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The intangible costs of human-resource outsourcing

Article  in  Human Resource Management International Digest · August 2010

DOI: 10.1108/09670731011071656

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Mandy Sim
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Viewpoint
The intangible costs of human-resource
outsourcing
Mandy Sim
Mandy Sim is a University
Teacher based at the
University of Nottingham,
Malaysia campus,
Selangor, Malaysia.
q Mandy Sim.
DOI 10.1108/09670731011071656
ver the last ten years or so, a number of large and medium-size organizations have
O outsourced the routine, transactional functions of human-resource management.
They have seen this as a way of saving money while also freeing in-house HR to
function more strategically.
There are, however, dangers in outsourcing some HR tasks while keeping others in-house.
First, major organizational change can be more difficult to achieve if part of the HR function is
outsourced. This is because HR’s relationship with the workforce is built on trust gained
through constant communication and interaction. Much of this trust is built up in the very
transactional tasks – recruitment and selection, training and development, pay and benefits
– that are most often outsourced. When these connections are broken, unifying the
workforce to accept major organizational change becomes more difficult. Moreover, the
contracted service provider may standardize all or parts of its service to achieve economies
of scale across clients. When this occurs, it can threaten the client company’s unique
organizational characteristics.
Second, good recruitment practice involves telling prospective employees about the
negative as well as the positive aspects of the job. When recruitment is outsourced,
outsiders who are not even employees of the organization may be responsible for providing
information about the client company. Since they have not gained this information at first
hand, it is more likely to be inaccurate. And employees who accept a job on the basis of
inaccurate information they gained during the recruitment process are more likely to leave
within a short period. This then involves the client company in an expensive, second round of
recruiting.
Third, outsourcing the transactional aspects of HR sheds opportunities for HR personnel to
be trained in the outsourced area. What HR staff get to learn can then be insufficient for them
to see the whole picture of human-resource management. When these HR staff advance to
managerial level, they may lack knowledge in the human-resource functions that have been
outsourced. They may even have to arrange to gain experience in the outsourcing company,
on their own initiative, to learn fully about how the outsourced areas operate.
The implementation of human-resource outsourcing can also create more rigidity. For
example, when the payroll function is outsourced, payment for service may be on a
per-transaction basis. Any special request or customization would then be subject to extra
charges. For instance, if a company decided to have an additional pay cycle in a month, and
did not have the possibility of doing this written into the outsourcing contract, it could be
considered an additional request that leads to additional charges. If the payroll process is
performed in-house, in contrast, the payments could be made with just a few clicks of a
mouse.
Having in-house payroll can also facilitate operational needs. Certain organizations reshuffle
their employees frequently. This is especially common in manufacturing, where variations in
production may be needed at short notice to meet customer demand. Redeployment and
VOL. 18 NO. 6 2010, pp. 3-4, Emerald Group Publishing Limited, ISSN 0967-0734 j HUMAN RESOURCE MANAGEMENT INTERNATIONAL DIGEST j PAGE 3
 rescheduling of shift patterns obviously have a major impact on payroll management. These
changes can be more difficult to communicate to an outsourced service provider than to a
firm’s in-house HR team. Once mistakes are made on the payroll – if, for example,
employees fail to receive the extra money to which they are entitled because of having
worked longer or more anti-social shifts – more employee problems can arise. High levels of
employee dissatisfaction, low morale, more grievances, low productivity, greater frustration,
higher turnover and even law suits may follow.

When human-resource functions are fully integrated, HR is better able to deliver its role as
change agent, policy executor, developer of organizational culture and guardian of good
employee-employer relations. Integrated and synchronized human-resource functions can
help an organization to get the most out of its employees. The connections make everything
possible – be it downsizing or change management. Failure in any one HR activity will
reduce the success rate of subsequent HR initiatives, because all human-resource functions
are highly integrated.
Organizations should therefore consider carefully before making the decision to outsource
their entire human-resource department or some of their HR functions. A shared service
center could be a better option, in some cases, as it can keep human-resource functions
in-house while simultaneously contributing to cost saving by consolidating
transaction-based activities in one place within the organization.
In today’s increasingly competitive business world, driving down costs is important in any
organization. Cost-saving is the main reason most companies opt for HR outsourcing. The
intangible implications of outsourcing some or all HR functions can be hard to discern and
even harder to quantify. But no organization should go down the outsourcing road without at
least trying to get to grips with the non-financial implications of HR outsourcing.

Note
Mandy Sim can be contacted at: mandy.sim@nottingham.edu.my

j j
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