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Outsourcing and human resource management
An introduction and comparative overview
Ruth Taplin
Outsourcing is a growing phenomenon and it needs to be assessed from a broad standpoint as it constitutes a new historical phase in global production and the global division of tasks. Severe teething problems exist with the process of outsourcing and this is reflected in the projection that in the next few years the costs of legal proceedings just in the US for such problems will exceed half a billion dollars. The countries of the world are increasingly becoming less national and more focused on being centres of excellence.1
Outsourcing is following this tendency with certain regions such as Bangalore in India developing their own specialities that are preferred by companies throughout the world. The phenomenon of the 1960s, in which companies behaved in a footloose manner, opening and closing semiconductor factories at a ferocious rate and seeking the cheapest labour, are of a bygone era, as today companies seek added value from innovation that affects what they require in outsourcing activities as well. Therefore, most current outsourcing books that concentrate on cost efficiency are out of date. New global production, whether increasingly in services or in manufacturing, needs to be analysed within the context of added value and complexity of service rendered. Not understanding this leads to contracts that are not negotiated properly and a misreading of the dynamics of human resources (HR). Definitions of outsourcing, insourcing and backsourcing, outsourcing lifecycles and the role of HR all require clarification, extending beyond viewing outsourcing as a cost-saving exercise. Outsourcing is assessed in this book in all its dimensions from an interdisciplinary perspective encompassing management, financial services, HR, operational management, organizational and behavioural psychology, and socialization. The second half of the book also provides a cross-cultural, cross-border approach, assessing how outsourcing is manifested within different cultures and sectors. Too often outsourcing is seen as a process that can be universally applied without any regard to country-specific issues or cultural considerations.
Practical and interdisciplinary solutions
In this book both practitioners and academics with practical experience explore and provide case study examples of all different aspects of the outsourcing process, so that a multidimensional, interdisciplinary perspective is gained, thus enabling the reader to see outsourcing from all the different perspectives elaborated below. Also provided are practical solutions based on years of experience by practitioners to make the process of outsourcing proceed smoothly.
Outsourcing is a particular form of externalization of employment involving an outside contractor taking over an in-house function including the management of staff. A broad range of activities has been transferred in this way, including catering, cleaning and security – often termed ‘secondary’ or ‘non-core’ functions. There has also been an increase in the outsourcing of professional activities, including HR, IT and financial services. When an outsourcing agreement is negotiated a clear target and understanding of responsibilities should be accomplished at the outset but within a flexible context. As Chapter 4 shows, an over-rigid service level agreement (SLA) can only lead to disappointment and conflict. A clear set of aims backed up by some form of insurance, as explained in Chapter 5, will also serve to clarify the risks involved. Risk assessment and an understanding of enterprise risk management (ERM) are vital to successful outsourcing, multi-vendor outsourcing, insourcing, backsourcing or offshoring within an outsourcing context.
According to Professor Gerry Dickinson, enterprise risk is the ‘extent to which the outcomes from the corporate strategy of an enterprise may differ from those specified in its corporate objectives, or the extent to which it fails to meet these objectives (using a “downside risk” measure)’. ERM has developed over the years from general management thinking but has been broadened to consider insurable and financial risks together and to develop a more holistic approach to risk management, including the greater role that shareholder value models have been playing in strategic management, which have all been a reaction against the crises in corporate governance in the last decade.2 We can be sure that such a strategy of enterprise risk and ERM theory will work smoothly if the targets are both realistic and not too ambitious. Yet risk and the management of risk usually entail hidden outcomes that a corporate strategy is unable to foresee or account for. This is especially the case in relation to HR management where the human element itself always carries inherent greater risk as humans, according to organizational behaviour theory, are unpredictable, most especially when they are thrust into an unfamiliar way of working, such as transferring the processes outside the organization, or are perceived to be set adrift in a new situation within the loose context of their original company or a new one as in outsourcing.
HR outsourcing strategy is nowhere weaker than within a rigid rule-based corporate agreement. This is clearly seen in the process of outsourcing in which high attrition rates, resentment at being set adrift from the original company context, insecurity concerning company identity and poorly negotiated SLAs lead to high-risk profiles. Many of the risks taken in outsourcing by corporations are perceived as not being subject to insurance or as unable to be hedged against or securitized, which Chapter 5 exposes as an inaccurate perception.
Often the risks are not even thought of and only become an item on corporate strategy and risk once performance targets remain unmet. Enterprises usually divest a part of their operations because they believe that those to whom they are outsourcing are better equipped and more capable of handling the task and risks.3 This is the reasoning behind much of the outsourcing of computer and information systems, especially those from financial institutions. Outsourcing is there to deal with the risks of technological obsolescence and systems failure. One dimension that does not seem to be factored into the equation is the unreliability of HR and analysis of how well-placed companies or the companies of the outsourcers are to deal with these risks, whether they are in-house, outsourced, insourced or backsourced. A rigid contract can never cope with elements of organizational behaviour psychology and personal relations, which ultimately affect the outcome of successful outsourcing.
The importance of flexible contracts
Outsourcing arrangements that are poorly executed and that rely on rigid SLAs with little understanding of what ERM constitutes are doomed to fail. As explained in Chapter 4, in 2005 McKinsey carried out a study of 30 outsourcing deals that had occurred four years prior to the study and were worth a total of 20 billion dollars.4 The conclusion was that up to 50 per cent of outsourcing arrangements did not deliver the anticipated value. These failures were found to be linked to over-reliance on standard procurement approaches and cost/price as the primary consideration. Such rigid procedures all fly in the face of what ERM should constitute. Rigid and detailed rules that are handed down to implementation teams often contain more risks than utilizing an approach that contains fewer detailed, directional procedures. Much like business in East Asia, lesser risks are taken if trust and personal relations are built upon over the long term rather than in distant, proscribed, short-term confrontational business practice. A flexible approach that builds on these relationships by sharing strategic intent, having regular and transparent communications, is essential and needs to occur throughout the lifecycle of the project. Just handing a proscribed set of rules to those implementing the outsourcing and leaving it unattended until problems occur, which is then often too late with extensive damage having occurred with no foundation built between the two parties to resolve the matter, can only lead to disaster. ERM, in relation to outsourcing and HR management, should be more akin to how the Financial Services Authority (FSA) has organized its regulation of the financial services industry in the UK, this being based on high-level principles rather than detailed prescription, accompanied by flexibility to fill in the details as the project proceeds to completion. The preferred method therefore should be a loose framework that is part of a strategic planning agenda, including a lucid assessment of core competencies and skills, particularly in relation to the outsourcing suppliers, that is clear in the SLA.
Also required is a clear mapping for value creation according to new products, innovative design processes and new relationship clusters and where the business partnering model within ERM will create demonstrable results over the lifecycle of the project. In this book we intend to assess some of these potentially useful contractual frameworks within the financial services industry and in relation to insurance and risk, especially in Chapters 4 and 5. In Chapter 6 the operational risks of outsourcing are assessed through a matrix of what to look for and examples of what can go badly wrong if potential operational risks are not factored into the initial contract.
Definitions of outsourcing
Outsourcing may be defined in a number of ways. A concise definition other than contracting out or buying in, which can serve to prevent misunderstanding, is provided in Chapter 3: ‘the delegation or handing over to a third party (external supplier) mediated via a contractual agreement, all or part of the technical, process and human resources, including management responsibility for transferred staff …’.5 This serves to differentiate outsourcing from the process of insourcing, which is shown in Chapter 7 to refer to bringing in external contractors to assist with processes that are understaffed in the host company or that the company is trying to expand. Fitting in as part of the team can be a problem for insourcing, which is still not a highly developed variant of outsourcing (see Figure 1.1).
Another major variant of outsourcing is backsourcing. This is when a process that has been outsourced has been brought back in-house. This has been occurring in a number of companies and increasingly so as the outsourcing partners have underperformed or were negligent or engaged in criminal activity, points that will be taken further in Chapters 4 and 5. Most companies do not even consider this as an option and are forced to accept it when performance levels are not reached by outsourcing partners or in the event of criminal activity. Chapter 3 shows how the need to backsource comes to light when the lifecy...
