HR outsourcing: the impact on HR role, competency development and relationships

• DOI: http://doi.org/10.1111/1748-8583.12031
• Date: 01 April 2014
• Author: Alison J. Glaister
• Published date: 01 April 2014

HR outsourcing: the impact on HR role,

competency development and relationships

Alison J. Glaister, Aston Business School, Aston University

Human Resource Management Journal, Vol 24, no 2, 2014, pages 211–226

The business benefits of an outsourcing strategy are well documented, and HR is encouraged to outsource

in order to add value. Yet little is known about how HR outsourcing affects the HR role, competencies

and relationships with senior management. These issues are examined through 27 semi-structured

interviews with senior HR professionals, comparing HR departments engaged in HR outsourcing with

those maintaining full in-house HR provision. The findings indicate that HR outsourcing stymies HR

role transformation. HR outsourcers experienced limited skill development and an increased focus on cost

reduction at the expense of their strategic position. In contrast, non-HR outsourcers actively engaged in

other parts of the business, developing competencies that garnered trust and support of senior managers.

The benefits of an external HR community appear limited. The study suggests that an ‘internal’ HR

community is better placed to enhance HR departmental roles.

Contact: Dr Alison J. Glaister, Aston Business School, Aston University, Work and

Organisational Psychology Group, Birmingham, West Midlands B4 7ET, UK. Email:

a.glaister@aston.ac.uk

INTRODUCTION

Human resource outsourcing (HRO), placing HR activities outside an ‘organisation’s

boundaries’ (Macbeth, 2008: 38), is the fastest growing segment of business process

outsourcing (Brown and Hale, 2007), valued at $3.1 billion in 2010 (Ferguson, 2010). Its

attractiveness lies in the promise of operating efficiencies, the import of specialist expertise,

greater process control and risk reduction, and more specific to HR, a key strategic enabler

(Stroh and Treehuboff, 2003; McIvor, 2005; Mol, 2007) facilitating a shift away from an inward

HR administration focus towards an outward business focus (Martin et al., 2008). The

momentum for HRO has been increased further by the financial crisis, creating radical change

in the parameters within which the human resource function (henceforth HR) operates,

representing a ‘cultural crisis of ideas, assumptions and values’ (Zagelmeyer and Gollan, 2012:

3287). Pressure is therefore placed on HR to adjust its policies and ways of working.

Through 27 qualitative interviews with senior HR personnel, this article examines how HRO

impacts on HR’s role, competencies and senior management team (SMT) relationships, and

compares each of these to their non-outsourcing counterparts. A key contribution is made to the

understanding of the impacts of HRO on the HR function as it struggles to cope with the

repercussions of the financial crisis. The study also contributes to the theoretical underpinnings

of HRO logic and examines the tensions inherent within institutional theory (IT), proposing the

integration of structuration theory in order to understand better HRO motivation. This is the

first study to combine IT and structuration theory to explain and compare the institutionally

accepted response of HRO to an alternative position of non-outsourcing, evaluating whether or

not HRO produces superior outcomes. The study is timely given the growing concerns over the

ease with which organisations are embracing a contracting-out culture and experiencing its

negative repercussions. It provides preliminary evidence of a need for an alternative approach.

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doi: 10.1111/1748-8583.12031

HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 24 NO 2, 2014 211

© 2013 John Wiley & Sons Ltd.

Pleasecite this article in press as: Glaister, A.J. (2014) ‘HR outsourcing: the impact on HR role, competency development and relationships’. Human

Resource Management Journal 24: 2, 211–226.

The article is set out as follows. The next section discusses the theoretical underpinnings of

HRO, sets out the benefits of an HRO strategy and discusses the extent to which HR

transformative measures have been successful. A series of research questions is introduced

through a discussion of HR role change, competencies and SMT relationships. The research

methods are then introduced, and the findings are presented. The discussion and conclusion is

followed by the limitations of the study and recommendations for further research.

HRO AND UNDERPINNING THEORIES

A variety of theories underpin the use of HRO in organisations, including transaction cost

economics (TCE), the resource-based view (RBV), micro economics, industrial organisation,

agency theory, real options theory and IT (Mol, 2007: 36). Studies of HRO tend to rely on the

first two of these approaches. Williamson’s (1975) TCE suggests that firms use the most efficient

form of organisation that reduces production and transaction costs. Production costs are

reduced through the allocative efficiency of the market, but there are transaction costs

associated with selection, negotiation and contract maintenance. However, little analysis is

conducted on the availability of strategic options and their consequences (Macbeth, 2008), and

economising motives only limits the discourse of the outsourcing decision (Holcomb and Hitt,

2007). Also, the efficient use of resources confers little status to HR, as HR professionals are

limited by their personal characteristics and their own HR processes (Lawler and Boudreau,

2009). Knowledge acquisition and development are missing elements of the TCE framework,

and firms may be willing to endure high transaction costs of market trading if deemed

advantageous (Madhok, 1996; Jacobides and Winter, 2005).

The RBV emphasises the internal resources of the firm and explains the organisational need

for balance between exploiting existing resources and acquiring and developing new resources

(Wernerfelt, 1984). According to Greer et al. (1999), HRO can be nested within a bigger change

initiative contributing to the creation of resources that are valuable, rare, inimitable and

non-substitutable (Barney, 1991), but the literature does not explain how this value can be

extracted through HRO engagement. Further, the identification of core and peripheral HR

activities is problematic, and a need remains to consider the interface between different HR

processes (Kotabe, 1992; Lilly et al., 2005).

Some attempt has been made to synthesise RBV and TCE, merging governance issues with the

transaction costs involved in creating, protecting and developing organisational resources and

know-how (Leiblein, 2003; Foss and Foss, 2004). While these theories assume that HRO is a

considered intervention with a clear and articulated rationale, in practice this is often not the case

(Macbeth, 2008). It is also necessary to consider the social alongside the economic influences that

guide behaviour (Granovetter, 1985; Scarborough, 1995). IT is particularly pertinent as it

considers the broader context of HRO as well as the pressures (political, situational and historical)

exerted through the continued professionalisation of HR departments.

IT explains HRO engagement through three ‘isomorphic’ pressures: coercive pressure – the

threat of sanction from resource providers; mimetic pressure – described by Klass (2008) as

‘contagion processes’ often resulting in a ‘shared definition of social reality’ (Scott, 1987: 496),

leading to inappropriate solutions; and normative pressure – adherence to professional

standards set down by professional bodies, such as the Chartered Institute of Personnel and

Development (CIPD). In unpredictable environments, such as the financial crisis, organisations

are more likely to copy the initiatives of similar organisations (Muñoz-Bullón and

Sánchez-Bueno, 2013). Thus, organisations seek legitimacy through conformance to their

institutional settings.

The HR function and human resource outsourcing

HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 24 NO 2, 2014212

© 2013 John Wiley & Sons Ltd.