Why Firms Outsource TheirHuman Resources Activities:An Empirical Analysis
Michel Patry, Michel Tremblay,Paul Lanoie, Michelle Lacombe
Série ScientifiqueScientific Series
Preliminary draft—NOT FOR QUOTATION
MontréalAoût 1999
CIRANO
Le CIRANO est un organisme sans but lucratif constitué en vertu de la Loi des compagnies du Québec. Lefinancement de son infrastructure et de ses activités de recherche provient des cotisations de ses organisations-membres, d=une subvention d=infrastructure du ministère de la Recherche, de la Science et de la Technologie, demême que des subventions et mandats obtenus par ses équipes de recherche.
CIRANO is a private non-profit organization incorporated under the Québec Companies Act. Its infrastructure andresearch activities are funded through fees paid by member organizations, an infrastructure grant from theMinistère de la Recherche, de la Science et de la Technologie, and grants and research mandates obtained by itsresearch teams.
Les organisations-partenaires / The Partner Organizations
$École des Hautes Études Commerciales$École Polytechnique$Université Concordia$Université de Montréal
$Université du Québec à Montréal$Université Laval$Université McGill$MEQ$MRST
$Alcan Aluminium Ltée
$Banque Nationale du Canada$Bell Québec
$Développement des ressources humaines Canada (DRHC)$Egis
$Fédération des caisses populaires Desjardins de Montréal et de l=Ouest-du-Québec$Hydro-Québec$Imasco
$Industrie Canada$Microcell Labs inc.
$Raymond Chabot Grant Thornton$Téléglobe Canada$Ville de Montréal
© 1999 Michel Patry, Michel Tremblay, Paul Lanoie, Michelle Lacombe. Tous droits réservés. All rights reserved.Toute reproduction interdite.Not for quotation.
Ce document est publié dans l=intention de rendre accessibles les résultats préliminairesde la recherche effectuée au CIRANO, afin de susciter des échanges et des suggestions.Les idées et les opinions émises sont sous l=unique responsabilité des auteurs, et nereprésentent pas nécessairement les positions du CIRANO ou de ses partenaires.
This paper presents preliminary research carried out at CIRANO and aims atencouraging discussion and comment. The observations and viewpoints expressed are thesole responsibility of the authors. They do not necessarily represent positions of CIRANOor its partners.
ISSN 1198-8177
Why Firms Outsource Their Human Resources Activities:
An Empirical Analysis*
Michel PatryH, Michel TremblayI, Paul Lanoie', Michelle Lacombe&
Résumé / Abstract
Ce mémoire développe et estime un modèle causal de l’impartition desressources humaines. Six grandes activités ressources humaines sont analysées: lapaie, les avantages sociaux, la dotation, la formation, les relations de travail et lessystèmes d’information de ressources humaines. Les déterminants de l’impartitionproviennent de deux littératures scientifiques : celle de la théorie des organisationset de la formulation de la stratégie d’une part, et celle de la théorie économiquedes coûts de transaction d’autre part. Nos résultats montrent que les déterminantsde l’impartition varient d’activité à activité. Les déterminants suggérés parl’approche des coûts de transaction semblent jouer un rôle particulièrementimportant. L’expérience qu’ont les organisations avec l’impatition de d’autresfonctions, l’incertitude de la transaction et la présence d’un syndicat ont uneinfluence prépondérante sur la décision d'impartir les activités ressourceshumaines.
In this paper, we develop and estimate an explanatory model of HumanResources Outsourcing. Six HR activities are analyzed: Payroll, Benefits,Recruiting, Training, Labor Relations, and Human Resources InformationSystems. The determinants of outsourcing are drawn from two fields: the field oforganizational analysis and strategy formulation, and that from transaction-costtheory. Our results indicate that the drivers of HRO are rather specific to eachtype of activity. The transaction-cost determinants appear to play a particularlyimportant role in the HRO decisions. In particular, the prior experience of theorganization with outsourcing of other functions, the uncertainty of thetransaction, and the presence of a union have a commanding influence.Mots Clés :Keywords:
*
Impartition, gestion des ressources humainesOutsourcing, human resources management
Corresponding Author: Michel Patry, CIRANO, 2020 University Street 25th floor, Montréal, Qc, Canada H3A 2A5Tel: (514) 985-4001Fax: (514) 985-4035email: patrym@cirano.umontreal.ca
†‡§¶
École des Hautes Études Commerciales and CIRANO École des Hautes Études Commerciales and CIRANO École des Hautes Études Commerciales and CIRANO
CIRANO
INTRODUCTION
The wave of corporate restructuring that swept the world didn’t leave Canadian firms untouched.If the progression of outsourcing in Canada lagged behind that in the U.S., it has showed signs ofcatching up in the nineties. As a recent study conducted by Industry Canada reveals, Canadianfirms have undergone, in the last ten years in particular, an unprecedented shake-up, of whichreductions in personnel and in labor costs are the dominant features (Magun, 1998).
As in the U.S., this process of reorganization has spawned a reconsideration of the strategic roleand size of human resources departments. The question: What functions and which activitiesshould be managed internally, and which should be performed by outside companies has foundits way on the agenda of large and small organizations (Yeung and Brockbank, 1995; Lever,1997). Obviously, the responses to this question vary greatly from organization to organization,and from industry to industry, as Klaas et al. have pointed out (1998).
A number of empirical studies have tracked the trend of human resources outsourcing (Harkins etal., 1995; Laabs, 1993; Spee, 1995; Stewart, 1996). If the level of human resources outsourcingremains, overall, rather low (Klaas et al., 1998a), there is some evidence that outsourcing ispervasive for some activities and that it is rising. For instance, a survey of 1750 senior humanresources executives and specialists revealed that over 90% of firms were outsourcing at least oneof their human resources activities and that a vast majority were planning to rely more onoutsourcing in the future. With the notable exception of McIntyre’s analysis (1996) of theoutsourcing of training activities by Canadian firms, we know of no comprehensive study usingfirm-level Canadian data.
We define human resources outsourcing (HRO) as the contracting out of part or whole HRactivities to an outside supplier, in opposition to internal procurement whereas the activity isperformed by the employees of the organization. Although some authors argue that outsourcingentails the existence of a long-run relationship between the parties (Burzawa, 1994; Lever, 1997;Laabs, 1993; Sharpe, 1997), we prefer to treat outsourcing in a “make-or-buy” framework. It ispossible that long-run relationships play a particular role in many outsourcing relations, but wefocus our attention on the essential question: who is responsible for conducting the activity? Thismeans that our definition of outsourcing encompasses many different commercial relations,stretching from the routine contracting out of simple and repetitive activities, to the completedelegation of HR management to an outside firm.
The question we address in this paper is: what are the determinants of HRO in Canadian firms?Surprinsingly, this question has received little attention. Two notable exceptions are thepioneering works of Klaas et al. (1998a, 1998b) and Lever (1997). To answer that question, wegroup determinants in two families and use the results of a survey conducted in Eastern Canadato empirically test the relative significance of each determinant, and each family of determinants.The two families of determinants are: 1. Organizational/strategic; and 2. Transaction-specific.
1
THE DETERMINANTS OF HR OUTSOURCING
We conducted a survey of the literature on HRO (Tremblay et al., 1999a) and on the motivationsfor outsourcing. We found two theoretical bases upon which one can build an understanding ofthe decision to outsource.Organizational/strategic factors
The first basis or theoretical underpinning is what might be called the business strategy model. Afirst explanation, and one that is often found in the professional literature, is that firms willoutsource the activities that are not “strategic” and keep in-house those that are closely linked totheir core business. This suggests that firms which reorganized with the strategic aim ofconcentrating on their core-business would have outsourced other activities –IT, financial, etc.- aswell: hence the existence of a “pattern”. It also suggests that the decision to outsource HRactivities depends on how close to the core business the HR activities are seen by topmanagement.
On an organizational level, outsourcing might be seen as a strategic issue whose outcome shoulddepend on the political power of the HR staff, on the organizational structure and culture of thefirm and on the perceived relative performance of the firm’s HR management.
Equally important is the impact on the make-or-buy decision that a union might have byimposing constraints on management.Transaction-specific factors
Transaction Cost Economics (TCE) offers a powerful framework for the analysis of make-or-buydecision. It has been extensively used in recent years to analyse the choices made in a myriad ofindustries between different governance structures.
Under the usual maintained hypotheses of TCE (Williamson, 1985; Milgrom and Roberts, 1991):competitive markets, bounded rationality, positive transaction costs, and opportunism, theprobability that a (boundedly) rational decision-maker will prefer to internalize a giventransaction depends on many transactional characteristics. Williamson (1975, 1985), Klein,Crawford and Alchian (1978), Grossman and Hart (1982), and others have laid the bases of thecharacterisation of transactional context which is still under way.
Among the prevalent transactional characteristics of HR activities, TCE suggests the followingplay an important role:
• Asset specificity: the more specific the physical and human assets deployed by the HR
department are, the less likely the firm is to contract out an HR activity. In the case of HRactivities, one can conjecture that specificity will play a greatest role for human capital assets.As the required firm-specific skills, know how, and idiosyncratic features become moreimportant for an HR activity, the risk of hold-up for the firm and the necessity to provide theasset owner with appropriate incentives reduce the likelihood that the activity will beoutsourced;2
• Measurability: performance ambiguity curtails the efficiency of contracts. As measurementproblems become more important, control of behavior will be chosen over control of output: arational decision-maker will prefer to coordinate and motivate employees rather than managea contract;• Complexity: this transaction characteristic could lead to more or less outsourcing. Infrequentand very complex activities are more likely to be outsourced, whereas complexity makes theinternalization of recurrent activities more likely;• Predictability of volume: an unpredictable level of HR activities might lead to mixed strategysolutions where the firm maintains and develops resources in-house to meet the predictablecomponent of demand and outsources the “peak period” requirements.• Firm size: TCE suggests that firm size matters because, as firm size increases, thedisadvantages of internal procurement arising from possible economies of scale diminish. Asfirm size increases, transaction costs play an increasingly important role vis-à-vis productioncosts (Williamson, 1985). Lever (1997) and McIntyre (1996) have found an inverse statisticalrelationship between size and HRO.• Relative Production Costs: The trade-off between internal procurement and outsourcing willpredictably be influenced by the comparative cost advantage or disadvantage of in-houseproduction.• Experience and Contracting Costs: Prior experience with outsourcing might also reduce thetransaction costs of HRO as learning which can be transferred from one area to the othercertainly occurs.THE HYPOTHESES
We formulate the following hypotheses:
H1: HRO is more likely to be found in firms which have undergone a majorreorganization and focused on their “core” activities
H2: HRO is more likely to be found in firms which have outsourced other activities –finance, IT, etc.
H3: HRO is more likely to be found in firms where top management strongly backs“contracting out”
H4: HRO is less likely to be found in firms with strong and strategically involvedHR departments
H5: HRO is less likely to occur in unionized firms
3
H6: HRO is less likely for highly firm-specific, idiosyncratic activities
H7: HRO is less likely when measurement problems and performance ambiguityplague outcome-based contracts
H8: HRO is more likely when the demand for HR activities fluctuate and isunpredictable
H9: HRO is more likely to occur in firms with a “Pay Leadership Strategy “
METHODOLOGYThe survey
We conducted a survey of 1450 firms in Quebec, both private and public organizations.Questionnaires were sent to the person in charge of the human resources department (vice-president, director, etc.). The list of respondents was provided by the Professional Association ofQuebec Human Resources Management (Ordre des Conseillers en Relations Industrielles duQuébec).
The respondents were asked to supply information on their organization in general, on thestructure and performance of the HR division, and on the way thirty specific human resourcesactivities were being conducted. These could be grouped into six major activities: 1.Payroll; 2.Benefits; 3. Recruiting; 4. Training; 5.Labor relations; and 6. HR Information Systems.
254 questionnaires were returned, for a response rate of 17%, which is comparable to firm-levelsurveys. Table 1 describes the characteristics of our sample.
Table 1
Sample: Summary Statistics
Sample Size (N)
Average Number of EmployeesAverage Size of HR Staff
Percentage of Private Firms in SamplePercentage of Unionized FirmsThe dependent variable
For the purpose of analysis, the mean scores (score on a four-point scale) for each of the sixmajor activities were calculated and treated as our dependent variables. Table 2 shows thedescriptive statistics for the mean level of outsourcing for each major HR activity.4
2541 747697263
Table 2
Mean Levels of Outsourcing-Six major Groups of HR Activities
N254252254254233213
Minimum1,001,001,001,001,001,00
Maximum4,004,003,603,254,004,00
Mean2,03151,90641,63401,65161,61161,8052
Std. Deviation
,9955,7966,5348,5044,6842
,6291
PAYROLLBENEFITSRECRUITMENTTRAININGHR INFORMATION
SYSTEMS.
LABOR RELATIONS
Payroll activities are the most often outsourced. A score of 2 means that, on average, 25 % of theactivity is being outsourced. At the other end of the spectrum, HR Information Systems appear tobe the least outsourced, with a mean score of 1.6, meaning that roughly 15 % of the activity wascontracted out. Note that the overall level of outsourcing appears to be modest, in the same rangeas the reported levels in Klaas et al. (1998). Finally, it is interesting to note that some firmsoutsource in totality each group of activities.
The estimating method
To test the hypotheses about the relevance of the strategic/organizational and transaction-specificdeterminants of HRO, we ran six ordinary least-squares regressions, one for each major activity,using SPSS 8.0.
The independent variables
Because the strategic decision to outsource might well be conditioned by regulations or norms orconventions that are sector-specific, there is a possibility that industrial patterns emerge. Tocontrol for these, we included in the estimating equations a set of dichotomous variables, one foreach industry (in fact we ran the regressions with an intercept and dropped one industry variable).To test H1, we had asked our respondents whether or not their organizations had been involved inreengineering or in systematic benchmarking over the last three years (the dummies REENG andBENCH take value1 when reengineering or benchmarking has been declared practice). Weexpect positive signs on those variables, although it can be argue that benchmarking might beused as a substitute to outsourcing, particularly in the public sector.
EXP is a dummy which takes value 1 when the organization outsources other activities. EXP isexpected to be positively signed.
SUPPORT serves us in testing H3. The respondents were asked to rate the proposition: “Topmanagement is seen as supporting the outsourcing of HR activities” on a five-point scale. Weexpect a positive sign on SUPPORT.
5
HRSTRAT measures the degree to which the HR department and the HR vice-president orhuman resources director are perceived as being strategically important. The variable wasmeasured by a four-item scale with a Cronbach statistic of 0.845. We expected that variable to benegatively correlated to the extent of outsourcing.
UNION is a dichotomous variable which takes the unit value when the firm was unionized. Wedefined unionization as a positive fraction of employees belonging to a union. Politicalconstraints applied by the union on the strategic choices of the top management lead us to expecta negative coefficient on UNION. We also included in the regression an interactive dummy tocatch the specific influence of unions in the private sector, since public sector organizations inQuebec are overwhelmingly unionized.
SPEC measures the level of specificity involved in each HR activity. The variable is constructedas the sum of the scores on a five-point scale for two questions: one concerning the idiosyncrasiesof the activity (“Our methods, procedures, and equipment are very different than those of ourcompetitors”), and the other relating to the importance, in conducting each activity, of a goodknowledge of the organisational culture. We expect SPEC to be negatively signed.
MEAS is an index of measurement problems related to each activity. It is the answer, on a five-point scale, to the question: “In our organization, it is difficult to measure with precision thequality of the services in this particular area”. We expect MEAS to have a negative sign.VAR measures the variability in the demand for the services of each activity. It is also measuredon a five-point scale. VAR is expected to be positively signed. We also asked respondents if thedemand for the goods and services provided by the organization was hard to forecast. DEMANDcaptures this difficulty.
COMP is an index of task complexity related to each activity. It is the answer, on a five-pointscale, to the question: “In our organization, the problems we have in this HR area require acomplex analysis and can rarely be solved on the spot”.
SIZE is a measure of the size of the firm, based on the number of employees. We expect SIZE tobe negatively correlated with outsourcing.
Lacking a well-defined measure of each firm’s relative cost position, we use the respondent’sanswer to a question regarding their organization’s position on pay leadership. Presumably, whena firm pays relatively higher salaries, it also pays higher compensation for its entire HR staff.PAY is a dichotomous variable which takes value one when the firm has a strategy of “PayLeadership” and declares its labor costs are above 110% of the industry median. We expecthigher costs firms to outsource more. Although the relationship between pay leadership andoutsourcing ultimately depends on the “efficiency wages” paid to workers: pay leaders maysimply attract the best and most productive workers. If this were the case, their relative costposition would not be disadvantageous and their incentive to rely on HRO reduced.
6
RESULTS AND DISCUSSION
We first ran Ordinary Least Squares regressions (OLS) of the six dependent variables on all thecontrol variables, including a set of industry-specific dummies to investigate the inter-industrypatterns. Five of the six estimating equations were statistically significant. The Benefits equation,quite clearly, was not. We could not reject the null hypothesis that all estimated coefficients werejointly equal to zero with a F-test : the computed value was 1.07. The associated adjusted R-square was 0.009. The model did not explain the behavior of the dependent variable Benefits, andthe Benefits equation was dropped from the analysis.
The performance of the model for Labor Relations was also very weak. But separate estimationsfor the private and public firms led, in this particular case, to markedly contrasting results.Essentially, outsourcing of Labor Relations by the private-sector firms was much better explainedthan it was in the public sector. And there are good institutional reasons to that. In Quebec,industry-wide collective agreement are negotiated between the provincial government and thelabor unions. This leaves very little room for decision-making at the firm or organizational level.Hence the “constrained” decisions observed in the answers from the public sector firmsconcerning Labor Relations. The Labor Relations equation was then estimated twice: on the twosub-samples for private and public firms in our sample.
7
Table 3(a)
OLS Results – Payroll Equation
8
PayrollCoefficients
Std. Error
INTERCEPT0.8660.712BENCH-0.300**0.141REENG
-0.0380.151EXPERIENCE0.391**0.156SUPPORT-0.0310.051HRSTRAT0.143*0.082
SIZE
-0.0590.047DEMAND0.158***0.051UNION
0.3640.325PRIVATE*UNION-0.603*0.351PAY STRATEGY-0.0490.202MEAS (Payroll)-0.0560.065VAR (Payroll)0.1210.093COMP(Payroll)-0.0330.037SPEC(Payroll)-0.072*0.039FINANCE0.942***0.351COMMERCE1.277***0.344MANUF.0.771**0.318TRANSPORT0.811**0.405TECHNO0.912***0.320PRIMARY0.1960.388SERVICE0.5550.411MUNICIPAL0.0330.342GOVERNMENT-0.2990.361EDUCATION-0.6180.425STATE ENTER.0.5230.329
R²0.281F-Stat3,315**
N
237
Sig : * < 10%, ** < 5% and *** < 1%
Table 3(b)
OLS Results – Recruiting Equation
RecruitingCoefficientsStd. Error
INTERCEPT0.935***0.325BENCH-0.145*0.076REENG
-0.0050.083EXPERIENCE0.193**0.084SUPPORT0.090***0.028HRSTRAT0.047
0.045
SIZE
0.058**0,026DEMAND-0.0190.027UNION
0.1140.182PRIVATE*UNION0.0500.195PAY STRATEGY-0.0410.109MEAS (recruiting)0.0030.031VAR (recruiting)-0.058*0.030COMP(recruiting)-0.0200.021SPEC(recruiting)-0.0090.026FINANCE0.327*0.196COMMERCE0.2260.198MANUF.0.376*0.180318TRANSPORT-0.0190.228TECHNO0.416*0.185PRIMARY0.359*0.217SERVICE0.444*0.223MUNICIPAL0.1070.185GOVERNMENT0.2900.196EDUCATION0.1870.218STATE ENTER.0.1180.177
R²0.274F-Stat3.177**
N
235
Sig : * < 10%, ** < 5% and *** < 1%
9
Table 3(c)
OLS Results – Training Equation
TrainingCoefficientsStd. Error
INTERCEPT0.918***0.338BENCH-0.0660.074REENG
0.0060.082EXPERIENCE0.226***0.084SUPPORT0.063**0.028HRSTRAT0.008
0.044
SIZE
0.0440,025DEMAND-0.0180.027UNION
-0.1020.175PRIVATE*UNION0.1550.189PAY STRATEGY-0.0130.109MEAS (training)0.0410.030VAR (training)0.0430.038COMP(training)0.041*0.021SPEC(training)-0.0290.023FINANCE0.0740.188COMMERCE0.1290.185MANUF.-0.0060.168TRANSPORT-0.3150.217TECHNO0.0980.172PRIMARY0.1210.207SERVICE-0.1610.218MUNICIPAL0.0790.185GOVERNMENT0.0270.193EDUCATION-0.1230.216STATE ENTER.0.1980.177
R²0.202F-Stat2.139**
N
236
Sig : * < 10%, ** < 5% and *** < 1%
10
Table 3(d)
OLS Results – Labor Relations Equation
Full Sample
Labor RelationCoefficientsStd. Error
INTERCEPT1.397***0.507BENCH0.0550.110REENG
0.0850.120EXPERIENCE0.296**0.122SUPPORT-0.0110.040HRSTRAT0.0640.064
SIZE
-0.0070,037DEMAND-0.0200.040UNION
0.4000.295PRIVATE*UNION-0.791**0.313PAY STRATEGY-0.2220.151MEAS (labor rel.)0.0120.043VAR (labor rel.)-0.0700.043COMP(labor rel.)-0.0420.030SPEC(labor rel.)0.0270.033FINANCE0,610*0,310COMMERCE0,871***0,305MANUF.0,607**0,282TRANSPORT0,4480,351TECHNO0,565*0,307PRIMARY0,544*0,329SERVICE0,4240,360MUNICIPAL-0,2760,246GOVERNMENT-0,2220,268EDUCATION0,1040,284STATE ENTER.-0,0360,246
R²0,184F-Stat1,521N
194
Sig : * < 10%, ** < 5% and *** < 1%
11
Table 3(e)
OLS Results – Labor Relations Equation
Private Firms
Labor RelationCoefficientsStd. Error
INTERCEPT2.276***0.608BENCH0.270*0.146REENG
0.1200.147EXPERIENCE0.363**0.164SUPPORT0.0100.052HRSTRAT0.0590.081
SIZE
0.0080,048DEMAND-0.107*
0.054UNION
------PRIVATE*UNION-0.426***0.135PAY STRATEGY-0.0410.195MEAS (labor rel.)-0.0540.052VAR (labor rel.)-0.0670.055COMP(labor rel.)-0.077*0.040SPEC(labor rel.)0.0260.040FINANCE-0,0150,231COMMERCE0,2880,225MANUF.0,0250,183TRANSPORT-0,1060,271PRIMARY-0,0430,251SERVICE-0,1910,333
R²0,218F-Stat1,688*N
134
Sig : * < 10%, ** < 5% and *** < 1%
12
Table 3(f)
OLS Results – HR Information Systems Equation
HRISCoefficientsStd. Error
INTERCEPT1,496***0,505BENCH-0.0410.108REENG
0.0920.120EXPERIENCE0.0670.126SUPPORT0.0290.040HRSTRAT0.043
0.061
SIZE
0.061*0.037DEMAND-0.0210.040UNION
0.0740.257PRIVATE*UNION0.0660.277PAY STRATEGYMEAS (hris)-0.0760.047VAR (hris)-0.0990.062COMP(hris)0.071**0.031SPEC(hris)-0.0280.033FINANCE0.0980.281COMMERCE0.0300.283MANUF.-0.1180.253TRANSPORT-0.1700.330TECHNO-0.1120.257PRIMARY-0.1080.318SERVICE-0.1380.333MUNICIPAL-0.497*0.284GOVERNMENT-0.2450.267EDUCATION0.0010.302STATE ENTER.-0.2190.247
R²0.181F-Stat1.645*N
211
Sig : * < 10%, ** < 5% and *** < 1%
13
14Table 3 (continued)
OLS Estimation—Complete Model
Variable
PayrollCoeff.
FinanceCommerceManuf.TransportTechnoPrimaryServiceMunicipalEducationState Enter.R2F-StatN
Std.
Recruit.Coeff.0.327*0.2260.376*-0.0190.416*0.359*0.444*0.1070.2900.1870.1180.2743.177**235
Std.0.1960.1980.2280.1850.2170.2230.1850.1960.2180.177
TrainingCoeff.0.0740.129-0.3150.0980.121-0.1610.0790.027-0.1230.1980.2022.139**236
Std.0.1880.1850.1680.2170.1720.2070.2180.1850.1930.2160.177
Lab.Rel. (a)Coeff.0.610*0.607**0.4480.565*0.544*0.424-0.276-0.2220.104-0.0360.1841.521194
Std.0.3100.2820.3510.3070.3290.3600.2460.2680.2840.246
0.2181.688*134
Lab. Rel. (b)Coeff.-0.0150.2880.025-0.106-0.043-0.191
Std.0.2310.2250.1830.2710.2510.333
Coeff.0.0980.030-0.118-0.170-0.112-0.108-0.138-0.497*-0.2450.001-0.2190.1811.645*211
HRIS
Std.0.2810.2830.2530.3300.2570.3180.3330.2840.2670.3020.247
0.942***0.3511.277***0.3440.771**0.811**0.1960.5550.033-0.6180.5230.2813.315**237
0.3180.4050.3880.4110.3420.3610.4250.329
0.871***0.305
0.180318-0.006
0.912***0.320
Government-0.299
Sig : *< 10 %, **< 5 % and *** < 1 %14
Estimation results for the Payroll, Recruiting, Training, Labor Relations, and HR InformationSystems equations are reported in Tables 3(a)-3(f). All estimated equations, except the LaborRelations equation for public firms, are statistically significant with computed F-tests rangingfrom 1.688 to 3.315.
Two independent variables are never statistically significant in any equation: the indicators forreengineering and for pay leadership. HRSTRAT, our construct for the strategic implication ofthe HR department appears to have some influence in the Payroll equation, but otherwise is notstatistically significant.
We were not too surprised by the lack of information contained in the reengineering variablebecause the notion of “reengineering” has become so porous in recent years. On the other hand,the benchmarking variable probably captures more closely a set of practices. We were a bitsurprised by the lack of explanatory power of the pay variable. Roughly 10 % of respondentsdeclared that their organizations were paying salaries at least 15 % over the reference groupmedian. One would normally expect those firms to have a greater incentive to outsource. It mightalso be argued, on the contrary, that these are firms who commit themselves to their employeesand strategically try to attract the best workers by offering better conditions: those firms would beless likely to outsource. If both types of firms are found in our sample, the net impact on HROmight be nil. Yet, Klaas et al. (1998) found a strong and statistically significant relation betweenpay level and HRO, but their pay ledership variable applied to the HR staff only. This may alsoexplain the divergence between their results and ours.
We dropped REENG and PAY from the set of estimating equations and ran OLS regressions withthe other independent variables. The results are presented in Table 4. As a comparison of Tables3 (a)-(f) and Table 4 shows, the estimated parameters are fairly robust. We focus our discussionon the reduced model estimators of Table 4. As before, the F-tests are significant at the 1% levelfor the Payroll, Recruiting, and Training equations, and at the 5% level for the Labor Relations(private sector) and HRIS equations. The Labor Relations equation, when estimated on bothpublic and private organizations, does not fit the data very well, as expected, and for theaforementioned reasons.
Let’s turn our attention first to the organizational/strategy variables. We see that BENCH,EXPERIENCE ,and SUPPORT are very often statistically significant. On the other hand,HRSTRAT appears to play a role only in the Payroll equations, and its sign is puzzling. Quiteclearly, the presence of a strong HR voice does not reduce the reliance on HRO. This negativeresult is robust to changes in specifications and rather independent of the activities underconsideration.
Among the strategic variables examined, the reliance on benchmarking is particularlyinteresting. For two specific activities (Payroll and Recruiting), benchmarking appears to be asubstitute for HRO; and in the case of Labor Relations in the private sector, it is complementaryto HRO. Hence, the evidence on H1 is mixed.
On the other hand, H2 is strongly supported by the positive and statistically significant coefficienton EXPERIENCE for four of the five major activities. Organizational learning which occurswhile a firm contracts out financial or IT services appears to play a very important role in
15
determining the outcome of the make or buy decision for HR activities. This learning reduces thetransaction costs associated with dealing with a party external to the firm. This finding was alsofound by Lever (1997), which even concluded that “This organizational-level factor is the onlyuniversal factor found in outsourcing decisions.” (p. 46).
H3 is also moderately supported: the perceived support from the top management of theorganization appears to tilt the balance in favor of HRO. This variable would be expected to playa central role in a political-based model of strategy formulation, just as such an approach wouldimply a key role for HRSTRAT.
Now, quite clearly, the estimated parameters strongly reject H4: we must conclude that thestrategic importance and involvement of the HR department do not play a role in the decision tooutsource HR activities. Firms with “strong” HR departments and tradition are just as likely asfirms with “weak” or passive HR departments to favor HRO (Recall that the four-item scalecaptured the presence of the senior vice-president, human resources, on the executive committeeof the firm, the appreciation of the involvement of the HR department in strategy formulation,etc.). This result is somewhat surprising, for one would believe that senior HR executives thatplay a strategic role would be tempted to “defend” internal management over HRO, at least tosome extent.
Therefore, overall, three of the five organizational drivers are signnificant more than once, andEXPERIENCE is four times out of five. Three other control variables that were organization-specific were the presence of a unionized workforce, the size of the firm and the difficulty inpredicting the demand for the organization’s goods and services.
Of the three, the presence of a union is negatively correlated with reliance on HRO in three of thefive cases. But this finding is stronger in the private sector. Hence, we cannot reject H5. SIZEappears to be significant in three cases, but is positively signed, contrary to our expectations. Thissuggests that the larger the organization, the greater the reliance on HRO. Surprinsingly, in thePayroll equation, SIZE is not statistically significant: we expected smaller firms to easilyoutsource their payroll. It might be that the threshold for capturing economies of scale in this areahas been drastically reduced because of the availability of IT services and packages which alloweven the smallest firms to reap at least some of the economies and gains in efficiency that HROwould generate. That Training, Recruiting, and HRIS are positively correlated with size isslightly intriguing, Although only the Training equation contains a strong signal about therelevance of size. Finally, note that Klass et al. (1998) did not find any statistically significantrelation between HRO and size. As for the unpredictability of the organization global demand, itis statistically and positively correlated with the dependent variable in the Payroll and LaborRelations (private sector) equations only. This suggests that the reliance on HRO is greater whendemand is highly unpredictable, which is what a transaction-cost perspective suggests: employeesare typically hired for stable, medium to long-run periods of time. Unpredictable swings in globaldemand could more easily be dealt with using external suppliers, thus giving the firm someexternal flexibility. This is consistent with the findings in Klaas et al. (1998).
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Table 4
OLS Estimation—Reduced Model (a) (b)
VariableInterceptBenchExperienceSupportHRSTRATSizeDemandUnionPrivate*UnionMeas (x)Var (x)Comp (x)Spec (x)R squareF-statN
Payroll0.865(0.705)-0.288**(0.135)0.382**(0.151)-0.032(0.051)0.141*(0.081)-0.060(0.046)0.156**(0.050)0.364(0.323)-0.608*(0.348)-0.057(0.065)0.120(0.092)-0.033(0.037)-0.074*(0.039)0.2813.630***237
Recruit.0.937**(0.323)-0.142*(0.074)0.191**(0.082)0.090***(0.028)0.045(0.044)-0.058**(0.025)-0.019(0.027)0.111(0.181)0.052(0.193)0.003(0.031)-0.059*(0.030)-0.021(0.021)0.009(0.025)0.2743.477***235
Training0.063**(0.027)-0.066*(0.072)0.227**(0.082)0.063**(0.027)0.007(0.044)0.044*(0.025)-0.017(0.027)-0.104(0.174)0.157(0.187)0.004(0.030)-0.004(0.038)0.041**(0.021)-0.029(0.023)0.2022.347***236
Lab.Rel.(a)
1.383***(0.497)0.052(0.108)0.290**(0.118)-0.010(0.040)0.051(0.064)0.001(0.037)-0.021(0.039)0.354(0.295)-0.722**(0.310)-0.006(0.005)-0.078*(0.043)-0.041**(0.030)0.041(0.032)0.1691.529*196
Lab. Rel.(b)
2.229***(0.573)0.262*(0.142)0.404***(0.152)0.007(0.052)0.059(0.079)0.015(0.046)-0.104**(0.052)
HRIS1.519**(0.504)-0.050(0.106)0.075(0.123)0.036(0.040)0.037(0.061)
0.067*(0.037)-0.018(0.040)0.054(0.256)
-0.407***0.102(0.133)(0.276)-0.018**(0.007)-0.061(0.054)-0.079**(0.039)0.026(0.039)0.2201.955**196
-0.073(0.047)-0.105*(0.061)0.070**(0.031)-0.022(0.033)0.1721.701**236
a) Standard deviations in brackets
b) The sector-specific dummies were included in the regressionX: Payroll, Recruiting, Training, Labor Relations, HRIS
17
A more comprehensive test of H8 about the importance of fluctuations in the demand for HRservices requires that we examine the behavior of VAR(x), which measures, on a five-point scale,the agreement of the respondents to the question: “In our organization, the volume of this HRactivity is highly predictable.” Transaction-cost economics suggests a negative sign on VAR(x)(which is an activity-specific variable in opposition to DEMAND, which is organization-specific). And our findings are very much supportive of this conjecture: VAR(x) is negativelycorrelated to HRO for three of the five activities. It is never positively correlated with HRO andits level of significance is rather high. Our results on DEMAND and VAR(x) allow us toconfidently accept H8.
Finally, the coefficients on COMP(x), SPEC(x) and MEAS(x) inform us about the strength ofH6-H8 and the role of transactional complexity,--hypotheses related from the transactioncharacteristics of the HR activities. None of those characteristics appears to have a clear impacton all the make-or-buy decisions. Instead, we found a complex picture in which one or twodifferent characteristics impacted on each HR activity. For instance, H6 is validated for Payroll,H7 for Labor Relations (private sector), and transactional complexity appears to be a significantfactor for three HR activities, but is not consistently signed: it is positively correlated tooutsourcing for Training and HRIS and negatively correlated for Labor Relations.
The pattern of signs in the Labor Relations equation may have an explanation: as HRIS andTraining are increasingly perceived to become more complex by organizations, the costs ofdeveloping and managing in-house resources to accomplish them appears too high. Unless theactivity is seen as being close to the “core business” of the organization, it will rely more andmore on outsourcing. On the other hand, complexity in Labor Relations is arguably less of atechnical nature and probably pertains more to the web of interactions with the union, the cultureof he firm, the composition of its labor force, and so on. Hence, in the Labor Relations equation,COMP(x) may capture elements of specificity. If this were the case, we should expect a negativesign on it. It is interesting to note that measurement problems appear to play a significant roleonly in the Labor Relations equation, possibly for the same reasons: while it may be possible todefine reliable and rather precise indices of performance for elements in other areas, it becomesmuch less easy to do so in Labor Relations. On the other hand, Labor Relations is the HR activitywhich is more predictable: uncertainty about volume of HR activities plays no role in explainingthe reliance on HRO in this case.
To sum up: we found weak evidence to support H6-H7, and we found that complexity impacts onthe make or buy decision. Overall, uncertainty (about the required resources in HR and theglobal demand for the organization goods and services) and complexity are the two transactionalcharacteristics which emerge as having an impact on most activities. Specificity and performanceambiguity (measurement problems) play a minor role, but one in accordance with the predictionsof transactions costs economics.
Table 5 summarizes our findings about H1-H9.
18
Table 5
Summary of Findings
Hypotheses
H1: HRO and core competencies
H2: Interrelatedness of HRO with outsourcing in otherareas
H3: Importance of support from top managementH4: Strategic importance of HR departmentH5: Influence of unionsH6: Idiosyncasies
Conclusions
Weak support: importance ofbenchmarkingStrong support
Moderate supportStrong rejection
Strong support for private firmsWeak support—for Payrollactivities
H7: Measurement problems and Performance ambiguityWeak support—for Labor Relations
in the private sector
H8: Uncertainty and fluctuations of the demand for HRStrong supportresources
H9: Pay leadership strategyStrong rejectionRole of complexityComplexity plays a significant role
in the decisions for three activities
CONCLUSION
Five HR activities were analyzed to identify the determinants of HRO. Few determinants play avery significant role in the explanation of outsourcing in all areas. The emerging picture is one inwhich each family of activities appears to be driven by a specific set of factors.
Yet, prior experience with outsourcing of other functions, the presence of a union, and the levelof uncertainty in the volume of the HR activity required play a dominant role in almost everydecision. Overall, the empirical findings support a transaction-cost approach to HRO. On theother hand, resources-based explanations and the strategic role of the HR function do not appearto have a significant impact on HRO decisions. These negative results may be attributable to ourdifficulty in measuring with precision the underlying variables.
Other often-cited determinants, such as the pay strategy of the organization and its size have aweak influence, if any, on the decisions to outsource.
19
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