OUTSOURCING HR AS A COMPETITIVE STRATEGY?

A LITERATURE REVIEW AND AN ASSESSMENT OF IMPLICATIONS

FANG LEE COOKE, JIE SHEN, AND ANNE MCBRIDE

HR outsourcing as an organizational strategy has increased substantially over the last decade. However, this trend has attracted little academic attention regarding hovi/ outsourcing decisions are made, the manner in which these decisions are implemented, how outsourcing effectiveness is measured, and its impact on organizational performance. In this article, we provide a critical review of the reasons for, the processes invoived in, and the perceived effectiveness ofHR outsourcing. We investigate the implications of HR outsourcing for the role of the HR function and for the various groups of people affected by this strategy. We argue that organizations should apply both the resource-based view and institutional theory when making outsourcing decisions. 2005 Wiley Periodicals, Inc.

Introduction

n recent years, there has been serious debate about HR's contribution to organizational performance (Ulrich, 1998). In part, this debate is due to the inability of the HR functii>n to demonstrate its tangible value and to account for its absence at the strategic level. The practice of decentralizing HR responsibility from corporate central departments to business unit-level departments (and further still to line management) has created much streamlining of HR responsibilities. These trends run parallel to more radical ones where traditional core personnel areas are outsourced to HR service providers. In some accounts, these trends are perceived as part of a "crisis," as HR struggles for legiti-

macy and status in cost-conscious times. The HR function has been described as being under siege from external consultants {Redman & Wilkinson, 2001). The popularity of outsourcing and of e-HR also subjects personnel practitioners to growing pressure to measure their performance. A number of firms outsource routine administrative HR activities to release their in-house HR team for a more strategic role. However, a minority of others have opted to outsource the entire package, including the design of HR systems that are likely to have a fundamental impact on organizational culture and performance (Klaas, McClendon, & Gainey, 2001). This emerging trend raises a number of questions. For example, what HR activities should be outsourced?

Correspondence to: Fang Lee Cooke, Professor of HRM and Chinese Studies, Manchester Business School, University of Manchester, Manchester M15 6PB, UK,Tel: 0044 161 306 8987, fang.L.cookei^manchester.ac.uk Human Resource Management, Winter 2005, Vol. 44, No. 4, Pp. 413-432 2005 Wiley Periodicals, Inc. Published online in Wiley InterScience (www.interscience.wiley.com). DOI; 10.1002/hrm.20082

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How does HR outsourcing affect the role of the in-house HR function and the rest of the workforce? What are the pitfalls for the HR function? Evidence from professional and practitioner publications indicates that HR outsourcing has increased substantially over the last decade (Woodall, Gourlay, & Short, 2000). However, few academic researchers have investigated empirically how decisions of outsourcing are made, the manner in which these decisions are implemented, how the effectiveness of the outsourcing is measured, and, most important; the implications of these outsourcing decisions for the role of the HR Empirical evidence function and for different groups in the workforce. This dearth of on the reasons for research is in sharp contrast to and effects of ^^^ burgeoning prescriptive literature on the financial and strateoutsourcing HR gic reasons why firms should outsource (Rubery, Earnshaw, Marchington, Cooke, & Vincent, activities is both 2002) and how to go about it fragmented and (e.g.. Cook, 1999; Rippin, 2001). inconclusive. As Purcell (1996, p. 22) noted, "We lack the research to make definite statements on the effect of outsourcing on employees." What has been conspicuously missing in much of the research "is the 'insiders" perspectivethe employees' voice" on the impact of outsourcing on employment relations (Kessler, Coyle-Shapiro, & Purcell, 1999, p. 6).

We review existing literature, drawing from academic and practitioner publications on HR outsourcing practices, and discuss implications for the role of the HR fimction and different groups of the workforce who may be affected one way or another by the outsourcing decision. First, we outline various rationales for outsourcing in general. We then review HR outsourcing more specifically in terms of the commonly perceived reasons for outsourcing, types of HR activities to be outsourced, current trends of HR outsourcing, and the effectiveness of the outsourcing activities. In the second part of the article, we critically analyze the implications of HR outsourcing for the role of the HR function in an organization's business strategy. We question whether organizations looking to outsource their HR functions do so as a strategic move, or whether they are unwittingly letting go of a high value-added professional activity that is central to organizational success. We also analyze the impact of HR outsourcing on the in-house HR staff, the line managers, the employees, and those HR staff who are transferred from the client firm to the HR service provider firm. As mentioned previously, there has been little academic-oriented research on issues related to HR outsourcing, in contrast to a growing body of literature on outsourcing in general. We have made use of available research to develop our argument. We rely mainly on the academic literature, but also As a result, empirical evidence on the rea- selectively draw on practitioner publications for statistical information and critical analysons for and effects of outsourcing HR activsis. This article also is informed by our ongoities is both fragmented and inconclusive. ing studies on interorganizational relationOpinions are divided as to the potential benefits of HR outsourcing. For example, some ships, the outsourcing of skilled and authors see HR outsourcing as beneficial in knowledge-intensive work, and the outterms of both service delivery and the en- sourcing of the HR function (Cooke, 2001; hancement of the strategic position of HR Marchington, Cooke, & Hebson, 2003; Rubery, Cooke, Marchington, & Earnshaw, (Brenner, 1996; Laabs, 1993; Switser, 1997). 2003). Others consider HR outsourcing a concession that the HR function no longer has any strategic significance (Baker, 1996; Caldwell, Theoretical Views on Outsourcing 1996). The strength of each argument is difficult to discern, since limited independent Outsourcing can take a number of different empirical research exists in these two partic- forms. The specific activity of HR outsourcular areas. ing is defined as placing responsibility for

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various elements of the HR function with a third-party provider (TurnbuU, 2002). Some commentators have used the concepts of the "core" and "periphery" to explain and explore the outsourcing of company functions (e.g., Atkinson, 1984; Poliert, 1987; Torrington & Mackay, 1986). Broadly speaking, core activities are those that the firm does best and/or are crucial to the firm's competitive advantage and therefore must be kept internally. In contrast, "noncore" activities are considered to have a lower impact on the overall performance of the organization and can therefore be outsourced to external providers. The decision-making process as to whether to "make or buy" (goods) or "supply or buy" (services) has been conceptualized by Williamson's (1985) transaction-cost economic model. According to this model, the decision to provide goods and services internally or to outsource rests upon the relative costs of production and transaction. That is, a comparison of the costs of coordinating and managing alternative models of governance related to either buying the goods/services through market mechanisms (i.e., outsourcing) or supplying the goods/services through the internal, or "hierarchy," mechanism. In the context of accelerating global competitive pressures, organizations are being advised to concentrate on their core competencies and utilize outsourcing to capitalize on others' expertise (Domberger, 1998; Porter, 1990; Prahalad & Hamel, 1990). However, what constitutes core activities and competencies is not static. Organizations are constantly reassessing what constitutes the core and noncore aspects of their business and readjusting the way these activities can be sourced, either in-house or externally (Cooke, 2003). In turn, the nature of the activities themselves is changing. For example, HR activities are becoming more complex, are more compartmentalized into relatively self-contained areas (Tyson, 1987), and are more prone to being performed by expert consultants (Torrington, 1989). Specialist outsourcing supplier firms have emerged in response to this growing market in busi-

nesses, and outsourcing HR is one of them. As Bosch, Webster, and Weisbach (2000, p. 108) note, "some very radical decisions are being made to outsource apparently central core functions." Arguments for Outsourcing In general, employers consider using outsourcing for a number of (overlapping) perceived benefits (Shen, Cooke, & McBride, 2004; see Table I). First, it allows them to concentrate resources on their "core" business activities where they have expertise and are likely to do best. Second, it enables firms to profit Outsourcing enables from the rising comparative advantage of specialized service providers who may have expertcosts down by ise in the areas concerned. Third, it provides firms with greater flexselecting the most ibility and productivity by using temporary subcontractors to competitive tender cover fluctuating demands for for renev^mg the labor (Cooke, 2001). This "justin-time" deployment of human contract. resources also brings other advantages of saving direct costs (e.g., reducing headcount and overtime working) and indirect costs (e.g., cutting administration and backup costs, saving recruitment and training costs, saving absenteeism costs, and reduced industrial relations problems). Fourth, outsourcing creates opportunities for firms to shift the burden of risk and uncertainty associated with the business to someone else (National Economic Development Office [NEDO], 1986; Williamson, 1985). In addition, outsourcing enables firms to keep future costs down by selecting the most competitive tender for renewing the contract (Domberger, 1998). If the above reasons for outsourcing are predominantly concerned with cost reduction, then the final reason listed here is focused more on capacity building associated with organizational learning. It has been argued that outsourcing relationships can create partnerships between contractors and clients that may facilitate learning and crossfertilization between the two firms (Child &

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Faulkner, 1998; Powell, Koput, & SmithDoerr, 1996). Writers on organizational learning (e.g., Araujo, 1998; Boland & Tenkasi, 1995; Brown & Duguid, 1991; Pentiand, 1995) have argued that iearning processes are collective accomplishments that reside in networks that do not respect formal organizationai boundaries. The importance of networks and interorganizationai relationships (e.g., alliances, partnerships) is also recognized by writers from the strategic perspective. According to Powell et al. (1996, p. 120), a network "serves as a locus of innovation because it provides timely access to knowledge and resources that are otherwise unavailable, while also testing internal expertise and learning capabilities." Advocates of the resource-based view (RBV) of the firm (e.g., Barney, 1991; Ulrich, 1996) also believe that outsourcing can be productive to the development of the core competence of the organizationespecially in relation to HR practices. The notion of the RBV was "rediscovered" by Wernerfelt (1984) and developed into a more robust theory by Barney (1991, p. 99), who argued that organizations "obtain sustained competitive advantage by implementing strategies that exploit their internal strengths, through responding to environmental opportunities, while neutralizing external threats and avoiding internal weaknesses." The resource-based view of strategy is closely related to a growing body of research on high-commitment man-

agement models. This perspective helps to define both an organization's "core" function and the optimal HR policies that will elicit the best performance outcome. 1 he question that remains is how to decide which functions are not part of the core, and who are the noncore employees.
Arguments Against Outsourcing

As noted in Table I, despite the rising popularity of outsourcing organizational activities, the practice is not without pitfalls. One of the most serious is maintaining the continuity of skill supply and the retention of inhouse knowledge and expertise. In many cases, firms seek outsourcing to save training costs, assuming that someone else will carry out the training to ensure the delivery of key skills. Skill loss can have damaging effects on competitiveness. As Prahalad and Hamel (1990, p. 84) point out, "outsourcing can provide a shortcut to a more competitive product, but it typically contributes little to building the people-embodied skills that are needed to sustain product leadership." Another major concern with outsourcing, particularly for those firms that operate in the upper end of the product market, is the loss of quality. Employees often judge service quality by comparing their expectation of the resulting service under the proposed change with their view of what the services should be or with the services that they used to have. Switching the HR services

TABLE

Perceived Benefits and Potential Adverse Consequences of Outsourcing Potential Adverse Consequences

Perceived Benefits

Concentration on in-house expertise Specialist supplier's economies of scale Numerical flexibility Shift burden of risk Competitive tendering process Organizational learning from specialist provider
Source: Adapted from Shen et al, (2004).

Discontinuity of skill supply Loss of in-house knowledge and capacity Reduction in quality Higher total cost Loss of employee morale Loss of long-term competitiveness

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from in-house to an external provider inevitabiy causes disruption to the continuity of the services, often for a prolonged period of time and with unpredicted problems. Indeed, there have been reports in the media and in practitioner journals on the failures of outsourcing resulting from unfulfilled promises and/or expectations. These perceived benefits and disadvantages must be considered when firms make strategic decisions on whether or not to outsource functional HR activities.

HR Outsourcing
The above overview of the perceived benefits and potential adverse consequences of outsourcing provides the backdrop against which to discuss the outsourcing specifically of the human resource functions. In this section, we review the operational and strategic rationales for outsourcing HR and establish the scope and extent of HR outsourcing practices. It must be noted that much of the evidence that exists is drawn from practitioner experiences contained in case studies and large-scale surveys discussed in practitioner journals, rather than rigorous independent research published in academic journals. Reasons for HR Outsourcing Tliere are a number of reasons, at both the strategic and operational level, why firms want to outsource HR activities. Many share similarities with the outsourcing of other organizational functions. In particular, demands for increased productivity, profitability, and growth have forced organizations to examine their internal HK processes, resulting in a move toward strategic outsourcing services and away from discrete services. As Greer, Youngblood, and Gray (1999) observe, HR outsourcing decisions are frequently a response to an overwhelming demand for reduced costs for HR services. Downsizing and tougher competition mean that the HR function is under increasing pressure to demonstrate value, both in terms of efficiency and effectiveness {Roberts, 2001). Although some elements of the HR functions, as noted ear-

lier, may have always been performed by external service providers, Brewster observes that a new dimension "is this finance-driven idea connecting outsourcing to human resource managementthe idea that you can save a lot of money by outsourcing" (quoted in TurnbuII, 2002, p. 10). In addition, outsourcing is seen as a way of liberating HR professionals within the client organization to perform the more consultative and strategic role of designing and implementing programs aimed at retaining the workforce and enhancing its performance. This rationale is in line with Ulrich's (1998) influential thesis of the four roles of HR, in which Outsourcing HR also he proposed that HR should be a is seen as an strategic partner, an administrative expert, an employee chameffective way to pion, and a change agent. In a similar vein, Greer et al. (1999) bypass argue that HR outsourcing is conorganizational sistent with the business partner role that the in-house HR department is attempting to assume. These roles arguably are where efficiency. HR can add the greatest value to the organization, but they are difficult to measure quantitatively. Outsourcing HR also is seen as an effective way to bypass organizational politics and improve efficiency. For example, according to the sales and training manager of United Kitchen, a company that has outsourced all personnel and training, the company's aim was to buy an expert who could maintain an objective view, would not get embroiled in office politics, and yet could call on the support of a wide range of other experts in their own organization (Pickard, 1998). In short, the main reasons for outsourcing HR appear to be fairly consistent (Sisson & Storey, 2000). Typical reasons include seeking specialist services and expertise, cost reduction, and enabling HR specialists to take on a more strategic role. In general, most commentators are convinced that outsourcing is seen not only as a cost-cutting exercise but also as a strategic tool. As Oates (1998) suggests, the outsourcing decision is a

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from organizations' HR outsourcing activities? Hall and Torrington (1998) found that training and management development, recruitment and selection, outplacement, Types of HR Activities to Be Outsourced health and safety, quality initiatives, job evaluation, and reward strategies and sysAs with the outsourcing of other organizational functions, one major issue in out- tems were the likely HR activities to be outsourcing HR is to decide what types of HR ac- sourced, either because they were considered noncore or because the organization lacked tivities should be outsourced. In making this the expertise to handle them internally. Hall decision, organizations need to consider the and Torrington's findings are supported by likely impact of outsourcing these activities Shaw and Fairhurst (1997), who found that on the organization's performance. To do so, training and development along with facilithey may need to distinguish between "core" ties management were the most likely areas and "noncore" activities. Finn (1999) sugto be outsourced, while industrial relations gests that a basic distinction can be made beexpertise was the least likely area. tween HR "core" and "noncore" activities. The former include top-level strategy, HR A recent large-scale survey (Vernon, policies, and line management responsibiliPhilips, Brewster, & Ommeren, 2000), the c ties (e.g., appraisal and discipline), while the Cranet Survey, provides further evidence to latter include specialist activities (e.g., resupport these earlier findings. The survey cruitment and outplacement), routine per- was carried out in 1999 on 3,964 organizasonnel administration (e.g., payroll and pentions, each with more than 200 employees in sion), and professional HR advice (e.g., legal European countries. It focused on four differadvice related to employment regulations). ent areas of HR outsourcing: training and deUlrich (1998) goes one step further by sug- velopment, recruitment and selection, pay gesting that core activities are transformaand benefits, and workplace outplacement/ tional work that creates unique value for emreduction. The survey found that some 97% ployees, customers, and investors. Noncore of the organizations in the survey used exactivities would be transactional work that is ternal providers in HR to cover at least one of routine and standard and can be easily duthe main service areas (see Table II). The replicated and replicated. sults showed that training and development activities were the most common "bought-in While writers of strategic management service." One-third of organizations surwarn of the danger of outsourcing core acveyed used external providers in at least tivities, are firms really following this advice three of the areas identified. While 50% of in making their decisions about which HR the surveyed organizations remained conactivities are to be sourced from external stant in the use of external providers, 40% service providers? Do any clear patterns arise strategic one and is generally taken at a senior level.

T A B L E

The Incidence of HR Outsourcing Percentage of Respondents Using

External Provider Type

Training and development Recruitment and selection Pay and benefits Workforce outplacement / reduction
Source: Vernon et al. (2000, p. 7).

77% 59% 30% 29%

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reported an increase in their use. In particular, 32% of U.K. organizations made use of external providers for pay and benefits. While this empirical evidence provides some useful insights into the types of HR activities that firms are sourcing from external providers, it provides only a partial and superficial picture due to the quantitative nature and the scale of the studies. What remains unclear is how firms reach the decision on why these particular HR activities are to be outsourced and whether they truly constitute the noncore activities of the firm, h is equally unclear as to whether and how the effectiveness of these outsourcing activities is evaluated and how outsourcing provider and client firms coordinate their inhouse and outsourced HR activities to create a coherent HR function. One way to understand these relationships is to examine the recent trends in HR outsourcing.

Trends in HR Outsourcing
Over a decade ago, Adams (1991) argued: Personnei as a function is subject to increasing encroachment from external consultancies which are "poaching" their day-to-day activities . . . [but] there is no evidence that externalization is the overwhelming trend even for particular activities of personnel functions such as graduate recruitment, training and development, or counseling, (p. 40) Evidence now exists to suggest that HR outsourcing has increased substantially over the last decade (Andersen, 1996; Harkins, Brown, & Sullivan, 1995). Qualitative and quantitative reports from a range of sources such as People Management (various issues) and the Cranet Survey (Vernon et al., 2000) provide further evidence of this growth (also see Maurer & Mobley, 1998; Mobley, 2000; PricewaterhouseCoopers, 2002). Although evidence points to the continuing growth of HR outsourcing, the anticipated speed of its continuing growth is open to considerable debate. On the one hand, a

number of commentators believe that HR outsourcing will continue to grow rapidly. Among 314 delegates of the HR Forum 2000, 62% reported that they already were outsourcing some of their HR activities (Pickard, 2000d). A few large organizations such as British Telecoms (BT) have also turned their HR function from a cost center into a separate revenue-generating business to capitalize on the growing outsourcing market for HR services (Hammond, 2001). Moreover, according to an article in People Management, the transfer of HR services to overseas locations is about to see a phenomenal increase, although it is noted that legal and cultural differences may inhibit the transfer of advisory roles (Crabb, 2003). There is reason to remain more conservative about the growth of HR outsourcing. For example, as reported by Pickard (2000c), the HR consultancy firm William M. Mercer argues that HR outsourcing is evolution, not revolution. Companies with a clear policy of applying outsourcing across their business were still in a minority. Indeed, Pickard's research leads her to question whether reports of a boom in outsourcing HR services may be more hype than reality. According to the Cranet Survey (Vernon et al., 2000), 40% of the surveyed companies failed to report any increase in the use of external providers for HR over the past three years. Figure 1 below indicates that U.K. organizations use HR outsourcing to a lesser extent than Belgium, The Netherlands, and France. Since 2000, the HR outsourcing news in the United Kingdom has been dominated by high-profile HR outsourcing decisions from a few super-large blue chip organizations.

Source: Pickard (2000b) FIGURE I.Thetrends in HR Outsourcing

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outsourcing is not as widespread as had been predicted, and there is no way to judge whether the next few years will see a surge in activity or a slow growth from a steady state (Vernon et a!., 2000). In addition, the Cranet Survey "[did] not yield conclusive evidence of major trends or key drivers that infiuence organizations to utilise external providers in resourcing their HR functions" (Vernon et al., 2000, p. 16). This conclusion also refiects the findings from a study by Greer et al. (1999) showing that rationales for, and the extent of, HR outsourcing appear to be very complex and without any distinct patterns. Overall, considerable variations exist among organizations in their use of HR outsourcing. More important, these variations seems to bear little relationship to the size, cost, or productivity of the function (Greer et overriding trend is (Hammond, 2001 ). al., 1999; Vernon et al., 2000), although The UK outsourcing firm for companies to Klaas et al. (2001) found that idiosyncratic Northgate Information Solutions outsource only part commissioned a study in which HR practices, firm size, and cost pressures affected both the degree of outsourcing and interviews were conducted with of their HR functions joo senior managers from U.K. the perceived benefits. companies employing between fo a third party. 400 and 10,000 people. The reEffectiveness of HR Outsourcing? suits indicate that many companies are mistrustful of outsourc- The effectiveness of HR outsourcing as a ing HR. Despite recognizing the benefits of management strategy has rarely been exremoving administrative work from staff plored, especially with work that involves in(cited in Hammond, 2002), managers in the depth, firm-specific knowledge and great austudy expressed a reluctance to outsource, tonomy. Outsourcing in general may lead to particularly following the limited success of a reduction in the quality of products, or perhigh-profile deals such as that between BP haps more so, of the services provided and Exult. Half of the larger companies and (Cooke, 2001; Marchington et al., 2003). In three-quarters of the smaller companies surcertain organizational activities, such as HR veyed reported spending more than 40% of activities, it is often difficult to specify the retheir time on HR administration. The interquirement in a manner that leads to observview survey also found that a significant able and verifiable outcomes (Domberger, number of companies (42% of large firms 1998). Effective monitoring and measuring and 14% of small firms) had outsourced of these activities requires enormous resome services, most notably recruitment. sources and expertise from an in-house monHowever, plans to take it further were limitoring team. ited, with 75% of larger companies and 88% One danger with outsourcing HR is that of smaller ones having no plans to outthe service provider may have a vested intersource HR in the next two years. est in standardizing all parts of its service in It appears that the overriding trend is for order to achieve economies of scale across clients. Standardization may lead to a detricompanies to outsource only part of their HR mental loss of the client company's unique functions to a third party, rather than handorganizational characteristics. In addition, ing over control of the entire department. As the Cranet Survey suggests, the growth of HR many problems may arise from a mismatch These include the BP Amoco deal with Exult in 2000 ("Huge Outsourcing Hits HR Jobs," 2000), BAE Systems and Xchanging's partnership in their new company "Together HR" in 2001 (Hammond, 2001), Prudential Financial's HR outsourcing deal with Exult in 2002 (Higginbottom, 2002), and tlcoms giant Cable & Wireless's HR outsourcing arrangement with e-peopleserve (Wustermann, 2002). To a large extent, the success or lack thereof of these outsourcing deals serves as a barometer for the HR outsourcing market. Indeed, there is evidence to suggest that many organizations remain prudent in their perception about the success of outsourcing. While It appears that the HR outsourcing has become a trend, it has yet to prove a success

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in culture between the host operation and the supplier (Pickard, 1998, p. 23). When the quality of services provided by an HR outsourcing service is deemed unsatisfactory, the cost of an alternative solution (such as switching suppliers, obtaining a long-term coritract with the new supplier, or bringing the service back in-house) may increase considerably, and any immediate improvements may be difficult to materialize (Caulkin, 2002). From a strategic point of view, most commentators would agree that outsourcing administrative HR activities is plausible. Ulrich (1998) argues that outsourcing transactional HR activities that are heavily reliant on expensive IT systems frees internal HR professionals to engage in strategic decision making. However, this result cannot be easily achieved. As Liff (1997) noted, any attempt to develop an HR information system would face many operational problems. Angela Baron, a Chartered Institute of Personnel and Development (CIPD) Adviser, pointed out that the boundaries between HR activities and policy making may be blurred. What appears to be routine may turn out to be a key function that should stay in-house (cited in Pickard, 2000a). Baron's view is shared by Bob Hill, manager of personnel servicing at Imperial Chemical Industries (ICI), who believed, "If HR needs to be close to the business and adding value, this becomes more difficult if it's outsourced" (quoted in Pickard, 1998, p. 23). in a similar vein, Simon Drysdaie, an HR manager at BP Amoco, the first UK-based private multinational to outsource its entire personnel administrative function, has publicly warned that outsourcing HR strategy would be going a step too far (Taylor, 2001). Many interviewees in Greer et al.'s (1999) study likewise cautioned against outsourcing activities that could remove or distance the HR function from the employees. The general consensus appears to be that with extreme outsourcing, HR departments run the risk of losing their identities and control. Therefore, a mixture of outsourcing and inhouse activities appears optimal under many circumstances. The need to preserve confi-

dentiality and an appropriate amount of control are important considerations, particularly for activities involving sensitive information (Greer et al., 1999). HR is a service that is coproduced with line managers and employees. HR professionals are being asked to help provide business solutions for employee problems. They are being challenged to develop core competencies to help formulate and deliver these business solutions. HR departments are being challenged to change their bureaucratic culture, to be more customer-focused, and to deliver HR departments are value-added services. Outsourcing should, therefore, be used in being challenged to conjunction with an internal HR change their team that focuses on core competencies to produce these solutions bureaucratic in partnership with an external HR service provider. culture, to be more However, outsourcing is only one component of the strategic transformation process. As one and to deliver valuesenior vice president for HR pointed out in Greer et al.'s study added sen/ices. (1999, p. 90), It is difficult to change your role to strategic by dumping activities via outsourcing. It is easier if you are already in the strategic role." The same study further reveals that the role of HR outsourcing depends on how senior HR executives view the role of the HR function (Greer et al., 1999). Similarly, Vernon et al.'s (2000) study found that the formal position and the influence of the HR function have not changed in the past decade. The study further reveals that outsourcing is often a business decision made by senior management and occurs outside the control of the impacted function. Where top management actively evaluates the performance of the HR function, outsourcing appears to be more common (Vernon et al., 2000). In general, the more centralized the organization and HR function, the more HR outsourcing is likely to be deployed as a resource tool. Vernon et al. (2000, p. 14) writes, "When decisions are taken at headquarters, more than 40 per cent of organizations used

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external providers for pay and benefits, whereas when they are taken on a devolved basis, less than 30 per cent use external providers." More significantly still, they find that there is scant relationship between the size or nature of the HR function and the use it makes of external providers. This finding suggests that the function makes ad hoc resourcing decisions, disregarding efficiencies and functional good practice. Additionally, what occurs is "an organization specific response rather than any reai professional good practice or shared learning. It is this factor that provides an interesting challenge for the HR function" (Vernon et al., 2000, p. 17). In other words, outsourcing HR to enable an in-house HR department to take on a more strategic role remains largely an aspiration rather than a reality. Even if the in-house HR department takes on a more strategic role, a number of issues will be raised as to how it can develop and manage the complex relationships with the outsourcing service provider and the rest of the organization (see Figure 2). In particular, how will the in-house HR department manage its multisourced HR functions? What control mechanisms are in place to operate such a system successfully? How can they make sure HR input reaches the strategic level when the HR functions are delivered by a potentially iaige and growing collection of special-

ized and self-contained units, both internal and external to the organization? In a nutshell, how should the two-way relationships indicated in Figure 2, between the role of outsourcing HR, in-house HR, line management, HR strategy, and the business strategy, be developed and maintained? Given the fact that most outsourcing relationships incur more problems than anticipated, some with serious implications, how can the in-house HR team disassociate itself from these operational problems and diffuse discontent from its "clients" on the one hand, and try to enhance its strategic importance on the other? Given that HR outsourcing has important consequences for the quality and cost of HR, the HR profession (Ulrich, 1996), and the strategic position of the in-house HR function, it is important that we assess the implication of HR outsourcing for the role of the HR function and the people concerned. It is to this issue that this article now turns.

Implications of HR Outsourcing for the People Affected

Outsourcing HR may bave serious implications for different groups of employees in the organization, both in terms of their (changing) roles and their experience of the HR services as a resuit of outsourcing. The most obvious groups of people likely to be affected

Business strategy

HR strategy

Outsourcing HR

In-house HR

Line management

FIGURE 2. Relationships Between the Role of Outsourcing HR, In-house HR, Line Management, HR Strategy, and the Business Strategy

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are HR professionals, line managers, employees who receive the services, and outsourced HR staff who provide the services.
In-house HR Professionals

Outsourcing HR may impact in-house HR professionals in a number of waysmost notably, in terms of the nature of their work and their career patterns (see Table I), although detailed studies on these aspects remain scarce. According to Ulrich's proposal (1998) of HR's four new roles, the HR work will be shared in varying proportions with line management, employees, external consultants, and other groups. However, Ulrich does not really discuss the process of interaction by which this distribution of work is determined (Procter & Currie, 1999). Nor have the implications for their career prospects been contemplated. Outsourcing HR not only leads to job losses (Pickard, 2000b), but also creates a need for monitoring and evaluating the service provider's performance and inevitably requires work reorganization for the in-house HR staff. For example, Greer et al.'s (1999) study suggests that where HR activities are outsourced, it is important that the user company deploy in-house HR generalists who know the business. These generalists can manage the outsourcing relationships because they enhance the perception and reality of HR as a true business partner. For these generalists, knowing where to get a problem solved is more important than having specialized HR knowledge. However, there is a danger of work intensification for

these HR professionals, as their colleagues may still be relying on them to provide the service because they may be used to it and unfamiliar with the new system. For example, Shen et al.'s study (2004) found that the outsourcing of the estate maintenance function of a National Health Services (NHS) trust hospital in the United Kingdom under a Private Finance initiative (PFI) agreement has led to severe work intensification and radical change in the job content for the NHS maintenance manager. It is not difficult to imagine that similar things can happen to the HR managers where outsourcing HR takes place, since both functions require intimate knowledge of the organization and a relatively high level of relationship management. HR outsourcing further raises issues concerning the career prospects of the HR staff. When HR activities are outsourced, fewer career development opportunities are available for the in-house HR staff, especially those with specialist instead of generaltst skills. In the meantime, where only a limited number of activities are performed in-house, broad or general HR experience will be more difficult to obtain. Furthermore, the practice of increasing specialization apparent in many outsourcing firms raises important questions about how HR professionals are to be trained. It is arguable that existing training for the HR profession is generalist-oriented. This notion runs parallel to an increasing demand for specialists in a wide range of different functional areas, from recruitment to pay, and from training and development to outplacement.

How HR staff were affected by BP Amoco's outsourcing of its HR function

When BP Amoco outsourced Its HR function, nearly half of its HR staff were affected. While Exult would need to employ up to 350 existing staff members, BP Amoco admitted that many of its employees would not want to transfer to Exult's two headquarters, which would be based in the United Kingdom and the United States. Job losses were expected. In addition, many of those who retained their jobs within BP Amoco would have different roles. According to a senior figure of the giant corporation, "Clearly, a computer can't help if an employee needs to talk to someone. We expect the HR staff who remain with us to be able to focus on that, and on the strategic and policy aspects of the job" ("Huge Outsourcing Hits HR Jobs," 2000, p. 13}.

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HR personnel can facilitate the line managers in issues related to HR. This subject will not, therefore, be expanded upon here. What needs to be highlighted is that outsourcing HR activities may bring inconvenience and work intensification to the line managers in ways similar to those of the inhouse HR managers. Instead of having their HR colleagues at hand to call for help, HR outsourcing providers are likely to be located in a different place. They may not have sufficient understanding of the line managers' local needs or they may have never met with each other and established a working relationship. In theory, the HR outsourcing provider is there to provide the service, but in reality, some of the jobs may be difficult to explain via electronic devices, and it would be more efficient for the line managers to just do it themselves. a given, then the HR In addition, the need to raise work requests Line Managers for even the smallest job as a result of the outprofessionals wiil sourcing agreement inevitably creates extra A key driver in the development need to learn how to ^f ^R policies in recent years has workload for the line managers. As previous research shows, outsourcing of service provibeen HR's objective to increase play the game. sions tends to create new rigidity and buline management involvement in reaucracy in the way work is organized and and ownership of HR decisions. monitored (Cooke, Earnshaw, Marchington, For example, Vernon et al. (2000) & Rubery, 2004; Marchington et a!., 2003). found that the most common pattern of policy decision making in Kurope involved sliaring responsibilities between the HR specialEmployees Receiving HR Services ists and the line management: "About a third of senior HR specialists reported an increase Outsourcing the HR function may have a sigin line management responsibility for HR isnificant impact on the workforce, on both sues over the last three years" (Vernon et al., in-house employees who receive the HR serv2000, p. 7). The role of line managers in im- ices and those who provide the services. Outplementing HR policies and shaping HR sourcing the HR function is in many ways practices has long been recognized (e.g., Curdifferent from the outsourcing of other busirie & Procter, 2001; Marchington & Parker, ness processes in that the organization is 1990; McConville & Holden, 1999; Procter & arming an external service provider with its Currie, 1999). employees' personal information that may be of a sensitive and confidential nature. In other words, line managers do not Outsourcing these tasks may seem unsettling merely implement decisions or changes forto employees. mulated by the HR function. Knowledge of the operational context gives line managers Outsourcing HR may also require ema particularly significant infiuence in the im- ployees to adopt different ways of obtaining plementation of changes in the area of HR assistance and information. One of the human resources and the role the HR funckey features of HR outsourcing services is the tion may adopt. Marchington and Wilkinson adoption of a self-help, online HR informa(2002) provide an overview of the role of the tion system (HRIS) for employees of the line managers in the HR function and how client firm to input and update their per-

Therefore, outsourcing HR may affect the in-house HR staff in ways such as job intensification, change in job content, reduction of career development opportunity, and increased levels of stress, especially when the relationship with the service provider is strained and the quality of services unsatisfactory. More broadly, the role that HR professionals play will be dependent upon their interaction with other groups both within and outside the organization (Procter & Currie, 1999). Communication can be more difficult, especially when there is geographical, as well as organizational, separation. But if the onward march of HR outsourcing is a given, then If the onward march the HR professionals will need to learn how to play the game (Turnof HR outsourcing is J 2002)

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sonal data on the system. As noted above, the implementation of an HRIS often involves unpredicted operational problems for various reasons, including the incompatibility of IT systems between and within the two organizations, lack of in-house expertise to maintain the system, lack of clear ownership of problems, and lack of willingness of employees to use the system. All these changes may cause some fear and resistance among the workforce. BP Amoco's outsourcing of HR is a case in point (see Higginbottom, 2001). As a result, it may actually be more costly for the organization to acquire the HR services from the external provider when all the indirect costs (both financial and emotional) that may incur in-house are calculated. This is especially true for Iarge organizations in which employees are highly professional and highly paid. Outsourced HR Staff Traditionally, skilled and knowledge-intensive work such as HR activities has been provided by workers of "status." Employers tend to have an employment relationship with these employees that is characterized by relatively high levels of trust in order to elicit greater commitment and effort from the workers (Streeck, 1987). It has been argued that the tacit knowledge possessed by these workers is vital for the organizational competitiveness (Cooke, 2002; Manwaring, 1984; Pavitt, 1991; Polanyi, 1966; Willman, 1997). Outsourcing of this type of work replaces the status approach by a (short-term) contractual relationship of tight specifications of ail aspects as a predominant mechanism of control. This mode of employment relationship does not encourage workers to provide "extra-functional" contribution to enhance the firm's competitiveness (Fox, 1974). In fact, the potential problem of gaining commitment from the nonemployee workers is well recognized by organizations and academics (Cooke, Hebson, & Carroll, 2005). For the employees of the service provider, job security may be low and firm-specific knowledge may be lacking as a result of multiclient services and the standardization of

work processes. Indeed, lack of critical expertise and a customer service focus, or failure to take the interests of their client into account when delivering their HR services, have been found to be some of the main reasons for the failure of the HR outsourcing relationships (Greer et al., 1999). Additional complications in the employment relationships may occur where the HR outsourcing decision involves the transfer of existing HR staff to the external .service provider (see Table 1). For the employees concerned, the transferred HR staff are likely to be protected, at least in principie, by some sort of employment regulation of the specific country ^ork intensification (e.g., the Transfer of Undertaking and increased Protection of Employment [TUPE] regulations in the United performance Kingdom). In theory, the employment contract of the transferred monitoring are workers is preserved intact under TUPE regulations. In reality, how- common features of ever, their terms and conditions post-transfer and other experience of work may change significantly, albeit working life. incrementally (Cooke et al., 2004), since the impact of TUPE has proven to be only marginal to date (Colling, 1999; Wenlock & Purcell, 1990). As Domberger pointed out, "the principal effect of TUPE is to ensure minimum standards are maintained in negotiated transfers. The legislation is designed merely to assure the continuity of employment" (Domberger, 1998, p. 143). For example, Cooke et al.'s (2004) study of outsourcing in the public sector reveals that work intensification and increased performance monitoring are common features of post-transfer working life. Outsourcing offers the new employers opportunities to improve organizational performance by creating change through reducing staff numbers; introducing new skills and working practices; and by modifying individual incentives, employment terms and conditions, and attitudes to the workplace (Domberger, 1998). None of these changes can be prevented effectively by TUPE, although not all of these changes necessarily point to a wors-

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legal advice), areas in which they lack inhouse expertise and that are deemed noncost-effective to develop and maintain inhouse. Existing evidence suggests that HR outsourcing has increased substantially over the last decade, although some authors remain cautious about the future growth of HR outsourcing. Training and payroll appear to be the favorite aspects of HR outsourcing. In addition, recruitment, taxation, and legal compliance are often outsourced. However, empioyee relations, HR planning, career management, and performance appraisal are less likely to be outsourced, as they are more likely to be seen as core competencies or activities. Even so, there are no clear patterns It is difficult to draw of the types of HR activities that are outronment with multiple cultures, sourced. clear conclusions multiple identities, and competExisting evidence also suggests that the ing demands for preferential treaton the types of HR primary motives for HR outsourcing are to ment from client organizations reduce cost, to gain external expertise, to en(Rubery et al., 2003). These issues activities that hance strategic focus of the in-house HR also present a serious challenge tor the new employer. The out- function, and to improve service quality. should be Cost reduction and "sell-out strategy" are sourcing firm has to manage a outsourced and the also important factors for making decisions. fragmented workforce, one where While the overwhelming objective for outemployees have different employeffectiveness of HR sourcing appears to be cost reduction, both ment packages. At the same time, the transaction-cost economics model the outsourcing firm is trying to outsourcing. (Williamson, 1985) and the resource-based implement a coherent HR strategy view of the firm (Barney, 1991) seem to inand a consistent organizational fluence firms' HR outsourcing decisions. The culture while deiivering customized HR servdiverse evidence as to whether the HR outices to its client organizations. sourcing trend is set to grow or not and/or at what rate implies pragmatic decision making Conclusions by firms when considering whether to outsource HR activities. The aim of this article has been to provide an Due to the limited number of empirical overview of the various aspects of HR outstudies on various aspects of HR outsourcing sourcing with a combination of empirical evand the fragmented and inconclusive eviidence and academic debate. The intention has been to provide a critical review of the dence they have yielded, it is difficult to state of affairs in the practice of HR out- draw clear conclusions on the types of HR acsourcing and to raise issues that require fur- tivities that should be outsourced and the effectiveness of HR outsourcing. In fact, evither academic research and attention from dence seems to suggest that organizations' organizations interested in HR outsourcing. decisions in outsourcing are not always raExisting literature on HR outsourcing aptional (Vernon et al., 2000), nor is their pears to be rather limited in general. This is process successful or the outcome effective. perhaps due to both research and practice in It is possible, however, to identify a number HR outsourcing being in its early stages of of research issues and practical implications development. There is a longer tradition of that require further attention from academfirms outsourcing discretional aspects of HR ics and practitioners (in addition to a num(e.g., payroll, training, health and safety, ening scenario to the disadvantage of the workers (Cooke et al., 2004). However, this raises a question as to the extent to which the client organization can expect their ex-employees to (continue to) demonstrate loyalty and commitment in providing their services. These employees may be resentful that they are being "dumped" by their former employer and/or may have taken on their new employer's organizational values that are not necessarily in line with those of their former employer. These issues may be exacerbated if the new employer has also taken on staff from other client organiza-

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ber of empirical and research questions that we have already raised throughout the review). As HR outsourcing is an issue that would benefit considerably from academicled empirical research, we address these issues and implications to both academics and practitioners together, but where appropriate, we differentiate the two types of readers. First, management should make an informed judgment as to whether and why they need to outsource, and what kind of role the in-house HR team should play in the outsourcing process. A related question is deciding what activities to be outsourced. It must be noted that there is no "best practice." What differentiates "core" from "noncore" is a highly subjective and contentious issue (Legge, 1995; Purcell & Purcell, 1999). What are deemed noncore activities may turn out to be central to the effective operation of an organization. What is a noncore activity for one firm may prove to be a core activity for another due to their different organizational histories and operating environments. For example, a large call center with a high volume of staff turnover may find it more cost-effective to outsource their recruitment and training processes, whereas an organization operating in a knowledgeintensive market with a high-road HRM model (e.g., consultancy firm) may wish to keep these functions in-house, as they are often seen as important mechanisms for shaping the organizationai culture. Klaas et al. (2001) argue that tacit knowledge is one of the crucial factors that warrants consideration when deciding to use HR outsourcing. HR processes cannot always be codified for transactional purposes, but are often based on tacit knowledge that reflects the organization's unique culture. Tacit knowledge is the result of an accumulation of experiences that may be difficult to communicate to those without equivalent experience (Barney, 1991). Since contractors control work processes, unless they share the required tacit knowledge, they may choose suboptimal processes (Conner & Prahalad, 1996). Addressing this limitation may require intense day-to-day involvement by organizational managers with the HR contrac-

tor until the contractor acquires the tacit knowledge. In addition, firms need to look beyond the resource-based view that helps them identify their core competence, and therefore competitive advantage, when they make outsourcing decisions. An organization's HR strategy may be profoundly influenced by a complex institutional context of resource decisions and not just by strategic factors such as the nature of the product market. This institutional context includes decision makers' norms and values, corporate history, organizational culture and politics, public and regulatory pressures, and industrywide norms (Oliver, 1997). In other words, an organi- An organization's HR zation's HR strategy may be shaped by the social as well as strategy may be economic context of the firm. ^^^^^^ ^^ ^^^ We therefore need academic research to provide evidence on social as welt as the following topics: the most common reasons for outsourcing economic context of HR activities, the scope of outthe firm. sourcing, who within the organization makes outsourcing decisions, the implications that the changed role of HR will have on the business and the workforce, and whether there are any industrial and national differences in these choices and outcomes. Such empirical research is necessary if HR outsourcing is to be presented as a strategic option instead of a capricious whim, especially for multinational corporations operating in a diverse institutional environment. Second, in terms of the outsourcing process, it is necessary for management to clarify their specific organizational needs, choose the right suppliers, manage the change effectively, maintain control of the outsourcing relationship, and at the same time develop an ongoing partnership with the supplier. Firms that outsource their HR activities also need to develop a comprehensive model with which to evaluate the effectiveness of the outsourcing, incorporating both financial and nonfinancial indicators and direct and indirect costs in both the short term and long term. In particular, an HR outsourcing provider worthy of

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mined, ln other words, "if HR managers want to become strategic change-makers, they need to understand both where and how they can do so" (Procter & Currie, 1999, p. 1089). Ideally, existing literature should be able to provide evidence in and advice on the most appropriate HR activities to be outsourced and how the relationship between HR outsourcing and the in-house HR function should be managed. However, there is a paucity of rigorous empirical research in this area, which leaves a number of unanswered Moreover, firms need to manage the poquestions. Rigorous empirical research is tential tension between the differtherefore required to identify how in-house ent objectives within the HR stratHR teams manage their multisourced HR Firmsneedto ^^ ^ ^^^^ organization. We have functions and the control mechanisms that already highlighted the considerneed to be in place to operate such a system managethe able impact that HR outsourcing successfully. In addition, it is necessary to unhas on HR personnel, line manderstand how HR input can reach the stratepotential tension agers, employees, and outsourced gic level when the HR functions are delivered , ^ ^, HR staff. If HR outsourcing is not between the . , ^. , , by a potentially large and growing collection implemented m a way that takes of specialized and self-contained units, both different objectives due consideration of the issues ininternal and external to the organization. dicated above, there could be an The debate over HR's contribution to orwithin the HR adverse effect on the psychological ganizational performance, along with the decontract of employees, therefore strategy of the cision by some companies to outsource roucreating a negative impact on orgatine administrative activities in order to give organization. nizational performance. their in-house HR team a more strategic role, Third, in terms of the implicaraises a number of questions that this article tions of outsourcing HR and the has tried to address. Although theoretically, role of the HR function, there outsourcing HR could be a competitive stratmay be a danger of "hollowing out" the inegy, there is insufficient empirical evidence house HR function through streamlining to to know whether it actually is in practice. line management and outsourcing. As Hall These questions raise a considerable research and Torrington (1998) argue, the outsourcagenda for academics and provide a caution ing of HR activities presents a potential probto practitioners to carefully consider all of lem of throwing out the baby with the baththe implications of outsourcing HR. water. Even if the in-house HR team is to take on a more strategic role following the outsourcing, this raises a number of issues as to Acknowledgments how it can develop, manage, and maintain the internal and external relationships that We wouid like to thank the three anonymous rerelate to its different roles: monitoring outviewers and the associate editor Professor Scott sourced HR activities; providing an amount Sneil for their constructive comments to the first of in-house HR activities; being an HR strateversion of this article. We wouid also like to thank gist; and being a strategic partner to the busiRizwana Zafar for her assistance with the elecness. In addition to considering the variety tronic literature searches. The work underpinning^ or the portfolio of roles the HR function this article was conducted as part of a larger projmight adopt, from both the academic and ect funded by the Department of Health (DoH) of practitioner point of view, we need to underBritain. The views expressed are tiwse of the austand the processes by which these are deterthors and do not necessarily reflect those of DoH, assuming responsibility for the new work must be flexible and skilled enough to provide innovative and customized approaches to problem solving. Any external input needs to be managed and monitored. Managing this relationship requires management time, sound judgment, and considerable interorganizational management expertise. No external supplier can make strategic decisions about what is needed and what can be afforded (Hall & Torrington, 1998), and decisions like these must remain firmly in-house.

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FANG LEE COOKE is a professor of HRM and Chinese studies at the Manchester Business School at the University of Manchester. She has written and published widely on issues related to human resource management, business, and ennployment, particularly in China. She also has a strong interest in researching outward Chinese investment and the employment of migrant Chinese in developed countries. Dr. Cooke is the author of HRM, Work and Employment in China Routledge, 2005). JIE SHEN, PhD, is a lecturer In HRM at the School of Management, University of South Australia. His main research interest is international human resource management, HRM, and industrial relations in China. Dr. ANNE MCBRIDE is a senior lecturer in employment studies and a member of the HRM, Employment Relations, and Law group of the Manchester Business School, University of Manchester. Dr. McBride's main research interests are health services management, gender relations at work, and public-sector industrial relations. She is currently leading a major U.K. Department of Health-funded research project exploring issues of skills development and organizational learning. She has also written on workforce modernization and working-time issues in the NHS and is also the author of Gender Democracy in Trade Unions (Ashgate, 2001 ).

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