Wednesday, August 11, 2010

Does Outsourcing Spell the Extinction of In-House HR?

Throughout my first year with MBA, I have heard people, students and professionals alike, disparaging the profession of HRM. It is a common belief that ‘The best and the brightest don’t go into HR’ and when people asked me about what I wanted to specialise in, I have faced various discouraging responses like, “There is no scope in HR”, “HRs do no work” and so on. A popular question most HR aspirants encounter is “Why HR?” A short question that is never easy to answer, at least never to the satisfaction of the interviewer. One such interviewer told me that soon HR departments would cease to exist and all functions would be outsourced. Although I debated passionately, I found myself pondering on whether I was going to be redundant in this field I had chosen.

According to Mary F. Cook & Scott Gildner, "Human resource (HR) outsourcing means having a third-party service provider or vendor administer, on an on-going basis, an HR activity that would normally be performed internally."

HR outsourcing can be classified into two broad categories: (a) Transaction and Administration Outsourcing and (b) HR consultancy. While transaction and administration outsourcing deals with the day-to-day and month-to-month activities like payroll management, employees benefits management, and pension management, HR consultancy is a much more complex process that constitutes management of strategy and policy functions of the organization.

Most of the major economies around the world have undergone deregulation and globalisation wherein the rules of the game have changed. Markets are wide open for entry of new players including well-established MNCs and private entrepreneurs. Technology is changing the business of human resources. Research indicates that an HR department spends 80% of their time in managing tactical and transaction oriented HR operations. If these processes are outsourced then the trained HR staff could be re-deployed to the core process which will add substantial value to the organization. With-in the past decade, HR professionals have embraced technologies that offered freedom from often daunting levels of administrative work. The vendor's investment in technology gave employees better, faster service and cost efficiency making it a winning proposition.

The areas impacted by HR outsourcing in the past include some of the most transaction-heavy functions of personnel. This covers areas such as hiring, payroll processing, health benefits and retirement account management, collections, employee training, and IT areas that support the information and records needed by personnel.

Outsourcing takes on an entirely new meaning, however, when there are viable products in the market offering companies the opportunity to outsource every facet of HR work--including the function itself.  Their marketing strategies have overtaken the heads of HR and are now aggressively directed towards CEOs and CFOs.  Some industry sources believe that outsourcing is the future of HR, thereby quickly resulting in the extinction of in-house HR departments.

While technology has transformed HR and will continue to, technology should be seen for what it really is--a delivery channel. Likewise, outsourced services are not a threat—they are a tool. The HR's challenge is to effectively deploy all available resources. This requires understanding the possibilities and limitations of each service delivery option. In today's global business environment, where competition is fierce and talent is relatively scarce, HR plays a critical role in creating outstanding products and services that create a shared experience of the company by employees.

A popular argument in favor of outsourcing has always been its cost advantage. In a competitive market, many companies are looking for ways to cut costs. Outsourcing has been a popular strategy to reduce operating costs. However there is a pivotal difference between cost and value. No outsourcing arrangement can ever be an effective surrogate for a company's culture--this is why HR needs to be a vital part of the organization.

Rather than being a threat to HR, outsourcing certain non-core functions can be a way to quickly gain a competitive advantage by reducing costs, improving quality and concentrating on the core business. However it is important to note that there are ripple effects and impacts to placing these responsibilities in outside hands. If the staff of a company perceives outsourced HR companies as a threat, internal conflicts could arise. It usually is not a popular move to eliminate internal jobs and switch to a provider service to save money. This could lead to job insecurity and employee dissatisfaction within the company. Outsourcing also increases data privacy risks and the complexity of managing that risk. Even if an internal employee is overseeing the outsourced operation, there are still many issues that can go unnoticed and unaddressed, threatening the security and confidentiality of stored information. 

In the past mainly lower level jobs were outsourced to cut costs, but today almost every profession is in jeopardy; the jobs of accountants, analysts, tax-professionals, architects, attorneys, radiologists, or technical writers, to name a few.  Threats can be seen as opportunities and people are generally known for their resilience in turbulent times.  Whether we choose to perceive outsourcing as a threat or an opportunity depends on our mindset, our actions, and most of all: our approach. An interesting teaching from Buddhism tells us, "As we are the ultimate cause of our difficulties, we are also the solution. We cannot change the things that happen to us, but we can change our responses."  I chose not to be afraid of my career choice and the changing world, but rather to do my best with all the resources that are on offer.

- Cheryl D’Souza


Throughout my first year with MBA, I have heard people, students and professionals alike, disparaging the profession of HRM.
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