Professional Documents
Culture Documents
2
to its degrees of freedom (
2
/df) as well as the
goodness-of-ft index (GFI) Second, this study also
used Tucker-Lewis ft index (TLI) and fnally, two ft
indices that are based on the noncentrality ft index
(CFI) and the root mean square of approximation
(RMSEA). The criteria for evaluating these indices
were for the
2
to be non-signifcant and the
2
/df
to be small approaching unity (Bentler 1995). For
GFI, TLI and CFI, values greater than 0.95 constitute
good ft and values greater than 0.90 are good ft.
For RMSEA, values less than 0.05 constitute good ft,
values in the 0.05 to 0.08 range acceptable ft, values
in the 0.08 to 0.10 range marginal ft and values
greater than 0.10 are poor ft (Hair et al. 2006).
Path modeling via AMOS is employed to test the
hypotheses of this study. In this model, the structural
relationships between latent variables were specifed
(see Figure 2). This technique permits researchers
to analyze groups of independent variables and
dependent variables simultaneously, as opposed
to regression equations (Hair et al. 2006). In other
words, the model examines direct or indirect
relationships between latent variables and how much
the relationship infuences the score of particular
latent variables (Bagozzi & Dholakia 2006). In fact,
it was used to test the overall ft of the studys model
and to decide whether this model ftted well with the
sample data (Lievens & De Corte 2008).
RESULTS
Table 1 displays the result of exploratory factor analysis.
From exploratory factor analysis, six factors of HRM
strategy were produced with factor loading from 0.419
to 0.817 with KMO and Bartletts test of 0.908 and
0.000. These six factors contributed 52.33% to item
variance. The Cronbach (as) of each of the factor are
as follow. Expansion HRM strategy a = 0.904; quality
conscious HRM strategy a = 0.589; cost effciency HRM
strategy a = 0.592; commitment HRM strategy a =
0.536; employee development HRM strategy a = 0.743
and conventional HRM strategy a = 0.677.
14 / Jurnal Pengurusan 30 (Julai 2010)
Factors/Items
Factor loading
HRM Strategy - KMO = 0.908 Barletts: Sig. = 0.000
Factor 1: Expansion
All HR activities are fully integrated with one another.
Human resource activities are in line with overall corporate strategy.
The human resource department has as much say in corporate matters.
The human resource department has explicit statement of its goal.
Promotion is closely tied to performance appraisal.
Training is viewed as an investment.
Supervisors keep open communication with employees.
Training is a valued function.
Employees may suggest improvement in the way things are done.
0.817
0.693
0.721
0.552
0.575
0.549
0.545
0.481
0.471
Factor 2: Quality Conscious
Employees are actively involved in formal participation process.
The job descriptions are explicit.
Employees performance appraisal is according to standard set of
procedures.
Employees complaint through proper channel is encouraged.
My company conducts standardised/structured interviews.
The job has an updated job description.
There are multiple promotion ladders.
0.676
0.685
0.645
0.609
0.589
0.496
0.439
Factor 3: Cost effciency
The human resource department function is accorded a trivial role.
Qualifed employees have narrow opportunities to be promoted.
Job duties are ambiguously defned.
Employees have little participation in goal setting.
The head of human resource is excluded from the executive meeting.
Promotion is based on seniority.
The career path is broad.
The basic salary offered is low compared to others.
0.700
0.696
0.632
0.602
0.552
0.544
0.512
0.419
Factor 4: Commitment
Employees performance is emphasised on their personal development.
Performance is based on objective results.
Employee will go through the training programs frequently.
The discussion between supervisor and subordinate focuses on future
performance.
My company constantly updates the range of benefts for the
employees.
Performance appraisal is discussed frequently with the employees.
0.650
0.608
0.482
0.481
0.472
0.451
Factor 5: Employee Development
There are formal training programs to teach new skills.
Extensive training programs are provided for a group of employees.
Salary raise for employees is based on job performance.
My company has comprehensive fexible benefts scheme.
0.714
0.545
0.509
0.443
Factor 6 : Conventional
The job security is almost guaranteed.
It is diffcult to dismiss an employee.
My company emphasises on individual criteria is assessing performance.
0.760
0.728
0.537
TABLE 1. Results of factor analysis
Jurnal Pengurusan 30 (Julai 2010) / 15
The results of CFA combined with construct
validity tests, will yield a better understanding of the
quality of the measurements. There are two methods
commonly used by researchers in evaluating the
validity of the measurement model: testing each
construct separately where each latent variable
is conducted independently (Garver and Mentzer
1999) or testing all constructs together at one time
(Cheng 2001).Since this study involves with many
variables, CFA process for refning and testing the
unidimensional constructs should be tested and
refned independently with each latent variable. The
results of the confrmatory factor analysis in Table 2
shows that different types of HRM strategy meet the
criteria of goodness-of ft index (GFI), tucker lewis
index (TLI) and comparative ft index (CFI) of above
0.9 (Hair et al. 2006). These authors add that root
mean square error of approximation (RMSEA) values
of less than 0.1 represent a good ft, while values
below 0.05 represent a very good ft to the data.
Moreover, convergent validity was examined by
assessing the average variance extracted (Hair et al.
2006). The average variance extracted for the study
constructs were above the reasonable benchmark of
0.40 (Hatcher 1994). The discriminant validity was
assessed by comparing average variance extracted
of each of the first-order factor with the shared
variances of this frst-order factor with any other
frst-order factors of the study constructs. Most of
the average variance extracted was higher than all
shared variances, indicating discriminant validity of
the constructs.
DESCRIPTIVE ANALYSES
The study begins with a summary of some descriptive
analysis. Table 3 depicts that from 232 respondents,
48.7% (113) of them claim that they engaged with
outsourcing of HR functions and the rest indicate
that they do not involve with HR outsourcing at
all. Most of the respondents (15%) are from the
machinery and equipment industry. Almost 41% of
the organisations employ 301 to 1000 employees,
and about 47% employ fve to 20 HR employees.
Next, 36.3% of these organisations have been in
business for at least 20 years. In terms of the position
of the respondents, almost 56% of them are the HR
managers and about 61% of respondents have less
than fve years of experience in HR areas.
Based on 113 respondents, the organisations
outsource various HR functions depending on the
importance of the functions (Stroh & Treehuboff
2003). Table 4 shows that a majority (83.2%) of
the organisations outsource recruitment functions.
Secondly, they outsource training functions by 64.6%
and followed by payroll with 39.8 percent. However,
only 8.8% of these organisations outsource HRIS
function. Unsurprisingly, none of the organisations
outsource strategic HR functions. This result is
consistent with the study conducted by Smith et al.
(2006) in which a majority (68%) of the organisations,
in the context of Russian organisations, outsources
recruitment functions. Moreover, training is also
considered among one of the popular HR functions
to be outsourced. In Gainey and Klaass (2002)
study, organisations report that they outsource
approximately 30% of their training functions
which are closely connected to core capabilities,
and in most cases this outsourcing led to improved
performance and training design. Moreover, Lever
(1997) posits that 65% of the organisations in his
study outsourced training functions.
Greer et al. (1999) asserts that non core functions
such as payroll administration and benefts as being
frequently outsourced. However, in this study,
payroll is among the least function to be outsourced.
Variable 2 (2)/df GFI TLI CFI RMSEA
Expansion 26.69 1.484 0.934 0.967 0.976 0.066
Quality-conscious 10.95 1.217 0.968 0.984 0.990 0.044
Cost effciency 16.86 1.204 0.960 0.973 0.982 0.043
Commitment 4.83 1.610 0.978 0.973 0.987 0.074
Conventional 1.49 1.490 0.991 0.975 0.992 0.066
Employee Development 3.22 1.073 0.985 0.955 0.998 0.026
TABLE 2. Confrmatory factor analysis for HRM strategy
Note: (1) 2 =Chi-Square; df = degree of freedom
16 / Jurnal Pengurusan 30 (Julai 2010)
HR Outsourced Organisations Number Percentage
1. HR outsourcing decision
Yes 113 48.7
No 119 51.3
2. Type of industry
Food and beverages 8 7.1
Textiles 10 8.8
Wood products 6 5.3
Chemical products 12 10.6
Rubber and plastic products 11 9.7
Metal products 9 8.0
Machinery and equipment 17 15
Electronics 16 14.2
Radio, TV and communication 16 14.2
Motor vehicles, trailers and semi-trailers 8 7.1
3. Years in operation
20 years above 41 36.3
11-20 years 40 35.4
10 years and below 32 28.3
4. Total employees
150 to 300 employees 30 26.5
301 to 1000 employees 46 40.7
Above 1000 employees 37 32.7
5. Total HR employees
Below 5 employees 33 29.2
5 to 20 employees 53 46.9
Above 20 employees 27 23.9
6. Positions
Top Management 9 8
Senior Management 23 20.4
Management Level 63 55.8
Senior Executive 18 15.9
7. Years of working experience
Below 5 years 69 61.1
5 to 10 years 34 30.1
Above 10 years 10 8.8
TABLE 3. Profle of the organisations that outsourced HR functions
Jurnal Pengurusan 30 (Julai 2010) / 17
In fact, Smith et al. (2006) also suggest that payroll
function is among the least popular candidate to be
outsourced (27%). With regard to HRIS function, and
consistent with the fnding by Lever (1997), very
few (30%) organisations outsourced this function.
In terms of outsourcing strategic HR functions, the
result of this study is consistent with past research
(e.g. Smith et al. 2006; Lever 1997) in which there
was no respondent who outsourced strategic HR
functions such as HR planning and research on
HRM.
TEST OF MODEL AND HYPOTHESES
Figure 2 shows the conceptual model derived from
the literature. Table 5 summarises the fndings. The
hypotheses testing were conducted on the outsourced
HR functions only namely training, recruitment,
payroll and HR information system. Overall, the data
of the study ft the model well. The results of the ft
are as the following: c
2
= 4.219, p > 0.01, GFI = 0.993,
TLI= 0.912, CFI= 0.994 and RMSEA =0.060.
From Table 5, expansion HRM strategy was
signifcantly associated with outsourcing of training
(p0.001), recruitment (p0.1), payroll (p0.01)
and HRIS (p0.001). For H2, quality conscious HRM
strategy was found to have a negative signifcant
relationship with outsourcing payroll (p0.1) and HRIS
(p0.05) functions. As for H3, cost effciency HRM
strategy was only signifcantly related to outsourcing
of recruitment functions (p0.001) but in different
direction. The results interpret that organisations
outsource only small portions of these functions
when they pursue cost effciency HRM strategy. In this
case these organisations anticipate that the external
vendors could not provide suitable candidates for the
organisations since they do not understand well the
culture of the organisations. Besides, organisations
should foresee the danger of losing internal experts by
engaging with outsourcing and thus, it is crucial for
them to maintain at least a minimal level of in-house
recruitment expertise as protection.
For H5, conventional HRM strategy was found
to be negatively related to outsourcing training
HR Functions Outsourced Number Percentage
Payroll 45 39.8
Training 73 64.6
Recruitment 94 83.2
HR information system 10 8.8
TABLE 4. Type of HR functions outsourced
FIGURE 2. Model of the study
18 / Jurnal Pengurusan 30 (Julai 2010)
HR functions (p0.05). This is consistent with the
prediction in which traditional organisations do
not value and appreciate the contribution of the
employees and consider outsourcing strategy is
inappropriate for their organisations. Thus, the
results showed that these types of organisations
were unlikely to rely heavily on outsourcing
strategy. Conversely, H6 was not supported in which
employee development HRM strategy was found not
to have signifcant relationship with any outsourcing
HR functions.
DISCUSSION AND IMPLICATIONS
The rapid growth of HR outsourcing exemplifes
that for many organisations the decision to either
make or buy HR functions swings toward the
latter. Hence, it is pivotal for the researchers to give
attention on the factors that trigger the decision to
outsource HR functions. This study has provided a
signifcant step in this direction by examining the
predictors to HR outsourcing. In addition, this study
takes a frst step towards a better understanding
on the antecedents of HR outsourcing among
manufacturing organisations in Malaysia.
Past research concentrates mostly on the reasons
and risks towards HR outsourcing. Consistent with the
idea in which outsourcing different HR functions may
have different determinants, prior research indicates
that no universal factors infuencing outsourcing
different types of HR functions can be found
(Wahrenburg et al. 2006). Therefore this research
attempts to investigate the factors that infuence
HR outsourcing namely HRM strategy. This is not
shocking as HRM strategy is designed for the whole
HR departments functions. The fndings indicate
Hypothesis Direction S.E. b Support
H1 Expansion training 0.136 0.352 Yes***
Expansion recruitment 0.132 0.185 Yes
Expansion payroll 0.147 0.299 Yes**
Expansion HRIS 0.107 0.370 Yes***
H2 Quality conscious training 0.166 -0.127 No
Quality conscious recruitment 0.160 0.067 No
Quality conscious payroll 0.178 -0.198 Yes
Quality conscious HRIS 0.130 -0.295 Yes*
H3 Cost effciency training 0.149 -0.059 No
Cost effciency recruitment 0.144 -0.438 Yes***
Cost effciency payroll 0.160 -0.143 No
Cost effciency HRIS 0.116 -0.039 No
H4 Commitment training 0.147 -0.246 Yes*
Commitment recruitment 0.142 -0.077 No
Commitment payroll 0.159 -0.287 Yes**
Commitment HRIS 0.115 -0.087 No
H5 Conventional training 0.134 -0.207 Yes*
Conventional recruitment 0.139 -0.047 No
Conventional payroll 0.144 0.074 No
Conventional HRIS 0.105 0.069 No
H6 Employee development training 0.105 0.050 No
Employee development recruitment 0.101 -0.095 No
Employee development payroll 0.113 0.038 No
Employee development HRIS 0.082 0.139 No
TABLE 5. Results of hypotheses
Note: (1) is standardised regression weights and SE is standard error (2) Signifcance levels: *** = p<0.001, ** = p<0.01, * p<0.05, p<0.1
Jurnal Pengurusan 30 (Julai 2010) / 19
that expansion HRM strategies were signifcantly
related to outsourcing training, recruitment, payroll
and HRIS functions. However, quality conscious HRM
strategy was signifcantly associated to outsourcing
payroll and HRIS functions. Cost effciency HRM
strategy was signifcantly related to outsourcing
recruitment functions only. Moreover, commitment
HRM strategy was signifcantly related to outsourcing
training and payroll functions. While conventional
HRM strategy was only related to outsourcing
training functions. Finally, employee development
showed no signifcant relationship with outsourcing
of any HR functions.
Although most of the different types of HRM
strategy predict the decision on the degree of
outsourcing the HR functions, not all types of
HRM strategies signify the relationship with HR
outsourcing. There are some possible explanations
for these fndings. Firstly, the preferences of the HR
manager of some organisations may have formal
infuence on the outsourcing decision. For example,
some HR managers may favour a certain function
and want it to stay in-house. That function is less
likely to be outsourced than one that does not have
the managers preference. Secondly, the degree on
HR outsourcing would probably be based on the
organisational politics. Some organisations make
the decision to outsource to get rid of a troublesome
HR function such as one when employees are
underperforming as well as for functions which are
diffcult to manage or are out of control. As a result,
the disturbance and diffculties in performing these
functions are transferred to the external vendors.
Moreover, the making of the outsourcing
decisions require proper estimating of the cost of
performing the HR functions, and any associated
opportunity costs (Kee & Robbins 2003). Cost
pertains to not only contract price but also monitoring
financial and technical expenses (Prager 1994).
Organisations tend to outsource if the service
providers are able to beat the overall process
costs incurred by the organisations. Thus, the total
outsourcing contract is very important for the
organisations to make the outsourcing decision.
Finally, there is a wide range of outsourcing
arrangements: from short-term contracts to full
ownership of and, or, a merger between service
purchasers and service providers (Bensaou 1999).
The relationship between two parties in a market
transaction must have overlapping motives in order
to enter into, develop and maintain a relationship
(Dyer 1997). This shows that organisations must
focus on this situation and not solely conclude
that HRM strategy as the only predictor for HR
outsourcing.
CONTRIBUTION OF THE STUDY
THEORETICAL CONTRIBUTIONS
This study contributes by proposing HRM strategy as
the determinants to HR outsourcing. The rationale is
that when organisations differ in how they operate
and compete, there are likely to be dependent on
their strategies that place greater infuence on the
importance of certain HR functions. Therefore, it
highlights the notion that organisational decision
on HR outsourcing is likely to be infuenced by the
HRM strategies. As a result, the application of HRM
strategies into the theoretical relationship is expected
to provide significant contributions to the HR
outsourcing literature particularly TCE and resourced
based view. This study adds to TCE in which HRM
strategy were found to infuence the organisations
decision on whether a transaction should be governed
inside the organisation or outsourced to external
vendors. Likewise, this study provides support to
resource based view where core HR functions such
as HR planning is placed internally, whereas some
other functions such as payroll and recruitment are
outsourced to external vendors.
MANAGERIAL CONTRIBUTIONS
Four important implications for HR managers
can be derived from this study. Firstly, this study
offers to assist the HR managers to understand the
concept of HR outsourcing and to guide them on
what conditions the HR outsourcing is most desired.
HR outsourcing is a potentially strong instrument
for organisations attempting to empower their HR
function. Outsourcing of non-core HR functions
such as payroll an HR information system allows
HR managers to focus on strategic activities that add
more value. As the result, the arguments derived
from transaction cost economics and resource-
based theory, would have led this study to expect
that HR outsourcing would have enhanced the core
competence of the HR employees.
Secondly, the exercise of HR outsourcing may
have actually increased costs for the HR functions
in terms of the need for further development or
20 / Jurnal Pengurusan 30 (Julai 2010)
Secondly, the respondents of this study are from
the manufacturers, thus generalising the fndings to
service organisations may be diffcult. It is possible
that the pattern of outsourcing may be different for
service organisations than it is for manufacturers,
because service industries are characterised by less
tangible outputs and simultaneous consumption
and production (Boddewyn, Halbrich & Perry
1986). Future studies should therefore allow for
generalisations regarding this subject and must cover
service organisations in different sizes and sectors.
Third, the fndings are based on cross-sectional self
reports to a survey. Both independent and outcome
variables were gathered with the same survey. As
level of HR outsourcing can evolve over time, it is
essential to use longitudinal data in future.
Fourthly, the dependent measures were single-
item measure. Although these measures asked about
factual information and rely on direct measures for
quantifable dimensions, this study acknowledges
the provisional nature of these measures. The
measurement error present might have contributed to
the lack of signifcant relationships found for some
dependent measures (the degree of HR outsourcing).
Finally, this study did not focus on the
consequences of HR outsourcing on organisational
performance and HR performance. For example, very
few empirical studies have examined the impact
of HR outsourcing on the organisations of the HR
functions. Perhaps, future research should focus on
fnancial metrics to provide objective evaluation of
performance. Indicators such as productivity, cost
savings or reduction in overhead costs might be
very interesting. In addition, future studies should
also examine the consequences of HR outsourcing on
HR performance such as turnover rate, absenteeism,
employee morale and other HR effectiveness
measures.
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Hasliza Abdul Halim
School of Management
Universiti Sains Malaysia
11800 Minden, Penang
Malaysia
Email: haslizahalim@usm.my