The pursuit of HR outsourcing in an emerging economy: The effects of HRM strategy on HR labour costs

• Author: Hasliza Abdul‐Halim,T. Ramayah,Norbani Che‐Ha,Alan Geare
• DOI: http://doi.org/10.1002/cjas.1370
• Published date: 01 June 2016
• Date: 01 June 2016

The pursuit of HR outsourcing in an emerging

economy: The effects of HRM strategy on HR

labour costs

Hasliza Abdul-Halim*

Universiti Sains Malaysia

Norbani Che-Ha

University Malaya

Alan Geare

University of Otago

T. Ramayah

Universiti Sains Malaysia

& UTM, International Business School

Abstract

The study examines the relationships among six types of

HRM strategies with three categories of outsourcing HR ac-

tivities to reduce HR labour costs. The data were gathered

from a survey questionnaire of 232 manufacturing organiza-

tions of which 113 organizations engaged with HR

outsourcing. We found that no organization outsourced

transformational HR functions and that organizations that

espouse cost eff‌iciency, commitment, and conventional

HRM strategies tend to outsource traditional HR functions,

whereas quality conscious and commitment HRM strategies

tend to outsource transactional HR functions. Transactional

and traditional HR functions show a signif‌icant relationship

with a reduction in HR labour costs. Copyright © 2016

ASAC. Published by John Wiley & Sons, Ltd.

Keywords: HR outsourcing, HR activities, HRM strategies

outsourcing, labour costs

Résumé

Cet article porte sur les relations entre six types de straté-

gies de Gestion des ressources humaines (désormais GRH)

comprenant trois catégories d’externalisation des ressources

humaines (RH) visant à réduire les coûts de la main-

d’œuvre en RH. Les données utilisées proviennent d’une

enquête réalisée auprès de 232 entreprises manufacturières,

dont 113 ayant externalisé leurs activités des RH. Les

résultats indiquent qu’aucune entreprise n’externalise les

fonctions transformationnelles des RH. Par ailleurs, alors

que les entreprises qui adoptent le rapport coût-eff‌icacité,

l’engagement et les stratégies traditionnelles en GRH tendent

à externaliser les fonctions traditionnelles des RH, celles qui

adoptent les stratégies axées sur l’engagement et la qualité

tendent à en externaliser les fonctions transactionnelles. Les

fonctions transactionnelles et traditionnelles des RH sont

étroitement liées à la réduction des coûts en RH. Copyright

© 2016 ASAC. Published by John Wiley & Sons, Ltd.

Mots-clés : externalisation des RH, activités des RH, exter-

nalisation des stratégies en GRH, coûts en main-d’œuvre

Rapidly changing markets and increasing global com-

petition are forcing many businesses to re-examine their ac-

tivities and reprioritize their operations (Ok, 2011). External

labour markets are shifting towards greater f‌lexibility and

limited predictability, while internal labour markets in orga-

nizations seem to be moving in the direction of greater inse-

curity, volatility, and job instability (Kock, Wallo, Nilsson,

& Hoglund, 2012). Many organizations f‌ind it is diff‌icult

to address changing customer needs, cope with obsolete

technology, and enter new or emerging markets. Due to this

situation, many organizations strive to f‌ind better ways to

become competitive in the dynamic environment (Susomrith

& Brown, 2013) by planning restructuring, developing f‌lex-

ibility, and decreasing cost by contracting out activities tra-

ditionally performed in-house. This scenario also affects

the development and growth of manufacturing organiza-

tions. From the context of Malaysia, manufacturing organi-

zations have been at the forefront of the economic

expansion and are considered the powerhouses of the

country’s economy. This has signalled the end of the com-

mon way of conducting business, and has mandated new ap-

proaches toward strategies that organizations must adopt in

order to safeguard business sustainability (Sheehan, 2009).

From this context, organizations in Malaysia face challenges

in terms of cost-effective f‌inancing and f‌inding both the

skilled manpower and technological capability needed for

such sustainability. Hence it is crucial for organizations to

adopt new strategies in order to survive in the marketplace.

*Please address correspondence to: Dr. Hasliza Abdul-Halim, School of

Management, Universiti Sains Malaysia, 11800 Pulau Pinang, Malaysia.

Email: haslizahalim@usm.my

Canadian Journal of Administrative Sciences

Revue canadienne des sciences de l’administration

33: 153–168 (2016)

Published online 15 February 2016 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/CJAS.1370

Can J Adm Sci

33(2), 153–168 (2016)Copyright © 2016 ASAC. Published by John Wiley & Sons, Ltd. 153

It goes without saying that most organizations cannot be

competitive, innovative, and creative without skilled human

capital. As a result, many organizations, both in the

manufacturing and service sector, are increasingly choosing

to outsource their peripheral activities, thus enabling them to

focus more closely on their own core competencies (Kock

et al., 2012).

To address the dearth of skilled human capital, HR de-

partments must become more strategic with limited re-

sources, which is a trend that has been shown to exist

competitively (Kinange & Murugaiah, 2011; Sheehan &

Cooper, 2011). To achieve this objective, HR managers turn

to outsourcing. The growth in HR outsourcing has encour-

aged research into the best strategic conditions for external-

ization of HRM activities (Kinange & Murugaiah, 2011;

Sheehan & Cooper, 2011). HRM activities represent an in-

creasingly costly component of the operations of all busi-

nesses (Brown, 2011; Susomrith & Brown; 2013). By

outsourcing their HR activities, organizations seek to reduce

their costs while simultaneously enabling the HR function to

play a more active strategic role in the life of the business

(Cooke Shen, & McBride, 2005; Sheehan & Cooper,

2011). HR activities that are outsourced are those that are ad-

ministrative, mundane, and routine such as recruitment of

contract workers and organizing one-off training courses

(Khatri, 2000). Previously, HR managers have traditionally

been responsible for selecting, hiring, training, and manag-

ing compensation of the workforce; they are now expected

to be more f‌lexible, responsive, and eff‌icient in these activi-

ties, as well as contribute to the strategic decisions of their

organizations (Edralin, 2008; Nankervis & Stanton, 2011;

Ulrich, Younger, & Brockbank, 2008). In meeting the de-

mands of this shift in the HR paradigm, many organizations

consider outsourcing as an essential cost-saving option that

permits the HRM department to shift resources from routine

administration, enabling them to assume a more strategic

role by focusing on higher value-added activities (Delmotte

& Sels, 2008; McCracken & McIvor, 2013).

Several studies have documented this trend towards

the outsourcing of HR functions (Chiang, Chow, &

Birtch 2010; Gilley, Greer, & Rasheed, 2004; Kinange

& Murugaiah, 2011). For example, Smith, Vozikis, and

Varaksina (2006) reported that 61% of a sample of 67

Russian organizations outsourced at least one HR func-

tion, and Cooke et al. (2005) reported 97% of organiza-

tions in their survey utilized external providers to cover

at least one HR function. Additionally, Sheehan (2009)

reported that training and development (48%) and recruit-

ment and selection (34%) were the main functions

outsourced in Australia. Likewise, Susomrith and Brown

(2013) identif‌ied recruitment and selection (22.8%) and

training and development (16.4%) as the top two

outsourced HR functions in Australia. In the context of

Asian countries, HR outsourcing is less widespread.

Chiang et al. (2010) revealed that HR outsourcing is in

a nascent stage in Hong Kong, with only about one quar-

ter of f‌irms surveyed in a broad range of industries

outsourcing some parts of HR functions. This compares

to an average of 39% in the Asia Pacif‌icRegion.

Previous studies have pointed out that HR outsourcing

is not restricted to traditional and transactional activities

(such as payroll and benef‌its administration) (Greer, Gray,

& Youngblood, 1999; Susomrith & Brown, 2013); indeed,

there are organizations that outsource HR activities that

might be described as strategic and transformational (Gainey

& Klaas, 2002). Such activities occur when an organization

attempts to recover after it has plunged behind its competi-

tors; at this point an organization is likely to address out-

dated technology, change customer needs, and enter new

or emerging markets (Susomrith & Brown, 2013). Neverthe-

less, other empirical studies argue that the uniqueness and

value of particular HR activities are used to guide the

outsourcing decision in which high value and highly unique

activities are best performed internally and less unique and

valuable tasks can be outsourced (Sheehan & Cooper,

2011; McCracken & McIvor, 2013). As a result, the ques-

tion of whether HR activities have the potential to be

outsourced and how this will impact HR labour costs

remains contentious if not inexplicable. Despite the fairly

extensive literature on this burgeoning phenomenon, few

studies have sought to identify the predictors of HR

outsourcing (Cooke et al., 2005; Sheehan & Cooper,

2011); indeed, empirical evidence of the effect of HR

outsourcing on performance very limited (Gilley et al.,

2004; Sheehan & Cooper, 2011). It would obviously be in-

teresting (and potentially benef‌icial) to know: (i) how HR

outsourcing decisions are made; and (ii) the impact on HR

labour costs. We assume that a decision to outsource HR ac-

tivities is signif‌icantly inf‌luenced by the specif‌ic strategic

HRM orientation of the organization (Chiang et al., 2010).

The remainder of this paper is organized as follows. We

next present a literature review of the concepts of HR

outsourcing and HRM strategy. This is followed by a discus-

sion of the theoretical framework of the study, including the

generation of hypotheses. We then describe the methodol-

ogy of this empirical study. The results of the study are then

presented and discussed. We conclude with a summary of

the major f‌indings and implications of the study.

Literature Review

Outsourcing the HR Function

In general, “outsourcing”can be def‌ined as the purchase

from external vendors of a value-creating activity that either

was, or could have been, performed in-house (Gilley &

Rasheed, 2000). The outsourcing of HR activities is there-

fore def‌ined in the present study as the practice of turning

over to external providers all or part of an organization’s

THE PURSUIT OF HR OUTSOURCING IN AN EMERGING ECONOMY ABDUL-HALIM ET AL.

Can J Adm Sci

33(2), 153–168 (2016)Copyright © 2016 ASAC. Published by John Wiley & Sons, Ltd. 154