HR Outsourcing and its applications in IT

sector

A project Submitted to

University Of Mumbai for partial Completion of the degree of

Bachelor of Management Studies

Under the Faculty of Commerce

By

Nistha Mukund Sharma

Under the Guidance of

Nisha Gupta

Chikitsak Samuha’s

Sir Sitaram & Lady Shantabai patkar College of arts and Science and V.P varde College of
Commerce & Economics

Piramal Nagar, Goregaon West, Mumbai, Maharashtra 400062

March,2019

1
 Certificate
This to certify that Ms/Mr _Nistha Mukund Sharma has Worked and duly completed his/her
project work for the degree of bachelor of Management Studies under the Faculty of Commerce in
the subject of ______HR Outsourcing______________and her/his project is entitled , “Nisha Gupta
”Under my Supervision.

I further certify that the entire work has been done by the learner under my guidance and that no part
of it has been submitted previously for any degree or Diploma of any University.

It is her/his own work and facts reported by her/his personal findings and investigations.

Name and Signature of Guiding Teacher

Date of Submission:

2
 A project Submitted to

University Of Mumbai for partial Completion of the degree of

Bachelor of Management Studies

Under the Faculty of Commerce

By

Nistha Mukund Sharma

Under the Guidance of

Nisha Gupta

Chikitsak Samuha’s

Sir Sitaram & Lady Shantabai patkar College of arts and Science and V.P varde
College of Commerce & Economics

Piramal Nagar, Goregaon West, Mumbai, Maharashtra 400062

March,2019

3
 Acknowledgement
To list who all have helped me is difficult because they are so numerous and the depth is so
enormous.

I would like to acknowledge the following as being idealistic channels and fresh dimensions in the
completion of this project.

I take this opportunity to thank the university of Mumbai for giving me chance to do this project .

I would Like to thank my Principal , Dr. (Mrs.) Sharmishtha L. Matkar__for providing the necessary
facilities required for completion of this project .

I take this opportunity to thank our Coordinator Swati Takkar ,For her Morale Support and Guidance
.

I Would also like to express my sincere gratitude towards my project Guide _ Nisha
Gupta____________Whose Guidance and care made the project Successful .

I Would Like to thank my College Library ,for having Provided various reference books and
magazines related to my project.

Lastly ,I would like to thank each and every person who directly or indirectly helped me in the
completion of the project especially my parents and peers Who supported me throughout my project.

4
Index

Chapter No .1 : Introduction 6

Chapter No. 2 Research Methodology

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 CHAPTER-1 INTRODUCTION

Human Resource Outsourcing: and its applications in IT sector

Abstract

The objective of the study is to represent the current state of outsourcing of Human Resource
functions at
IT Industry Specifically, the study addresses the issues of when and under what circumstances does
HR outsourcing contribute value to the companies by attempting to identify environmental and
organizational characteristics that affect HR department performance and how HR outsourcing
mediates that relationship in service organization like telecommunication sector. It tries to find out
the relationship between outsourcing and numbers of employees within the organization and also
shows the relationship between outsourcing and number of employees in HR department. Most of the
companies are highly interested to outsource recruitment and selection functions whereas temporary
staffing is in the least position for outsourcing. Companies show maximum satisfaction to improve in
service quality due to outsourcing HR functions but in some extent it reduces the effectiveness of
human capital management.

It is defined as the art of procuring ,developing and maintaining competent workforce to achieve the
goals of an organisation in an effective and efficient manner.”HRM” is the function performed in
organisations that facilitates the most effective use of people to achieve organisational and individual
goals HRM is planning ,organising directing and controlling of the procurement,development
,compensation ,integration,maintainance ,and separation of human resource to the end that individual
,organisational and social objectives are accomplished .Core Elements of HRM
organisations,people,management .The HRM process consist of planning ,attracting,developing ,and
retaining the human resource (employees ) of an organisation

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1.1 Recruitment and selection

Recruitment is a process of identifying, screening, shortlisting and hiring potential resource for filling
up the vacant positions in an organization. It is a core function of Human Resource Management.

Recruitment is the process of choosing the right person for the right position and at the right time.
Recruitment also refers to the process of attracting, selecting, and appointing potential candidates to
meet the organization’s resource requirements.
The hiring of the candidates can be done internally i.e., within the organization, or from external
sources. And the process should be performed within a time constraint and it should be cost effective.
Importance of Recruitment is one of the most fundamental activities of the HR team. If the
recruitment process is efficient, then –
 The organization gets happier and more productive employees
 Attrition rate reduces.
 It builds a good workplace environment with good employee relationships.
 It results in overall growth of the organization.
Selection is the process of picking or choosing the right candidate, who is most suitable for a vacant
job position in an organization. In others words, selection can also be explained as the process of
interviewing the candidates and evaluating their qualities, which are required for a specific job and
then choosing the suitable candidate for the position. The selection of a right applicant for a vacant
position will be an asset to the organization, which will be helping the organization in reaching its
objectives.
1.2 Training and development is vital part of the human resource development. It is
assuming ever important role in wake of the advancement of technology which has resulted in
ever increasing competition, rise in customer’s expectation of quality and service and a
subsequent need to lower costs. It is also become more important globally in order to prepare
workers for new jobs. In the current write up, we will focus more on the emerging need of
training and development, its implications upon individuals and the employers.Noted
management author Peter Drucker said that the fastest growing industry would be training and
development as a result of replacement of industrial workers with knowledge workers.

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 In United States, for example, according to one estimate technology is de-skilling 75 % of the
population. This is true for the developing nations and for those who are on the threshold of
development. In Japan for example, with increasing number of women joining traditionally
male jobs, training is required not only to impart necessary job skills but also for preparing
them for the physically demanding jobs

1.3 Performance management is the process of creating a work environment or setting in

which people are enabled to perform to the best of their abilities.Performance
management is a whole work system that begins when a job is defined as needed. It ends
when an employee leaves your organization.

Human resource information systems keep track of critical employee data such as
demographic information, job titles and Equal Employment Opportunity Commission
identification codes. Storing this information in an electronic database allows you to analyze
it more easily when working on recruitment strategies, progression planning and affirmative
action programs. HR reps can quickly run reports to determine items such as how many
employees were hired last year, average length of tenure and a breakdown of the employee
population by specified EEOC criteria such as gender and race.

Times have changed. The modalities of managing a business has changed fundamentally during the
past few years. The overall objectives are the same: attaining profitability and growth, building
shareholder value and other similar goals are foundational requirements for most companies, large
and small. Executives are being asked to manage their companies much more closely, to do more
with less, to meet their growth and profitability commitments predictably. Traditional responsibilities
now co-exist with the increased demands for efficiency, profitability and accountability. Corporate
officers are finding ways of redefining and restructuring their operations to achieve traditional
objectives more efficiently and effectively, while focusing more time on the strategic issues central to
the organization’s survival and growth. What have changed is the business environment and the
parameters within which they have to work. In the present global competitive environment there is
increased pressure on growth through new breakthrough product lines and new business models or on
achieving differentiation through higher performing core processes such as distribution, customer
relationship management, logistics and branding- all of which lead to innovation. Today the issue is
not so much about what you could not do yourself efficiently, but what you do not want to do, for
whatever business reason. Out sourcing is the ‘new’ business wave that has transcended geographical
barrier of trade and commerce. The latest challenge for business technology managers is coming to

8
terms with a new competitive reality: how to achieve lower costs, high quality, rapid innovation and
change, as well as manage complexity while offering customers personalized experiences.
Global competition has forced companies, large and small, to compete differently and search for
ways to manage in this environment calls for new capabilities— ones embedded primarily in
managerial processes, decision analytics, and behaviours. Power is essentially shifting from the
producers of goods and services to the consumers. A company’s ability to command a higher iprice
for the unique value it offers lasts only for a fleeting moment. At the same time, the pressure on
businesses for improved performance is unrelenting. Growth and profitability are expected. Increased
shareholder value is demanded. Disappointments on any ofthese fronts are severely punished in the
capital markets, making funding future operations even more difficult. It is against this backdrop of
hyper-competition and increasing pressure for performance that the very structural integrity of
organizations is beginning to break down. Rapid advancement in every field makes it a practical
impossibility for every organization to develop and sustain bestin-world expertise in every facet of its
operation. The operational activities across an organization are becoming increasingly specialized and
knowledge-driven. Expertise is rivaling size as a competitive differentiator. Doing the right thing is
becoming more important than doing everything. Producing results is becoming more important, in
most cases, than is the ownership of resources. To respond to this hyper-competitive, performance-
driven environment, organizations are becoming better focused and more specialized. They are
evaluating each activity to determine if and how it provides a unique competitive advantage. Those
areas that provide an advantage are likely to receive increased internal investment. Those that do not
are likely to be either eliminated entirely or put in competition with an ever expanding marketplace of
external service providers. That is, they are considered for outsourcing. No organization can stay
competitive in today’s rapidly changing global economy by relying solely on its own resources.
Outsourcing is a necessary response to today’s hyper-competitive environment. In this environment,
no organization can afford the level investment required to be best-in-world across its entire
operation, yet none can afford to be anything less. Through outsourcing, organizations solve this
dilemma by focusing their internal resources on the activities that provide them a unique competitive
advantage

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1.4 Perspectives on Outsourcing
This is an age of outsourcing. Firms seem to be subcontracting an ever-expanding set of ^activities,
ranging from product design to assembly, from research and development to jmarketing, distribution,
and after sales service. Some firms have gone so far as to become “virtual” manufacturers, owning
designs for many products but making almost nothing themselves. Nike was one of the first to
embody the concept of the “virtual” firm by concentrating on design and sourcing every other key
capability from outside. It was a manufacturer that manufactured nothing, but who made sure that
“its” manufacturing process was the best. . Outsourcing can be defined as the situation where ‘an
external vendor provides, on a recurring basis, a service that would normally be performed in-house’.
In other words, outsourcing is a process in which companies concentrate on those aspects of their
business, which give them a competitive advantage (core business) and contract out the more
peripheral or non-core aspects for other firms. Faced with increasing global competition, businesses
have come to look to outsourcing as a means of gaining a comparative advantage over their
competitors. Outsourcing is thought to benefit a business by allowing it to focus on its “core
competencies” or “core activities.” In this way, the business can shift its energy away from peripheral
activities that lie outside of its true area of expertise, and instead concentrate more energy on what it
does well in order to differentiate itselffrom competitors. By outsourcing non-core activities, the
business may also be able to reduce operating costs by reaping the benefits of a supplier’s lower cost
structure, which may result from economies of scale or other advantages associated with
specialisation in the outsourced activity. Over 85 per cent of companies realise that outsourcing
critical support services can enhance their competitive edge through access to a wealth of intellectual
capital, without the need to invest in infrastructure. The bottom-line is that the company can
concentrate on core operations and let a third party devote time and resources to providing non-core
functions.
Outsourcing is critical to the growth and success of both emerging and developed economies.
Harvard Business Review lists it as one of the most important new management ideas and practices
of the 20th century.2 James Brian Quinn has called outsourcing “one of the greatest organizational
and industry structure shifts of the century.”3 As management expert Peter Drucker says, “If you ask
me what is the fastest growing industry—it’s outsourcing.’^ A report of the World Trade
Organization (1998) details, for example, the production of a particular “American” car: Thirty
percent of the car’s value goes to Korea for assembly, 17.5 percent to Japan for components and
advanced technology, 7.5 percent to Germany for design, 4 percent to Taiwan and Singapore for
minor parts, 2.5 percent to the United Kingdom for advertising and marketing services, and 1.5
percent to Ireland and Barbados for data processing. This means that only 37 percent ofthe production

10
value is generated in the United States. The process of Outsourcing creates an operating environment
that is substantially more conducive to change. It provides a balance of improved product quality and
service delivery through access to best practices, technology and professionals. BPO acts as a catalyst
for change to help stimulate company growth by achieving unique competitive capabilities.
Outsourcing creates tremendous value and gives companies the ability to be more productive and
create significant business impact. Companies gain competitive advantage by exploiting an
outsourcing service provider’s advantages such as economies of scale, best-in-class process
execution, better and cheaper labour, and capital at more competitive rates in order to customize
offerings more effectively and efficiently. In doing so, they generate tremendous value for customers
and wealth for shareholders. Outsourcing manifests itself in every aspect of business today.

1.5 Characteristics of Outsourcing

The main characteristics of outsourcing are as follows:
1. An outsourcing contract is a collaboration agreement that involves a series of mutual transfers
between the parties, on a technical or material level and on a more personal level, with the outsourcer
assuming part of the risk of the client company, being better equipped to do so (Erdozain, 2001).

2. Outsourcing is a management tool. When a company initiates an outsourcing process, it ceases to

manage internally a series of functions or processes that are not part of its core competencies and
instead acquires them from an outside supplier or outsourcer. By doing so, the company is able to
devote more ofits time and personal and material resources to matters that directly concern its
strategy.

3. The outsourcer, for its part, has its “core business” or competitive advantage in the functions and
processes it has acquired from the company that undertakes the outsourcing process. The client thus
gains access to expertise which enhances the service it offers.

4. The same volume of business can be managed by fewer people, giving the client company greater
flexibility, capacity and resources to devote to activities related to its core business.

5. During the outsourcing process, the client company retains control and strategic management of
the service it has outsourced and is responsible, together with the outsourcer, for establishing the
guidelines that will align the service with its strategic objectives. In other words, the client and the

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outsourcer must agree on a series of quality standards; but these standards will be agreed on the basis
of a strategic improvement
proposal on the part ofthe outsourcer, and will steadily rise thanks to the efforts by both parties to
adapt to the new demands ofthe market.

6. Outsourcing allows companies to leverage their resources to reinforce their competitive advantage.
1.4 Emergence of Outsourcing In the post-war period companies were either conglomerated,
horizontally integrated or vertically integrated (Lonsdale & Cox, 2000). In the absence of developed
external markets organizations, ofnecessity, sourced a wide range of activities in-house (Jennings,
2002). According to Lonsdale & Cox (2000) there were as well four main motives behind these
strategies. First, companies were able to achieve economies of scale. Second, due to horizontal
integration, companies had an opportunity to exercise greater market power. Third, conglomeration
strategy gave firms a potential for greater security through an increased product range. And fourth,
vertical integration potentially offered greater control for the companies (Lonsdale & Cox, 2000). The
idea of outsourcing is certainly not new. Hiring outside groups to do work that an organization either
cannot do or chooses not to do for itselfdates back as far as one cares to look. Explorers, traders, and
mercenaries are all early examples of the concept of outsourcing. Even the term outsourcing was first
used in the 1970s by manufacturing executives and has been gradually adopted since then by
executives in just about every other business function. In the late 1970s and 1980s, it was
increasingly recognized that many ofthese large and diverse companies were under-performing the
market. The large vertically structured companies were not sufficiently efficient to meet ever greater
cost discipline demands and academic studies pointed disappointing rates ofreturn (Kakabadse &
Kakabadse, 2002; Lonsdale & Cox, 2000).

In the early 1980s, with the onset of a global recession, this under-performance became even imore
pronounced (Lonsdale & Cox, 2000). That led companies re-evaluating their strategies and ifocusing
on fewer activities. The idea of core became dominant and managers were re-evaluating the idea that
they needed to be vertically integrated and self-sufficient. Over the past 20 years, one ofthe most
notable trends in the world of business has been the move away from high levels iof vertical
integration toward outsourcing (Leavy, 2001). In the early 1990s at a time when the U.S. economy
faced a severe recession and the very competitiveness of its businesses was in question, outsourcing
gained significance as the potent strategic business model . Companies used outsourcing then to help
streamline their operations and to regain their competitive strength. The result was an unprecedented
period of economic growth during the latter half ofthe 1990s.

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Today’s challenges may be even more pressing than those of a decade ago. Peter Drucker was
among the first to focus the attention of business executives on the power of outsourcing. While
writing for The Wall Street Journal in 1989, he made a prediction that “more and more people
working for organizations will actually be on the payroll of an independent outside contractor.” The
inefficiencies of many internal clerical, maintenance, and support operations, he argued, pose one
ofthe biggest problems for the productivity and competitiveness of most organizations. The problem
cannot really be fixed as long as these activities are performed by internal departments operating as
de facto monopolies. Through outsourcing, a company places its existing internal operations into
competition with the marketplace of external service providers. Although some may not like the idea
of elements of a business competing in this way, competition brings out the best in people and
organizations. Competition improves performance and quickly strips away unnecessary costs.
Whichever way the competition comes out, the organization is better off for it. If the operation is kept
inside the company, the competitive pressure leads to the much-needed improvements. If the
operation is outsourced, then needed improvements are brought in from the outside. As the
contemporary use of the term outsourcing has grown, so has the actual amount of outsourcing taking
place. The typical manufacturing company now outsources 70 to 80 percent of the content of its
finished product. The entire professional Services industry of accountants, lawyers, advertisers,
consultants, and the like is based on the concept of outsourcing. Facilities executives routinely
outsource cleaning, food services, and mailrooms. CIOs in large companies often outsource more
than half of their company’s information technology budget. Call center outsourcing is commonplace
as well. Most recently, organizations have started outsourcing entire back offices, performing work as
diverse as customer order processing, payroll, accounts receivables, and accounts payables through
outside specialists. In fact, it would be difficult to 'find any organization that is not outsourcing, to
some extent, in just about every part of its operation. Outsourcing has, thus, emerged as one of the
most important and powerful forces available for building successful companies, creating economic
growth, and generating and enhancing jobs.

Outsourcing as a Strategic Alternative Outsourcing, then, is in direct response to these realities

ofthe modern world. Organizations of all kinds use outsourcing every day to improve the products
and services they provide customers. They use outsourcing to free capital and brainpower for
investment in research and development, leading to new products and new services. In fact, more
than 90 percent of companies say that outsourcing is an important part oftheir overall business
strategy. Many firms are finding that even trimming budgets and restructuring departments can’t

13
deliver the savings and performance improvements required to meet the new business imperatives.
One solution seems to be a viable alternative for managing virtually any critical, non-core function is
outsourcing. Outsourcing, or subcontracting responsibility for completing certain business functions,
has been a fact of corporate life for a number of years. Traditionally, corporations have outsourced
individual business functions, such as computer hardware infrastructure or payroll processing. With
the pressure to refocus and restructure without degrading the service levels of critical functions,
corporations are outsourcing responsibility for entire business processes. In many cases, only a small
monitoring function remains within the corporation. Several key trends in business process
outsourcing are emerging:
Most if not all transaction-intensive, back office functions have already been or will shortly be
outsourced, if the corporation is to remain competitive. • Most of the transactional or administrative
functions are outsourced as others can do better and cheaper due to economies ofscale and focus. •
The trend toward outsourcing non-core functions is critical to refocus the precious skills and
resources of the business on its central mission. Massive business process outsourcing contracts have
been the stuff of business news for a number of years. Fortune 50 firms have negotiated multiyear,
multi-billion dollar contracts with major service providers such as Accenture, IBM and EDS etc. 1.6
Drivers of Outsourcing We live in a world that can best be described as hyper-competitive.
Globalization is inextricably linking the world’s major economies. Today’s standard of excellence is
notjust best-in-class; it’s best-in-world. In this global economy every company must compete against
customer choices coming from everywhere and anywhere. Barriers to the marketplace are dropping
quickly, with new competitors just a mouse-click away from any customer. Outsourcing is one of the
fastest growing aspects of the world economy with a world wide spending of about $ 4 trillion in 200
l (Clott, 2004). Outsourcing is nothing more and nothing less than a management tool. It is used to
move an organization away from the traditional vertically integrated, self-sufficient structure; one that
is increasingly ineffective in today’s hyper-competitive, performance-driven environment. Through
outsourcing, the organization moves toward a business structure where it’s able to make more
focused investments in the areas that provide its unique competitive advantage. Along the way, the
organization creates interdependent relationships with specialized service providers for many iof its
critical activities that must be performed extremely well, but where the organization gains little
competitive advantage by doing the work itself. This not only enhances the business of the company,
it creates exciting new business opportunities for other companies to become providers of outsourcing
services. According to the Outsourcing Institute, the top ten drivers behind outsourcing decisions are:

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1. Accelerate reengineering benefits - Reengineering aims for improvements in critical measures of
performance such as cost, quality, service, and speed. The need to increase efficiency can come into
direct conflict with the need to invest in core business, and as non-core internal functions are
continually put on the back burner, systems become less efficient and less productive. By outsourcing
a non-core function, a company can begin to see the benefit of reengineering.
2. Access to world class capabilities - World class providers makes extensive investments in
technology, methodologies, and people. They gain expertise by working with many clients facing
similar challenges. This combination of specialization and expertise gives customers a competitive
advantage and helps them avoid the cost of chasing technology and training.
3. Cash infusion - Outsourcing often involves the transfer of assets from the customer to the
provider. Equipment, facilities, vehicles, and licenses used in the current operations have value and
are sold to the vendor. The vendor then uses these assets to provide services back to the client.
Depending on the value ofthe assets involved, this sale may result in a significant cash payment to the
customer.
4. Free resources for other purposes -Every company have limits on the resources available to it.
Outsourcing permits a company to redirect its resources, most often people resources, from non-core
activities toward activities that serve the customer or drive revenues.
5. Function is difficult to manage or out of control - Outsourcing is certainly one option for
addressing this problem. When a function is viewed as difficult to manage or out of control, the
company needs to examine the underlying causes. If the expectations or needed resources are not
clearly understood, then outsourcing won't improve the situation; it may in fact exacerbate it. If a
company doesn't understand its own requirements, it won't be able to communicate them to an outside
provider.
6. Improve company focus - Outsourcing lets a company focus on its core business by having
operational functions assumed by an outside expert. Freed from devoting energy to areas that are not
in its expertise, the company can focus its resources on meeting its customers' needs.
7. Make capital funds available - Deciding where to invest capital funds is one of the most
important decisions that senior management makes. It is often hard to justify non-core capital
investments when areas more directly related to producing a product or providing a service compete
for the same money. Outsourcing can reduce the need to invest capital funds in non-core business
functions.
8. Reduce operating costs - Companies that try to do everything themselves may incur vastly higher
research, development, marketing, and deployment expenses, all of which are passed on to the
customer. An outside provider's lower cost structure, which may be the result of a greater economy of

15
scale or other advantage based on specialization, reduces a company's operating costs and increases
its competitive advantage.
9. Reduce risk - Tremendous risks are associated with the investments a company makes. Markets,
competition, government regulations, financial conditions, and technologies all change extremely
quickly. Keeping up with these changes, especially those in which the next generation requires a
significant investment, is very risky. Outsourcing providers make investments on behalf of many
clients, not just one. Shared investment spreads risk, and significantly reduces the risk borne by a
single company.
10. Resources not available internally - Companies outsource because they do not have access to
the required resources within the company. Outsourcing is a viable alternative to building the needed
capability. New organizations, spin-offs, or companies expanding into new geography or new
technology should consider the benefits of outsourcing from the very start. The impact of these new
imperatives affects invariably all kinds of business organizations irrespective oftheir size and sectors
to which they belong. The focus is on spending less time on functions that are required, but don’t add
value to the corporation’s core business, and investing more time and energy on those functions
strategic to the corporation’s core mission. After years ofconsultant’s scrutiny, internal audits and
cost-cutting, there aren’t many functions left that can be eliminated outright without affecting the
basic performance of the company. While outsourcing improves the performance of areas of the
business that do not provide a unique competitive differentiation, it also frees needed capital and
resources for investment in those areas that dp. It reduces both direct costs and opportunity costs. The
areas of the business’s operation that provide its unique competitive differentiation—the areas where
none of its competitors nor the external marketplace of providers can deliver superior results—are its
core competencies. The connection between core competencies and outsourcing was completed with
Tom Peter’s frequently cited quote “Do what you do best and outsource the rest,” advising executives
to focus on their core competencies and outsource every other part of their operation.

1.6 Human Resource Outsourcing:

The Issue Rapidly changing market dynamics and global competitive pressures have caused
organizations to spend more time focusing on their core business. Organizations are fast realizing that
they can't be all things to all people. So companies now, be it a software company, a service provider
or a manufacturing firm, decide what they are good at and outsource everything else, i.e., focus on
their core competency, and let someone else do the rest in a more efficient and cost-effective .
manner. One very important trend in the recent times has been the growth of human resource
outsourcing. HR outsourcing is the outsourcing of peripheral but necessary administrative tasks such

16
as ^payroll, benefits, education/training, recruiting personnel, administration, to realize economies of
scale and achieve standardization of services. Outsourcing non-core activities allows HR
professionals to move away from routine administration to a more strategic role. The organization can
focus on higher value-added activities while the outsourcing provider takes care ofthe day-to-day
administration. HR Outsourcing is much less noticed but one of the fastest growing areas of
outsourcing. Starting with humble payroll processors, HR-BPO providers now offer to take over
virtually any HR activity or even the entire function. If we look at the history of HR outsourcing
(HRO) industry, it can be traced back to more than five decades, when ADP (Automatic Data.
Processing) set up its payroll processing services in the US (Kodwani, 2007). Experts today suggest
that in a few years, up to 90 percent of the HR function will be fully automated - bringing huge
savings for both the firm that is outsourcing and the firm providing the outsourced services. The
number of companies outsourcing HR activities continues to rise, and the scope of outsourced HR
activities continues to expand. HR outsourcing can happen in HR functions, like payroll
administration (producing checks, handling taxes, dealing with sick-time and vacations), employee
benefits (Health, Medical, Life insurance, Cafeteria, etc), human resource management (hiring and
firing, background interviews, exit interviews and wage reviews), risk management, etc.

1.7 A Changing Environment for HRM and its Functionality

In most companies, the human resource function has little strategic importance. The HR staffs spend
70%- 80% of its time in administration and clerical activities - activities that are not seen as very
critical, and certainly not as core. Nevertheless, there are signs of a shift in the role ofHR functions.
Changes in the broader business environment are altering how firms are managing their human
resources and affecting nearly every aspect of HRM.
1. Labour markets: Over the past decade, conflicting pressures in the labour market have brought the
role of HR to the fore. Intensifying competitive pressure has also forced firms to be more aggressive
in cutting costs and headcount. HR functions have learned to become “world class” in managing
downsizing. At the same time they become more innovative in attracting and retaining scarce talents.
2. Costs pressures: As the domestic and global competitive pressures intensify, firms pay increasing
attention to their costs — operating, overheads and capital costs. In many firms, HR departments are
regarded as a target for efficiency improvement efforts. A growing number of firms are discovering
that HR-BPO providers are more efficient in providing specialized services to stay ahead in the
present competitive environment. 3. Legal and regulatory environment: The legal environment ofHR
has grown increasingly complex. HR managers have been struggling to stay abreast ofthese
regulatory changes. An increasingly complex regulatory environment drives demand for outsourced

17
employee services. Many HR specialists feel that an outsourcing vendor can perform the more
heavily regulated functions better, cheaper and faster than in-house staff can. 4. Mergers and
acquisitions: Recent years also saw increasingly frequent mergers and acquisitions. These created
huge challenges for the HR function. Globalization represents a comparable need for employees in,
and moving between, different countries. Companies confronted with the challenge of merging
heterogeneous HR technology and infrastructures into one cohesive programme often find
outsourcing appealing. 5. Technology: Of the various forces affecting HR, the development of
technology is perhaps the most important. On the “demand” side, many employees today are
accustomed to working with PCs on their desks that allow self-service information access. On the
“supply” side, the Internet and new generations of software systems have revolutionized human
resource information systems (HRISs) and significantly improved HR productivity and cost-
effectiveness. GE estimated annual savings of $ 2 million when 25,000 calls per month were diverted
from HR staff to their HR portal. Microsoft savedabout $ 1 million in labour costs using portals.
These various environmental changes have led to different HR activities. Under conflicting pressures,
companies have abandoned promises of career employment and shifted to more market-oriented
employment practices. HR functions are looking for ways to provide more value at lower cost. The
key, many argue, is to focus on activities that are “truly strategic” and outsource the rest. Study shows
that there are significant changes in the activities performed by HR professionals during the last
decade.
1.8 Why Human Resource Outsourcing
Human Resources have undergone a major transformation over the past three decades (Gubman,
2004). Instead of solely pursuing a functional approach of delivering services, HR professionals now
seek to develop and support the critical firm capabilities that drive business strategy. This shift
indicates an important change in the way HR contributes to the achievement of an organization's
objectives. And yet responsibility for the older, functional aspects of HR still resides within the field,
intertwining two components with considerable differences. While the functional component focuses
on providing services of a set quality and scope at the lowest cost, the strategic component seeks to
provide unique organizational consultative services that differentiate the firm from its competitors in
the marketplace. The functional and strategic components of HR intertwine in modern HR
departments because the leeway to develop the strategic component is often contingent upon the
successful operation of the functional component, which grants the department legitimacy. While
functional HR services are essential to the organization because they are needed for the organization
to function, they are not critical in the sense that they do not contribute to the sustainable competitive
advantage of the organization. Thus, it is not necessary for them to be performed inhouse and an

18
organization should not pay a premium for these services. If a company can find these services at a
better cost, quality, and/or efficiency by outsourcing them to an external vendor, the firm should do
so as it may gain a short term cost advantage over its competitors. In contrast, the strategic
component of an HR department is essential for different reasons. Unlike the functional component,
it appears at first glance that the strategic component is not required ;for the everyday operation of the
organization. The challenge for the future appears to lie in sustaining a balance between strategic and
technical roles, and shifting from being a provider to being an enabler in HRM, particularly in
facilitating Organizational change. This will most likely involve the use of core HR staff, while
outsourcing appropriate activities and concurrently devolving responsibilities to the line and to
employees (Brewster, Mayhofer, and Morley, 2004). It is perceived, from the literatures on HR
outsourcing, that companies use HR outsourcing for both operational and strategic reasons that can
enhance the HR value chain as well as support the development of human resources as a business
partner and strategic contributor to the organization’s goal. The literatures also suggest the five
competitive forces that are driving more companies to outsource some or all of their HR activities.
These forces are downsizing, rapid growth (or decline), globalization, increased competition, and
restructuring. Over the past decades, these forces have significantly altered the strategy and structure
of many firms. During this time, firms have attempted to refocus their businesses, lower their costs
while increasing services, and improve capabilities to respond to future business challenges. By
refocusing the HR function, executives hope to achieve a closer alignment of HR practices with
business strategy. HR managers, in turn, acknowledge collaborating with line managers to deliver
more value-added services at a lower cost and to re-examine if, in fact, some HR activities are
needed, and if so, who can be able to deliver the best. If HR departments are to be responsive to both
internal and external customers, they must look for ways to improve the quality and responsiveness of
their services. Outsourcing offers HR an option to satisfy competing demands for improved services
and responsiveness at a reasonable cost

19
1.9 Strategic Rationale for HR Outsourcing
The most significant shift in attitudes to outsourcing is the fact that most companies no longer see it
merely as a cost-cutting exercise, rather than a strategic tool. While cost-cutting is still the prime
motivator for outsourcing, six other highly strategic reasons are: (i) to improve the overall business
performance; (ii) to sharpen business focus; (iii) for accessing external skills; (iv) for improving
quality and efficiency of outsourced process; (v) to achieve competitive advantage; and (vi) to create
new revenue sources. With efficient HR outsourcing, corporate entities can move away from rigid
self sufficient organization structures to an open entity with the flexibility to respond rapidly to new
markets and new technologies and to take pleasure in competitive advantage through clear strategic
focus, decentralised structure and reduction of bureaucracy and cultural change.

1. Strategic Focus: HR departments often lack a clear strategic focus because they are preoccupied
with operational activities. In essence, it is believed that HR departments should outsource many of
their non-strategic activities. Outsourcing permits HR departments to move away from these routine
administrative elements toward a more strategic role. Although outsourcing can be used to sharpen
the strategic focus ofHR, it is but one component ofthe strategic transformation process. 20 One
Senior Vice President for HR provided perspective by advising that, “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.” Numerous executives noted how their goals were to shift more of the HR responsibilities to the
line managers and to transform the HR staff to an internal consultant role. By considering any aspect
of the “old” HR function as a candidate for outsourcing, the executives were explicitly redefining the
roles oftheir HR staffs. As another HR executive stated, HR departments are more likely to “stick to
their knitting” when they perform only those activities related to the implementation of their
companies’ strategies rather than less essential functions.

2. Decentralised Structure: HR outsourcing is associated with decentralised or matrix structures and

extensive internal networking. The company, which relies heavily on internal networking and
departmental barriers, has a very informal culture with a heavy emphasis on flexibility. The
combination of a decentralized structure, lean staffing, and an informal, fast-paced culture appears to
be consistent with its outsourcing arrangements. It is opined that, except for benefits and
compensation outsourcing, one does not sign contracts with the HR outsourcing vendors but instead,
relies on trust in established relationships. In addition to heavy reliance on outsourcing, the company
uses vendors that operate internationally to supply the same service to its operations throughout the
world. Decentralisation of the HR function through redeployment of some of its assets to operating

20
units is another strategic rationale for outsourcing. By outsourcing specialized services, the HR
function can redeploy HR expertise from the corporate level to provide HR services at the operational
level.
3. Reduction of Bureaucracy and Culture Change: HR departments are often criticized for their
bureaucratic processes and the constraints they impose on operational flexibility. Thus, an important
rationale for outsourcing is to develop a less bureaucratic HR function. As it is stated, successful
outsourcing vendors emphasize a customer-service orientation that, in turn, permits the HR executive
to address, with reduced HR headcount, only the most extreme cases that need his or her attention. In
addition, outsourcing replaces bureaucracy with market forces. As one senior vice president stated,
outsourcing allows us to “harness the power of the bidding process.” Similarly, because of their size
and focus, outsourcing firms are often more nimble and agile. As a result, they can often deliver
services more quickly than in-house HR staff.

1.10 Benefits of Human Resource Outsourcing

The essential logic behind human resource outsourcing lies in the fact that the company can focus on
its “core business”, delegating specific areas to external experts and thus freeing up resources that can
be dedicated to core aspects of its business.
1. Accessing top-level capabilities The major service suppliers are making important investments in
technology, methodologies and people. They are gaining experience working with many clients that
are confronting common problems. This combination of specialisation and experience provides the
clients with a competitive advantage and helps them to avoid the cost of continually keeping abreast
of developments in technology and training. There are also better professional opportunities for
professionals that join up with an outsourcing supplier.
2. Freeing up resources for other purposes Every organization faces limited resources. HR
outsourcing allows an organization to redirect its resources, particularly people, from lateral activities
to those with superior ‘added value’. People whose energy is focused internally can shift to a more
external focus on the client. 3. Commitment to the technological evolution In order to be successful,
an outsourcing agreement should be based on a relationship of deep trust, between the service
supplier and one’s own staff. This closeness, linked to contractual conditions that demand
technological updating, ensures the ongoing satisfactory development of all technological
infrastructure.

21
4. Improving the company’sfocus Outsourcing allows the company to focus on its core business, in
delegating operational tasks to a third party. HR outsourcing implies there is an exclusive contact
point for operational questions regarding the starting point, whereby numerous supervisors are
involved who are dedicated to managing the relationship with suppliers and internal staff, planning,
etc. These supervisors can now concentrate on increasing the business.
5. Reducing operating costs Companies that try to do everything themselves often incur substantial
costs for research, development, marketing and implementation, which they end up passing on to
their clients. The external supplier’s smaller cost structure resulting from economies of scale, along
with the efficiency derived from specialisation, reduce the company’s operational costs and thus
provide a clear competitive advantage.
6. Accessing resources not available internally Companies resort to outsourcing because they do not
have the resources they need internally. HR outsourcing provides a viable alternative to build up the
capacities they need from scratch.
7. Freeing up financial resources HR outsourcing can reduce the need to invest capital funds in
non-core business operations. Instead of acquiring the resources by using capital funds, these can be
contracted whereby they are paid per service. HR outsourcing can also improve certain financial
ratios for the company in eliminating the need to demonstrate a return on capital investments in non-
strategic areas.
8. Risk reduction The investments made by any business entity also reflect the risks due to the
constantly Changing markets, competition, standards, financial circumstances or its own technology.
Staying up to date is very risky in the face of all these changes, particularly those that necessitate a
sudden transition requiring substantial investments. The outsourcing suppliers make investments on
behalf of various clients simultaneously. In sharing the investment, the risk is apportioned, thus
significantly reducing the risk to each ofthe companies involved.
9. Improving management of operations that are complex or difficult to control HR outsourcing
does not imply the withdrawal of final responsibility for the processes or operations subject to the
service agreement. When there are confrontations with an operation that proves difficult to manage or
that is out of control, the organization should carefully analyze what is causing the problem.

Human resources is used to describe both the people who work for a company or organization and the
department responsible for managing resources related to employees. The term human resources was
first coined in the 1960s when the value of labor relations began to garner attention and when notions
such as motivation, organizational behavior, and selection assessments began to take shape.Human
resource management involves both strategic and comprehensive approaches to managing people, as

22
well as workplace culture and environment. The role of human resources professionals is to ensure
that a company’s most important asset—its human capital—is being nurtured and supported through
the creation and management of programs, policies, and procedures, and by fostering a positive work
environment through effective employee-employer relations.The concept behind human resource
management is that employees who are subject to effective human resource management are able to
more effectively and productively contribute to a company’s overall direction, thereby ensuring that
company goals and objectives are accomplished.Today’s human resource management team is
responsible for much more than traditional personnel or administrative tasks. Instead, members of a
human resource management team are more focused on adding value to the strategic utilization of
employees and ensuring that employee programs are impacting the business in positive and
measurable ways.

An August 2014 Forbes article explored the shifting goal of today’s human resource
management teams. More specifically, the article found that HR teams focused on things that
don’t add true value to the organization are often deemed reactive, uncreative, and lacking
basic business understanding. On the other hand, HR professionals who want to be recognized
as true business partners must see themselves as business people who specialize in HR, not as
HR people who advise a business. Todays’ human resources managers/business partners must
understand the workings of the business and be able to comfortably speak the language of
business leaders in order to have a measured and proven impact on business objectives.
Outsourcing can be defined as the situation where an external vendor or service pro-vider
provides, on a recurring basis, services that would normally be performed in-house by the
organization. In other words it can said that, outsourcing is a process where in organizations
concentrate on those aspects of their business processes, which gives them a competitive
advantage (called as corebusiness) and contract out or shell out the noncore aspects of their
business processes. With the increasing global competition, organizations are looking
outsourcing as a means of gaining a comparative advantage over other competitors.

Outsourcing is thought to benefit a business by allowing an organization to focus on its “core

competencies” or “core processes.” In this way, an organization can divert its energy away from
peripheral or non-core activities of the business which lies outside of its “true” area of expertise, and
instead of that concentrating more energy and focus on what it can does well in order to differentiate
itself from other competitors. By outsourcing their noncore activities, organizations would be able to
reduce their operating costs too. This is possible by reaping the benefits of a supplier’s lower cost

23
structure, which could result from economies of scale or other advantages associated with specialisation
available with the outsourcing service provider. One very fine example of this is the BP-Exult deal
where Exult handled the administrative elements of compensation, benefits, payroll, organizational
development, performance management, employee development, training, recruitment and relocation
with its web based software and left British Petroleum responsible for HR policy, strategy,
professional resources and labour relations. It was observed through literature survey that around 85 per
cent of companies have realized that outsourcing critical support services can en- hence their
competitive edge, without the need to invest in infrastructure

Human Resource Outsourcing is the process of subcontracting human resources functions to a third-
party supplier. Outsourcing can be seen as a process in which a company delegates some of its in-
house operations to a third party through which the company acquires services from another while
maintaining
ownership and ultimate responsibility for the processes. The primary motive for outsourcing includes
enabling the company to invest more time, money and human resources into core activities and
building strategies to facilitate company growth. I
n todays increasingly competitive and rapidly changing global
market a company has little choice but to concentrate on improving productivity while cutting down
costs. As a result, a variety of different processes that take up precious time and resources are being
outsourced. Business Process Outsourcing (BPO) companies are often considered to provide more
flexible, faster, cheaper and effective services.

Human resource functions outsourcing comes a long way. The history depicts that through
specialization contracting began to be more accepted, especially in the service industry. This was the
beginning of the first wave of outsourcing in the time of the industrial uprising approaching the
growth of services such as insurance services, architecture and engineering services. At this time the
companies doing the outsourced work, were mostly located in the same country, often in the city, just
like the customers.

Companies those are multinationals, or from western countries and BPO units in countries such as
Malaysia, China, Russia and India even are looking forward to outsource. The operations or processes
being outsourced vary from manufacturing to customer service to software development and much
more. Services such as, contract programming, bureau services, and project management have been
outsourced for a long time. Business process outsourcing refers to such greater level of handing over

24
ownership and control as its HR related activities to a single or combination of service provides
located, at times, even beyond the bounderies of its own country such as Philippines, China, India and
so on.
The “Outsourcing” is the new management mantra which came into existence during the
turbulent times of 90s, where it was seen as an effective tool for cost cutting. Outsourcing
basically means hiring of the relevant business function from a third party. This phenomenon
made rapid advancement and very soon engulfed nearly all area of the business. The function
of Human Resource management has also been affected by it. Although in HRM outsourcing
is a relatively newer term but the economic crisis of global meltdown has helped it to a stage
where more and more organisations and businesses are opting for it. Following are main
findings of the survey carried out by CIPD (2009) in the UK-

HR outsourcing (HRO) is used by 29% of the survey respondents.

Most organisations are increasing their use of HRO. Over the last five years, 20% reported
significant increases in HRO activity, and 44% reported a slight increase in HRO activity.
Only 11% have reduced their reliance on HRO.

Only 44% of those organisations that outsource other business functions also outsource HR.

HR outsourcing is used predominantly in private sector organisations, with 69% of those

outsourcing HR working in this sector. HRO is pursued by 25% of public sector organisations
in this sample.

The private service industry dominates the use of HRO, with 50% currently undertaking HRO
activities. Twenty-four per cent of HRO activity is in manufacturing, 22% in public services,
and 4% in voluntary and charitable organisations

The top drivers for HRO include access to skills and knowledge (71%), quality (64%) and
cost reduction (61%). Organisations stressing clear objectives and targets in these areas are
also more likely to have achieved them.

The top three wholly outsourced areas include legal activity (69%), payroll (66%) and
pensions (64%). The areas partially outsourced the most include training (49%) and
recruitment and selection (47%).

25
HRO is not relieving pressure for the internal HR team, with 43% confirming HRO failure in
this case.

Source- CIPD survey 2009

Human Resource Outsourcing can help cutting costs, concentrating on core business and most
importantly in ensuring employee satisfaction. Companies can save huge amounts of money
by Human Resource Outsourcing and be free of complications that are otherwise involved in
maintaining an internal HR department. Companies can concentrate on their core
competencies which will save them their valuable time and resources. Some industry experts
believe that Human Resource Outsourcing is the future, making the next generation of in-
house professionals simply integrators of the company's outsourced services.

If you're considering outsourcing HR, keep in mind the following

challenges:

1. Disconnection with staff: The word "human" isn't part of the title "human resources" for
nothing. HR representatives are critical to helping employees feel like they have a voice and
are valued. Transferring these duties to computer software or to an off-campus third party can
lead to staff feeling disconnected from their employers and employers not fully understanding
their staffs' needs.
2. Reduced flexibility: In smaller-sized businesses especially, HR reps and managers can
help employees out in a pinch -- paying out unused vacation days in an emergency or letting
them dip into next year's leave early. When HR becomes automated and/or outsourced, these
types of accommodations for loyal workers can be difficult if not impossible.
3. Problems that take longer to fix: In situations where an error's been made -- say with
payroll or with the number of vacation days an employee has -- going through a third-party
vendor can mean a long wait before the error is fixed, leaving the employee angry or
frustrated. In addition, when an employee quits and the business is using an outside recruiter,
the hiring and training process can take longer than an in-house HR department, which can be
more proactive about hiring and training employees before positions even become open.
4. Fewer choices: Companies using a Professonal Employer Organization (PEO) to handle
everything from hiring to firing and payroll to insurance might find that they have fewer
choices when it comes to selecting benefits for their organization. By handing off control of

26
certain functions to a third-party, you're also limiting your company to whatever packages that
PEO has to offer.
5. Security issues: Many service providers use web-hosted software to handle HR functions,
leaving sensitive employee information vulnerable to security threats as well as crashes.
Checking your vendor's security record and calling references is essential will shopping
around for any web-hosted HR services.
How To Overcome These Challenges
A satisfied, hardworking staff is the biggest competitive advantage a business has, and you
can help create a company culture that values employees and their contributions by making
sure their voices are heard. As you can see from the list above, one of the biggest challenges
of outsourced HR is not having someone who can troubleshoot the workaday problems,
frustrations and miscommunications that are inevitable in any work environment.

Fortunately, for companies considering outsourcing, they can pick and choose which
functions they wish to hand over to someone else, keeping personnel on hand to handle those
important interpersonal relationships and to act as a liaison between employees and your HR
vendors.

While some vendors have an all-or-nothing policy regarding your HR Functions (they either
want to handle all of them or you can't use them), many offer an ala carte option, allowing
you to decide which functions you'd like to keep in the building and which can be performed
elsewhere .

The most common services offered by HR companies include:

 Payroll services (paying employees, handling taxes and keeping track of sick time and
vacation)
 Benefits (health insurance, life insurance, 401ks, etc.)

 HR management (recruiting, hiring, firing, exit interviews, annual reviews)

 Risk management (employee compensation, safety, conflict resolution, office policies,

etc.)

While outsourcing any one of these would save your business time and money, keep in mind
that it might be wise to keep people-centric jobs (thinking hiring, firing and reviews) on the
premises. In addition, allowing your employees to air their frustrations and concerns about the

27
outsourced services will help you better assess what's working and what isn't to find the best
solution for your business.

Pros and cons of Outsourcing

For small business owners, knowing when to outsource work is an important part of growing
your company, but while there are advantages to taking work outside of the company, there
are also risks involve. Here, Expert Market’s Head of Organic Customer Acquisition, Ian
Wright, details the pros and cons of outsourcing for his SME.
There are three reasons people might want to outsource work. The first is that outsourcing
work can be cheaper than doing it in-house, especially if it is outsourced to a country that has
lower labour costs than the UK.

The second reason to outsource work is that there is more work to be done than can be
handled by the internal team. So you can choose to outsource work to fill this gap in either the
short or long term.

The third reason to outsource work is to use people who are specialists in specific tasks. Need
to shoot and edit a video? A decent Mac will make it possible to do it yourself, but an expect
videographer can probably do a better job in less time.

Outsourcing can seem like a simple solution, but there is a lot to consider beforehand.
Perceived lower costs are often the primary reason businesses opt to outsource rather than use
in-house resources. On top of differences in wage rates, lower costs can come from paying
only for delivered pieces of work and not paying per hour worked. Thus you can know your
costs upfront.

This can be a huge advantage for industries that compete primarily based on price. If you find
your costs constantly exceeding the price you’re able to charge it’s time to at least look into
outsourcing as a way to reduce your costs.

If you outsource based on workload you should start before you have too much work as
finding, training and managing outsourced workers can take time and you don’t want to be
doing it when you already have a lot on your plate.

28
If you’re outsourcing based on skill you simply choose to do it when you require a skill no
one in your team possess.

There can also be some serious pros and cons of outsourcing, rather than keeping it in house.

It can take a lot of time to find, train and manage outsourced workers. The work delivered can
be inconsistent, both in terms of quality and reliability and it also can be difficult to assess the
skills of others if you don’t have at least some of them yourself.

Ultimately it may end up not being cheaper in the long run.

Some of the bloggers we’ve hired at Expert Market have been pretty poor. They give good
samples, but then the work they actually delivered had to be edited and uploaded, which took
up lots of time.

Another time we worked with a designer who went AWOL for months and did not respond to
e-mails.

However, this is the exception rather than the rule. It can be much cheaper and help you scale
your workforce quickly and smoothly. It may also give you access to a range of skills you
internal team may lack.

For example at ExpertMarket we would outsource if we needed blog posts written for us or
data collected or collated the team doesn’t have time to do. We work internationally so we
may also outsource if none of the team have the necessary language skills.

Overall it makes clear business sense for an SME, such as ours, to outsource. It can be
cheaper and quicker than making a new hire (even if only temporary). However, as with
anything, it is important to ensure you have a clear cost / benefit analysis worked out.

1.11 HR outsourcing (also known as HRO) is the process of sub-contracting human

resources functions to an external supplier.
Reviews of business processes have led many organisations to decide that it makes business
sense to sub-contract some or all non-core activities to specialist providers.

HR, as a non-profit centre, is an obvious candidate for outsourcing.

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 There are many ways in which outsourcing human resources can be done:

 Business process HR outsourcing (also known as BPO), where an external supplier manages
discrete HR activities, such as payroll administration or recruitment, or perhaps the
whole human resources function.

 Shared service HR outsourcing, where only the transaction or administrative elements of

HR’s activities are subcontracted to an external supplier. This may include the personal
interface with employees.

 Application (and facilities) service HR outsourcing, where external providers look after the
technological (and physical) infrastructure to support human resources activities.
Outsourcing human resources or some of its processes to an external provider is a major
business decision as, while it may be cost-effective, it introduces new elements of risk,
including:

 Loss of control

 Impact on the employer/employee relationship

 Loss of flexibility

 Failure to deliver cost benefits

 Legal or regulatory requirements

 Industrial relations issues

The operation of any HR outsourcing arrangement should be governed by a service level
agreement. This will define the required standards of performance by both parties and any
penalties for non-compliance. A service level agreement is a crucial document and must be
negotiated with great care to mitigate the above risks.

People management plays a crucial role in delivering organisational performance. In today’s

modern, knowledge economy this is more true than ever before. The decision to outsource
human resources is therefore not to be taken lightly.

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 There are many circumstances in which outsourcing HR services can deliver tangible benefits
to the organisation, for example by freeing HR professionals to devote more time to a
strategic role supporting organisational performance.

Past research on HR outsourcing (HRO) has offered conflicting views about its impact on HR's
strategic position. This study highlights the processes by which decisions to outsource HR are made,
followed by the processes implemented post such decisions and their effect on the HR function

The main goal of the study is to reveal the existing practices of outsourcing of human resources
functions in IT Sector . At the same time the study was conducted to find out the causes of out
sourcing and the satisfaction level of those who are outsourcing human resources functions.

31
 CHAPTER-2
2. Research Methodology

2.1 Objectives of the Study

The main purpose of the study is to know about the practices of outsourcing of human resources
functions in telecommunication sector in Bangladesh. Specific objectives are:
 To find out the relationship between existence of HR department and number of employees in
telecommunication sector.
 To find out the relationship between outsourcing and number of total employees in
telecommunication sector.
 To find out the relationship between outsourcing and number of employees in HR department in
telecommunication sector.
 To find out the relative importance of different HR functions in telecommunication sector.
 To find out the causes of outsourcing in telecommunication sector.
 To find out the causes of not outsourcing in telecommunication sector.
 To find out the satisfaction level of different companies having outsourcing some human resources
functions.

2.2 The rationale behind the Outsourcing

The five competitive forces (Charles R Greer; Stuart A Youngblood; David A Gray, 1999)
that can be called as the driving force for the companies to outsource some or all of their HR
activities are: downsizing, rapid growth or decline, globalization, increased competition, and
restructuring.

Downsizing: The inevitable restructuring of entire industries has recast HR departments as

formulators and implementers of downsizing. The pressure of ‘reducing costs’ has now made
HR themselves as targets of downsizing due to the overwhelming demands for reduced costs
for HR services.

Rapid Growth or Decline: Again the ‘Costs’ as a major factor, the retrenched firms, or those
in decline, face incredible pressures to reduce costs, while high-growth firms face similar
pressures to monitor costs. HR outsourcing presents the option of cost reduction

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Globalization: Due to this, the companies now staff comprising of host country or third party
nationals, this required harmonizing pay and benefit packages in accordance with the local
laws demands specialized expertise. Larger vendors that focus on compensation and benefits
offer these specialized services and deliver expertise built on experience and concentration in
particular regions of the world.

Increased Competition: Increased competition, both on domestic and international front,

emphasizes the value-added role of products and services. Firms that subscribe to the
balanced scorecard approach to measure effectiveness look not only at financial measures of
firm success, but also at customer and employee measures of service quality. As per General
Electric’s CEO Jack Welch- He pays attention to only three measures of firm effectiveness-
cash flow, customer satisfaction, and employee satisfaction. If HR departments are to be
responsive to both internal and external customers, they must look for ways to improve the
quality and responsiveness of their services. Proponents argue that outsourcing offers HR an
option to satisfy competing demands for improved service and responsiveness at a reasonable
cost.

Structuring: Firms that redeploy HR generalists to serve key divisions or business units of
the organization can transform HR into a service role. Such a transformation serves as a
source of competitive advantage for the firm. These new, service-quality cultures are not easy
to build and sustain, particularly among established, traditional, or entrenched HR
departments. Strategically, HR outsourcing decisions can potentially be part of a larger
pattern of responses designed to deliver hard-to-imitate, hard-to-substitute, value-added
services that enhance the value and quality of the firm’s products and services.

After having seen the driving force behind the HRO we will now try to analyse various
models of HRO as conceptualised by the resource-based view (RBV) (e.g. Barney 1991;
Ulrich 1996); that suggests that the resources of a firm are rare and valuable and cannot easily
be substitutable, are more likely to achieve sustained competitive advantage. According to the
RBV, a firm should only outsource those resources which are replaceable or imitable not its
core functions. This concept is in line with the ‘core’ and ‘periphery’ concept (Atkinson
1984), which can be applied to evaluate what HR activities are more likely to be outsourced.
According to Atkinson, the core is defined as a ‘numerically stable core group which will
conduct the organization’s key, firm-specific activities’ (Atkinson 1984: 29). The core can be
redeployed easily between activities and tasks and has functional flexibility. All other

33
function which support the core are known as the periphery, this provides the organization
with an advantage to vary the numbers with fluctuation in labour demand (known as
numerical flexibility). Ulrich (1998) suggested that core activities creates unique value to
employees, customers and investors and are transformational in nature. Non-core activities are
easily duplicated and replicated and are of transactional nature. Thus we find that HR ‘core’
activities include top-level strategy, HR policies, employee relations, and line management
responsibilities (e.g. appraisal and discipline) and the ‘peripheral’ activities include specialist
activities (e.g. recruitment and outplacement), routine personnel administration (e.g. payroll
and pensions), relocation, and professional HR advice (e.g. legal advice related to
employment regulations) {Finn (1999) and Lepak and Snell (1998)}. Thus according to the
core and periphery theory, while the administrative and transactional functions (periphery)
can be outsourced, it is in the interest of the firm to keep the strategic parts of HR (core)
remain in-house. However, in practise, the core and periphery concept is difficult to
distinguish as some HR activities appear to be purely administrative, but actually are not. For
instance, recruitment is often seen as suitable for outsourcing, but it’s a key function that
should stay in-house. To ascertain these arguments, we next shall analyse the advantages and
the disadvantages of Outsourcing of HR functions.

Most business owners agree that their employees are their most valuable assets. As such,
managing human resources has become a critical role in managing a business. Yet for some
businesses, the various functions of the HR department are too comprehensive and complex to
maintain in-house.

Keep in mind, there are several HR specialty areas, including payroll, recruiting, benefits,
compliance and more. In some businesses, an HR generalist may be asked to perform more
than one of these HR functions, and that can often result in less than optimal results.

In these situations, a business can achieve the same level of efficiency and workforce
management by joining a professional employer organization (PEO) and outsourcing HR. The
benefits of outsourcing HR are plentiful and can have a significant impact on your bottom
line.

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According to a study by The Society Of Human Resource Management (SHRM), over half of
all HR professionals have taken advantage of outsourced HR. The top two reasons for
outsourcing are the benefits of cost and time efficiencies. These efficiencies are really the
opportunity costs of business owners and managers, who lose time and money focusing on
HR tasks when these resources can be spent on what must be done to grow their business.
That is, the time and money devoted to employee management is better spent by outsourcing
HR so that businesses can be devoted to core business functions. Other reasons cited by
SHRM include improved compliance, a wider range of offered services, and more experience
in the HR field.

2.3 FUNCTIONS OF HR OUTSOURCING

If a company choses to partially outsource HR, the company shares responsibilities with the
vendor, sharing information and control over the functions. If the company decides to
completely outsource, the vendor takes on all HR responsibilities. The owner or HR manager
in the original company takes on a new role, liaison with the vendor, focusing only on HR in
order to manage the vendor-company relationship. Whether partially or completely
outsourcing, companies frequently outsource the following HR functions:

 Background Screening
 Payroll Services
 Risk Management
 Temporary Staffing
 Employee Assistance/Counseling
 Health Care Benefits
 Retirement Planning
 Performance Management
 Drug Screening

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2.4 Distinguish between HR outsourcing and HR offshoring

Outsourcing and offshoring both the activities are done for reducing the operating cost of the
organisation or improvement of the quality of the work.

Outsourcing is a process whereby business organisation transfer or delegate their non core of
peripheral activities to the other organisation for getting done the work at a cheaper price
comparing the organisation costs or efficiently to get better quality of work. Normally,
outsourcing tasks are get done by third party rather than using organisations employee and it
could be domestically or out side of the country.

Offshoring is the process of shifting the organisation activity or business to other countries to
reduce the company,s over all cost. In one sense, offshoring is also one kind of outsourcing
but its task is done in other countries.

36
The trend of business process outsourcing is growing rapidly. Though, it has both negatives
and positives, but the percentage of positives have over-weighted the shortcomings. Many
companies believe that this is the best option for improving productivity. Basically, it allows a
company to outsource single or multiples services from any reliable platform. The
understanding of ideology that links BPO with E-commerce is very essential for its owner.

business process outsourcing and E-commerce work efficiently together.

When it comes to an E-commerce website, there is so much to do with it. You need to work
on web development, content creation and uploading; web designing maintaining and regular
updating is also an essential element. For this, the company instead of wasting hell of time in
all these domains should work on key points and get all these outsourced from a recognized
outsourcing platform.

Business process outsourcing is not about just handling your work to a second party. Instead
you need to understand the core values for attaining profitable outcomes.

When an E-commerce need Business Process outsourcing?

Normally, E-commerce start ups are overburdened with various activities. This leads to
adverse results, as they evade most of the vital practices for achieving well established
business. This is the right time when you need to take wise decisions. Instead of hiring more
in house staff you can decrease the cost by business process outsourcing. They will work for
you and will share your burden, which will let you pay attention towards flourishing your
business.

At times, E-commerce becomes a heck, when you have a small team and score lot of sales.
Hiring new people will be risky and negligence towards customer care will also shake your

37
company reputation. This is a critical moment which can be sorted with business process
outsourcing. You can outsource HR, accounting and any of the other desired services.

Points to ponder while opting for an outsourcing platform

Finding a top rated outsourcing firm is not as simple as it seems. Though, the service
providers assist you in sharing your work load but at the same time it is dicey for both.
Following are some of the bullet points you need to consider before handing over your E-
commerce data.

 The company should be registered and well-known for its services.

 Get an overview of their previous achievements and current projects.
 Get a written signed document consisting of all essential details and policies of
agreement.
 Last but not the least, have full access to your E-commerce data.

How to get desired outcomes

Once you have assigned your services in terms of business process outsourcing to the firm,
now keep an eye on them. Mark the deadlines and stay tuned to them. For scoring a successful
outsourcing deal, be ready and have complete knowledge about the critical information on
every meeting. Trust is a main factor among both the parties. Explain your concerns once in
for all and then watch out, avoid distractions as it often aggravate the deal.

So, this was all about business process outsourcing in relation with E-commerce.

2.5 SWOT Analysis of Indian BPO Industry

SWOT analysis is a strategic planning method used to evaluate the Strengths, Weaknesses,
Opportunities and Threats involved in a project in a business venture. It involves specifying
the objectives of the business venture or project, and identifying the internal and external
factors that are favorable and unfavorable to achieve those objectives. A SWOT analysis
helps elucidate strategic advantages.Strengths are attributes of the person or company helpful
in achieving the objective(s), while weaknesses are attributes of a person or company, harmful
in achieving the objective(s).Opportunities are the external conditions, helpful in achieving
the objective(s) and threats are external conditions which could do damage in the objective(s).
India has a number of positives to operate successfully in the BPO segment. India being one

38
of the world's most populous countries naturally has a large pool of human resources.
Government's continued investment in higher education since independence in terms of
establishment of educational institutes as well as subsidization of education have produced a
pool of knowledge-workers capable of performing skilled and specialized tasks. Already
having a strong IT sector helped further to develop India's IT-enabled services sector. In
addition, due to the rupee dollar exchange rate, Indian labour turned out to be considerably
less expensive for the US business enterprises. Traditionally, English language skill is also
high amongst the Indian population compared to other Asian countries. Given India's value
proposition, multinational organizations came up to establish captive units in India or
outsource processes to third party service providers. Given the opportunities and challenges of
the global BPO market, several important questions arise for India as a player in this segment.
First, how is the Indian BPO industry coping up with the challenges? What are our strengths
to be highlighted in the global market and what are the shortcomings that need to be
overcome? How do we compare with our competitors and what should be our strategies to
effectively compete in the market? Given the fact that India's success in this industry has
significant implications on its economy in terms of export revenue and employment
generation for educated youths, these questions are of importance. For the purpose of SWOT
analysis, following methodology was adopted:

 A self structured questionnaire was prepared and industry persons were asked to fill it up.

 The questionnaire comprised a number of statements related to strengths, weaknesses,

opportunities and threats, which were identified on the basis of literature review and informal
discussion with the BPO executives.  The respondents were asked to rate these statements
on the basis of 5 point likert scale. The highest rank Five was to be given to the most favored
statement and the lowest rank One was to be attributed to the least preferred statement.

 The statistical tool used for the purpose of SWOT analysis was Weighted Mean, Standard
Deviation; and software used was Microsoft Excel.

 The Weighted Mean for every statement was calculated on the basis of rates given by
respondents and then every statement was ranked according to Weighted Mean in order of
preference.

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2.6 ANALYSIS OF THE STRENGTHS OF INDIAN BPO INDUSTRY Respondents
have considered the following strengths and rated them on the basis of Likert scale. The
analysis of the strengths is described as follow:

2.6.1 HUMAN RESOURCES: Availability of suitable human resources is one of those

factors which have made India one of the hotspots of BPO/IT industry. India is home to a vast
pool of human resources consisting of educated, English speaking, tech-savvy personnel.
India is rich not only in terms of number of qualified people, but the quality is also of
international level which brings it at First position with highest weighted mean score 4.89, in
the list of strength analysis.

2.6.2 ROUND THE CLOCK ADVANTAGE: India has an 8-12 hour time zone difference
with respect to the US and other developed markets. India is able to offer a 24x7 services and
reduction in turnaround times by leveraging time zone differences. This time difference has
been intelligently brought to their advantage by the call centers/BPO. So it has attained the
Second position with weighted mean score 4.8,number in the list of strength analysis.

2.6.3 COST BENEFIT: In developed countries, where the cost of labour is high while
relatively cheap labour is available in the third world country including India. Process
outsourcing has been used for times immemorial to enhance shareholder value by controlling
costs and avoiding capital expenditures associated with purchase of new systems and
upgradation. It has been indicated that for every dollar invested in BPO across India, the value
derived by the US economy is between $ 12-14. It is on the Third position number as strength
to BPO industry on the basis of weighted mean score 4.6.

2.6.4 AFFORDABLE QUALITY EDUCATION: The Indian education system places

strong emphasis on Mathematics and Science. This has resulted into a large number of science
and engineering graduates. Mastery over quantitative concepts coupled with English
proficiency makes India one of the hot spots of the IT/BPO word. It has enabled the India to
take advantage of the current international demand for IT. As a result, it is being listed at
number Fourth in the analysis of strength on the basis weighted mean scores 2.1.

2.6.5 SKILLED AND DEDICATED WORK FORCE: All the BPO employees are well
educated and they are well aware of their responsibilities, not only they work for money but
also they work hard to make the best out of it. India receives most of outsourcing jobs from

40
US. The US people have acknowledged that India is the best place for outsourcing. With the
so much determined workforce, this statement stands at Fifth position the weighted mean
score 2.0

2.6.6 TECHNOLOGICAL COMPETITIVENESS: Technological advancement in India

has witnessed rapid progress in last decade mainly due to privatization or reducing
governmental control. This state-of-the-art technology has enabled India to improve the
quality of service at a reasonably reduced cost. As a result of quality improvement, it has now
BPO industry and has come to the The strengths have been ranked according to the weighted
mean score and depicted in the graph

Source: Primary Survey

2.7ANALYSIS OF THE WEAKNESSES OF INDIAN BPO INDUSTRY

2.7.1 HIGH ATTRITION RATE The major problem which a BPO is facing is the high
attrition rate i.e gradual reduction in the number of people working in a company due to
retirement, resignation or death. The rate of attrition in the BPO industry in India is currently
nearly 50%. Attrition in individual firms varies from 15% in the larger firms to up
Technological competitiveness Skilled workforce and Dedicated Affordable quality education
Cost Benefit Round the clock advantage Human Resource reduced cost. As a result of quality
improvement, it has now become BPO industry and has come to the Sixth position with
weighted mean 1

ANALYSIS OF THE WEAKNESSES OF INDIAN BPO INDUSTRY HIGH ATTRITION

RATE: The major problem which a BPO is facing is the high attrition rate i.e gradual

41
reduction in the number of people working in a company due to retirement, resignation or
death. The rate of attrition in the BPO industry in India is currently tion in individual firms
varies from 15% in the larger firms to up 1.99 2.09 2.11 Technological competitiveness
Skilled workforce and Dedicated … Affordable quality education Cost Benefit Round the
clock advantage Human Resource STRENGTHS OF INDIAN BPO INDUSTRY become
strength to with weighted mean 1.99. The strengths have been ranked according to the
weighted mean score and ANALYSIS OF THE WEAKNESSES OF INDIAN BPO
INDUSTRY The major problem which a BPO is facing is the high attrition rate i.e gradual
reduction in the number of people working in a company due to retirement, resignation or
death. The rate of attrition in the BPO industry in India is currently tion in individual firms
varies from 15% in the larger firms to up 4.68 4.88 4.89

to 40% in the smaller ones Analysts believed that if this left unchecked, there would be a
shortage of professionals. Therefore, it is the most severe problem faced by Indian BPO
industry and has been ranked at First with weighted mean score 4.86.

2.7.2 MARKETING PROBLEM: Due to inclusion of the smaller companies, the maximum
number of companies reported marketing as the major problem faced in this sector. It is well
known that global BPO market is huge, smaller sized firms suffer from lack of information.
Transaction costs to explore market possibilities are also very high. Unlike in the
manufacturing sector, subcontracting is not a practice prevalent in this industry. The reason
for not outsourcing is mainly that the industry being an emerging one, most of the firms are in
their own growth mode. Some firms also have quality concerns for subcontracting their work
to a smaller firm. Some of the higher end work that are currently subcontracted relate to
software development, necessary for efficient delivery of outsourcing services of a BPO firm.
Thus it is considered as an important weakness by the respondents and scored Second position
with weighted mean score 4.83.

2.7.3 FEEBLE INFRASTRUCTURE: Despite of more than six decades of independence,

India’s reliability is at stake especially in segments like power and telecom. Any company,
intending to have

a base in India has to provide for an alternative source of power generation in case of power
failure and scheduled power cuts. It has taken the Third position in the analysis of weaknesses
with weighted mean score 2.84.

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2.74 CULTURAL DIFFERENCE: The productivity of India was never questioned, but
cultural diversity posed questions due to the number of festival holidays. The corporate clock
ticks 24×7; in fact, it never stops. In India festivals or other occasions affect regularity,
resulting in absenteeism and in turn hamper productivity. In India, organizations hire extra
manpower to manage work in case of festival induced absenteeism. Though absenteeism is
temporary in nature, the cost of extra manpower is permanent. That in turn reduces
productivity per person, which places it at Fourth important problem faced by Indian BPO
industry by obtaining weighted mean score

LEGAL LACUNA: Security of information and data is the prime concern for companies
before outsourcing their business processes. India has still not taken a major initiative towards
data protection and privacy, especially for cyber crimes. Legal control on e-practice is still in
its nascent stage. MNCs have security concerns regarding their data. In fact, it is the most
important consideration that determines the destination of a BPO and due to which it comes
on the of analysis of weakness

2.7.6 GOVERNMENT TAX POLICIES The Indian government is making Indian

companies less competitive and costlier new players in the field. In countries like China,
Philippines, Srilanka and South Africa, governments are offering 10 to 15 year tax breaks and
China even offers income-tax holiday to its BPO employees. position in the list of weaknesses
The graph depicts the weaknesses rank wise according to the weighted mean scores given by
respondents. Source: Primary Survey Government Tax Policies Legal lacuna Cultural
difference Feeble infrastructure Marketing problem High attrition

destination of a BPO and due to which it comes on the Fifth position in the list of analysis of
weaknesses by obtaining mean score

2.7.7 GOVERNMENT TAX POLICIES: The Indian government’s tax policies such as
taxes on ESOPS, rental space etc is making Indian companies less competitive and costlier,
when compared to the new players in the field. In countries like China, Philippines, Srilanka
and South governments are offering 10 to 15 year tax breaks and China even offers tax
holiday to its BPO employees.Therefore, it comes on the position in the list of weaknesses
with the weighted mean score .2 depicts the weaknesses rank wise according to the weighted

43
mean scores given by respondents.

Government Tax Policies Legal lacuna Cultural difference Feeble infrastructure Marketing
problem High attrition WEAKNESSES OF INDIAN BPO INDUSTRY ifth position in the list
tax policies such as taxes on ESOPS, rental space etc when compared to the new players in
the field. In countries like China, Philippines, Srilanka and South governments are offering 10
to 15 year tax breaks and China even offers it comes on the Sixth with the weighted mean
score 1.78. .2 depicts the weaknesses rank wise according to the weighted 4.83 4.86

2.8 ANALYSIS OF THE OPPORTUNITIES FOR INDIAN BPO INDUSTRY BPOs

translate into an enormous business opportunity for India. With many companies, looking for
the chance to outsource, the global BPO market is bound to grow. India is positioned to
capture a sizeable chunk of the global pie in outsourcingdue to a number of factors which
have been analyzed as follows:

2.8.1 PEOPLE: Till the late eighties, the major factor for establishing a business was
infrastructure. Nowadays there is a paradigm shift to locations where people are available
easily. Here, India has a number of advantages because of its quality manpower and it is
another opportunity for BPO industry in India and as a result it comes at First (4.91) position
in the analysis.

2.8.2 INFORMATION TECHNOLOGY: India has proved its supremacy to the rest of the
world in having a rich reservoir of IT companies. These IT companies are providing solutions
to a majority of BPO. This is evident from existing client base of IT companies in India. Now
the same or existing client base is outsourcing their processes. Here, India could further
strengthen its position by capitalizing on this phenomenon and creating

44
more opportunities. As a result it is given Second (4.8) position by respondents in the
analysis.

2.8.3 MARKET POTENTIAL: The current conservative estimate is that as of now it has
only been a testing phase of the BPO industry, where just 6 to 10 per cent of industry potential
has been tested. This elucidates the tremendous potential of the industry. India has proved to
be a preferred destination. Even the World Bank has opted for India as their first base out of
their home country. India has fair chances to encash on actual potential. Many companies
intend to extend outsourcing to more areas than routine ones, even US multinationals
including HP, Whirlpool and GE. Therefore it is a good opportunity for BPO industry and it
comes at third (3.4) position in the list of analysis through weighted mean

2.8.4 TO WORK CLOSELY WITH ASSOCIATION LIKE NASSCOM: Most BPO has
certification such as BS7799 and SAS 70, and undergo third party audit at regular intervals. A
number of BPO has obtained this certification through the help of NASSCOM. Which
emerges at new opportunity for the industry and in weighted mean analysis it had gained
fourth (2.84) position.

ANALYSIS OF THE THREATS TO INDIAN BPO INDUSTRY COMPETITION: BPO has

been established as a win that outsources and the company/country that accepts. This further
intensifies competition. Earlier, the were competing, where India had quite a sustainable
strategic advantage. Now other countries like China have emerged as strong competitors. At
the moment, language is one positive factor benefiting India, but gra overcome that
shortcoming by adopting international languages like English as mode of their global
business. In order to take the strategic lead, India has to To work closely with association like
NASSCOM Market potential Information technology OPPORTUNITIES FOR INDIAN BPO
INDUSTRY

ANALYSIS OF THE THREATS TO INDIAN BPO INDUSTRY BPO has been established
as a win win alternative to both the company/country that outsources and the
company/country that accepts. This further intensifies competition. Earlier, the Philippines,
Ireland, Malaysia and other few countries were competing, where India had quite a
sustainable strategic advantage. Now other countries like China have emerged as strong

45
competitors. At the moment, language is one positive factor benefiting India, but gradually
China is trying to overcome that shortcoming by adopting international languages like English
as mode of their global business. In order to take the strategic lead, India has to 2.84 3.40 To
work closely with association like Market potential Information technology People
OPPORTUNITIES FOR INDIAN BPO INDUSTRY ANALYSIS OF THE THREATS
TO INDIAN BPO INDUSTRY win alternative to both the company/country that outsources
and the company/country that accepts. This further intensifies , Ireland, Malaysia and other
few countries were competing, where India had quite a sustainable strategic advantage. Now
other countries like China have emerged as strong competitors. At the moment, dually China
is trying to overcome that shortcoming by adopting international languages like English as
mode of their global business. In order to take the strategic lead, India has to 4.87 4.91 gain
other advantages. As a result, it is given first (4.8) position by respondents in the analysis.

THE ANTI-OUTSOURCING BILL: The anti-outsourcing movement has been slowly

gathering steam as the US grapples with its worst unemployment rate (of 6 per cent) in the
last four years. In order to curb the flight of jobs out of the US, state senators moved Bills in
their respective senates. As much as 71 per cent of Indian IT export revenue comes from the
US. Any movement against outsourcing in the US will have a dual impact on the Indian
economy that is, on outsourcing contracts as well as through Indians placed on-site (US). The
situation could worsen if the slow growth of the US economy continues. Then social pressure
could prompt it to seek excuses to curtail outsourcing. As a result in weighted mean analysis it
had gained second (4.7) position.

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BILLING RATES: For the last four to five years, BPO has taken the shape of an industry
and therefore cost per unit of process plays vital role for business negotiation, for example,
cost per man-hour, cost per unit of production, cost per transaction and cost per month. Their
nature creates a constant pressure on rates. Earlier, quality was the major criterion. Nowdays,
it is quality at a reasonable It might reduce the profitability and then the interest of people.
third (1.9) important threat faced by Indian BPO industry.

SECURITY CONCERN: The main threat of BPO or outsourcing is its security and secrecy.
Trade secrets or proprietary information may leak out to competitors because a firm’s
information system are being run or developed by outsiders. Thus it is considered as Fourth
score 1.78. The graph depicts the opportunities rank wise according to the weighted mean
scores given by respondents. Source: Primary Survey Security Concern Billing rates Anti
outsourcing bill Competition THREATS TO INDIAN BPO INDUSTRY

It might reduce the profitability and then the interest of people. Therefore it is the threat faced
by Indian BPO industry. The main threat of BPO or outsourcing is its security and secrecy.
Trade secrets or proprietary information may leak out to competitors because a firm’s
information system are being run or developed by outsiders. Thus it is important threat by
respondents providing weighted mean depicts the opportunities rank wise according to the
weighted mean scores given by respondents.

THREATS TO INDIAN BPO INDUSTRY Therefore it is the The main threat of BPO or
outsourcing is its security and secrecy. Trade secrets or proprietary information may leak out
to competitors because a firm’s information system are being run or developed by outsiders.
Thus it is s providing weighted mean depicts the opportunities rank wise according to the 4.77
4.89

STRATEGIES TO FIGHT GLOBAL SLOWDOWN On the bases of above SWOT

analysis, the strategies can be determined for the BPO Industry to fight the global slowdown.
By using the matrix table 7.1 which consists of strengths, weaknesses, opportunities and
threats,variety of strategies can be developed.

SWOT ANALYSIS MATRIX STRENGTHS Mean WEAKNESSES Mean Human

Resource 4.89 High Attrition Rate 4.86 Round the Clock Advantage 4.88 Marketing Problem
4.83 Cost Benefit 4.68 Feeble Infrastructure 2.84 Affordable Quality Education 2.11 Cultural

47
Difference 2.72 Skilled and Dedicated Workforce 2.09 Legal Lacuna 2.44 Technological
Competitiveness 1.99 Government Tax Policies 1.88 OPPORTUNITY Mean THREATS
Mean People 4.91 Competition 4.8 Information Technology 4.87 Anti-outsourcing Bill 4.7
Market Potential 3.40 Bill Billing Rates 1.9 To Work Closely With Association Like
Nasscom 2.84 Security Concern 1.78

As SWOT Analysis is an effective way of combining (a) internal strengths with external
opportunities and threats, and (b) internal weaknesses with external opportunities and threats.
The following strategies can be developed:

1. USE INTERNAL STRENGTHS TO CAPITALIZE ON EXTERNAL

OPPORTUNITIES(SO)

 BPO’s should use it dedicated, qualified and skilled human resource to capture large
markets.

 Having the advantage of Cost Benefit, BPO should invest in the global market.

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2. IMPROVE INTERNAL WEAKNESSES BY USING EXTERNAL
OPPORTUNITIES (WO)

 Cultural difference can be overcome by using upcoming generation.

 To fight with government policies and other legal aspects, BPOs should work on set lines
of NASSCOM.

 High attrition rate can be reduced by employing new people, i.e right person at right job.

3. USE INTERNAL STRENGTHS TO AVOID EXTERNAL THREATS (ST)  To face

the competition with other emerging markets it should use its round the clock availability of
HR and Technological Competitiveness.

 May use the Technological Competitiveness to secure the data of their clients.

4. THE STRATEGIES CREATED HERE WILL WANT TO AVOID THREATS AND

MINIMIZE WEAKNESSES (WT)

 Government policies should be made in such a manner that it reduces the impact of anti
outsourcing bill.

 Reduce threat of competition by developing feeble infrastructure.

Review tax policies and social policies.

CONCLUSION

The future of the Indian outsourcing industry has always been a hot topic of discussion and it
is still on. There is a wide spread fear that the increasing unemployment in the west would
reduce outsourcing as they are about to take steps to drive jobs back home .But after
analyzing the key strengths, weakness, threats and opportunities, it is believed that the
outsourcing industry in India will grow at a rate, which is more than what the present
estimates show. It requires deeper understanding of the customers in terms of outsourcing and
improved delivery capabilities.

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2.9 Advantages of outsourcing HR functions.

1. Cost Savings

Overhead costs associated with performing HR services are typically very high. A fully-
functional HR department requires additional office space and highly trained and experienced
HR staff. Many small businesses simply can’t afford this expense and find that it’s more cost-
effective to outsource HR functions. Outsourcing HR helps reduce your costs and helps you
avoid trying to financially maintain nonrevenue-generating back-office expenses.
Furthermore, HR outsourcing costs are variable and can be reduced when business needs
warrant.
2. Payroll and Accounting

The cost of outsourcing payroll is very cheap compared to the cost of maintaining an in-
house payroll staff. The outsourced company can be responsible for employee pay slips,
advising on tax and deduction questions and also offer a payroll analysis for accounting
purposes. This frees up time in calculating the payroll and dealing with different and
sometimes difficult employee situations.
3. Global Talent

One of the great benefits of outsourcing is expanding your perspectives. When HR functions
are outsourced to PEO companies, you get your HR services performed by the best talent
around the globe.

4. Risk Management

Employment and labor laws change regularly, and it can be difficult for you to remain up-to-
date on regulations that affect your workplace. Outsourcing firms employ HR professionals
whose purpose is to stay current on federal and state employment laws. This will help you
comply with these laws and avoid costly lawsuits brought on by employees. HR firms also
maintain and audit company policies and practices to ensure your organization and your
employees’ best interests are protected.

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5. Efficiency

Maintaining an efficient and productive workplace is critical. Outsourcing HR functions

creates greater efficiency within human resources systems. Advanced human resources
technology utilized by outsourcing providers, helps streamline important HR functions such
as payroll, benefit administration and compliance management. Outsourcing helps you and
your managers spend less time on paperwork and more time dedicated to improving the
efficiency and effectiveness of your workforce.

6. Employee Development

Outsourcing HR functions can help you manage employee performance and development.
HR providers implement performance management plans to ensure employees comply with
company policies and procedures and successfully meet your business goals. Outsourcing
firms periodically monitor employee performance and report findings to management. This
reduces the workload of your managers by minimizing their administrative responsibilities.
7. Help with compliance

This is one area where many small businesses really struggle to keep up, especially with the
changing laws pertaining to hiring, insurance claims management, and benefits regulations.
The greatest challenge is that failure to comply can lead to serious financial consequences.
Outsourcing HR functions to a trusted provider can help you understand and take action to
comply with these laws and regulations.

8. Reduce Employment-Related Expenses

While there are hundreds of corporate cost-cutting areas to consider, labor costs account for
one of the largest operating expenses in a business. Beyond payroll and tax overhead, other
expenses are related to health insurance premiums, workers’ compensation insurance,
recruiting fees, payroll processing, and legal costs.

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 9. Health Insurance Benefits

As our economy improves, employers are looking for ways to incentivize and motivate their
staff. PEO firms provide small employers the unique opportunity to offer their staff a robust
and comprehensive array of employee benefits that are typically available to only the largest
corporations. These robust offerings include a wide range of major medical plans and
voluntary benefit offerings.

2.10 Limitations of the Study

Poor Performance
Many companies outsource to limit costs; however, decreased costs often result in decreased
quality of performance by the outsourced provider. The human resources department is
responsible for the day-to-day operation of the company and any poor performance from the
outsourced provider causes an overall negative impact on the company as a whole.

Distance
Outsourcing human resources functions to an offsite location often leads to a sense of distance
between the employees and the company. When the human resources department is not
instantly accessible, employees experience delays in communication, leading the employees to
feel frustrated and unimportant to the company. This often results in reduced morale among
employees. The fact that the company is willing to outsource a department may lead to
speculation about the possibility of the outsourcing of other departments.

Recruitment Problems
In some cases, outsourced employees lack the understanding of the company culture that a
regular employee has. As the human resource department recruits employees, this lack of
understanding may transfer to new employees during the recruitment process. The outsourced
provider may also recruit employees who do not fit with the overall culture of the company.
The success of a business heavily relies on the performance of its employees, if the employees
are not the right fit; the success of the company suffers.

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Information Leaks
Outsourcing human resources functions may lead to the release of sensitive company
information. Often, for an outsourced company to provide adequate service, some sensitive
information about the company’s organizational structure, product information or other inner
workings is necessary for the vendor to perform unhindered. Whether deliberate or not, when
providing an outside company with sensitive information, there is always a possibility for an
information leak.

Dependency and Loss of Control

After outsourcing to a provider, executives may give up too much control over the company’s
human resource functions or the company may become too dependent on the outsourced
provider. Dependency and loss of control create the risk of the business not being able to
operate successfully if outsourcing is no longer an option for the company or if the provider
changes the terms of the contract.

People Issues. This is one of the most debatable aspects of Outsourcing. An extensive study
by Hackett Benchmarking & Research revealed that companies consider the greatest obstacles
to outsourcing to be cultural and political factors. The services being outsourced to an outside
entity poses a threat to the employee trust in the system. Further more the vendor working
environment and ethics might not be commiserating with the firms’ which would bring out
contention of issues. For example (Broad 2002), when Bank of America formed an alliance
with Exult which included a major outsourcing arrangement, employees were worried about
the implications of the deal for their positions. It is only when they understood that it was
Exult, and not Bank of America, that would make the required investments, that they became
reassured and accepted the alliance

Problems with the Outsourcing Provider. The providers might be faced with issue where
he is forced to cover up for any mistakes for which the service provider can be held liable.
Further more the organisational culture of the provider would also be a binding factor as they
can be a cause low service standardsr, a lack of attention to regulatory and business
requirements, or unmet objectives and timeframes by the outsourcing provider.

Loss of Control. Outsourcing HR functions can lead to a loss of control by the buying
company. According to recent study by Accenture, 48% of executives surveyed stated that the
fear of a loss of operational control was the greatest impediment to expanding their use of

53
outsourcing. Their can be a fundamental mismatch of hierarchy in the firm as the line
manager and the service provider might not be able to synchronise their working.

Consequences of outsourcing

Major implication, both in terms of their (changing) roles and their experience of the HR
services of Outsourcing have been felt by HR professionals, line managers, employees who
receive the services, and outsourced HR staff who provide the services.

In-house HR Professionals. Most noticeable impact on in-house HR professionals will be in

terms of the nature of their work and their career patterns, although due to scarce literature,
the extent is difficult to predict. Ulrich (1998) proposes four new roles for HR; among those
he recommends sharing of HR work in varying proportions among the line management,
employees, external consultants, and other groups. But he does not really discuss the rationale
by which this distribution of work would be determined (Procter & Currie, 1999). Nor have
the implications for their career prospects been contemplated. Greer et al.’s (1999) study
suggests that as a consequence of outsourcing of HR activities, the user company would
mandatorily have to deploy in-house HR generalists who know can manage the outsourcing
relationships. However, this also poses a threat of work intensification for these HR
professionals, as they might still be relied by their colleagues to provide the service because
they may be used to it or are unfamiliar with the new system. For example, Shen et al.’s study
(2004) indicates that the job content for the NHS maintenance manager of National Health
Services (NHS) trust hospital in the United Kingdom has undergone severe work
intensification and radical change ever since the outsourcing of maintenance. The same can
also happen to the HR managers when outsourcing HR takes place, since both functions
require intimate knowledge of the organization and a relatively high level of relationship
management. HR outsourcing also raises concerns about the career prospects of the HR staff.
One of the significant changes to career prospect would be – Availability of fewer career
development options for specialists as compared to generalist. At the same time, as there
would be only a limited activities being performed in-house, general HR experience would be
hard to gain. This will also raise question about the type of training to be provided to HR
professionals that existing training for the HR profession is generalist-oriented, while in future
the service provider would need specialists. Therefore, outsourcing HR could affect the in-
house HR staff in ways such as job intensification, change in job content, reduction of career

54
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 the HR professionals will need to
learn how to play the game (Turnbull, 2002).

Line Managers. One of the apparent rationales of Outsourcing has been to delegate the softer
aspects of the HR function to the line management ie involvement in and ownership of HR
decisions. For example, Vernon et al. (2000) found that in Europe it is a common practise for
sharing responsibilities between the HR specialists and the line management, in regard to the
policy making: “About a third of senior HR specialists reported an increase in line
management responsibility for HR issues over the last three years” (Vernon et al.,2000, p. 7).
The role of line managers in executing HR policies and shaping HR practices has long been
acknowledged (e.g., Currie & Procter, 2001; Marchington & Parker,1990; McConville &
Holden, 1999; Procter & Currie, 1999). This has resulted in line managers taking on
additional responsibilities, thus intensifying their role. This can at times all draw away or
cloud the focus of line manager from their primary role. Also in reality, some of the smaller
tasks may take longer to explain via electronic devices and are easier for the line managers to
do themselves. The lack of HR support on-site seemed to have caused work intensification for
the line managers, since they no longer have easy access to the HR staff. Another aspect
which is pertinent to mention here is the competence of line manager. Line managers in the
United Kingdom have been criticized for their lack of HR skills and competence, especially
on legal matters such as discipline, dismissal, redundancy, and equal opportunities (e.g.,
Currie & Procter, 2001; Hall & Torrington, 1998; Mc-Conville & Holden, 1999). They have
also been criticized for their lack of interest in managing human resources, as HRM tends to
be low down in their operational priority. In addition, they tend to focus on the hard, rather
than soft, aspects of the HRM issues.

Employees Receiving HR Services. The most significant outcome of this has been on the
employees as they find difficulty in divulging confidential or private information with
unknown HR person over the phone or online. This can also be termed as loss of ‘Human
touch’ from the term Human Resources. Research carried out by Feng Lee Cook (2006) about

55
the employees’ response in Consult-Corp UK also indicates the same. Number of employees
felt loss of emotional aspect as they felt that staff in the services centre, provide answers by
reading off the screen or the manual and the entire process is mechanical. Another
consequence of the outsourcing has been the lack of clarity of ownership of problems that
may occur in HR services. With no HR department, at times the employees could find a void
for issues such as grievance against their line manager itself especially when the grievance
concerned the line manager or if the line manager responsible for their performance appraisal.
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 large 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 all 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

56
principle, by some sort of employment regulation of the specific country (e.g., the Transfer of
Undertaking Protection of Employment [TUPE] regulations in the United Kingdom). In
theory, the employment contract of the transferred workers is preserved intact under TUPE
regulations. In reality, however, their terms and conditions and other experience of work may
change significantly, albeit 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 worsening 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
organizations, thus creating a work environment with multiple cultures, multiple identities,
and competing demands for preferential treatment from client organizations (Rubery et al.,
2003). These issues also present a serious challenge for the new employer. The outsourcing
firm has to manage a fragmented workforce, one where employees have different employment
packages. At the same time, the outsourcing firm is trying to implement a coherent HR
strategy and a consistent organizational culture while delivering customized HR services to its
client organizations.

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CHAPTER-3
2. Literature Review
ARTICLE

One of the more recent “hot button” issues in our field is that of outsourcing all or some
human resource (HR) functions whether by fee for service or contract. Advocates from the
field of Public Choice Economics assume and, in many cases, economically substantiate the
case for privatization of governmental functions.1 Even though these economists demonstrate
an underlying anti-government bias, their basic argument with supply of government services
is “that agencies should compete to provide citizens with goods and services instead of acting
like monopolies under the influence of organized pressure groups.”2 Responsiveness to the
needs of individual citizens (or to governmental units to be served by staff agencies, for that
matter) is best obtained by competing within markets, with the result of economic choices by
clientele between competing services. From this market environment economies in resource
allocation and efficiency and effectiveness in operations are said to result. Public Choice
Economists would also include simulation of market forces by introducing competition,
possibly within the same department, governmental jurisdiction, or between other public,
profit or non profit providers.3

This essay departs from an article by Robert J. Agresta.4 He argues for an extension of the
Public Choice approach from one of “citizen-customers being empowered to select freely
among providers of a service—whether it is schools or health care (with vouchers) or
groceries (with food stamps)—and have control over the resources needed to acquire the
service…”,5 to the same market relationship between central administrative (staff or auxiliary
staff) agencies and the line units to which they provide services. While Agresta writes of
building choice into any line-staff relationships, this article is concerned with HR service
supply alternatives and alternative modes for their delivery.

Although there are lots of theoretical and empirical articles and on outsourcing organizational
function such as information system and accounting, the academic literature on outsourcing the HR
functions is almost non-existing. In the topic of human resource outsourcing, the top and most
important argument that comes in discussion is the cost benefit analysis for firing out services which
were performed internally (Anderson et al, 1986; Greer et al, 1999; Gupta et al, 1992; Kakabadse et

58
al, 2002; Lever, 1997), and Vining & Globerman (1999) note that empirical data from government
agencies outsourcing to private suppliers generated savings in the range of 20-30 % in production
costs. Some of the studies from these authors concern that there should be other factors except cost
which should be considered at the time of taking outsourcing decision. Other factors include vendor
customer satisfaction, employee satisfaction and expertise (Barthelemy, 2003) and loss of strategic
advantage. Adler (2003) notes that a review by the Granter group listed six factors that are important
in outsourcing decisions: dependency risk, spillover risk, trust, relative proficiency, strategic
capabilities, and flexibility. The first four of these factors are short term factors, whereas the last two
are considered more long term or strategic. However, no clear formula exists that identifies when
outsourcing is most efficient and effective.

The question arises that what are the situations where the outsourcing is most desirable and under
what circumstances an organization should outsource to increase effective performance by its human
resources. In other words are there internal and external forces that their conductive to HR
outsourcing? If these forces can be acknowledged that they provide some signs relating to the
appropriate action to take when outsourcing is being considered. This is especially important science
67% of HR departments outsourced one or more function in 2004 (Bureau of National Affair, 2004).
We especially address the issue of when and under what circumstance does HR outsourcing
contribute value to the firm by attempting to identify environmental and organizational characteristics
that effect HR performance and how HR outsourcing mediates that relationship.

Another issue that concerns the current outsourcing research is the absence of studies looking of the
HR functions in organization. Klaas (2003) develop a framework that helps analyze HR outsourcing
factors in small and medium sized enterprise (SMEs) by explicating on the relationship between
SMEs and the professional employer organization and Gainey and klaas (2003) analyze HR function
specifically in the context of training and development these studies are expectation rather than the
rule. This fact is surprising given that many HR function such as pay role, benefits, training, and
recruiting are often outsourced by organization(Gilley et al, 2004).

The SHRM Human Resource outsourcing Survey Report released in june 2004 found that HR
function that are entirely background checking, employee assistance/counseling and Flexible
Spending include administration. The outsourced functions include management of health care
benefit, pension benefit administration and payroll. Despite these increment in HR outsourcing
activities to date the empirical articles on outsourcing HR function focus on the impact of

59
organizational characteristics (Klaas, 2003), the role, the transaction costs (Gainey et al, 2003; Klaas,
2003; Klaas et al, 1999), the relationship between HR departments, size and outsourcing activity
(Pommerenke et al, 1996) and the rational and consequence of HR outsourcing, and the time of
outsourcing (Greer et al, 1999). The question concerning the appropriate time to outsource HR
practices based on the internal and external forces driving the firm to consider outsourcing however is
not directly addressed, although Klaas, McClendon & Gainey (1999) come close in their analysis of
moderate variables in the relationship between amount of HR outsourcing and perceived benefits
from outsourcing. A separate article by Klaas, McClendon & Gainey (2001) also discussed on few
organizational characteristics that lead firms to outsource the HR activities but does not consider HR
performance as a dependent variable. As such it is necessary to address the question of when to
outsource the HR function by looking into the theoretical issue of outsourcing in the literature
representing disciplines other that HR to from a basis for HR outsourcing. However a brief discussion
of definitions and HR activities is presented first.

Gilley Greer and Rasheed (2004) discussed a strategic typology of HR activities develop by Greer
(2001) in HR activities are classified as having either high or low strategic value and as being either
transaction or relationship oriented in nature. Their resulting typology shows the quadrant containing
relation oriented activities related to training and performance evaluation. When the HR activities
listed by Gilley, et al. (2004) are located in the HR value chain, it becomes certain that portions of
each major HR functions are potential candidates for outsourcing. However, three functions in
particular, training, performance planning and evaluation and compensation deal specifically with an
organization’s current relationship with it employees.

A notable recent trend has been the increased use of contingent and temporary workers, or the
outright outsourcing of Human Resource functions (Harkins et al, 1995). A 1996 survey by the
American management Association found that 77% of their respondents outsourced some functions,
up from 60% in 1994. Other HR departments, under budgetary and managerial pressure, are simply
eliminating certain services previously provided by HR staff. A number of competitive forces have
been identified as drivers of the trend to outsourcing (Greer et al, 1999). These include: downsizing
of internal staff, rapid growth or decline, increased competition, and restructuring. The push to reduce
costs drives many outsourcing decisions. A number of other reasons for outsourcing have been
identified as well. (Cook, 1999; Greaver, 1999; Greer et al., 1999; Milgate, 2001).

60
Lever (1997) cautions that “the old HR staffing rule of one HR staff member for every 100
employees is not as meaningful today as a measure of HR efficiency or effectiveness as in the past”.
Annualized HRO spending has experienced a significant and consistent growth over times. Whereas
HRO spending represented US $ 75 million in 1998, it's skyrocketing at an increasing rate to well
over US $ 1500 million in the year 2004(nearly 80% increase per year). Towards the end of modern
day the trend of outsourcing has moved into the world of data transcription, information technology
and call center operations. Studies on the history of outsourcing conclude that outsourcing is clearly
not just about payrolls and call centers. This can be seen by simply looking into the medicine cabinet.
It is very likely that the R&D of the daily medicine was outsourced to companies in India. The
insurance company which covers the costs of the medications may have their claim processing to
offshore transcription providers. And the medical clinic may easily be outsourcing the administration
of your confidential medical records to Russia, the Philippines of India.

Outsourcing human resource activities in our country is nothing new at all. Government has been
outsourcing, specially, in construction sector since long. Farmers in villages do outsource during the
time of harvesting crop. In domestic level, people outsource carpenters, masons and other kind of
activities. And so forth. Recently, private sector employers are more interested in outsourcing
different activities apart from their line of business. RMG manufacturers, construction firms, Banks,
telecom operators are frequently outsourcing their different need of human resource.

But all these, apart from government jobs, have been being operated in ad-hock basis. There has
never been any organization to give the Human Resource Management service for other organizations
until recently. Still the number of such HR service providers is nothing other than one. Our research
has determined only Monowara associates. Apart from this BDJobs.com and similar online based
organizations are coming up with recruitment and training solutions. All other services are somehow
collected in personal contact through local contractors. These contractors operate in mostly in so
unorganized way that for organizations searching for such services find it difficult to contact them.
And for the same cause we had a difficulty in finding any such information.

61
Theoretical Framework and Formulation of Hypotheses
The conceptual model for research has been developed based on an extensive review of literature
primarily aimed at capturing Amount of HRO and its impact on the firm performance. The present
study had taken into account the seven organizational characteristics or organization related variables
suggested by Klaas (1999; 2001), which have been reviewed in the previous section. Similarly, one
market related variable is included based on Klaas (2001) study.
Following these, a conceptual model is developed using three sets of suggests that the Amount of
HRO had 33 items covering different aspects of HRO in terms of design of programs and policies and
administration of programs and policies. They conducted a study on amount of HRO. The data were
collected from 2000 randomly selected members of the Society of Human Resource Management
(SHRM) in United States who were working as Vice President or Director of Human Resources. The
respondents rated each item on a 7-point scale with percentages as anchors. The responses to the 33
items were factor analyzed using principal component analysis with promax rotation. The following
four factors were identified: a) HR generalist activities consisted of items related to tasks typically
performed by HR generalists and it had 12 items (e.g., performance appraisal, HR planning, equal
employment opportunity/diversity, employee relations, and safety and health). b) Transactional
activities consisted of items relating largely to more routine, transactional activities and it had 7 items
(e.g., payroll, benefits, and human resource information system). c) Human capital activities
consisted largely of items relating to the building and maintenance of human capital and it had 6
items (e.g., training, organizational development, and employee assistance). d) Recruiting & selection
consisted of 8 items relating to staffing activities – recruiting, selection, and induction. A closer
examination of the 33 items loaded in four factories revealed that many of them are not relevant for
Indian organizations. Some items were repeated. Therefore, extensive discussions were held with the
HR experts and professionals in the field. Based on these discussions, 14 activities of HR from the
list 33 were identified as (a) most relevant in the Indian context, and (b) capturing almost all the HR
activities in Indian organizations. These 14 activates included: HR Planning, Employee Relations,
EEO/Diversity, Organizational Development, Safety and Health, Performance Appraisal, HRIS,
Payroll, Benefits, Training, Employee Assistance Programs, Recruiting, Selection, and Induction. In
this connection, a preliminary study was conducted to verify the validity of these 14 HR activities in
the Indian context. For this purpose we had developed a questionnaire based on the above 14 HR

62
activities. The data were collected from 96 senior managers attending training programmes at IBS,
Hyderabad, and Centre for Organization Development, Hyderabad. Factor Analysis technique was
used to analyze the data. Initially we obtained four factors from these 14 HR activities, but they
suffered from overlapping and cross loadings across the four factors. The activities that were loaded
on more than one factor included Employee Relations, EEO/Diversity, Organization Development,
Safety and Health, and Benefits Management (see Appendix C for preliminary study results analysis).
Elimination of these activities with cross loadings reduced the list to 9 activities. These 9 activities
were again subjected to factor analysis. The results of the analysis showed that 9 HR activities can be
grouped into just two factors instead of four – Transactional, and Core activities. The KMO score of
0.61 indicated just acceptable sample adequacy. The total variance explained by the two single
factors 60.65 %. Factor loading for each the nine items exceeded the normative value of 0.70.
Therefore, for this study, Amount of HRO had these two dimensions with 9 HR activities. Firm
performance is measured on three dimensions - financial, innovation and stakeholders’ performance.
Literature suggests that Organizational Characteristics and Market Variables are antecedents to the
Amount of HRO and firm performance relationship (Klaas, 1998; Klass et al., 1999 and 2001; and
Gilley, Greer and Rasheed, 2004).

Schematic Diagram of Theorized Relationships Transactional Cost Economics (TCE) is concerned

with two forms of governance systems – market governance and organizational governance.
Whenever any firm takes a HRO decision, it is opting for market form of governance as opposed to
organizational form of governance Organizational Characteristics Market Variables Amount of
HRO Firm Performance (Williamson, 1991). Many of the make and buy decisions in HRO are
addressed in TCE. Many organizational characteristics are likely to affect the costs and benefits
related with the market governance mechanism. Similarly, the Resource Based View (RBV) of the
firm tries to explain how firms gain sustainable competitive advantage through acquisition and
nurturing of resources. Resources which are valuable, rare, inimitable and non-substitutable help a
firm get sustainable competitive advantage (Barney, 1991). Therefore, such activities ought to
require organizational governance mechanism rather than market contracting governance. Hence
RBV demands attention to the processes, resource leverage and intangibles. Thus the relevance of
RBV to HRO is to understand the core and the non-core activities that can be outsourced or kept
inside the firm. This study used the TCE and RBV perspectives to formulate hypotheses that
predicted the association among the organizational characteristics, market variable, Amount of HRO
and the firm performance.

63
H1A: Firms having lesser idiosyncratic HR practices will rely more on the Amount of HRO
Transactional activities. H1B: Firms having greater idiosyncratic HR practices will rely less on the
Amount of HRO Core activities.

H2A: Reliance on HRO-Transactional activities will be higher in firms where HR department is

seen as strategic partner. H2B: Reliance on HRO-Core activities will be lower in firms where HR
department is seen as strategic partner.

H3: Firms that provide superior promotional opportunities to their HR staff compared to other firms
in their industry segment, their reliance on both HRO-Transactional and HRO-Core activities will
be lower.

H4: In firms facing substantial labor Demand Uncertainties across seasons, reliance on Amount of
HR outsourcing will be higher.

H5A: Firms having severe cost pressures are likely to rely more on HRO-Transactional activities.
H5B: Firms having severe cost pressures are likely to rely less on HRO-Core activities.

H6A: Firms following pay leadership will rely more on HRO-Transactional activities. H6B: Firms
following pay leadership will rely less on HRO-Core activities.

Hypothesis7: There exists an inverse relationship between firm size and reliance on Amount of
HRO.

Hypothesis 8: Organizational characteristics are related to the Amount of HRO.

Hypothesis 9: Reliance on HRO will be positively related to the degree to which a firm’s major
competitors are seen as relying on HRO.

Hypothesis 10: There exists a positive relationship between Amount of HRO and Firm
Performance.

64
65
4. Methodology

With a view to conducting a research study, what is necessary is to design the research framework
and select the appropriate research methodology. Given the nature of the present study, it was
required to collect data both from the primary and the secondary sources.

Secondary data were collected by consulting various documents, such as, Office-Order; financial
manuals, accounts manual, Annual Reports, Employee profile, Employee data base prepared by
Human Resource Department, and relevant Journals.

The judgmental sampling procedure was used to select the sample units from Human resources
division officers of different companies of telecommunication sector who were willing to respond to
the questionnaire. Total numbers of respondents were fifty, selected from four companies named
Robi, Grameenphone, Banglalink and Airtel.

We have prepared a questionnaire and collected data from the companies. The questionnaire consists
of eleven questions. Based on the responses to this questionnaire we have prepared the survey result.

The jargons that have been used in the questionnaire are all related to standard HRM practices. This
may seem not so easy for ordinary people to understand. However our target audience is the HR
professionals, which ultimately justify such choice.

66
a) Questions 01 through 03 are to know about the type of business the organization is in, and its
management. These questions serve the purpose of finding any intrinsic correlation of any kind of
human resource outsourcing and the management practice and/ or type of business.

b) Question 04 is to find the total number of employees in the organization, while questions 05 and
06 deal with findings whether the organization has any HR department. If yes, then how many
employees are there in the department? The answers from these three questions will give us an
understanding of correlation of having HRD with the number of total employees. When we add the
answer from question 07, which answers whether the organization outsourcers any HR activities, will
widen our understanding of the relations among these factors.

c) The first part of question 08 has been designed to find the effect, in ordinal scale, of nine different
HR activities on overall performance of the organization. Collected data has been converted into
interval scale in analysing and further comparison. This data would later be used in collaboration of
others found in questions afterwards. The second part simply is to know whether the organization
outsource those functions or not.

d) Question 09 inquires the reason(s) for outsourcing, if they do or why would they consider
outsourcing, if they don't do that already.

e) Question 10 is the continuation of question 08. If the answer of the second part is no, then this
question inquires the reasons in ordinal scale, which later would be converted into interval scale
assigning certain point in each order.

f) In the last question (number 11), we will have a picture of the level of satisfaction connected to
different expectations of the organizations who are currently outsourcing HR functions. This is
actually a vital feedback for the HRM outsourcing firm, providing the service.

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5. Findings of the Study
5.1 Relationship between Existence of HR Department and Number of Employee

Regardless of the number of employee, all the organizations we have surveyed have HR departments.
The range of number of employee was 800 to 5000 with an average of 2100 people. The number of
employees in HR department varies from 14 to 50 people with an average of 23 people. Total
employees per person in HR department vary from 53 to 106.

5.2 Relationship between Outsourcing and Number of Total Employee

It appears, as the number of the people in an organization increases, the necessity of outsourcing
emerges. To find whether there is any relationship between outsourcing and total number of
employees in an organization,
CHI SQUARE test was done.

Result of the analysis:

Table 1, 2 and 3 show the result of the analysis. The analysis shows that at 0.5 level of significance
and 2 degree freedom the calculated value of CHI square is 1.8333 which is less than the table value
5.99. So, at 5 percent level of significance, we can conclude that there is no significant relationship
between outsourcing HR functions and total number of employees.

Table 1. Observed Frequency (Relationship between outsourcing and number of total employee)
Total Employee Yes No
More than 2000 1 0 1
1000 to 2000 1 1 2
Below 1000 0 1 1
2 2 4

Table 2. Expected Frequency (Relationship between outsourcing and number of total employee)
Employee Yes No
More than 2000 0.666667 0.666667 1.333333
1000 to 2000 1.333333 1.333333 2.666667
Below 1000 0.666667 0.666667 1.333333
2.666667 2.666667 5.333333

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Table 3. Chi-square test result (Relationship between outsourcing and number of total employee)
Yes (O-E)2/E No (O-E)2/E

0.166667 0.666667
0.083333 0.083333
0.666667 0.166667
∑(O-E)2/E = 1.833333 ACCEPT

5.3 Relationship between Outsourcing and Number of Employees in HR Department

Apparently, many people are under the impression that there is a negative correlation between the
number of employees in the HR department and outsourcing HR functions. To find the relationship
between number of people in HR department and outsourcing, again, CHI Square test was done.

Result of the analysis:

Table 4, 5 and 6 show the result of the analysis. The result shows that at 5 % level of significance and
2 degree of freedom the calculated value of chi square is 1.8333 which is less than the table value of
5.99. So, we can conclude that there is no significant relationship between outsourcing and number of
employees in HR department.

Table 4. Observed frequency (Relationship between outsourcing and number of employees in HR

department)
HR Employee Yes No
More than30 1 0 1
15 to 30 1 1 2
Less than 15 1 0 1
3 1 4
Table 5. Expected frequency (Relationship between outsourcing and number of employees in HR
department)
Employee Yes No
More than 30 1 0.333333 1.333333
15 to 30 2 0.666667 2.666667
Less than 15 1 0.333333 1.333333
4 1.333333 5.333333

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Table 6. Chi-square test result (Relationship between outsourcing and number of employees in HR
department)
Yes No
(O-E)2/E (O-E)2/E
0.166667 0.666667
0.083333 0.083333
0.666667 0.166667
∑(O-E)2/E = 1.833333 ACCEPT

5.4 Relative Importance of Different HR Functions

Not all HR functions are of equally needed to be outsourced. Clearly, in a country like us activities
like recruiting and selection require greater sophistication than the functions like temporary staffing,
apparently, therefore of much greater relevance for outsourcing. The relative importance of various
HR function was done by converting ordinal ratings of the functions to numeric interval value. It was
determined using the following scale:
Then the numbers were averaged to find which function is more important to the organizations on
average.

Result of the analysis:

Table 7 shows Relative importance of different HR functions. Figure 1 shows the histogram of
ordinal response of relative importance of different HR functions. The analysis shows that Recruiting
and Selection is ranked first according to the importance to the organization. Temporary staffing is
considered to be of lowest importance among other HR functions by importance. The functions in
order of importance are as follows:
1) Recruiting and Selection
2) Appraisal
3) Training and Development
4) Job Design
5) Compensation and Reward
6) Employee Benefits
7) Strategic HR planning
8) Employee Assistance /Counseling
9) Temporary Staffing

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Table 7. Ordinal response of relative importance of different HR functions
Little 1
Much 3
Not so much 2
Very little 0
Very much 4
Little 1
Much 3
Not so much 2
Very little 0
Very much 4
Ordinal response for importance of a function Numeric value
Very little 1
Little 2
Not so much 3
Much 4
Very much 5

Figure 1. Histogram of Ordinal response of relative importance of different HR functions

5.5 Causes of Outsourcing

The causes for outsourcing can be anything between desires to save money to compensate for lack of
experience in handling HR related affairs. The most prominent of the reasons include desire to
achieving special competence, improvements in quality, save time, save money, and lack of
experience. Besides, there was also an attempt to see whether these motives that usually prompt
people to outsource vary according to different functions of an organization.

Method: Frequency analysis was done to identify the most frequent reason of outsourcing HR
function.

Result of the analysis:

Table 8 and Figure 2 shows the causes of outsourcing. Among others, it was found that the most
important cause of outsourcing HR function is the desire to special competence of the HR firms for

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40% of the total, followed closely by improve quality and harnessing saving time, representing 25%
and 20% respectively. Other significant causes of outsourcing include desire to save money and
compensating for the lack of experience.

Figure 2. Pie-chart shows the reasons of outsourcing

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5.6 Causes of Not Outsourcing

The possible reasons why HR activities are not outsourced are self sufficient HR departments, lack of
availability of HR outsourcing activities, conflict with internal practices, dissatisfaction with the
quality of the service rendered by the HR outsourcing companies, expense of the service and so forth.
We attempted to discover the actual reasons that impede the firms from taking advantage of HR
outsourcing.
Method of analysis: Again frequency for different reasons for different functions was counted.

Result of analysis:

Table 9 and Figure 3 show the causes of not outsourcing. The most frequent reason of not
outsourcing HR functions, reportedly, is self sufficient HR department of the organizations;
representing 56% .The other significant reasons include services not available, conflict with internal
practices, lack of satisfaction with the quality of service offered and cost of service, accounting for
23%, 9%, 6% and 6% respectively.

Figure 3. Pie-chart shows the reasons for not outsourcing

5.7 Satisfaction Level for the Results of Outsourcing

The relative satisfaction level with the impact of outsourcing has on organizations and its operations
generally differ in terms of bringing about a qualitative change in organizations activities to reduction
in costs. To appraise the level of satisfaction various such issues were analyzed by converting ordinal
responses to numeric value and averaging those values.

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Result of analysis:

Figure 4 shows that, managers are very satisfied by the change in service quality that is brought in by
outsourcing some HR functions. They are also satisfied with the impact of outsourcing on creating
standardized practices. But they are not satisfied with ability to manage good outsourcing vendor
relationship and organizations effectiveness in terms of human resource management.

Figure 4. Histogram of satisfaction level for the results of outsourcing

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6. Conclusion
Our analysis shows that Recruiting and Selection is ranked first according to the importance to the
organization, followed by appraisal, strategic HR planning, and training and development. Temporary
staffing is considered to be of lowest importance among other HR functions by importance.

On the other hand, it has been found that for such activities as training and development, employee
appraisal and strategic HR planning outsourcing was the most frequent in contrast to the activities as
job appraisal, compensation and rewards and employee benefits, where apparently employer
confidence was the lowest.

The reasons for outsourcing HR functions included, primarily, improvement in quality, saving time
and special competence in addition to the efforts to save money. In contrast, the most frequent
reasons of not outsourcing HR functions are self sufficient HR department of the organizations,
conflict with internal practices, and unsatisfactory quality of service and cost of service.

The result shows managers are very satisfied by the change in service quality that is brought in by
outsourcing some HR functions. They are also satisfied in terms of the impact of outsourcing on
creating standardized practices and cost reduction. However, they are not satisfied with ability to
manage good outsourcing vendor relationship and organizations effectiveness in terms of human
resource management.

7. Policy Recommendations
Searching through the industries and researching the findings we have concluded, within the
boundary of our scope and facing all our limitations, and recommend the following for potential HR
firm.

1) The prospective firm should target the larger organizations in the field, as our finding affirms the
fact.

2) Training & Development as well as recruiting are amongst the most demanding services for the
organizations studied. So, it is highly recommended to the prospective HR service provider to have
strong hold in these services. And by establishing trust and reliability the firm can expand its service
base to more confidential services, like Strategic HR planning.

3) Study shows that first three most important functions of organizations are Recruiting & Selection,
Appraisal, and Strategic HR planning. So, building expertise in those sectors would be more
profitable for prospective HR firm.

4) The prospective firm should emphasize on improving quality of service, be highly efficient and
have to control expenses in iron hand to give less expensive service to attain and continue with
market share.

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5) Conflict with internal practices is one of the most noted reasons why the organizations do not tend
to outsource certain functions. This could be reduced by providing extensively tailored services to the
organizations.

6) Organizations face difficulty in keeping relationship with HR service providers. So, this shall be a
challenge for the prospective firm. The firm shall have to keep an eye on improving healthy
relationship with its client.

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