Items Description of Module

Subject Name Management

Paper Name International Human Resource Management
Module Title Outsourcing and HRM
Module Id Module no.-21
Pre- Requisites Basic knowledge of what human resource management is.
Objectives To understand the concept of outsourcing and its impact on international human
resource management
Keywords Outsourcing, Advantages of outsourcing, international outsourcing
 QUADRANT-I
Module 24:Discipline in International Human Resources
1. Learning Outcome
2. Introduction to Outsourcing

3. Rationale behind outsourcing

4. Features of outsourcing
5. Types of outsourcing
6. Process of outsourcing
7. Significance of outsourcing
8. Limitations of outsourcing
9. Summary

Outsourcing and HRM

1.0 Learning Outcomes:

After reading this lesson, students will be able to

a) understand the concepts of Outsourcing and related issues.

b) understand the rationale behind the practice of outsourcing

c) know the process of outsourcing

d) impact of outsourcing in context of international HRM

1.1 Introduction to Outsourcing

Make or buy decisions have always been an important issue of debate in the management
literature. In the classical age, the focus of the firms was on developing inhouse business
processes as it helped them in reaping the economies of scale and developing the competencies
within the organization. Over almost a hundred years, firms harboured this idea. However, in the
modern times of information technology, development in means of transport and communication
and globalization, more and more firms are believing that they should concentrate on their core
competences and outsource all operations which others can do in a better way. With this change
in the mindset, outsourcing has become a norm of the day and the firms, particularly in the IT
industry are resorting to this practice, even if they have to outsource certain business processes
from other countries. This is having widespread ramifications on the businesses.
 Make or Buy Decisions

Outsourcing is a practice in which an individual or a company performs tasks, provides services

or manufactures products for another company -- functions that could have been or is usually
done in-house. In simple words, it can be stated that outsourcing is a process of contracting out
of a business process and operational, and/or non-core functions to another party. The ultimate
rationale behind the practice of outsourcing is typically to save costs. In the present times,
outsourcing has emerged as a common trend among information technology (IT) and other
industries. Generally, businesses take decisions to outsource those services that are considered as
essential to manage its activities and to serve its internal and external customers.

Thus, it can be said that outsourcing is practiced among different industries and companies to
reduce costs by transferring portions of work to other parties rather than completing it internally.
This is simply a process of hiring another individual or company to handle business activities for
you. Outsourcing does not confine to a nation, but extends beyond the national boundries. It is
quite a common business practice that facilitates the growth of small and medium-sized
businesses to gain services and skills they would be quiet hard to develop, because of either
financial or manpower constraints, or possibly due to a combination of both. In the context of IT
Conceptual Scheme of outsourcing industry, outsourcing of several services is done, which
includes nbound Customer Services, Web Design & Development, Search Engine Optimization
(SEO), Online Marketing, Administrative Support (payroll and book-keeping), Virtual Assistant
Services, Outbound Telemarketing, Accounting and HR Management, Marketing & Sales
Support, etc.

Outsourcing means that an activity which can be done in-house (or is already done in-house) is
assigned or contracted to an outsider vendor on a recurring basis with the expectation of reaping
future benefits via the expertise of the vendor in the assigned field. When an activity is assigned
to a vendor or third party who is located outside the firm’s home country, it is called off-shoring.

1.2 Rationale behind Outsourcing

The ultimate rationale behind the practice of outsourcing is typically to save costs i.e. saving on
the overhead and labor costs. Outsourcing is generally practiced whenever it is more economical
to purchase a good from other companies than to produce the good internally. Thus, outsourcing
is an effective cost-saving practice (if used properly). Further, improved efficiency, greater
productivity and the opportunity to focus on the core products and functions of the business are
also some other reasons that are responsible for employing outsourcing practice. By virtue of an
efficient outsourcing strategy, a firm can focus on core aspects of the business. Furthermore,
most of the firms are using the outsourcing practice as a means to achieve more innovation in
their products and services as they do not have to bother about peripheral activities. According to
Deloitte's 2016 outsourcing survey, 35% of respondents said that they are more concentrated
towards measuring the innovation value in their outsourcing partnerships.

1.3 Features of outsourcing

1. Outsourcing mainly involves contracting out non-core and routine activities to outside the
vendors.
2. It is mainly done to get benefited through the expertise, effectiveness and efficiency of
the outside vendor in a particular field.
3. By opting for outsourcing, the businessmen would be able to concentrate more and more
on core business activities. Thus, results into profit multiplication by offering quality
services to its customers.
4. It helps in attaining competitive advantages by delegating its non-core business activities
to outside vendors.
5. It enhances the dependence of the firm on other parties i.e. outside vendors for its certain
activities (dependency risk), which may or may not be harmful for the firm in future.
6. If there is certain activities to perform, takes help of outsourcing vendor, and if not, sends
them back. Thus, ensure flexibility for the organization. However, it is not possible to do
the same with in-house staff members.
7. Outsourcing also ensures cost savings for the company as company can avail benefits
from offered best of technologies and best talented and skilled people (human resource)
by outside vendors at lower rates than otherwise.
8. Outsourcing requires explicit knowledge on part of the outside vendors, which is formal
and trustworthy.
9. The activities with mutual interdependencies are less likely to be outsourced as it is
highly undesirable to outsource those activities that are connected to other critical
activities within the organization.
1.4 Types of outsourcing

There are different types of outsourcing services that businesses can contract with an outsourcing
vendor. On the basis of the commonly outsourced services, following are the main types of
outsourcing:

Types of Outsourcing
 Professional outsourcing
 Manufacturing outsourcing
 Process-specific outsourcing
 Operational outsourcing
 Project outsourcing
 Business process outsourcing
 Knowledge process outsourcing

Professional outsourcing

It is a common practice among many firms to outsource their complicated tasks and processes
which can be done better by specialists. Professional outsourcing services include specialized
services like legal, accounting, information technology, purchasing, as well as other specialized
services. This class of outsourcing arrangement offers increased cost savings as the firm has to
pay only for services actually provided while having access to high quality resources, which
considerably reduces overhead costs. Thus, the company became capable to have an access to
high quality resources and does not pay beyond the services used by it. The ultimate outcome of
all that is the significant reduction witnessed in a company’s overhead costs.

Manufacturing outsourcing
Manufacturing outsourcing is very beneficial for an organization where the cost of making its
own products locally is considerably high (as huge amount is to be paid to the factory workers
and raw material cost) and the material can be purchased from an other vendour at a much
competitive price. Manufacturing outsourcing services are usually industry-specific and it is a
common practice in the industries such as automobiles, pharma, electronics, computers, etc. The
main risk associated with this type of outsourcing could be the quality issues and maybe
disruption of the production line. For example, a mobile handset manufacturing firm faced the
problem of defective batteries, which were outsourced and the vendour did not supply good
quality product. However, these issues can be sorted out by ensuring adoption of a due process in
hiring an outsourcing company. Further, in order to cope up with high competition by availing
the benefits of economies of large scale, manufacturing outsourcing is essential for every type of
organization.

Process-Specific Outsourcing
Process- specific outsourcing services refers to those outsourcing services that can be specific to
a unique process or internal procedure. In present era, it is a very common practice to outsource
specific operation related activities to other vendors or units that specialize in providing that
particular service, so that the business can concentrate on its core areas. Thus, this type of
outsourcing services helps the organization to focus on its strengths by reducing costs and saving
time. Process-specific outsourcing may also be defined as a practice of handing over control of
public sector services such as (fire, police, armed forces, etc.) to for-the-profit corporations.

Operational outsourcing
Outsourcing services are also available specifically for operational activities. This type of
outsourcing arrangement is more common within the manufacturing industries than in any other
industries, as the nature of manufacturing industries provides the opportunities for certain
operational activities to be contracted out to an external vendor such as machine maintenance
and equipment repair, landscaping, cleaning services, facilities maintenance or property
management etc.

Project Outsourcing
Sometimes companies have trouble in managing some of its projects completely or even after
completing a portion of a specific project. In such a situation, companies can opt for a project
outsource. This type of outsourcing services can be contracted to an external vendor either to
manage a complete project or to complete the rest portions of a partially completed project.
Companies would want to project outsource because there are many benefits associated with
outsourcing parts of projects in form of cost and time saving. Further, in certain situations,
project outsourcing is the last hope for the businessmen i.e. unavailability of enough people in
house or enough skills, or funds to do the projects on their own.

BPO (Business Process Outsourcing)

In business process outsourcing, a particular process task is outsourced to the external vendor.
For example, payroll. BPO is not restricted to only back office related tasks, it also covers front
office tasks. Front office tasks means customer oriented activities like marketing, technical
support and so on. On the other hand, internal work like book-keeping, billing and purchase are
covered under the back office tasks.

KPO (Knowledge Process Outsourcing)

Knowledge Process Outsourcing is less old and mature than Business Process Outsourcing.
Knowledge process outsourcing is more preferred for a work that needs higher levels of
involvement from the worker. The worker has to employ advanced levels of research, analytical
and technical skills and has to make decisions of a higher order. In simple words, KPO refers to
contracting out an external vendor to fill up the knowledge gaps within the organization.

Process of outsourcing

One of the prime reason behind the popularity of outsourcing services is to cut back
organizational overhead costs. Cost savings comes both in terms of labor costs and equipment
costs as a result of outsourcing. However, a firm has to face serious concern in the respect to
quality and control issues. But, by adopting due process and diligence in hiring an outsource
service provider, those quality and control issues can be sorted very easily. Accordingly,
outsourcing process consists of the following steps to minimize the risks and maximize the
opportunities for ensuring the outsourcing success:
 Process of Outsourcing

Define objectives

Set realistic expectations

Count the costs

Understand and actively manage the risks

Objectively measure and track the benefits

Use an effective outsourcing model

Choose complementary business partners:

Start slowly, build gradually

Monitoring and evaluation of outsourcing

progress

1) Define objectives
The first step in outsourcing process is to clearly define the objectives and goals (must be
measurable) of outsourcing. Objectives explain the reasons for an outsourcing program, brighten
its business value, and to provide a working framework for making decisions about the
questions: which vendor to work with, which outsourcing model to use, what projects to
outsource, and what levels of risk to assume etc. Objectives also provide the evaluation criteria
for an outsourcing program. Measurable goals helps the management in monitoring the progress
of outsourcing process, taking corrective action about the project’s future performance.

2) Set realistic expectations

After establishing the goals and objectives of outsourcing process, the next step is to check out
whether the expectations (in form of goals and objectives) are realistic or not. Unfortunately,
unrealistic expectations with large immediate savings have ruined many outsourcing
arrangements. Thus, a thoughtful, realistic set of expectations ensures a continued support for the
outsourcing program.
3) Count the costs
It must be ensured that the expectations should reflect all related costs. It is as important as
setting realistic expectations. Senior management personnel pressurized to cut costs by putting
expensive skilled labor positions, thus, it became easy to underestimate the true costs involved.
These hidden costs can push up the actual work. However, these hidden costs can be minimized
with careful management and a right approach.

4) Understand and actively manage the risks

It is one of the most crucial step in the outsourcing process i.e. risk-analysis. Outsourcing
certain activities of a business process to an external vendor helps the organization to shift
its certain responsibilities to the outsourced vendor. As the outsourced vendor is a
specialist in that particular field, they can plan better for risk-mitigation. Thus, a successful
outsourcing strategy must be characterized by an aggressive risk-mitigation strategy. It is not
sufficient practice just to keep a list of potential risks and to be aware about the things that might
go wrong. Rather, it is advisable to prioritize and aggressively manage the risk component based
on their expected impact on the organizational health. Mitigation plans should be kept up-to-date,
monitored actively and to take proactive measures to ensure that risks do not materialize along
with the proper implementation of risk mitigation strategy.

5) Objectively measure and track the benefits

The outcome of counting costs with due care and caution is to objectively measure benefits
associated with it. If benefits are less than the expectations, it is highly advisable to take
corrective action. If performance is extraordinary, then the results should not be downplayed.
Further, if overhead costs are separated from the regular project costs, then it is important to
recombine the both whenever the actual benefits are communicated. Most of the organizations
prefer to level out the highs and lows in an outsourcing strategy and only to communicate the
mean results. But, recognition of the highs and lows is a critical step that should be taken with
due care and attention.

6) Use an effective outsourcing model

Another important aspect to be considered in executing an outsourcing program is the use of an
effective outsourcing model. A variety of outsourcing model are available to an organization,
each having its own strengths, weaknesses, and appropriate applications. The adopted
outsourcing model should be such that fits the current circumstances of the organization.
Outsourcing model must fits the company’s outsourcing needs and offers the best opportunity to
the organization to meet its high-level objectives and particular goals, rather than those of the
vendor.

7) Choose complementary business partners:

It is even more important to select a complementary business partner (external vendor) to
execute the outsourcing program than to select an appropriate business model. Many potential
business partners are available to an organization to contract out, that demands for a proper
evaluation process for them, which begins with the filtration of initial list of candidates, send out
an RFI (request for information) stating the business objectives and goals for establishing an
outsourcing strategy and let the vendors take the initiative in proposing a solution to meet the
business needs and requirements. And then to evaluate their responses on the basis of their
ability, commitment, and approach to meeting the organizational goals and objectives.

8) Start slowly, build gradually

This step is characterized by the effective implementation/ execution of outsourcing strategy.
And it should be determined by the rate of success of each successive project/ activity involved
in outsourcing scheme. Proper time should be taken to make sure the establishment of a solid
foundation for future executions. Always start with a single, well-defined, self-contained pilot
project. A pilot project helps to minimize the initial risks associated with it.

9) Monitoring and evaluation of outsourcing progress:

After the proper implementation of the outsourcing arrangement, it is quiet important to keep a
track of meaningful measurements associated with it in order to understand the relative success
or failure of outsourcing strategy, as well as a particular part of it. Without proper monitoring and
evaluation, the whole process fails. So, it is important to follow-on the outsourcing program even
after its proper implementation.

Benefits or significance of outsourcing

Firms construe several benefits from outsourcing as it helps them to reap economies, become
efficient and competitive. Some of the specific benefits from outsourcing are as under:

Benefits of Outsourcing

1. Enough time would be made available to the businessmen to put the focus on the core
functions of the business by outsourcing the non-core business activities such as
administration and back office operations or front office operations.
 2. One of the biggest plus point of outsourcing practice is possibly increased cost savings.
Because, outsourcing allows the company to pay only for services actually provided
while having access to high quality resources, which considerably reduces overhead costs
both the cost of operation and labor. Thus, reduction in the overhead costs makes it
attractive to outsource.
3. When certain functions of an organization become operationally uncontrollable,
outsourcing helps to overcome such difficulties such as machine maintenance and
equipment repair, landscaping, cleaning services, facilities maintenance or property
management etc.
4. Outsourcing results into increased level of productivity and efficiency, thus, the
organization gets better-prepared for the existing and upcoming market challenges by
having a streamlined cash flow. Thus, outsourcing ensures the long term survival of the
organization.
5. Outsourcing provides greater business flexibility in staffing, manpower management, that
helps in cost saving and also helps in picking up the best people to perform its core
activities. Thus, outsourcing will allow the operations that have seasonal or cyclical
demands to bring in additional resources whenever needed and to release them when not
in demand.
6. Outsourcing helps to develop competitive advantages by providing opportunities to the
businesses to develop new competencies and skill-sets by availing benefits of large scale
economies.
7. Generally, tasks/activities are outsourced to external vendors who specialize in their
field by having specific equipment and technical expertise on their part, thus,
makes possible the completion of the tasks/ activities outsourced at a faster rate
with better quality of output in an effective and efficient manner.

Limitations of outsourcing

However, all that glitters is not gold and outsourcing also has several disadvantages or
limitations. Signing contracts with other companies may take time and extra effort from a firm's
legal team. Security threats occur if another party has access to a company's confidential
information and then the party suffers a data breach. A lack of communication between the
company and the outsourced provider may occur, which could delay the completion of projects
etc. Some of the limitations of outsourcing are discussed below:

Source: http://image1.slideserve.com/3077829/limitations-of-outsourcing-n.jpg

1. Whenever an organization go for an outsourcing process (human resource, payroll,

operations, projects etc.), there is a great risk of exposure of confidential company data
and information to a third party i.e. external vendor. Thus, the risk of losing sensitive data
and the loss of confidentiality is the biggest disadvantage associated with outsourcing.
2. It is very important to select a right outsourced partner, otherwise, there may arise certain
common problems i.e. stretched delivery time frames, sub-standard quality output and
inappropriate categorization of responsibilities etc.
3. An outsourced vendor may be catering to the expertise-needs of multiple
organizations at the same time period. Thus, they lack complete focus on a
particular organization’s task/ activities. They might not be able to give 100% time
and attention to a single project.
 4. When a company contract in with another company to perform its certain business
functions of an entire department or a single task, the company is going to lose its
management control over those outsourced activities/ functions as it may be no longer to
control the operations and deliverables of outsources activities.
5. Outsourcing is associated with certain hidden costs and legal problems that may
arise due to not clearly defined terms and conditions of outsourcing.

6. Dependency risk of the firm got increased. If the firm outsource its key or core functions,
then the organization might be dependent on the outsourcing firm. And the risks such as
bankruptcy and financial loss are not in control of the firm. In simple words, after
outsourcing its key activities, a firm is tied to the financial well-being of another
company.

Summary

In today’s complicated and competitive era, outsourcing emerges as a weapon to survive. In a

simple sense, outsourcing is a process that includes transferring some of your business tasks/
activities to an independent entity that can manage those tasks/ activities easily, thus, making life
easier for the business owners. Further, it will also results into saving money by controlling costs
(overhead and labour costs), improved efficiency, greater productivity and to provide enough
time to the businessmen to focus on core aspects of business. Though outsourcing has its share of
various advantages and disadvantages, the many benefits that outsourcing carries far
overshadow/ offset its disadvantages.

Keywords

Outsourcing, Off-shoring, Professional outsourcing, Manufacturing outsourcing, Process-specific

outsourcing, Operational outsourcing, Project outsourcing, Business process outsourcing,
Knowledge process outsourcing.