HR outsourcing in small and medium sized high-tech

By Michelle Williams,2014-10-03 16:18
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HR outsourcing in small and medium sized high-tech enterprises in Britain

    HR outsourcing in small and medium sized high-tech enterprises in Britain

    Chapter One Introduction

1.1 Research background

    In recent years, outsourcing or business process outsourcing (BPO) more exactly is an increasingly popular buzz word in management level around the world. Actually, business process outsourcing is not a new business idea. Outsourcing could be literally explained that people dont have the time or energy to do something or deliberately choose not to do something for different reasons such as security or payment, but the work can not be simply neglected. For that reason, people have to pay someone to do the things they dont want to do.

    However, the real meaning of the term outsourcing does not just mean that superficial meaning. Garnet Report (1995) defined that outsourcing is the delegation of one or

    more business process to an external provider, who then owns, manages and administers the selected processes based on defined and measurable metrics. During the

    outsourcing process, the control power of the company is partially handed over to the external provider; outsourcing is definitely not a simple Master-and-Servant relationship.

    Outsourcing has different synonyms used by the business man. Like business process outsourcing as mentioned above, business people also use contracting out, subcontracting to express the same thing. Especially, when the internal employees show


    HR outsourcing in small and medium sized high-tech enterprises in Britain

    their concern whether this kind of relationship would cause the loss of permanent employees job security, the manager would even more carefully choose the words in the company document to alleviate this kind of concern. Partnering, co-sourcing and joint sourcing will be used instead of outsourcing (Vernon et al, 2000: 24). The term outsourcing will be used throughout this dissertation, in order to avoid misunderstanding by using different usages.

    The history of human beings using the idea of outsourcing is much longer than ordinary people could imagine. Actually the ancient people dont use the word outsourcing, but

    their actions were influenced by the outsourcing idea. As far back as the Romans, the Romans started to outsource the tax collection (Kakabadse and Kakabadse, 2002). In the eighteenth and nineteenth century, the British outsourced the maintenance and operation of street lights, the maintenance of public highways, and the collection of rubbish to the private sector (Industry Commission, 1996).

    In the 1970s, the term outsourcing was first used by manufacturing executives and then outsourcing gradually adopted in other business section (Corbett, 2004). These business sections include accounting, advertising, law, consulting as well as human resource management (HRM). The main topic of the article is about HR outsourcing and the relationship between the HR vendor and the purchaser.

Cook (1999) defined HR outsourcing as having a third-party provider or vendor


    HR outsourcing in small and medium sized high-tech enterprises in Britain

    furnish, on an ongoing basis, the administration of an HRM activity that would normally be performed in-house. The main reason of why the organizations outsource

    their HR practices is that developing an effective HR system is a difficult task, one that requires the firm to effectively implement a complex set of complementing HR practices that fit the needs of the organizations business and culture (Klaas, 2003).

    The increasing numbers of organizations are frequently using HR outsourcing as a potential delivery option for some HR activities. After BP signed a seven-year contract with HR vendor Exult and gave Exult $600 million and responsibility for its global

    human resource administration and management (HRM International Digest, 2004), BAE systems, Cable & Wireless, BT and Unilever outsourced their HR functions respectively.

However, these organizations signed up the HR outsourcing contract, its not because

    their competitors have done so. The final HR outsourcing decision is done by a process of due diligence. Although Martyn Hart, chairman of the National Outsourcing Association, said that full HR outsourcing was still the preserve of multinational, he also added: If you are an HR professional in a large company that hasnt [outsourced

    HR], then you ought to be worried (Personnel Today, 2006).

1.2 Objectives of research

    The main objective of this study is to explore HR outsourcing in small and medium


    HR outsourcing in small and medium sized high-tech enterprises in Britain

    sized high-tech enterprises (SMEs) in Britain. The reason why I chose HR outsourcing in high-tech SMEs in Britain is influenced by the article named Professional Employer

    Organization and Their Role in Small and Medium Enterprises: The Impact of HR Outsourcing written by Brian S. Klaas.

    However, the focus area of this study is not just simply repeating what Klaas does in the US. Although the study would compare and contrast the difference between the States

    -Jackson et al. and Britain, it would focus on another area in HR outsourcing. Scott(2005) say that on the one hand, large organizations commonly outsource the operational elements of delivering all HR activities whilst retaining control over HR strategy and decision-making, on the other hand, small organizations outsource HR strategy to HR vendors and keep the delivery of HR processes internal. So the more specific goals of this study are addressed as follows:

1. To discuss and analyze the HR outsourcing vendors strategy when they service

    different customers. The aim is to prove whether the HR outsourcing vender will follow what really just as Scott-Jackson et al in the book named HR outsourcing: the Key

    decisions. They would be more likely to provide HR strategy outsourcing service to small and medium sized enterprises than to large organizations.

    2. To compare the current situation of HR outsourcing services mostly used by high-tech small and medium sized enterprises in Britain. The aim is to find whether


    HR outsourcing in small and medium sized high-tech enterprises in Britain

    there is a niche market in HR outsourcing industry in Britain, which means the HR vender will provide HR outsourcing services according to the size of the companies.

    3. To investigate the relationship between HR vendors and HR purchasers in Britain. Whether British HR vendors realize that the importance of the relationship with the customer is an important agent of business success.

1.3 Structure of the study

    This study can be divided into six chapters. In the introduction chapter, I have already briefly introduced outsourcing and HR outsourcing, explaining the reason of choosing the HR outsourcing area as well as the main research goals.

    Chapter two will review the existing literature on outsourcing and HR outsourcing and the related issues such as HR offshoring, shared center services. This chapter will not just list the meaning of the related terms like the dictionary, but will try to explain some academic issues which might be caused common peoples misunderstanding.

    In chapter three, the applied research strategy, the method used in data collection and data analysis, and the limitation of the research method are discussed in detail.

    In chapter four, the data gathered from the questionnaire and the desk based research will be analyzed and discussed respectively. By analyzing the data along, the main


    HR outsourcing in small and medium sized high-tech enterprises in Britain

    research findings will be summed up.

    In chapter five, a relationship between the findings and the research questions would be discussed thoroughly. The recommendations for the HR outsourcing market in Britain would be given as well as suggestions about the improvement of HR vendor‟s

    operational structure based on the research.

    Chapter six, conclusions will be derived from the main findings released in the previous chapter. Theoretical and practical limitations of the research are discussed and specific recommendations for further research are also included.


    HR outsourcing in small and medium sized high-tech enterprises in Britain

    Chapter Two Literature Review

2.1 The literature review about outsourcing

    2.1.1 The economic feasibility of outsourcing-comparative advantage

    The first question related to outsourcing is why people want to outsource the jobs or business processes in the organizations to the outside provider. The main reason given by the managers, who use outsourcing services, is that the use of outside service

    providers is more efficient and less costly than hiring staff to handle these functions in house. (Galanaki and Papalexandris, 2005: 382)

t seems that the cost reason is the most influential reason that dominates the decision I

    makers final decision, when they decide to sign an outsourcing contract. So at the beginning of this section, I would focus on using the economic theories to prove the outsourcings feasibility.

    The main economic theory related to outsourcing activities is the principle of comparative advantage. The theory was first used by David Ricardo in 1817 to explain the international trade between different countries (Samuelson and Nordhaus, 1985). Although the comparative advantage theory was first used in international trade, it could be used here to explain why outsourcing has economic feasibility.

The traditional example of lawyers and secretaries in Samuelson and Nordhaus book


    HR outsourcing in small and medium sized high-tech enterprises in Britain

    (1995) is used here to illustrate the comparative advantage. A lawyer in the town is the best lawyer as well as the best typist in the town. Even he or she is the best typist in the town; a secretary still will be hired by the lawyer to do the typing work for him or her.

    The key points here are the absolute advantage and the comparative advantage. Even the lawyer has the absolute advantage in both activities compared to the secretary; each one still has the comparative advantage and the comparative disadvantage respectively. If the lawyer hired the secretary, the lawyer focuses on the law issue and the secretary specializes in typing, the situation is mutually beneficial to both parties.

    The concept of the comparative advantages could be used in the outsourcing area. The outsourcing purchaser has the comparative advantage in the core area, meanwhile has the comparative disadvantage, the most economic way is to find the outsource vendor who is good at in that area and outsource it. Then, the company could specialize in the area which has the comparative advantage and the situation of the both parties is becoming better than before.

2.1.2 The opportunity cost of outsourcing

    The difference between the opportunity cost used by economists and the monetary cost used by the accountant or the businesspeople is that the economist includes all the costs-no matter they reflect monetary transactions or not; while the accountant generally excludes non-monetary transactions (Samuelson and Nordhaus, 1985: 469). The reason


    HR outsourcing in small and medium sized high-tech enterprises in Britain

    why the accountant doesnt include non-monetary transactions is that the accountant has difficulty in listing all the transactions cost, because some of them actually dont exist in

    the real world. If some transaction costs were not existed, why the concept of the opportunity cost is still introduced here?

    The concept of the opportunity cost is very useful in the decision making process. From the economists viewpoint, the rational way of decision making is, before you make an important decision, that first listing all the alternative ways of doing things, and then comparing the things that are given up by taking that particular decision rather than taking an alternative decision (Samuelson and Nordhaus, 1985: 469). To cut a long story short, it means that before the final decisions are made, the decision makers should thoroughly consider the different factors which might be involved in the whole process.

    When the organization considers the outsourcing option, they must know the potential alternative ways and consider the opportunity cost in advance. The managers might not think twice and make a quick decision to outsource the business process, when they merely hear outsourcing could bring a reduction of cost.

    However, if they calmed down and compared the difference between the present cost and the predicted cost, they would find the outsourcing decision is not a panacea for cost cutting or it is not as potent as imagined. The non-monetary factors, such as the employee issues or the power of control, must be considered by the management level,


    HR outsourcing in small and medium sized high-tech enterprises in Britain

    and then they would find making an outsourcing decision is not easy task.

    If the management used unilateral strategy, such as redundancy or relocation, to force the employees to cooperate in the transformation process, the morale of the employee would be more or less affected by the outsourcing decision. The organization‟s business

    or the good imagine might be damaged by the organization‟s hasty outsourcing decision.

    The influence of the employee is an important non-monetary factor; after all they are also the stakeholders in the organization.

    So the decision makers should spent much time on serious considering on the outsourcing decisions. If the high opportunity cost might be caused by the outsourcing, its much better not to choose to outsource the business process to the external providers. After all, the outsourcing is not a panacea.

2.1.3 The organization structure

    From the introduction chapter, we know that outsourcing had longer history than industrial revolution started from the eighteenth century in the Europe. However, the development of outsourcing met the stage of plateau in the manufacturing industry and this situation didnt improve until 1970s. The main reason is that the vertically integrated organization structure hinders the development of outsourcing activities (Kakabadse and Kakabadse, 2002). So this section will focused on the issue that the organization structure influences on the outsourcing activities.


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