When a certain company is approached for getting a certain work or activity done, it is regarded as outsourcing. Outsourcing is implemented by almost every organisation. The core activities are not outsourced by the organisations. For example, some of the operations of a telecom company which are not connected to insurance or have strategic significance to the business can be outsourced to specialised organisations. Service providers or third party providers are the common names used for the firm providing the facility of outsourcing. In recent years, outsourcing the HR related activities is a common and popular exercise which is adopted by both small and large organisations as it results in cost reduction, lesser administrative work, and minimisation of risks. Outsourcing human resource can be seen as a trending issue in HRM. It can be understood as a process in which different HR related processes are assigned to an outside firm which is having expertise in dealing in such tasks. All the outsourced activities will be managed and administrated by the external firm on behalf of its client. In simple words, human resource outsourcing can be seen when some activities of human resource are assigned to a service provider. A number of HR related activities can be outsourced. The last decade can be considered as the decade of organisational restructuring and outsourcing has been implemented in both public and private sector. Challenges have been created for the existing employment relation frameworks and for the management workplace relation due to resulting phenomenon. At the union’s workplace level, various advantages are provided to the managers by outsourcing as the work can be taken away from the effect of unions to an organisation which is external to the firm.
Reasons for Investing in Outsourcing
The different reasons causing the investment in the outsourcing are given below:
Improved Profit and Productivity: The operating expenses of performing every activity within the organisation is relatively quite high. The competitive edge can be obtained by the cost structure and economy of scale which is provided by a firm that specialises in HR outsourcing.
Controlling Labour Costs: It can be very time consuming and costly to hire different employees for different projects and providing them training in different aspects of the projects. The resources can be allotted at appropriate places with the help of HR outsourcing.
Limited Risks and Liabilities: There is a continuous change in competition level, government regulations, and financial positions. A certain amount of risk emerges for the business owners with these changes and this can be controlled by outsourcing.
Get “Big” Company Benefits: The in-house support services which are maintained by the big firms cannot be managed and afforded by the smaller firms. The same quality of efficiencies and expertise can be provided with the help of Outsourcing.
Reasons for Failed Outsourcing Contract
The predefined objectives are not achieved by every outsourcing company. This results in an increase in costs which could be due to the repetition of the outsourcing process or bringing the processes back in the organisation. There are several reasons for the failure of outsourcing which are listed below:
Lack of Shared Objectives: One party involved in an outsourcing relationship may have to increase its cost because of another. Therefore, a common objective will result in cost saving for the parties involved in an outsourcing relationship. For example, provisions for rewards and penalties specified in the outsourcing contract.
Poor Communication: Poor communication between the supplier and the outsourcing company may result in the failure or the outsourcing contract. Many unforeseeable situations may force the Outsourcing contract to be modified or altered. proper communication among the parties is necessary regarding any change in their expectations and possessions.
Failure to Manage Relationship: A proper internal framework of managing relations might not be developed if the outsourcing arrangement is made very complicated. There may be even cases where no contact personnel are appointed.
Basic HR Functions Outsourced
The task of maintaining high enthusiasm levels of employees till the time they continue to be the part of the organisation is taken care of by the human resource management. At first instance, one may think that maintaining low cost per employee and keeping the motivation and performance up to the maximum level are easy tasks to do. But in practicality, this is not the case. Thus, if we see the present trends, certain HR functions are Outsourced by many firms which are enlisted below:
Employee Assistance Programmes: One of the most popular services which can be outsourced by the firm can be the counselling of employees and their families on a personal level. Qualified counsellors are used in order to facilitate the counselling of employees with the help of these third party employee assistance programmes. There is total confidentiality in all the interactions. The different types of advices such as legal, financial, personal, and familial are taken by the employees so that they can deal with these issues effectively and can find the solution.
Drug Testing: Another outsourced function is drug testing. Such kind of testing in the workplace is prohibited in many countries. It is a common practice to conduct pre-employment drug The job applicants are sent to collection sites which are operated by authorised labs and the samples are collected and tested there.
Background Cheeks: On behalf of in-house HR department, third party vendor can be used for the background checking purpose. Identity verification, confirmation of educational qualifications, searching for any criminal records, etc., are the common activities which are performed. In fact, credit reports can also be asked for by some employers for certain reasons.
Payroll: The process of payroll is assigned to the accounts department of the firm but in some firms, this responsibility is assigned to the HR department too. One of the most significant functions of HR outsourcing is the payroll processing. Different types of flexible methods of data submission are provided by the service providers to the clients. Apart from reducing the number of checks, various additional services such as tracking employee time off, preparing customised reports, submitting tax data, dealing with garnishments, etc., are also facilitated by these service providers.
Benefits Administration: In order to manage the various benefit plans of a firm such as life insurance, vision and disability plans, dental check-ups, etc., human resource department can hire any third party service provider.
Recruitment: The most popular outsourced activity of the HR function is recruitment. Depending upon the culture, requirement, and nature of the organisations, different individuals are recruited by the organisations. The checking of resumes and primary screening is conducted by them. In most of the cases, the final round of interview is conducted either by or under supervision of the in-house HR department or CEO. However, the organisations are responsible for the strategies, designing of questionnaires, and the environment Of the interview. In order to ensure the selection of the correct candidate, proper care should be taken in the entire process so that the right impression of the firm can also be laid on the prospect employees.
Compensation Consulting: The compensation packages are also handled by third-party firms. This is a common fact that the employees are mostly attracted and motivated by money. Special care must be given While deciding these packages. A ‘per employee budget’ is provided by the client to these firms. Depending upon the given budget, the firms decide On basic salary, health benefits, incentives, dearness allowance, conveyance allowances, and probation norms. As there are number of state and central rules and regulations which must be followed while deciding each of these criteria, it is not an easy task to accomplish. Sometimes, the required expertise for designing compensation programmes is not possessed by the in-house HR department. Different types of customised compensation plans can be formulated by the outside consultants who are specialised in designing compensation plans so that higher level of motivation and performance can be obtained from the employees.
Employee Re-Location: HR department of a firm can be assisted by firms in transferring an employee from one location to the other. Some special services such as shipping the vehicles of the employees can be offered by the service providers in addition to packaging of household stuff of family, providing domestic and international for the family, etc. In Order to facilitate the social, psychological, and economic adjustment needed due to job relocations, these services are provided.
Exit Interviews: A record of performance and behaviour of the employee is maintained during their association with the organisation. These records are also maintained with the outsourcing firm. These details are checked when there is an end of tenure of an employee due to retirement, resignation, or tennination. Exit interview is compulsory for a corporate. With reference to the employee, this can be seen as the last form of interaction which takes place between the firm and the organisation.
Advantages of Outsourcing
Various advantages of outsourcing are as follows:
Facilitates Better Manpower: Better quality of manpower can be received with the help of outsourcing firms. They also provide the latest information and practice related to the certain activity or task. These firms can have the expertise in doing the different activities of HR as this is their core business activity. For example, the firm which is having the expertise in training the manpower on the application of presentation making software will be quite useful in facilitating the training of the employees On the latest and upgraded software which includes new specifications and features.
Boosts Employee Morale: In order to improve the morale of the employees and preserving the strong culture in the organisation, certain employees and activities which are not aligned with the organisation can be outsourced. For example, the benefits administration activity by a law firm can be outsourced in the situation where the employees are trained only as attorneys.
Minimises Risk: The risk associated With the business can be controlled through outsourcing. There is a regular change in the employment and labour laws and it is very difficult for the employees to have the updated information on these regulations. The firms which have the latest information on various updated laws of central and local government are hired by the organisations. These firms can be quite useful in order to avoid the costly law suits which could result from the employee side in case these laws are not followed and implemented in the workplace. In order to protect the interest of the organisation and the employees, different types of audits are also conducted for the organisational policies and practices by these service providers.
Cost Savings: There is a requirement of highly trained and experienced HR professionals and additional office space by a fully functional HR department. In comparison to expanding to a bigger and more spacious location to meet the space requirements of other department, outsourcing can be more effective method of dealing with these issues by smaller firms. Whenever there is a requirement, the cost of outsourcing can be controlled as these are variable.
Disadvantages of Outsourcing
Different disadvantages associated with the outsourcing are stated below:
Loss of Control: There is always a problem of losing control over a crucial activity when these activities are outsourced. This can be a costly affair for the organisation. For example, the deadlines of a time sensitive projects can be missed by the organisation which has outsourced its recruitment process to an external service provider if there are more clients prioritised by the service provider.
Loss of Opportunity to acquire Knowledge: The opportunity of acquiring important knowledge which can prove quite beneficial for the organisation in long run can be missed if these activities are outsourced. For example, When the executive training and development program of a business organisation is outsourced, it can be seen as a missed opportunity to learn about the distinctive features of the way the leadership takes its form within the organisation according to its culture.
Threat to Confidentiality: Some of the vital information of the company can be leaked to its competitor when these activities are outsourced. In order to facilitate the smooth and unrestricted functioning of the outsourced firm, various critical information of the organisation related to organisational structure, product, or other inner workings are mandatorily provided. There is always a probability that this information can be leaked from the side of outsourced firm.
Affects Company Goodwill: It is quite common to have layoffs when any activity is outsourced. This may also result in increase of domestic unemployment rates. The level of dissatisfaction among the remaining employees can be increased due to these practices. Due to doubts associated with the job security, it Will be very difficult the organisation to attract good talent for future recruitment.
Outsourcing HR Implications
Making a profit and staying competitive are the main objectives of any business. To that end, some organisations opt to Outsource their HR Or Other functions in Order to aid in their success. While this practice has positive implications, it does not come without its disadvantages. Companies considering outsourcing anything should carefully weigh these implications before making a decision:
Cost: Perhaps the most attractive implication of HR outsourcing involves cost reduction. By outsourcing certain functions, such as payroll Or recruitment, organisations do not need to spend money hiring and training employees for those particular roles. It also eliminates the need to pay wages and benefits in favour of a flat rate to contract the work to a third party agency, where labour is generally cheaper. Companies can also avoid paying taxes, insurance and various overhead costs, since the contracted organisation handles those instead.
Efficiency: Another positive implication of outsourcing HR functions is a company’s ability to allocate time and resources to other endeavours. Outsourcing absolves the mam company from having to recruit, train and replace employees. In doing so, the organisation can take the time and money otherwise spent on these functions and redirect it to new projects, allowing it stay competitive and speed up productivity.
Job Loss: HR outsourcing is not a perfect practice. Job loss is a classic occurrence and a serious concern for employees. It makes staff feel undervalued, leaving them in a state of fear that they may be laid off in favour of the company’s bottom line. In turn, employee loyalty suffers, resulting in increased turnover. This is especially problematic during a recession, where workers know that finding other employment will be more difficult.
Product Quality: HR outsourcing is not an effective way to ensure quality. Whether it is human resources functions, customer service or manufacturing, third party companies employ less skilled workers at a lower wage. This can result in a substandard product that ultimately results in client dissatisfaction. In short, a company’s desire to save money can be offset by lost revenue due to a poor end product.