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Outsourcing

HR Management
MBAO 6030

MBAO 6030 Human Resource


Management
Outsourcing
What is Outsourcing?
 Outsourcing is a strategic decision to give a task or activity to
an independent contractor who determines how best to do the
task or activity.
 The firm and the independent contractor become partners and
may establish a long-term relationship.
 Examples of outsourced activities: IT, HR, Legal services,
Manufacturing, R & D.
 Note: Outsourcing transactions are done in the market.

MBAO 6030 Human Resource Management


Outsourcing

Outsourcing Advantages:
 Better quality people and knowledge may be applied to
an activity or task by the outsourcing firm.
 Reduction in administrative costs may be possible
when certain tasks are outsourced.
 Outsourcing certain activities and employees that do
not fit with company culture may be used to preserve a
strong culture or employee morale.

MBAO 6030 Human Resource Management


Outsourcing

Outsourcing Disadvantages:
 Outsourcing may lead to loss of control of
certain activities which may be a problem on
time sensitive projects for example.
 Outsourcing an activity may result in loss of the
opportunity to gain knowledge and information
that may have general application to other key
processes and activities.

MBAO 6030 Human Resource Management


The Decision to Outsource
Work System
Design

Insource the Outsource the


Work Work

Contingent employees: Independent


temps, consultants Contractor

MBAO 6030 Human Resource Management


When and how to outsource activities
(Baron & Kreps, 1999)

High
Strategic Importance

??? Insource

Outsource Contingent
employees
Low
Low High

Interdependence

MBAO 6030 Human Resource Management


Outsourcing: Considerations
(Baron & Kreps, 1999)

 Does learning from this activity spill over to an


important “core” activity?

 Can the outsourcing relationship be reversed


and the work brought back inside when
conditions change?

MBAO 6030 Human Resource Management


Outsourcing: Considerations
(Baron & Kreps, 1999)

 Can the outsource supplier adjust more quickly


to changing labor or market demands than we
can?

 Do we have a strong clan-like culture that would


be weakened with employees who have different
values or interests (such as IT employees)?

MBAO 6030 Human Resource Management


Outsourcing: Considerations
(Baron & Kreps, 1999)

Outsourcing may not be appropriate when:


1. The task is a core activity critical to strategy or
technology.
2. Task is highly interdependent with core activity due to
technology or work design.
3. Task requires great deal of firm specific human capital
or access to proprietary information.
4. Tasks where the employees work in close proximity to
regular, core employees and are similar socially to
them.

MBAO 6030 Human Resource Management


Outsourcing

Critical Thinking Questions


1. The university hires many contingent faculty
(“adjuncts”) to teach courses on a part-time basis.
What challenges does this present to university
administration? Why are these adjuncts hired in the
first place?
2. A current trend in the practice of HR management is to
outsource a good deal of the HR function. Which
aspects of the HR activities should be outsourced, and
which ones should be kept inside a firm?

MBAO 6030 Human Resource Management


Outsourcing

Critical Thinking Questions


3. Some large pharmaceutical companies
outsource Research & Development activities.
What justification would they have to outsource
this important activity?

MBAO 6030 Human Resource Management