid changes in market conditions so as to remain competitive.
Rationale for HR Outsourcing
It can be said that, even though HR outsourcing is rooted on similar rationales and foundation, it is essential to mention that it became possible because of the recent development of information and communication technologies (ICT). In an era of advanced technology and globalization, the importance of integrating Information and Communications Technology (ICT) into almost all activities can hardly be denied. In fact, during the past decade, ICT use had consistently and relatively grew that it has made ubiquitous impacts on business process (Yuen, Law & Wong 2003). ICT has created such an impact that for most sectors, it has become a necessity instead of an option because of the intense competition dictated by it.
Wright (2002) perceives that with the emergence of different management decision support systems and other databases, many companies have been able to realise the new opportunities of e-HRM. The context of outsourcing has become more and more popular as personnels and employees become more comfortable with Web-based self-service. The existence of new portal technology provides its users deep knowledge content, decision-support devices and transaction capabilities even in one place.
Moreover, the in-house
development of electronic human resource management practice requires efficient
investments and proficiencies and the cost of owner which maintains and upgrade
technologies which are continuously escalating. Hence, the decision to outsource
has become a
reduced risk and cost cutting solution for every organization.
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