Polytechnic University of the Philippines

Quezon City Branch

Don Fabian, Commonwealth, Quezon City

Assignment in Seminar-Workshop in
Human Resource Management Trends and Issues
(MANA 4123):

HR Trends
and
Issues

Submitted by:
Ronald Allen B. Caseñas
HRDM 4-1

Submitted to:
Prof. Melanie F. Bactasa

January 3, 2018
Outsourcing & its HR Dimensions
by Dr. Aloke K Sen

In today’s global village, growth is evident and important for

survival of any organisation. During the 1990’s, there has been a movement
away from vertical growth strategies toward co-operative contractual
relationships with suppliers and even with competitors. These relationships
range from outsourcing, in which resources are purchased from outside
through long-term contracts instead of being made in house (for example
Hewlett- Packard buys all its laser engines from Canon for HP’s laser jet
printers), to strategic alliances, in which partnerships, technology licensing
agreements, and joint ventures supplement a firm’s capabilities (for
example, Toshiba has used strategic alliances with GE, Siemens, Motorola
and Ericsson to become one of the world’s leading electronic companies).

Outsourcing simply means hiring someone from outside the company to

perform tasks that could be done internally. Companies often hire the services of
accounting firms, for example, to take care of financial services. They may
hire advertising firms to handle promotions, software firms to develop data-
processing systems, or law firms to handle legal issues.

There are several HR concerns with regard to outsourcing, not the least of
which is that if employees are likely to lose their jobs when the work is
outsourced, morale and productivity can drop rapidly. To minimize problems,
line and HR mangers have to work together to define and communicate transition
plans, minimize the number of unknowns, and help employees identify their
employment options.

In the views of HR professionals, the process of outsourcing is different

from purchasing, procurement, and subcontracting. According to them
outsourcing occurs when a company contracts with a vendor to perform an
activity previously performed by the company. In contrast procurement
generally means that the company has not performed the activity before.
Outsourcing also has a temporal dimension in that some executives view
outsourcing as permanent. Whereas subcontracted activity is expected to return
to the company at some point, outsourcing is not. Outsourcing should be
referred as the performance by outside parties on a recurring basis of HR tasks
that would otherwise be performed in house.
 In some cases, the outside vendors may actually hire the displaced
employees. For example, M. W. Kellogg Inc., a petroleum services company
based in Houston, recently outsourced its entire clerical staff to the McBer
Company, a temporary employment agency. McBer hired most of Kellogg’s
secretarial staff, so even though the people were employed by a different
company, their job and locations stayed the same. This process is known as
employee leasing. Employee leasing has been growing rapidly. The value of
employee leasing lies in the fact that an organisation can essentially maintain its
working relationships but shift the administrative costs of health care,
retirement, and other benefits to the vendors.

The market for providers of outsourced service of all types is growing

rapidly. In 1996, American firms spent over $100 billion in outsourced
business activities. Globally, outsourcing usage grew by 35 percent for the 12
months during the year 1997. It was estimated that by 2000, expected to
increase to $200 billion. According the Hewitt Associates survey of large
employers conducted during 1996 found that 93 percent of respondents
outsourced some of their HR functions. Another survey conducted by
American Management Association (AMA) during 1996 confirms that 77
percent of firms outsourced their HR activities up from 60 percent in 1994.

The 1997 survey of Human Resource trend in 1700 organization reported

that 53 percent planned to outsource more in the future. HR Departments are
facing the classic make or buy decisions that other functional areas confront
when considering the outsourcing of services or products.

From the review of literature, it has been found that there are five
competitive forces that are driving more companies to outsource some or all
of their HR activities (1) Downsizing (2) Rapid growth or decline (3)
Globalization (4) Increased competition and (5) restructuring. Over the past
decade, these factors have significantly altered the strategy and structure of
many firms.

The Sourcing Decision

Where should a function be housed? Should it be integrated within the

organisation or purchased from an outside contractor? Outsourcing is
purchasing from someone else a product or service that had been previously
provided internally. Dupont contracts out project engineering and design to
Morrison Knudsen; AT & T contracts its credit card processing to Total System
Services and Eastman Kodak its computer services to Business land.

Outsourcing is becoming an increasingly important part of strategic

decision-making and an important way to increase efficiency and often
quality. Organisations competing in global industries must in particular search
worldwide for the most appropriate suppliers.

In a study of 30 organisations, outsourcing resulted on average in a 9% reduction

in costs and 15% increase in capacity and quality.

We should now discuss outsourcing in the Indian context. About 60

percent by value of a Bajaj vehicle was outsourced. Virtually no components
were imported and 70 percent of Bajaj Auto’s requirement was sourced
from within the State of Maharashtra. Compared to its competitors, Bajaj
Auto’s dependence on vendors was relatively low: over 90% of Hero
Honda’s components, for example, were outsourced. At the same time, the
level of outsourcing had begun to creep upwards. According to Arvind Gupta of
Bajaj Auto, we used to take 1.9 man-days to make a scooter. Now
because of outsourcing it has come down to between 1.4 & 1.5 man-days. Of
this reduction, 40% is from off loading and 60% from productivity increases.

TI Cycles had set itself an ambitious target of becoming the number

two bicycle manufacturer by 2000 with sales of 35 lakhs bicycles in the domestic
market while at the same time achieving 40% ROI. TI Cycles singled out a few
areas of the value chain for special attention and thrust. The company tied
up its outsourcing arrangements with Avon Cycles in Punjab and Hamilton
Cycles in Mumbai with a view to expanding its reach in the northern and
western markets respectively. With these arrangements, TI reached a stage
where its outsourcing was much higher than Hero and Atlas, who were more
vertically integrated. In the late 1990’s, Philips along with Sony took
the outsourcing route.

Organisations can benefit from the new concepts of outsourcing by

generating maximum return on investment through better productivity.
Outsourcing lead to reduction in fixed cost, hence a lowering of break – even
point on capacity utilisation leading to higher sustainability of the company in
recessionary market. This also leads to improved cash flow as the investment in
fixed cost on tangible fixed assets is reduced.
 The outsourcing programme is also being practiced in Public & Private
Sector enterprises to raise productivity. Nowadays many companies have
outsourced the car-pooling services. Many leading PSEs have outsourced their
maintenance activities (for example annual over hauling, major repairs work etc)
thus saving huge cost on HR.

Outsourcing is a fast and flexible approach to cover resource gaps.

As expectations continue to rise to higher standards, any business will doubtless
continue to benefit from outsourcing technical skill. It is a new coinage of an old
decision-making model known as “make or buy”, but outsourcing” has enlarged
the dimension of make or buy concept. Quality assurance and cost reductions
have become the prerogative for the competitive sustenance in an open
international market. Power of outsourcing lies not only, in its capacity to
effect a rapid, instant solution to an organisation’s problems but also in its
potential to help the organisation to re-think its entire way of doing
business, even its reason for existence.

The two terms “contracting” and “outsourcing” are used interchangeably

but they are not same at all. Contracting is when a company (buyer) purchases
goods or services from another company (supplier or vendor). In this situation
the buyer has the control over the situation and instructs the vendor to work
accordingly but in the case of “outsourcing” the buyer turns over the control
(ownership) or the process to the supplier. The buyer asks the supplier what
results it wants and the supplier decides how to achieve that. In
outsourcing the supplier has the expertise and the economies of scale.

During the year 2002, HP Services the software services arm of Hewlett
Packard (HP), got a contract for handling consumers product major Procter
& Gamble’s global IT outsourcing. At $ 3.5 billion and across 160 countries,
this was a large and beautifully structured deal. While HP gets the IT
services part of the deal. P & G will allot the building and real estate
management to another player and employee payroll management and accounts
payable to two others. The last three contracts have not been announced as yet.

Making the Outsourcing Decision

 Don’t allow sacred cows. Except for core competencies, all other HR
activities should be considered as candidates for outsourcing.
  Determine whether the desire to outsource an activity is driven by its low
contribution to core competencies, influences from the external
environment, or poor management of the activity.
 Recognize that performance is more important than low HR department
head counts or lower costs.
 Beware of vendors that supply off-the shelf solutions that do not fit the
company’s needs. Avoid excessive reliance on vendors.
 Decide how much control is needed for various HR activities and whether
control can be retained with outsourcing.
 Identify critical personal benefits of outsourcing.

Selecting and Negotiating with Outsourcing Vendors

 Assign a high weighting to vendors’ knowledge of the industry. Perform

reference checks of potential vendors.
 Understand the costs involved in switching vendors for outsourced
services.

Managing the outsourcing Transition

 Expect the internal HR team to resist outsourcing and develop ways

of managing this resistance.
 Anticipate conflict and develop a plan for resolving it in a manner
that supports the relationship with the vendor.
 Anticipate changes to HR culture and careers.

Managing Vendor relationships

 Develop long-term relationships with outsourcing vendors where such

continuity is critical.
 Develop staff members to become effective mangers of vendor
relationships.
 Maintain stability of the in-house staff who oversee vendor relationships
and understand the performance expectations originally negotiated.
 Require competitive bidding for each outsourced service at regular
intervals.