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HR outsourcing:
HR outsourcing: threat or threat or
opportunity? opportunity?
Jeroen Delmotte and Luc Sels
Faculty of Business and Economics, Research Centre for Organisation Studies, 543
Katholieke Universiteit Leuven, Leuven, Belgium
Received 26 September 2006
Revised October 2006
Abstract November 2006
Accepted 28 August 2007
Purpose – The debate on human resource (HR) outsourcing is polarised. HR outsourcing is seen as
an opportunity for the HR function by some and as a threat by others. The first view suggests that HR
outsourcing is an instrument creating time for HR to become a strategic partner. The second view
considers HR outsourcing as a cost-cutting instrument gradually reducing HR staff. The purpose of
this study is to examine whether HR outsourcing is a manifestation of a strategic HR focus, a
cost-cutting HR focus or both.
Design/methodology/approach – The sample is obtained from an economy-wide, cross-sectional
survey. The data cover 1,264 organisations with ten employees or more.
Findings – Results indicate that organisations with a strong focus on HR cost-cutting do not
outsource more than organisations with a weaker focus on HR cost-cutting. The analyses show a
positive relationship between a strong focus on strategic human resource management (HRM) and the
level of HR outsourcing.
Research limitations/implications – First, this study examines the breadth of HR outsourcing.
Further research might consider the depth of HR outsourcing. Second, as results are based on
cross-sectional data we cannot draw causal inferences. Finally, future research might focus on the
impact of HR outsourcing on the organisation of the HR function and internal HR customer
satisfaction.
Practical implications – HR outsourcing empowers the HR department. It frees up HR
professionals to focus on strategic HRM.
Originality/value – HR outsourcing has been heavily debated. Yet, empirical research into the
impact on the HR function is extremely limited. This study helps to fill this gap.
Keywords Human resource management, Outsourcing, Corporate strategy
Paper type Research paper

Introduction
In Human Resources in the 21st Century, Kanter (2003) sets out her view of the future
for the human resource (HR) function. According to her, HR may be doomed to
disappear as an internal department in the organisation. She does not call into question
the huge importance of HRM, but suspects that in the future HR tasks will be carried
out elsewhere and in different ways. She distinguishes four developments playing an
important role in the formation of the HR architecture:
(1) the automatisation of HR tasks;
Personnel Review
(2) the outsourcing of HR tasks; Vol. 37 No. 5, 2008
pp. 543-563
(3) the devolution of HR tasks to line managers; and q Emerald Group Publishing Limited
0048-3486
(4) the integration of HR tasks into shared service centres. DOI 10.1108/00483480810891673
PR These four developments are expected to reduce the range of tasks allocated to the HR
37,5 department, leading to a type of “HR anorexia” (Greer et al., 1999). In this article, we
examine this issue in greater depth, focusing specifically on HR outsourcing.
The literature contains two different views of HR outsourcing. The first view
approaches outsourcing as an opportunity for the internal HR department.
Outsourcing generates time and resources for tactical and strategic HR
544 contributions and allows a stronger focus on core activities. In other words, this
scenario assumes that outsourcing of transactional and operational HR activities
benefits the strategic position of HRM. The second view considers outsourcing as an
HR cost-cutter. In this case, outsourcing is considered synonymous with downsizing or
reductions in HR staff which, at first sight, generate little value to the core competence
of the organisation. The main driving force behind outsourcing is believed to be the
quest for maximum cost-cutting in the field of HRM. This view approaches HR
outsourcing as a threat.
The purpose of this article is to test these two competing views. In doing so, we
want to examine whether HR outsourcing is a manifestation of a strategic HR focus, a
cost-cutting HR focus or both. To answer this research question, we rely on survey
data collected from 1,264 Belgian organisations.
The further outline of this paper is as follows. First, we describe the two most
frequently cited drivers of HR outsourcing and formulate the research hypotheses. We
then clarify our method, sample and measures and elucidate the results. We close with
a discussion and with some suggestions for future research.

Theory and research hypotheses

Outsourcing activities or services to external organisations is not a new phenomenon.
Organisations have always had to take decisions about what they make and what they
buy (Gross, 1966; Venkatesan, 1992). Outsourcing grew rapidly in the 1980s and 1990s
(Kakabadse and Kakabadse, 2002) and has now become an accepted dimension of
corporate strategy. Cleaning, IT, catering and security are well-known examples of
activities that are frequently outsourced. Over the past ten years, HR activities have
been increasingly outsourced as well (Adler, 2003; Cook, 1999; Galanaki and
Papalexandris, 2005; Lilly et al., 2005).
A number of empirical studies have tracked this trend of HR outsourcing (Dasborough
and Sue-Chan, 2002; Dickmann and Tyson, 2005; Gainey and Klaas, 2003; Wahrenburg
et al., 2006). For example, Kakabadse and Kakabadse (2002) studied 747 European
organisations and concluded that, along with basic services (e.g. canteen facilities) and IT
activities, HRM is one of the functional domains affected most by outsourcing. A
large-scale study carried out in 1999 covering 3964 organisations (each with more than
200 employees) in 15 European countries (Vernon et al., 2000) provides further evidence to
support this finding. The survey found that 97 per cent of the HR departments outsource
some of their HR activities. According to this study, nearly half of all organisations are
reporting an increase in the use of service providers over the last three years. Other
empirical studies point out that HR outsourcing is not restricted to mere transactional HR
activities (e.g. payroll administration, records management, benefit management) (Greer
et al., 1999). More transformational and strategic HR activities are also being outsourced
(e.g. specific “high impact” training courses, recruitment and selection of core
professionals, manpower planning, . . .) (Gainey and Klaas, 2003).
 The aforementioned studies indicate that HR outsourcing has increased HR outsourcing:
substantially over the last decade. However, few academic researchers have threat or
investigated empirically the reasons why firms outsource HR activities (Klaas et al.,
1999; Lever, 1997). Cooke et al. (2005) rightly say that “the scarcity of this kind of opportunity?
research is in sharp contrast to the burgeoning prescriptive literature on the financial
and strategic reasons why organisations should outsource”.
A popular belief is that organisations use HR outsourcing primarily to cut costs in 545
the HR department. However, some studies caution that cost reduction should not be
the only factor considered in the decision to outsource (Shelgren, 2004; Stroh and
Treehuboff, 2003). For example, a study by Beaman (2004) shows that the real payoff
from HR outsourcing is not in reduced costs, but in improved quality. Other drivers of
HR outsourcing are gaining specialised HR expertise, achieving flexibility, reducing
risks and enhancing access to advanced technology (Belcourt, 2006; Lever, 1997;
Scott-Jackson et al., 2005).
We recognise that there exist many different drivers for HR outsourcing. Yet, in this
article, we only focus on the two most often debated drivers for HR outsourcing: focus
on core activities (focusing view) and cost reduction (efficiency view). These two
drivers are closely related to two theoretical perspectives: the resource-based view of
the firm (Barney, 1991; Prahalad and Hamel, 1990) and transaction cost economics
(Williamson, 1975) respectively. We further use the distinction between focusing view
and efficiency view to develop our research hypotheses.

Focusing view
The strategic driver mentioned most frequently in literature, is the possibility to
concentrate on core activities (Prahalad and Hamel, 1990). The reasoning here is that
organisations should sharpen their focus on activities generating competitive
advantage by outsourcing peripheral activities with low added value (Conklin, 2005;
Quinn and Hilmer, 1994). By outsourcing the non-core activities, an organisation can
direct more resources (time, money and managerial attention) to its core activities
(Venkatesan, 1992; Welch and Nayak, 1992). It needs to be remarked that a stronger
focus on core activities does not necessarily have to be strategic. The stronger focus
could also result in simply delivering and performing the activity better, cheaper and
faster. However, most authors start from the idea that the main purpose of a stronger
focus on core activities is strategic.
The resource-based view of the firm suggests that an organisation must focus on those
activities that constitute the core competencies and outsource the more peripheral
activities (Prahalad and Hamel, 1990; Quinn and Hilmer, 1994). This perspective helps to
identify those core activities that the organisation must perform in-house. From a
resource-based perspective it is the possession of certain resources and capabilities that
defines what the organisation will do itself and what it can obtain from outside parties
(Gilley and Rasheed, 2000). We find a similar line of reasoning in the strategic HRM
literature.
Recent literature on HRM strongly emphasises the strategic involvement of the HR
function (Lawler and Mohrman, 2003a; Ulrich, 1997). A strategic partnership can be
achieved, for instance, by focusing on those activities that are strategically relevant. By
outsourcing the transactional and administrative HR activities to an organisation for
which those activities are core, an organisation can redistribute its time and resources
PR and focus more on strategic activities (Welch and Nayak, 1992). HR outsourcing can
37,5 liberate HR professionals from their more routine and administrative tasks to perform a
more proactive and strategic role (Adler, 2003; Maurer and Mobley, 1998; Switser, 1997).
Moreover, we assume that HR professionals who are more strategically involved
actively consider which activities belong to the core and which are peripheral. In
organisations where HR is recognised as a strategic partner, there may also be less fear
546 within the HR department of the impact of outsourcing on the staff’s own positions and
tasks. There are signs that in organisations where HR does not play a strategic role,
outsourcing may pose a threat to the role and job security of HR professionals, resulting
in an inhibiting influence to outsourcing (Klaas et al., 2001). Based on the above
argumentation, we predict that organisations emphasising the strategic role of HR
would rely more on HR outsourcing. Thus, our first hypothesis can be stated as follows:
H1. A strong focus on strategic HRM is positively related to the level of HR
outsourcing.

Efficiency view
Much of the literature concerning outsourcing has its roots in the make or buy
arguments elaborated within the transaction cost perspective (Williamson, 1975).
According to this perspective, organisations focus on securing the most efficient form
of organising an activity. In such a way, this approach encourages the organisation to
evaluate whether it is more efficient to make a service in-house or to buy it from the
market. The criterion for deciding where the activity is performed depends on two
types of cost that must be minimised: the production cost and transaction
(coordination) cost. Outsourcing is appropriate when the organization achieves lower
costs by transacting with external agents rather than building the internal capacity for
a service (Williamson, 1975).
In many studies, HR outsourcing decisions were found to be a response to an
overwhelming demand for reduced costs in HR services (Greer et al., 1999; Lever, 1997).
Intensifying competitive pressures have forced organisations to be more aggressive in
cutting costs. As a result, HR departments are under increasing pressure to find ways
to provide more value at lower cost (Adler, 2003; Cameron, 1994; Yeung et al., 1994).
Outsourcing is one potential tool to achieve this. Cost savings can be achieved through
increased benefits from economies of scale of the providers for whom the provisioning
of these outsourcing activities is a core activity (Walker and Weber, 1984). External
suppliers can achieve economies of scale by performing the same activity for several
customers and consequently lowering the cost per unit (Abraham and Taylor, 1996). In
this debate, the reduction of labour costs receives particular attention (Erridge, 1995).
The staff, previously engaged in carrying out the activity, can be deployed in other
areas, can be transferred to the external supplier or can be laid off (Harris et al., 1998).
Thus, outsourcing can be strongly cost-oriented. Based on the above
argumentation, we expect that there is a positive relationship between a strong
focus on HR cost-cutting and the level of HR outsourcing. This brings us to a second
hypothesis that competes with the first:
H2. A strong focus on cost-cutting in HR is positively related to the level of HR
outsourcing.
Methodology HR outsourcing:
Sample and procedure threat or
The sample for this study was obtained from the Panel Survey of Organizations
(PASO). The objective of this Belgian panel study is to map out contemporary trends in opportunity?
HRM and the organisation of work. The panel survey has been organised on a yearly
basis during three consecutive years (2002, 2003 and 2004) and used a
disproportionately stratified sample of Belgian organisations, with industry and size 547
as stratification variables.
The targeted respondent was the HR manager or person responsible for HR (for
smaller organisations). While the respondents in this study were well positioned to
provide HR data, it remains possible that a general response bias is affecting the
results. Indeed, asking HR managers about their own function involves measuring a
partial perception of reality (Valverde et al., 2006). To reduce the effects of possible
bias, future research might benefit from designs that collect data from multiple
respondents within each participating organisation. For example, it would be valuable
to incorporate data from managers other than HR managers.
The questions in the second panel wave (2003) thoroughly examined the
organisation of the HR function and the use of HR practices in specific areas
(recruitment and selection, training, careers, compensation, performance management
and participation). Data were gathered from 2373 organisations, representing a
response rate of 25 per cent. Compared to other studies of similar nature, such a
response rate seems reasonable (Klaas et al., 1999; Shih et al., 2005).
The PASO sample does not apply any exclusion criteria. This means that all
organisations with at least one employee are taken into account and that all industries
(private and public; profit and non-profit) are represented. Yet, in the analyses below,
two exclusion criteria are added. The analyses are restricted to organisations having at
least ten employees. Micro organisations fall outside the empirical scope of this
contribution because we know from research that smaller organisations make less use
of HR practices (de Kok and Uhlaner, 2001; Sels et al., 2006). So fewer activities are
considered for outsourcing in this group.
In addition, two industries were omitted of the analyses because of their specific
nature. The agricultural industry is not included due to the limited number of
organisations with ten employees or more. The education industry is excluded because
of the specific regulations that apply in respect of personnel management. Eventually,
this resulted in a database containing 1264 organisations.
Weights were applied when analysing the data. Corrections were made because of
differences in the distributions of size and industry between sample and population.
All data in this article are weighted to be able to generalise the results.

Measures
HR outsourcing. Greer et al. (1999, p. 85) refer to HR outsourcing as “the performance,
by outside parties on a recurring basis, of HR tasks that would otherwise be performed
in-house”. Cook (1999, p. 4) states that HR outsourcing means “having a third-party
service provider or vendor furnish, on an ongoing basis, the administration of an HR
activity that would normally be performed in-house”. In this article, HR outsourcing is
defined as the transfer to an external vendor, on a recurring basis, of HR activities that
would normally be performed in-house. The level of HR outsourcing is included in the
PR analysis as the dependent variable. For a list of ten HR activities (Table I) the
37,5 respondents were asked to indicate whether the HR activity in question was being
provided by an external organisation (value 1 ¼ the HR activity is being outsourced;
value 0 ¼ the HR activity is not being outsourced). The responses to these
dichotomous variables were summed to give an overall measure of the firm’s reliance
on HR outsourcing. This new variable “HR outsourcing” yielded a value between 0 (no
548 HR activities outsourced) and 10 (all HR activities outsourced). The dependent variable

HR outsourcing 1. Payroll
2. Training
3. Temporary agency work
4. Recruitment and selection of operational and support staff
5. Advice in HRM
6. Recruitment and selection of managerial staff
7. Development of job or wage classification
8. Outplacement
9. Appraisal
10. Career guidance
HR devolution 1. Developing procedure for selection
2. Implementing selection process
3. Choice of candidate to be recruited
4. Developing procedure for dismissal
5. Decision to dismiss
6. Notification of dismissal
7. Developing appraisal instrument
8. Working out appraisal procedure
9. Following up complaints relating to appraisal
10. Deciding on the consequences of appraisals
11. Developing training plans
12. Detecting training needs
13. Evaluating the effects of training
HRM intensity 1. Selection
(a) Presence of a procedure for recruitment and selection
(b) Use of valid selection techniques
2. Training
(a) Provision of training for operational staff
(b) Presence of a training plan
3. Career management
(a) Opportunities for promotion for operational staff (vertical and/or
horizontal)
(b) System of internal career guidance for operational and/or managerial
staff
4. Compensation
(a) Application of profit sharing and/or financial participation
(b) Application of performance-related and/or development-oriented
remuneration schemes
5. Performance management
(a) Presence of an appraisal procedure
Table I. (b) Performance and/or development-oriented appraisal
Summary of HR practices 6. Participation
used to construct (a) Staff are informed of more than three subjects
variables (b) Presence of progress discussions and/or quality circles
was tested for normality in order to be used in regression analysis. The test applied HR outsourcing:
(Shapiro-Wilk test) indicated that this was the case. threat or
Instruments to measure the focusing view. Measures relevant for testing the first of
the competing hypotheses included three variables, which indicate a strategic view of opportunity?
HRM.
The first indicator is the strategic involvement of HRM. This indicator measures the
degree to which the HR function is being involved in the strategic management of 549
overall business issues. This dummy variable obtains value 1 if the HR responsible is a
member of the management committee and has power in strategic decision-making
processes. If an organisation does not fulfil both conditions, then it obtains value 0. In
other words, if the HR responsible only attends management committee meetings in an
advisory capacity, value 0 is attributed.
A second variable is whether an HR scorecard is used in the organisation. The HR
scorecard (Becker et al., 2001) is derived from the balanced scorecard (Kaplan and
Norton, 1992). It is a strategic planning and measuring system that can be used to
assess the contribution of HRM to the strategic objectives of the organisation. In other
words, an HR scorecard is designed to provide clarity about areas where HRM can add
value. In this sense it may be a valuable instrument in defining core activities. This
variable is included in the analysis as a dummy variable (0 ¼ HR scorecard not
applied; 1 ¼ HR scorecard applied).
A third indicator is the level of devolution of HR activities to line managers. HR
devolution refers to the extent to which HR responsibilities are devolved to line
managers. The role of line managers in implementing HR policies and shaping HR
practices has long been recognised in the HRM literature (Cunningham and Hyman,
1999; Larsen and Brewster, 2003; McGovern et al., 1997; Renwick, 2003; Whittaker
and Marchington, 2003). As line managers become the “owners” of an increasing
number of HR processes, the devolution of HR activities to line managers has an
impact on the position of HR professionals. If some of the operational activities (e.g.
people management) can be delegated to line management, the HR department can
concentrate more on strategic and tactical HRM. This is the reason why the level of
HR devolution is taken as an indicator of strategic HRM. The variable “level of HR
devolution” is a 13-point scale, created on the basis of data on the delegation of 13
different HR activities (Table I). In developing the HR devolution index we started
from the most common HR domains. To capture these domains, we relied on the
Michigan model (Fombrun et al., 1984). This model contains the basic HR areas:
selection, recruitment and dismissal, appraisal, training and development and
rewards. The HR devolution index covers three of the four HR domains presented in
the Michigan model: selection, recruitment and dismissal, appraisal and training and
development. The “rewards” domain was excluded because it is well-known from
the HRM literature that rewarding is less devolved to line managers (see for
example: Kulik and Bainbridge, 2006; McConville and Holden, 1999). It is important
to note that we prefer to use this rather narrow or “traditional” HR devolution index
because it allows for generalisation across organisations, company sizes and
industries. Indeed, each organisation deploys specific HR practices in each of the
three selected HR domains: each organisation has recruitment activities, selection
practices or at least some appraisal and training activities. For example, diversity
plans, competency frameworks or career plans on the other hand, are not so
PR frequently deployed (certainly not in smaller organisations). The variable “HR
37,5 devolution” has a maximum value of 13 (all HR tasks devolved) and a minimum
value of 0 (no HR tasks devolved).
Instruments to measure the efficiency view. To test the second of the competing
hypotheses, two variables were included in the analyses that indicate a strong focus on
HR cost-cutting.
550 The first indicator is the number of employees in HR positions (HR ratio). This
variable is measured as the number of staff in HR positions as a proportion of the total
number of employees (Brewster et al., 2006). In the questionnaire a distinction was
made between the number of full-time personnel officers and the number of part-time
personnel officers. In calculating the HR ratio, we assigned a weight of 0.60 to the
number of part-time staff. A lower HR ratio indicates those organisations that have
proportionately less HR staff (i.e. a larger number of employees for each HR employee).
A higher HR ratio indicates those organisations that have proportionately more HR
staff (i.e. a smaller number of employees for each HR employee).
The second indicator is the evolution of the HR head count. More specifically, the
question asked was whether the number of jobs in the HR department increased,
decreased or remained the same in 2002. Based on this question, dummy variables
were created. “Remained the same” is used as reference category.
Control variables. Despite the fact that we are interested in the link between the
focus on strategy or cost-cutting, and the level of HR outsourcing, other characteristics
of the organisation can have a significant influence on these relationships. To ensure
that the analyses are not affected by these variables, we control for a number of
variables.
The first control variable is the size of the organisation (number of employees).
Research shows that large organisations outsource more (Klaas et al., 2001). However,
the literature indicates that smaller firms in particular have a greater need of external
expertise due to their limited scale (Gilley et al., 2004a; Klaas, 2003). Indeed, SMEs often
lack the economies of scale required to build an effective HR system using internal
resources (Heneman et al., 2000). The cost associated with in-house delivery of HR is
likely to be greater for smaller firms. As a result, SMEs increasingly are outsourcing
HR activities to external organisations. In the regression analyses, the logarithm of size
was included. The logarithm gives an indication of a linear link. The squared term (ln
size)2 was also included. This squared term gives an indication of a non-linear
relationship.
The second control variable was organisational age. Organisational age was
assessed by first asking the respondent to self-report the year in which their employing
organisation was established. Age was then computed by subtracting the reported
year from the year in which the data were collected. Research shows that older
organisations are more inclined to outsource HR activities (Gilley et al., 2004b). Gilley
and Rasheed (2000) therefore suggest including organisational age in the analyses. In
the regression analyses, the logarithm of age was included. The squared term (ln age)2
was also included.
The third control variable is industry. Since different industries put different
emphasis on the importance of HRM, they may adopt different amounts of outsourcing
in HR activities (Klaas et al., 2001). Therefore, the variable industry is regularly
included as a control variable in outsourcing research. Respondents were asked to
indicate their primary industry. Responses were categorised into eight industries HR outsourcing:
(Table II). These eight industry classifications were used as dummy variables. The threat or
healthcare sector was used as our point of reference.
The fourth control variable is the employment evolution in the organisation in 2002. opportunity?
As mentioned before, the evolution in the number of jobs in the HR department is taken
as an indicator for the focus on cost-cutting in HRM. A fall in this HR head count may
have two causes. On the one hand, the reduction may be implemented while the 551
workforce in the organisation remains unchanged or increases, as a result of
“rightsizing” in the HR department. On the other hand, it may be a result of a general
reduction in staff numbers in the organisation. To measure the pure effect of the
evolution in the HR head count, we therefore included the employment evolution within
the organisation as a control variable. We calculated this indicator as the net evolution
in employment (outflow – inflow) in proportion to the total number of employees at the
end of the year.

Average F-value

Control variables
Industry 12.02 *
Chemicals, food and energy 3.41
Metal and electronics 3.08
Other industry 2.91
Financial and business services and other services 2.75
Trade, distribution and hotel and catering 2.54
Healthcare 2.14
Public administration and municipal facilities 2.06
Construction 1.99
Size (no. of employees) 45.76 *
10-99 2.38
100-499 3.59
500 or more 4.60
Age (years) 0.69
0-5 2.49
6-10 2.56
11 and þ 2.63
Focus on strategic HRM
Strategic involvement of HRM 18.31 *
No 2.46
Yes 2.89
HR scorecard 61.80 *
No 2.53
Yes 4.45
Focus on HR cost-cutting
Evolution of the HR head count 7.65 *
Reduced 3.70
Remained the same 2.64
Expanded 3.50 Table II.
Level of HR outsourcing
Notes: General average on ten-point scale: 2.57; * p c 0:001; figures weighted according to industry according to a number of
and size explanatory and control
Source: PASO (2003) variables
PR The last control variable is HRM intensity. If an organisation has a less intensive HRM,
37,5 fewer HR activities come into consideration for outsourcing. This is why we include a
variable controlling for the overall HRM intensity in the organisation. HRM intensity is
measured by means of an index, consisting in the sum of 12 binary variables. The
Harvard model of HRM (Beer et al., 1984) guided our selection of the variables for the
HRM index. We confined ourselves to six HR domains, each representing one of the
552 central “Harvard policy areas”. More specifically, we chose selection, training and
career management as HR domains representing the “HR flow” policy area;
compensation and performance management as domains representing “reward
systems” and participation as the HR domain indicating the “employee influence”
policy. We used two HR practices for each of the six HR domains. Each of the 12 HR
practices is constructed in the form of a binary variable, where 0 indicates the absence
and 1 the presence of the practice. These HR practices are represented in Table I. The
responses to these 12 binary variables were summed to give an overall measure of
HRM intensity. The HRM index ranges from 0 (no HR practices are present) to 12 (all
HR practices are present). If an organisation records a lower score on this HRM index,
this means that it has a less developed HR policy.

Results
Descriptive analyses
We begin with a summary of some descriptive statistics. Table III provides
information on the level of outsourcing of HR activities. The HR activities most
frequently outsourced to external organisations are payroll (71.8 per cent), training
(60.5 per cent) and temporary agency work (52.6 per cent). Activities, which
organisations outsource less frequently, include determining job and wage
classification (7.6 per cent), outplacement (4.7 per cent), appraisal (4.5 per cent) and
career guidance (2.0 per cent).
Table IV shows that 89.2 per cent of the organisations outsource one or more HR
activities. 71.8 per cent of the organisations outsource one to three HR activities. One in
six organisations (16.9 per cent) outsources one HR activity. The remaining 28 per cent

HR activity Percentage of organisations using

1. Payroll 71.8
2. Training 60.5
3. Temporary agency work 52.6
4. Recruitment and selection of operational and support
staff 20.0
5. Advice on personnel policy 18.4
6. Recruitment and selection of managerial staff 15.1
7. Drawing up of job or wage classification 7.6
8. Outplacement 4.7
9. Appraisal 4.5
10. Career guidance 2.0
Table III.
Incidence of HR Note: Figures weighted according to industry and size
outsourcing Source: PASO (2003)
 HR outsourcing:
Number of HR activities outsourced % % (HR outsourcing organisations only)
threat or
0 10.8 opportunity?
1 15.1 16.9
2 26.6 29.8
3 22.4 25.1
4 11.9 13.3 553
5 7.9 8.9
6 3.3 3.7
7-10 2.0 2.3
Notes: Average (on ten-point scale): 2.57; figures weighted according to industry and size Table IV.
Source: PASO (2003) Level of HR outsourcing

outsource several HR tasks (between four and ten). The results indicate that HR
outsourcing is firmly established in Belgian organisations.
Tables II and V relate the level of HR outsourcing to the various explanatory and
control variables. The results are based on variance analyses (for categorical variables)
and correlation analyses (for numeric variables).
The results show that there are differences according to industry regarding the level
of HR outsourcing. Based on the analysis, we can distinguish three categories of
industries concerning the level of HR outsourcing (Table II). The first group (e.g.
“chemicals, food and energy”) records high scores. The second group (e.g. “trade,
distribution, hotel and catering”) records average scores and the third group (e.g.
“construction”) scores very low.
We do not find any significant differences relating to the age of the organisation, but
the level of HR outsourcing does vary according to size. The larger the organisation, the
higher the average level of HR outsourcing. With regard to the employment evolution
(Table V), we note that there is no relationship between the employment evolution and
the level of HR outsourcing. Organisations that have reduced their workforce do not have
a higher level of HR outsourcing than organisations that have expanded their workforce.
Finally, the correlation analysis shows that organisations that record high scores on
HRM intensity demonstrate a higher level of HR outsourcing (Table V).
All indicators of a strategic focus on HRM show a positive relationship with the
degree of HR outsourcing. Organisations where the HR responsible has
decision-making authority on the management committee (strategic involvement)
outsource more than organisations where this is not the case (Table II). Next,
organisations that use an HR scorecard outsource more than organisations that do not
use this instrument (Table II). Finally, organisations with high levels of HR devolution
also have high HR outsourcing levels (Table V). These results provide an initial
indication of confirmation of the first hypothesis.
The result of the variables relating to the focus on cost-cutting produces a less clear
picture. There is a negative link between the number of HR staff (HR ratio) and the
level of HR outsourcing (Table V). The more people there are in the HR department, the
lower the level of HR outsourcing. Second, organisations where the HR department has
been expanded have more or less the same level of HR outsourcing as organisations
where the head count of the HR department has been reduced. The results relating to
the second hypothesis are, at first sight, not confirmed.
 PR
37,5

554

Table V.

correlations
Descriptive statistics and
Mean SD 1 2 3 4 5 6 7

1. Level of HR outsourcing 2.57 1.68 1.000

2. Level of HR devolution 1.64 2.53 0.195 * * * 1.000
3. Employment evolution 1.30 17.28 20.028 0.027 1.000
4. Proportion of employees in HR positions (HR ratio) 3.49 3.65 20.190 * * * 20.094 * 0.017 1.000
5. HRM intensity 5.66 2.76 0.382 * * * 0.307 * * * 20.033 20.142 * * 1.000
6. Size of organisation 63.67 196.05 0.221 * * * 0.133 * * * 0.049 20.220 * * * 0.259 * * * 1.000
7. Age of organisation 20.16 24.32 0.023 20.025 0.030 20.017 * * * 20.017 0.115 * * * 1.000
Notes: * p # 0:10; * * p # 0:01; * * * p # 0:001; figures weighted according to industry and size
Source: PASO (2003)
Regression analyses HR outsourcing:
A series of regression analyses (after multicollinearity test[1]) were conducted to test threat or
the hypotheses. The results of these analyses appear in Table VI.
In model 1, only the control variables industry, size, age, employment evolution and opportunity?
HRM intensity are included. The analysis confirms the industry differences observed
previously. We also observe a positive link between the size of the organisation and the
level of HR outsourcing. This seems obvious, but as mentioned previously, it 555
contradicts with a popular belief in the HRM literature that mainly smaller
organisations have more need of external expertise (Gilley et al., 2004a; Heneman et al.,
2000; Klaas, 2003). It may also be observed that the squared term (ln size)2 is negative
(although not significant). This negative sign indicates that the positive relationship
between organisation size and the level of HR outsourcing reaches its limit from a
certain size. Regarding age of the organisation, a negative link is observed between the
age of the organisation and the level of HR outsourcing. Older organisations are, ceteris
paribus, characterised by a lower level of outsourcing. The squared term is positive and
significant. This indicates that the negative relationship between age and the level of
outsourcing levels weakens from a certain age. As regards the employment evolution,
we observe that changes in respect of workforce are not linked to the level of HR
outsourcing. Finally, model 1 shows that there is a (fairly obvious) significant positive
link between the HRM intensity and the level of HR outsourcing. The aforementioned
control variables account for 25 per cent of the variance in the level of HR outsourcing.
In model 2 we include the variables relating to the strategic focus on HRM. Their
relationship with the level of HR outsourcing can thus be tested under control of
differences in industry, size, age, employment evolution and varying scores for HRM
intensity. The results indicate a strong significant positive relationship between the
strategic involvement of HRM and the level of HR outsourcing. The regression analysis
also shows a strong positive link between the use of an HR scorecard and the level of
HR outsourcing. This is also the case regarding the third “strategic focus” indicator,
the level of HR devolution. A high level of HR devolution goes hand in hand with a high
level of HR outsourcing. At first sight, HR devolution and HR outsourcing appear to
oppose one another. However, research shows that the creation of a more strategic
focus on HRM often conflicts with the fact that HR professionals have to concentrate
too much on purely “transactional activities” and direct “people management” (Greer
et al., 1999; Marinaccio, 1994). Many of the transactional activities can be outsourced,
while direct people management belongs more within the job profile of line managers.
Moreover, people-related practices and employee problems could be equally and in
some cases more effectively handled by line managers who bear a direct responsibility
because of their closer interaction with and greater understanding of employees’ needs
and problems. In any case, the combination of HR devolution and HR outsourcing
provides the HR function more time and resources for strategic HR tasks. In summary,
we conclude that model 2 indicates a strong positive connection between a strategic
focus on HRM and the level of HR outsourcing. These results provide support for our
first hypothesis that firms emphasising the strategic role of HRM would rely more on
HR outsourcing.
Model 3 includes the indicators of a focus on cost-cutting, alongside the control
variables. The first variable relates to the evolution in employment in the HR
 PR
37,5

556

Table VI.

coefficients)
HR outsourcing as
dependent variable
Results of regression

(standardised regression
analyses with the level of
Model 1 Model 2 Model 3 Model 4 Model 5

Intercept 0 0 0 0 0
Industry (health care ¼ ref. category)
Chemicals, food and energy 0.251 * * * * 0.232 * * * * 0.284 * * * * 0.363 * * * * 0.281 * * * *
Metal and electronics 0.226 * * * * 0.190 * * * * 0.235 * * * * 0.285 * * * 0.226 * * *
Other industries 0.142 * * * 0.137 * * * 0.189 * * * 0.213 * * * 0.203 * * *
Financial and business services and other services 0.274 * * * * 0.281 * * * * 0.281 * * * 0.307 * * * 0.292 * * *
Trade, distribution and hotel and catering 0.273 * * * * 0.238 * * * 0.338 * * * * 0.205 * * 0.325 * * *
Public administration and municipal facilities 0.100 0.086 0.105 0.071 0.121
Construction 0.111 * 0.115 * 0.112 0.021 0.132 *
Ln size 0.530 * * * 0.418 * * 0.371 0.820 * 0.291
Ln size 2 2 0.307 20.258 20.197 2 0.593 20.162
Ln age 2 0.280 * * 20.323 * * * 20.282 * * 0.094 20.322 * *
Ln age 2 0.334 * * * 0.390 * * * 0.357 * * * 2 0.015 0.407 * * *
Employment evolution 2 0.018 20.014 20.002 0.010 20.002
HRM intensity 0.253 * * * * 0.218 * * * * 0.301 * * * * 0.228 * * * * 0.264 * * * *
Strategic involvement of HRM 0.117 * * * 0.101 * *
HR scorecard 0.140 * * * * 0.112 * * *
Level of HR devolution 0.083 * * 0.092 * *
Evolution of the HR head count (remained the
same ¼ ref. category)
Expanded 0.044 0.042
Reduced 20.000 20.009
Proportion of employees in HR positions (HR ratio) 0.172 * *
R-square 0.25 0.28 0.27 0.26 0.29
Adjusted R-square 0.23 0.26 0.25 0.22 0.26
F-value 16.77 * * * * 14.60 * * * * 12.55 * * * * 7.00 * * * * 10.02 * * * *
Notes: * p # 0.10; * * p # 0.05; * * * p # 0.01; * * * * p # 0.001; figures weighted according to industry and size
Source: PASO (2003)
department. Regression analysis shows that changes relating to the workforce in the HR outsourcing:
HR department are not related to the level of HR outsourcing. threat or
The variable that measures the proportion of staff in the HR department (HR ratio)
is included in a separate analysis as it proved to be a high non-response item (model 4). opportunity?
Here again, it is remarkable to note that (contrary to the results of the correlation
analysis), there is a positive connection between the size of the workforce in the HR
department (HR ratio) and the level of HR outsourcing. Thus, we see that it is precisely 557
the organisations with a higher HR head count that also outsource in more HR areas.
The results of models 3 and 4 do not confirm the hypothesis relating to the focus on
cost-cutting. A strong focus on HR cost-cutting is not related to a high level of HR
outsourcing.
In model 5, all variables (indicators of focus on strategic HRM and cost-cutting) are
integrated into a single regression analysis because it may be possible that both types
of outsourcing (focus on cost-cutting in HR and strategic focus on HRM) can occur
together. Analogous to the previous analyses, this regression does not provide
confirmation for the hypothesis that organisations with a strong focus on HR
cost-cutting show a higher level of HR outsourcing. The analysis confirms that
organisations emphasising strategic HRM outsource more HR activities than
organisations where this is not the case.

Discussion and conclusions

Conclusion
Two divergent perspectives dominate the literature on HR outsourcing. Some
observers approach outsourcing as an opportunity for the HR department. After all,
outsourcing creates more time and resources to focus on strategic and value creating
HR activities. Other observers, however, portray outsourcing as a threat for the HR
department. In this view, outsourcing is seen as a cost-cutting instrument causing
“HRM without HR managers”. The purpose of this study was to examine whether HR
outsourcing is a manifestation of a strategic HR focus, a cost-cutting HR focus or both.
The analyses highlight two main results. First, the results indicate that
organisations with a strong focus on HR cost-cutting do not outsource more than
organisations with a weaker focus on HR cost-cutting. The analyses show a positive
relationship between a strong focus on strategic HRM and the level of HR outsourcing.
A second important finding is that HR devolution and HR outsourcing are closely
related. However, this does not necessarily mean that the HR department is being
eroded. By outsourcing operational HR tasks and delegating people management to
line managers, more time and resources can be released for more strategic HR
contributions. In other words, HR devolution and HR outsourcing offer the HR function
the opportunity to reposition itself and prepare for the role of “strategic business
partner” (Lawler and Mohrman, 2003b).

Implications for HR managers

Three important implications for HR managers can be derived from this study.
First, HR outsourcing is a potentially strong instrument for organisations
attempting to empower their HR function. Outsourcing of transactional and
operational HR activities allows HR managers and departments to focus on strategic
activities that add more value. Hence, it strengthens HR’s potential to make a proactive
PR contribution to business success. Therefore, HR outsourcing cannot be merely
37,5 considered as a danger for the HR department, undermining HR’s power in the
organisation.
Second, HR managers are responsible for a plethora of tasks. They are expected to
be strategic partner, employee champion, change agent and administrative expert at
the same time (Ulrich, 1997). In attempting to meet this multitude of expectations,
558 many organisations are rethinking the organisation of the HR function. There are
many alternative delivery mechanisms that remove the delivery of HR practices from
the HR department (Lepak et al., 2005). HR outsourcing is not the only option available.
There is also some evidence that a greater portion of HR tasks is shifted to line
management (Larsen and Brewster, 2003; Whittaker and Marchington, 2003) and that
an increasing number of organisations heavily rely on HR information systems to
design and deliver HR practices (Gardner et al., 2003). For HR managers it is vital to
scrutinise these alternative delivery mechanisms, to weigh their pros and cons and to
select the mechanisms that match HR’s objectives, the organisational strategy and
structure.
Third, the combination of several delivery mechanisms affects HR’s competency
profile. Managing and developing a complex web of relationships with internal and
external HR providers requires substantial skill in, for example, supplier management,
customer service and project management. Even when HR tasks are spread among
several actors, HR still has the unique responsibility and accountability to guarantee
that each HR task is fulfilled. For HR departments, it is also important to pay attention
to the impact alternative delivery mechanisms have on internal customer satisfaction
with the HR services provided and to guarantee that outsourcing, devolution to the line
or employee self-service systems result in similar or better service quality.

Limitations of the study and implications for researchers

Although this study represents an important step in understanding various aspects of
HR outsourcing, it contains a number of limitations that must be addressed in future
research.
First, this study only considers the breadth of the HR outsourcing phenomenon (i.e.
the number of HR activities outsourced) and consequently only indicates the presence
or absence of external provision in each HR activity. However, outsourcing strategies
can be conceptualised as having two fundamental characteristics: breadth and depth
(Gilley and Rasheed, 2000). Depth may be described as the extent to which an
organisation outsources a given activity. According to Gilley and Rasheed (2000), an
accurate picture of the outsourcing phenomenon can only be obtained if it is measured
both in terms of breadth and depth (Gilley and Rasheed, 2000; Wahrenburg et al., 2006).
HR outsourcing is indeed not necessarily a binary decision. An organisation can
simultaneously opt for both outsourcing and insourcing for the same HR activity.
Future research efforts that incorporate both breadth and depth will likely provide a
more complete understanding of HR outsourcing.
Second, because our results are based on cross-sectional data, we cannot draw
causal inferences. As the level of HR outsourcing can evolve over time, it is important
to use longitudinal data in the future. The analyses discussed above, show a positive
relationship between the strategic focus on HRM and the level of HR outsourcing.
However, this cross-sectional analysis cannot be used to distinguish “cause” from
“effect”. Do organisations applying a strategic focus on HRM outsource more? Or can HR outsourcing:
organisations that outsource HR activities spend more time to strategic HR matters? threat or
We recommend future research designs be longitudinal.
Third, the analyses discussed above show that the HR department can release more opportunity?
time and resources for more strategic HR contributions by outsourcing operational HR
tasks and delegating people management to line managers. If the HR department is to
take on a more strategic role, this raises a number of issues as to how it develops and 559
manages the complex internal and external relationships that relate to its different
roles: managing the relationship with external providers, managing the relationship
with line managers, providing the in-house HR tasks, being a strategic partner, . . .
(Cooke et al., 2005). Managing these relationships requires management time and
management expertise. There is a paucity of empirical research in this area, which
leaves a number of unanswered questions. Empirical research is therefore required to
identify how the in-house HR function can manage its multi-sourced functions.
Finally, future research might focus on the impact of HR outsourcing. For example,
very few empirical studies have examined the impact of HR outsourcing on the
organisation of the HR function. In addition, further research is also necessary to
investigate the impact of HR outsourcing on the perceptions of several internal
customers of the HR function (internal HR customer satisfaction). It would be
worthwhile to devote more attention to the nature of these relationships in future
research.

Note
1. We tested for the presence of multicollinearity by examining the correlation analyses.
Tabachnick and Fidell (2001) indicate that correlations above 0.90 are of serious concern for
the presence of multicollinearity. The correlations in Table V never rise above 0.40,
suggesting that multicollinearity was not a problem.

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About the authors

Jeroen Delmotte is Researcher at the Research Centre for Organisation Studies of the Faculty of
Business and Economics of Katholieke Universiteit Leuven. He is preparing a PhD concerning
the perceived effectiveness of the HR function. His current research focus is on the features of HR outsourcing:
strong HR systems, stakeholder perspectives on the HR function, the relationship between HRM
and performance, personnel management in small and medium-sized enterprises and HR threat or
outsourcing. opportunity?
Luc Sels is full Professor at the Research Centre for Organisation Studies and Vice-Dean of
the Faculty of Business and Economics of Katholieke Universiteit Leuven. His primary
substantive research interests center around individual and organisational career management,
the measurement of features and content of psychological contracts, the relationship between 563
investments in HR management and firm performance (ROI) and features of strong HR systems.
He has published articles in several high-standard journals such as Human Relations, Journal of
Organizational Behavior, Journal of Vocational Behavior, Small Business Economics, Work
Employment and Society. Luc Sels is the corresponding author and can be contacted at:
luc.sels@econ.kuleuven.be

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