Outsourcing as an Alternative to Investment in Human Resources As

indicated earlier, investments in human resources should support the

organization’s strategies. Unless there is the potential to build capabilities
that provide an advantage over competition, cost considerations often lead
to the rational decision to outsource through specialized service providers
rather than invest in human resources. In general, strategic outsourcing is
advocated where (1) world-class capabilities and a strategic advantage
cannot be developed, (2) the resources devoted to services performed
internally will be greater than those needed to outsource the service, and
(3) excessive dependency on suppliers can be avoided. When an activity is
performed internally at a higher cost, the misallocated resources will put
the company at a disadvantage to its competitors.17 Firms have been
outsourcing human resource activities at a phenomenal rate. Furthermore,
they have been outsourcing a wide range of activities. For example, firms
routinely outsource the administration of 401(k) plans, executive search
activities, payroll functions, employee assistance programs, human
resource information systems, benefits administration, and outplacement.
As a result of the demand for outsourcing, a whole new service industry of
personnel service providers has Page 13 STRATEGIC HUMAN RESOURCE MANAGEMENT Section One
been created, often by human resource executives who were downsized
during the 1980s and early 1990s. Although many firms have been willing
to outsource a wide range of their human resource activities, virtually all of
them have retained the critical and sensitive functions of performance
management, employee relations, and labor relations.18