Should Human Resources be an Inside Job?
A Study on the of Outsourcing Human Resources Departments

Prepared by
Nneka A. Gunn

Report Distributed July 21, 2011

Prepared for
Dr. Mike Chase
Managing Human Resources MBA BUSM 533 – Group 13

This is to certify that this paper was constructed and written solely by
Nneka Gunn

INTRODUCTION

In a world that is filled with financial turmoil and economic upheaval, companies are looking for ways to cut costs at every turn in order to maximize profits. This research paper will delve into the world of outsourcing. One may ask, “What is outsourcing?” Outsourcing in business is when an organization contracts or hires another company to perform duties and tasks or provide a service that is normally performed in-house, which offers access to skilled expertise, a manageable and variable cost structure, and opportunities for increased focus on an organizations’ core business. The idea of outsourcing is traced to have originated in the 1960s with the Electronic Data System. The history of outsourcing as a strategy shows that it developed from a need for specialized, lower cost labor; which makes outsourcing a great fit for small businesses that are often short of labor, and need low costs. Businesses can keep control of the training function, but gain a strategic partner that can address key needs at a reasonable cost. Human Resources (HR) is the fastest growing segment of the business process outsourcing sector. HR is heavily weighted with transactional services such as payroll, training administration, records management, and benefits administration. These services make up approximately sixty-five percent of HR’s work.
Outsourcing a company’s human resources department or certain duties has been on the rise, however, outsourcing one or more HR functions is nothing new to the business world. IT and finance departments were the earliest adopters of sharing key services through a centralized administrative hub, because most of their effort involves simple transactions that are easy to centralize and consolidate. As a matter of fact, nearly six out of ten organizations practice this very thing. Of late, many HR professionals are taking on dual roles; aligning human capital strategies with their organizations’ business objectives and addressing the day-to-day needs of the employees. Outsourcing particular HR duties can alleviate them from transactional task while providing additional time to focus more on valued strategic activities.
Yes, outsourcing may sound like a great idea, but there are two sides to every coin. On one side, a company may save tons of money, but employee connectedness may suffer as a result. In the following pages, the outsourcing human resources will be explored.
SIGNIFICANCE OF TOPIC
Outsourcing Human Resources is significant because it can excel a company to the next level or it can eat up profits like a termite in a wood mill. Outsourcing HR works in such a way that HR business operations are given to a company who is more experienced in a certain area. They are then paid for their services and dedication to provide the top quality they need. The advantages of outsourcing are significant for small businesses. Most small business owners do not have a large number of employees. Therefore managing your small business with few full time or part time staff can be challenging. Outsourcing began to become well known in the business arena in the early 1990s and have statistically increased over the years. The surge was because of the requirement of new trade strategies to take care of the dynamic business industry. Outsourcing has become a good business solution particularly for businesses that are starting up and those who have been influenced by the global recession. Outsourcing in the present times is also known as strategic management option. It enables the organization or company to attain its business ambitions via functional excellence and an advantage in the market place. Nearly all companies today have one or more of its services outsourced in order that it can focus on its core competencies. This remains to be the main reason why businesses outsource.

LITERATURE REVIEW

Considering HR Outsourcing? Consider SaaS.

This article written by Fidel Baca in the October 2009 edition of the online magazine called Financial Executives addresses the issues businesses should consider before they chose HRO (Human Resource Outsourcing) or whether they should consider using SaaS (Software as a Service). Baca also discusses what elements of HR can be outsourced and how to choose between HRO and SaaS.
Before you decided to use the HRO or the SaaS system, an organization will need to divide their HR into three types of functions: Strategic, tactical, and administrative. High-value functions are more suited to outsourcing, while low-value function are often more suited to technology (2009, p. 59). Whether SaaS or HRO is selected, expectations should be the same. They can be viewed in three distinct categories: buying, delivery, and support of technology, implementation, and services (2009, p. 60)
In this article, Baca basically states that before an organization takes that step to outsource a section or all of it HR functions, they should decide whether the HRO or SaaS system would be best. In doing so, an organization should ask if the chosen platform solves real problems. Will it ever work? And who will manage the account and how? What duties can be performed in-house and which duties are performed more efficiently by a contracted company. While HRO is more traditional, more companies are leaning towards SaaS to perform HR tasks. With SaaS, companies can reduce transactional costs in a way that doesn’t require traditional outsourcing models.

Outsourcing HR: Advisory firms are growing and staffs are burgeoning. Now there’s a way to buy out of your personal headaches.

The above article was written by Davis J. Drucker of Financial Planning Magazine out of New York, NY, February 1, 2006.
In this article, Drucker discusses how the opportunities to outsource HR tasks are expanding and how PEOs (Professional Employer Organizations) can be helpful. Most firms add benefits as profits and payrolls grow, eventually creating a patchwork of programs. Smaller firms pay more per head for most benefit programs, so economies of scale should be sought whenever possible. A PEO would enable companies to combine workforces with those of other firms and pay prices for benefits based on much larger numbers (2006, p. 1).
Drucker advises that organizations can conduct their own search for local PEOs. Most firms belong to a national membership group. And there are PEOs that fit the needs of all types of HR tasks with different fee structures. Most charge a percentage of wages, while others charge a flat fee per employee. Most companies prefer the latter. Companies can also outsource the selection process when trying to choose a company to outsource their HR duties to. These companies will do all of the research and draft a request for proposal (RFP).

INSIDE OUT. T + D: Why Training Out-Tasking Represents a Growing Solution for Corporate Learning.
Owen Davis is the author of the article in discussion in this section of the Literature Review. Davis wrote this article August of 2008, which was retrieved through Bryan College’s Research Library.

The Outsourcing of HR.
To Outsource or Not to Outsource? That is the Question.
Lawsuits, Added Regulation Forcing Businesses to Outsource HR: Owners Don’t Have the Time to Cope with Compliance Headaches.

CONCLUSIONS
To conclude, there are many advantages of outsourcing for small business owners: contained employee costs, less work in finding in the 'right employees', less work in managing the employees, better utilization of dollars (often you might have to hire a full time person when you only need a part time person or maybe a couple of part time specialists in their own fields). Companies that decide to outsource do so for a number of reasons. The primary reason is to achieve cost savings or better cost control over the outsourced function. Companies usually outsource to a vendor that specializes in a given function and performs that function more efficiently than the company could. On average, outsourcing companies realize a 9 percent cost savings and a 15 percent increase in capacity and quality, according to the Outsourcing Institute. Anticipated cost savings sometimes fail to materialize, however, because the vendor must make a profit and because the company incurs additional transaction costs when interacting with the vendor. Another common reason for outsourcing is to achieve headcount reductions or minimize the fluctuations in staffing that may occur because of to changes in demand for a product or service. Companies also outsource in order to reduce the workload on their employees, or to provide more development opportunities for their employees by freeing them from tedious tasks. Some companies outsource in order to eliminate distractions and force themselves to concentrate on their core competencies. Still others outsource to achieve greater financial flexibility, since the sale of assets that formerly supported an outsourced function can improve a company's cash flow. A possible pitfall in this reasoning is that many vendors demand long-term contracts, which may reduce flexibility. Some experts claim, however, that companies are exposed to new technology by vendors and that they could simply hire people with the expertise they seek. But this is not true for small businesses, which often cannot afford to hire computer experts or develop the in-house expertise to maintain high-level technology. When such tasks are outsourced, the small business gains access to new technology that may help it compete with larger companies. Company politics is another common reason for outsourcing. For example, some companies might begin outsourcing initiatives after observing the successful efforts of a competitor. Others might be pushed toward outsourcing by managers seeking personal gain or by a desire to eliminate troublesome departments. Finally, outsourcing provides an attractive option for startup firms as they grow. In these instances, outsourcing can free the entrepreneur from tedious and time-consuming tasks, such as payroll, so that he or she can concentrate on the marketing and sales activities that will enable the firm to make money.
Some of the major potential disadvantages to outsourcing include poor quality control, decreased company loyalty, a lengthy bid process, and a loss of strategic alignment. There may also be inherent advantages in maintaining certain functions internally. For example, company employees may have a better understanding of the industry, and their vested interests may mean they are more likely to make decisions in accordance with the company's goals. A general rule of thumb is that companies should never outsource any function that directly affects quality or service.

RECOMMENDATIONS

Before a company decides to outsource their HR department there are questions that need to be addressed. Organizations need to know why they are considering outsourcing and matching metric to those goals. Will outsourcing really cut costs or increase costs in other areas of the organization? Organizations need to look beyond the initial cost savings and track how outsourcing will affect employee satisfaction and organizational performance. Outsourcing is supposed to free a company’s HR executives in order to focus on more important matters. A company should quantify their current levels of cost and service. What results is the organization expecting from outsourcing its HR department? Outsourcing can provide savings from fifteen to twenty-five percent in the short run, but figures are undetermined in the long run. When a company decides to outsource their HR department, they should develop a scorecard for the contracted company to determine if outsourcing has: (a) Am I doing this for more or less money? (b) Do I have better technology than before? and (c) Are my processes more efficient? The organization should meet regularly with its vendor to develop and make sure that objectives, metrics, and measures are being met on a regular basis.
Outsourcing is not for every company. A mixture of in-house resources and outsourcing may be the answer. They have relatively low budgets and have fewer HR staff members per full-time employee than organizations that primarily keep their HR departments in-house or outsourced.

REFERENCES

Baca, F. (2009, October). Considering HR Outsourcing? Consider SaaS. Financial Executive, N/A, 59-60. Retrieved July 11, 2011, from www.financialexecutive.org

David J. Drucker. (2006, February). Outsourcing HR: Advisory firms are growing and staffs are burgeoning. Now there's a way to buy out of your personnel headaches. Financial Planning, 61-62. Retrieved July 11, 2011, from Research Library. (Document ID: 979291341).

Davis, Owen. (2008, August). INSIDE OUT. T + D, 62(8), 50-51,6. Retrieved July 11, 2011, from Research Library. (Document ID: 1531229611).

Imbrogno, D. (2010, December). The Outsourcing of HR. Quality Magazine, N/A, 34-35. Retrieved July 11, 2011, from www.qualitymag.com

Michie, P.. (2010, January). TO OUTSOURCE OR NOT TO OUTSOURCE? THAT IS THE QUESTION. Sales and Marketing Management, 162(1), 13. Retrieved July 11, 2011, from Research Library. (Document ID: 1968495561).

Williams, P. (2006). Lawsuits, Added Regulation Forcing Businesses to Outsource HR: Owners Don't Have the Time to Cope with Compliance Headaches. San Diego Business Journal, 27(29), 3-4.