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The International Journal of Human Resource Management,

Vol. 20, No. 7, July 2009, 15991617

Triggers of HR outsourcing decisions an empirical analysis of


German firms
Dorothea Alewella*, Sven Hauff a, Kirsten Thommesb and Katrin Weilandb
a
University of Hamburg, Hamburg, Germany; bUniversity of Jena, Jena, Germany
This paper takes an explanatory approach to the triggers of Human Resource (HR)
outsourcing decisions and evaluates them empirically. Our data show that many
German firms have never explicitly considered outsourcing of HR functions.
Obviously, explicit outsourcing decisions do not come into being automatically but
have to be triggered. We analyze theoretically and empirically which triggers are
relevant. In our definition, HR outsourcing includes a broad range of internal HR
functions and the respective, externally procured personnel services (e.g., temporary
agency work, payroll accounting, interim management, outplacement services, HR
consulting, placement services and others).
Keywords: HR functions; HR outsourcing; make or-buy-decision; personnel services;
triggers of explicit HR decisions

1. Introduction
A wide spectrum of heterogeneous services comes under the heading of personnel or HR
services. It ranges from temporary agency work to interim management, legal advice on
labour law, consulting, management-on-site, placement services, headhunting
(or executive search), outplacement, wage and salary accounting, and training services,
right up to the external provision of complete Human Resource Management (HRM). In
our definition, personnel services provide an external, market-based alternative to the
internal procurement of HR functions and HRM. Thus, we essentially address an HR
make-or-buy decision with regard to the whole spectrum of HR functions. We do not
restrict the term personnel services to administrative or operational functions.
There is already quite some research on outsourcing in economics. Many early articles
on outsourcing decisions focus on the IT sector (see, e.g., Aubert, Rivard and Patry 1996;
Grover, Cheon and Teng 1996; Slaughter and Ang 1996; Ang and Cummings 1997; Ang
and Straub 1998; Bruch 1998; Lacity and Willcocks 1998; Poppo and Zenger 1998; Canez,
Platts and Probert 2000; Klein 2004; Calmfors 2005; Jenster, Petersen, Plackett and
Hussey 2005). Following the many studies on outsourcing IT, the outsourcing debate has
more recently also included HR functions. However, until now, there have been
comparatively few analyses of make-or-buy decisions in favour of HR functions (but see
Klaas, McClendon and Gainey 1999, 2001; Greer, Youngblood and Gray 1999; Meckl
1999; Matiaske and Mellewigt 2002; Vosberg 2002; Autor 2003; Gainey and Klaas 2003;
Mellewigt and Kabst 2003; Lawler, Ulrich, Fitz-Enz and Madden 2004; Cooke, Shen and
McBride 2005; Lawler 2005; Belcourt 2006; Grund 2006). In spite of these studies, many
unanswered questions remain:

*Corresponding author. Email: dorothea.alewell@wiso.uni-hamburg.de

ISSN 0958-5192 print/ISSN 1466-4399 online


q 2009 Taylor & Francis
DOI: 10.1080/09585190902985228
http://www.informaworld.com
1600 D. Alewell et al.

First, the scope and degree of outsourcing HR functions differ between firms and
sectors (Cooke et al. 2005). Usually, research on outsourcing focuses on expected (cost
and quality) effects and is often based on transaction cost theory as a central approach to
the analysis of make-or-buy decisions (see, e.g., Williamson 1990; Williamson, Wachter
and Harris 1975; Picot, Reichwald and Wigand 2003). Klein (2004) summarizes the
empirical research on make-or-buy decisions which has been conducted on the basis of
transaction cost theory. He concludes that so far many relevant determinants, which
characterize firm structure and firm environment as well as causal relations between
outsourcing effects and make-or-buy decisions, have been neglected. On the basis of
current theoretical approaches one often cannot explain such demand patterns. Moreover,
they are frequently not supported by consistent hypotheses as to which situational or
structural determinants of firms will influence the make-or-buy decisions, and in what way
and direction. However, a number of such structural and situational factors may have a
strong impact on outsourcing decisions, for example firm size (for some recent
contributions on the relationship between firm size and HRM, see, e.g., Jack, Hyman and
Osborne 2006; Marlow 2006; Mayson and Barrett 2006).
Second, make or buy are often assumed to be alternatives for different HR functions
which firms may choose from. Whether firms always (and if so, which firms) conceive
make and buy as alternatives, and whether they realize that they have a choice between
one ore more alternatives of HR procurement, is ambiguous, however. Third, there may be
different reasons why firms do not even consider HR outsourcing. Factors triggering
decision processes related to HR outsourcing are often completely neglected in existing
studies on HR outsourcing.
There is, at present, a lack of knowledge about the following topics in particular: the
conditions favouring or hampering outsourcing decision processes; the set of perceived
alternatives; which expected effects are weighed against each other and whether and how
structural and situational characteristics of the focal firm influence the decision process;
and the decision pro or contra outsourcing HR functions in general. Thus, a powerful
theory which explains outsourcing HR functions and the related empirical patterns has yet
to be developed.
In this paper, we focus on the question of the triggers of explicit HR outsourcing
decisions. Figure 1 shows the modules of our general approach to the outsourcing of HR
functions and highlights the parts addressed in this paper. We analyze the triggers of
explicit HR outsourcing decisions (see grey elements in Figure 1), while the other aspects
and elements of the decision process will not be dealt with in this paper.
The core of our argument is as follows: As many firms start with an internal procurement
of HR functions, an explicit decision is needed to switch to the external procurement of the
respective function. Business as usual, routinized behaviour or merely implicit decisions
by changing nothing result in the continuing internal procurement in many firms. However,
explicit HR outsourcing decisions are not made automatically, but will often be caused by
certain events or situational conditions, which we call triggers. Such triggers increase the
probability that an explicit make-or-buy decision is made (and thus the probability that firms
indeed outsource HR functions).
We expect two main groups of triggers to be valid: First, the demand for personnel
services in a firm is contingent on whether or not there is a basic need for the procurement
of HR services: only if there is such a need, does the question of whether this should be met
internally (make) or externally (buy) become a relevant issue. In some cases, a decision
may already have been made in the past, and the need for the procurement of HR functions
is met by make or buy or a mixture of both. We hypothesize that a new necessity to
The International Journal of Human Resource Management 1601

Figure 1. Modules of the explanatory approach to the outsourcing of HR functions.

decide on the procurement of HR functions, and thus a new decision process, may be
caused by imbalances between manpower requirements and actual manpower endowment.
These may result from quantitative or qualitative shifts in one or both of these elements.
Second, outsourcing decisions may also be triggered by new internal schedules of
responsibilities for HR decisions, as such new responsibilities will often lead to a
re-evaluation of past decisions and/or to the implementation of new overall concepts for
HR, or a new statement of personnel policy.
Only if a decision is triggered, an explicit make-or-buy decision is made. If most firms
start with the internal procurement of (parts of) the personnel work, triggers are of high
relevance for an outsourcing decision and thus possibly for HR outsourcing and the
demand for personnel services. Our dataset differentiates between firms that decided
explicitly and those that decided implicitly in favour of the internal-make alternative
since, by their own admission, they never really thought about external procurement, e.g.
about HR outsourcing. In the main part of the paper, we analyze the influence of triggers
on such explicit HR procurement decisions. Please note that we do not analyze the use or
non-use of personnel services in this paper, but concentrate on the question whether
explicit decisions (for or against HR outsourcing) have been made or not.
Our theory (see Figure 1 for a brief overview) describes the further elements of the
decision process which may follow this triggering of decisions: even if a need for tasks to
be performed is acknowledged in a firm, a make-or-buy decision is only made if the
decision makers perceive make and buy as feasible alternatives. However, a number of
subjective, personal characteristics of decision makers as well as factors relating to the
firm and its environment may lead to a restriction of the set of alternatives. If the decision
is based on more than one alternative, firms will assess and weigh the expected effects of
the make-and-buy alternatives. The assessment of cost and benefits will potentially vary
between firms, depending on situational and structural factors. In this case, there will be an
explicit decision which includes weighing the expected effects. In contrast, there will be
no explicit decision on HR outsourcing (and thus a lower probability of this) in the
1602 D. Alewell et al.

following scenario: suppose a decision maker is unaware that there may be more than one
alternative for procuring HR functions. He or she may fall back on routinized behaviour and
employ the same procurement alternative as before often an internal procurement of the
function. These other aspects of the decision process are not analyzed here, however.
Our paper is organized as follows: In section 2, groups of triggers are discussed and
hypotheses generated. Section 3 describes the database and the measurement of the central
dependent and independent variables. In section 4, which contains the empirical results,
we start by presenting some descriptive results. Subsequently, two regressions are
presented, dealing with the influence of triggers on the number of explicit HR outsourcing
decisions. Section 5 discusses the results and concludes with a brief outlook on further
research needs.

2. Triggers of explicit make-or-buy decisions


Several factors may trigger explicit decisions on an HR outsourcing. There are two major
groups of triggers: imbalances between manpower endowment and requirements, on the
one hand; and new responsibilities and strategic decisions concerning the HR function, on
the other.
One essential task of HR Management is the ongoing quantitative and qualitative
balancing of manpower endowment and manpower requirements. New or changed needs
for the procurement of one or more HR functions arise if an imbalance between these two
elements occurs. The demand for personnel services by a firm is contingent on whether or
not there is a basic need for the procurement of HR services. If such a need is perceived by
the focal firm, the issue of whether this need should be met internally (make) or externally
(buy) becomes relevant. Table 1 depicts such imbalances between manpower
requirements and endowment as triggers of explicit HR outsourcing decisions.
The imbalances may lead to a manpower shortage or surplus, be predictable
or unpredictable, be caused externally or internally and take effect quantitatively or
qualitatively as well as permanently or only temporarily. Different types of imbalances
require the direct procurement of differing HR functions. Furthermore, adaptation
strategies which are induced by such manpower imbalances may necessitate changes
in conceptual and administrative HR tasks and thus result in indirect needs for the
procurement of HR functions. If, for example, qualitative manpower requirements are
greater than the qualitative manpower endowment, a new personnel development strategy
may be needed to cure the underlying problem.
These triggers may occur in the HR department and/or in other departments of the firm.
For example, a strong increase in manpower requirements concerning aspects of strategic
marketing may result in a make-or-buy decision either about contracting with a consulting
firm or recruiting the respective employees. If the decision maker favours recruiting, there
is a direct need for the procurement of recruiting functions, and the firm has to decide
whether to assign internal staff of the HR department to fulfil these tasks or to contract
with an external service provider. Thus, triggers for explicit HR outsourcing decisions may
exist on multiple levels and may be intertwined with outsourcing decisions in other
departments (in our example consulting in strategic marketing).
In line with our argument, Canez et al. (2000, p. 137) identify several triggers of
insourcing or outsourcing decisions: lack of capacity; introduction of new products; and a
skills shortage. These triggers describe imbalances of manpower endowment and
requirements. On the other hand, the authors identify an increased responsiveness to
customer needs, cost reduction, reduced time-to-market or increased quality demands as
Table 1. Imbalances between manpower requirements and manpower endowment as triggers of HR tasks.

Expected Required HR Potential


Type of imbalance duration Examples for potential reasons functions consequence
MR . ME Temporary MR " : short-term influx of orders Deployment,
(quantitative) staff recruitment
ME # : absence due to illness, vacation,
maternity legislation
Durable MR " : diversification of product-market concept Staff recruitment
ME # : termination of employment, disability, pension,
death, etc.
MR . ME Temporary MR " : fresh need of qualifications due to implementation Personnel development,
(qualitative) of new product line or new technology staff recruitment
Durable MR " : fresh/new need of qualifications due to Personnel development,
production of a new product line or use of a new technology staff recruitment
MR , ME Temporary MR # : short-term slowdown of orders Deployment, Dismissal
(quantitative)
ME " : miscalculation of staff recruitment
Durable MR # : outsourcing of duties or departments, process Dismissal
innovation, durable decrease of sales
MR , ME Temporary1
(qualitative)
Durable MR # : higher productivity of existing employees Deployment, dismissal
ME " : as a result of personnel development as well as
unplanned learning processes or further training
Additional or changed conceptual and administrative HR tasks
The International Journal of Human Resource Management

Note: 1. Temporarily, higher qualitative endowments are conceivable, e.g., if, due to a specific order situation, higher qualifications are available than necessary for a short period of
time. Because HR functions are affected only marginally, this case is not further considered in the analysis; MR: Manpower requirements, ME: Manpower endowment.
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triggers of outsourcing decisions, all describing causes for qualitative manpower


imbalances. Which underlying factors may cause such imbalances can be derived easily if
we look at the determinants of manpower requirements and endowments.
First, manpower requirements of a firm are influenced by primary and secondary
determinants (Kossbiel 1990, p. 1054 et seq.). Primary determinants have a direct
effect on manpower requirements. This group of determinants include: (a) the range of
products and services produced and the resulting kind and extent of tasks to be fulfilled
in the firm; (b) labour productivity; and (c) working time of workers per period.
Changes in manpower requirements result directly from variations in these primary
determinants. For example, a more comprehensive range of products and services, a
decrease in labour productivity or a reduction in working time increase manpower
requirements in a quantitative or qualitative manner as well as temporarily or
permanently. Changes in the demand for the firms product or services will often be of
special importance for its manpower requirements, but some changes will result from
internal decisions and processes, too.
Secondary determinants influence manpower requirements indirectly via influencing
primary determinants. They may have internal or external origins and be predictable or
unpredictable for the firm. Conditions of supply and product markets, including cost
structures and the degree of cost competition, a firms production technology, and
organizational factors, such as the degree of division of labour and the organizational
and hierarchical structure, all belong to this group of determinants. For instance, if there is
a change in the needs or preferences of customers or a new competitor enters the market,
the range of product and services the firm will sell may be affected and result in a change in
manpower requirements.
Hypothesis 1_1: Changed manpower requirements will increase the probability of explicit
HR outsourcing decisions.
However, the type of the imbalance (manpower surplus or lack of personnel) will impact
on the specific type of explicit HR outsourcing decision. If, for example, a manpower
surplus occurs, the probability of explicit decisions on HR functions which are related to
reducing the workforce will increase, e.g., outplacement or legal advice concerning labour
law. If, on the other hand, the imbalance results from a lack of manpower, the probability
of explicit decisions on HR functions which are related to expanding the workforce will
increase, e.g. placement services, headhunting, temporary agency work or deployment of
personnel selection devices. In other words, whenever there are changes in the firms
manpower or headcount, the probability of explicit HR outsourcing decisions increases,
but there might be different patterns for individual HR functions. The type of imbalance
affects the specific type of explicit HR outsourcing decision that is triggered a
manpower surplus increases the probability of explicit decisions on outplacement and
legal advice, a lack of manpower increases the probability of explicit decisions on
recruiting related HR functions as, for example, placement services, headhunting,
temporary agency work or deployment of personnel selection devices.
Hypothesis 1_2: Changes in the manpower endowment of a firm increase the probability
of explicit outsourcing decisions.
There are several factors influencing a firms manpower endowment. On the one hand, there
are more or less exogenously given parameters which a firm can only influence indirectly or
in a long-term perspective, for example, labour turnover, the rate of absence of personnel
or ageing processes in the workforce. On the other hand, there are endowment parameters on
The International Journal of Human Resource Management 1605

which firms decide directly, such as recruitment, staff reductions and displacement,
promotions, training or further education.
Changes in manpower endowment in any part of the firm may trigger an HR
outsourcing decision as they often result in a need for recruiting, lay-offs or displacement
activities, thus triggering a need for the procurement of HR tasks. However, whether these
changes in the quantity of HR tasks result in an imbalance in the HR department depends
on the HR manpower endowment. Thus, manpower endowment in the HR department
may be especially important in triggering outsourcing decisions. If the demand for the
fulfilment of HR tasks exceeds the capacity of the HR department, firms are more likely to
outsource HR tasks.
Hypothesis 2_1: If the workload in a firms HR department is too high, explicit
procurement decisions are more probable.
Additionally, the timing of tasks influences whether firms choose between internal or
external procurement. If the planning horizon for HR management is short, firms are more
likely to decide explicitly between make or buy. This can be explained by the fact that they
may not be able to procure a function internally in the short run if there are strong
imbalances between manpower requirements and endowments, which, in turn, call for a
large amount of additional HR functions. Instead, firms may have to consider and evaluate
alternatives apart from the internal introduction of the service.
Hypothesis 2_2: If the HR planning horizon is relatively short, explicit make-or-buy
decisions are more likely than under a longer planning horizon in HR
management.
Last but not least, newly created or newly assigned responsibilities in the HR department
and the introduction of a new personnel policy may trigger explicit HR outsourcing
decisions. With a new person being responsible for HR, past decisions will often be re-
evaluated in the light of some other personal background, other experiences and values,
and are thus likely to be changed, revised or modified. New responsibilities (or other
effects) may also lead to a new statement of personnel policy, thus introducing a changed
background for evaluating HR procurement decisions.
Hypothesis 3_1: New responsibilities in the HR department and/or the introduction of a
new personnel policy increase the probability of explicit make-or-buy
decisions in the HR department.
Having generated some hypotheses about triggers for explicit outsourcing decisions for
several personnel services, we now describe our dataset.

3. The empirical basis: The dataset and measurement of central variables


3.1 The dataset
The dataset we used to test our hypotheses covered the use and non-use of a broad
spectrum of personnel services by German firms. The survey, conducted in 2006, was
based on computer-aided telephone interviews. We interviewed 1,021 chief executives
and human resource managers.
We drew a sample of firms addresses from the dataset of all mandatory members of
the German Chamber of Industry and Commerce (Industrie- und Handelskammer, IHK).
Emails with a short description of the project were sent to the managers, requesting them to
cooperate. Absolute anonymity was guaranteed. After this first contact, we called them and
1606 D. Alewell et al.

asked for an appointment for a telephone interview. Of the contacted firms 25.03%
consented to a computer-aided interview. Our sample was disproportionally stratified for
firm size, industry and region, resulting in an approximated uniform distribution of
frequencies in the cells of the matrix. Compared to the distribution of firms in Germany,
the proportion of larger firms and of firms from the western German service sector is thus
much higher in our database. Table 2 shows the distribution of firms in our database
compared to the distribution of firms in the IHK database for Germany.

3.2 Measurement of dependent and independent variables


Dependent variables
The interviewees were asked whether, in 2004 and 2005, they employed the respective
personnel service or not. If they did not, they were then asked whether they had considered
its employment but decided against it, or whether they never considered it at all. These
questions were put to each firm for each personnel service we analyzed. Based on
the questions, we could identify explicit decisions (using the respective external service or
having explicitly decided against it) and separate them from implicit ones.
To evaluate our hypotheses we tested them in two groups of models which differ with
respect to the dependent variable:
The first group of models addresses the relationship between the triggers of the HR
outsourcing decision and the probability of explicit decisions in the outsourcing decisions
for single HR services. The general hypothesis is that such triggers will increase
the probability with which explicit decisions in the total group of firms are made for the
respective HR function or service. The dependent variable thus classifies firms into those
that have made an explicit decision for the respective HR function (1 explicit decision)
and those that have made an implicit decision only and never even considered the external

Table 2. Our database in comparison to the distribution in Germany (% of firms in the


respective cell).

Production sector Service sector


Former Former
Size (no. of Eastern Western Eastern Western
employees) Germany % Germany % Germany % Germany % Total %
Our database
Distribution in 1 to 19 6.07 6.07 6.07 6.56 24.78
Germany 1.33 9.42 6.26 65.73 82.73
Our database
Distribution in 20 to 99 6.17 5.78 5.97 6.46 24.39
Germany 0.83 4.11 0.93 7.41 13.27
Our database
Distribution in 100 to 499 6.17 6.37 6.46 6.56 25.56
Germany 0.21 1.51 0.14 1.46 3.33
Our database
Distribution in More than 500 2.94 9.40 3.53 9.40 25.27
Germany 0.01 0.31 0.02 0.32 0.67
Our database
Distribution in Total 21.35 27.62 22.04 28.99 100.00
Germany 2.38 15.35 7.34 74.92 100.00
The International Journal of Human Resource Management 1607

procurement of this function (0 implicit decision). Thus, we estimated logistic


regressions.
The second group of models addresses the relationship between the triggers of the HR
outsourcing decision and the number of explicit versus implicit decisions in one firm
concerning all HR functions. The general hypothesis is that such triggers will result in a
higher number of explicit decisions for the internal or external procurement of HR
functions. As we analysed nine different HR functions or personnel services, each firm
could have made nine different implicit or explicit decisions. We constructed an index
counting the number of explicit decisions in one firm and potentially showing values from
zero to nine. We then estimated linear regressions on this index.

Independent variables
The independent variables are the same for both groups of models.
We measured the development of manpower requirements indirectly by the perceived
trend in the order situation [Rising trend in order situation]. An increasing trend is denoted
by the value 1, whereas the reference group (0) contains all other order trend
conditions, e.g., a constant trend, a decreasing trend as well as no observable trend at all.
Besides, we asked for fluctuations in the firms order situation [Fluctuations in order
situation] (1 yes, 0 no). We finally measured changes in manpower requirements
indirectly by organizational changes [Organizational changes]. This variable could also be
either 1 if there were organizational changes of any kind, or 0 if there were no
organizational changes at all. The variable was generated ex post by using several
variables, namely the questions regarding insourcing, outsourcing and reorganization
activities. All these variables are dichotomous and refer to the two-year time span
covering 2004 and 2005.
We hypothesized that changes in the manpower endowment increase the
probability of explicit outsourcing decisions. To measure changes in manpower endowment,
we created a new variable to measure changes in the firms manpower [Changes in headcount]
(1 yes, 0 no). First, we subtracted the percentage of dismissals from that of newly
recruited staff (each with regard to all employees). Second, we used a variable specifying
the number of positions linked to management tasks for which a firm recruited
additional personnel [percentage of newly recruited staff with management functions, on
average per year].
We also hypothesized that the HR departments workload would influence whether
firms decide explicitly between make or buy. We measured the workload of the HR
department by asking firms directly whether the workload was too high [Workload in
HR too high] (1 yes, 0 no). We also asked whether the number of employees in the
HR department had risen in the last years [Risen no. of empl. HR] (1 yes, 0 no).
Subsequently, we asked firms about the length of their planning horizon concerning HR
management. We assume that a planning horizon for long-term decisions which is shorter
than a year is to be considered as short. Thus, for our models we used the information
whether the planning horizon in HR management was shorter than 1 year [Short planning
horizon in HR] (1 yes, 0 no).

Measurement of control variables


As control variables we used firm size, industry, works council and the region in
which the firms are located in Germany. Firm size is measured as the natural logarithm
1608 D. Alewell et al.

of the average number of employees in the years 2004 and 2005. Regarding the
industry, we used a rough differentiation between firms in the service sector (1) and
the production sector (0). An existing works council in the firm is denoted by 1 yes
and 0 no. Finally, we classified the region in Western Germany (1) and Eastern
Germany (0).
We start by presenting some descriptive results in sections 4.1 and 4.2, followed by
logistic and linear regression models in sections 4.3 and 4.4.

4. Empirical results
4.1 Descriptive results on the use of HR services and on the type of HR outsourcing
decisions
Figure 2 gives an overview of the use of different personnel services, e.g., the external
procurement of certain HR functions and the kind of decision made with regard to
HR procurement. We asked the firms whether they deployed the respective personnel
service (at least once) during the last 2 years, i.e. 2004 and 2005. The HR function
procured externally most often was training and development, which was employed by
61.8% of all firms, followed by external legal advice (54.4%). 50% employed temporary
agency work, 3.7% made use of interim management and 34.1% of HR consulting.
Headhunting (32.1%), external payroll accounting (25.9%) and placement services
(20.2%), being common services, were employed by between 20% and one third of the
firms. Only 9% of all interviewed firms had used an external procurement of services for
the selection of personnel; 8.2% used outplacement services, and only 2.07% had
outsourced the complete human resource department.

Figure 2. Frequency of deployment and of explicit decisions for and against the respective external
service (absolute number of firms out of 1,021 interviewed firms).
The International Journal of Human Resource Management 1609

We identified two types of decisions. Our interviewees were asked if: (a) they had
bought the respective service externally; (b) had considered the external procurement but
decided against it and instead chose internal procurement; or (c) had never considered the
external procurement of the respective HR function at all. Interviewees who answered
(c) had made an implicit decision for the internal procurement of the respective HR
function, without explicitly weighing the effects of cooperating with external service
providers. In contrast, positive answers to questions (a) and (b) can be interpreted as an
indicator of an explicit decision between make-or-buy alternatives.
Figure 2 indicates clearly that a high proportion of firms never considered the external
procurement of specific HR functions. Thus, explicit decisions on HR procurement are not
the standard case. In many firms, only implicit decisions were made in favour of the
internal procurement of HR functions. Even for well-known and comparatively often used
services, such as temporary agency work, consulting and payroll accounting, external
provision was never explicitly considered by more than 40% of the firms. For
outplacement, interim management and the complete outsourcing of HR management, the
respective proportions increased to more than 80% of the firms. These descriptive results
show clearly that the question of how, when and why explicit HR outsourcing decisions
are triggered is of great relevance for better understanding the outsourcing of HR
functions.
The data contain information about triggers of explicit HR outsourcing decisions on
different levels. On the one hand, we directly asked firms what triggered their outsourcing
decision for a certain personnel service. On the other hand, we asked for some of the
triggers directly, such as dismissals, changed order situation, etc. Let us first take a closer
look at the answers of the interviewed firms when they were directly asked for triggers of
their explicit HR outsourcing decision.

4.2 Descriptive results on triggers of explicit HR outsourcing decisions


An explicit decision on the internal or external procurement of HR functions can be
triggered by different factors. We asked users as well as conscious non-users of the
respective personnel services what triggered their decision on HR procurement (Table 3).
Interviewees could each choose more than one of the alternatives below; therefore, the
cumulated frequencies in rows do not add up to 100%.
Table 3 shows that changed manpower requirements were chosen as the most
important trigger of explicit HR procurement decisions. About every second answer
(51.6%) favoured this trigger. Other triggers mentioned were changed manpower
endowment (21.5%), dissatisfaction with aspects of the previous HR management (9.1%)
and the introduction of a new personnel policy (8.8%). The employment of new staff being
responsible for the decision was considered as a trigger in 5.8% of the answers. However,
a high proportion of answers indicated that other triggers not mentioned were also
important.
Thus, as Table 3 shows, explicit decisions for an external procurement of personnel
services are often triggered by changes in manpower requirements or manpower
endowments, while other triggers exist but are obviously much less important. On the
basis of these descriptive data, Hypothesis 3_1 is thus not well supported.
An analysis for the single personnel services reveals the following differences: for
users as well as conscious non-users of external legal advice services a changed manpower
endowment is the most frequently named trigger (42.9%) for an explicit HR outsourcing
decision, while for all other personnel services it is a changed manpower requirement.
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Table 3. Frequencies of firms mentioning the respective triggers for an explicit HR procurement
decision (answers of users and conscious non-users of different personnel services).

previous HR management %
Trigger

New staff responsible for

Introduction of a new

Changed manpower
Changed manpower

Dissatisfaction with
personnel policy %

requirements %

endowments %

Dont know %

No answer %
Other %
Personnel service HRM %

Temporary agency work 1.6 7.0 79.7 23.4 3.3 31.3 0 0.8
Interim management 0.0 10.5 47.4 26.3 11,1 57.9 0 0
Headhunting 6.9 5.0 55.4 16.8 15,8 44.6 1 0
Placement services 6.8 4.1 67.1 37.0 6.9 42.5 0 0
Miscellaneous services in 0.0 0.0 100.0 0.0 0.0 66.7 0 0
the selection of personnel
Outplacement services 15.8 26.3 42.1 42.1 5.3 47.4 0 0
Training services 11.1 11.1 29.6 11.1 11.1 77.8 3.3 6.7
Management consultancy 8.7 19.6 35.9 13.0 11,4 70.7 3.1 1.0
Payroll accounting 9.8 4.9 17.1 12.2 7.3 73.2 2.3 2.3
Legal advice services 0.0 0.0 14.3 42.9 7.1 57.1 0 0
Complete outsourcing of HR 0.0 5.4 24.3 16.2 13.5 62.2 0 2.6
Total 5.8 8.8 51.6 21.5 9.1 51.4 1.1 1.1

This trigger is mentioned by all interviewees of miscellaneous services in the selection of


personnel (100%), and except for outplacement services for other services it is named
distinctly more often than the respective second most frequently named trigger: Changed
manpower requirement (manpower endowment), for instance, is the most frequently
mentioned trigger for an outsourcing decision for temporary agency work: 79.7% (second
most important trigger 23.4%), placement services: 67.1% (37%), headhunting: 55.4%
(16.8%) and interim management: 47.4% (26.3%).
Besides manpower requirement and manpower endowment (each 42.1%), other
triggers for outplacement frequently mentioned are the introduction of a new personnel
policy (26.3%) and new staff (15.8%). This is different from the pattern for other services.
However, one exception is management consultancy where the introduction of a new
personnel policy was mentioned as a trigger by 19.6% of the interviewed users and
conscious non-users. Dissatisfaction with the previous HR management as another
important trigger is mainly mentioned by the users and conscious non-users of
headhunting (15.8%) and of complete outsourcing of HR (13.5%).
Interestingly, many interviewees named other triggers for certain personnel services
that caused their outsourcing decision, especially for training services (77.8%),
management consultancy (70.7%) and payroll accounting (73.2%). These other triggers
(not listed in the table) were manifold and included legal reasons, the general need for
training and structural changes in the firm as well as routines or marketing activities
performed by external service providers. Often, expected cost and quality effects were
mentioned as triggers for outsourcing, such as cost saving or the expectation of better
training services provided by external service providers. Although many interviewees
The International Journal of Human Resource Management 1611

named other triggers of outsourcing decisions for a particular personnel service, only few
of them indicated the respective trigger explicitly.
In sum, manpower imbalances seem to be the most important trigger. In the following,
we will therefore concentrate on manpower requirement and manpower endowment as
triggers of explicit HR outsourcing decisions rather than analyze Hypothesis 3_1 any
further. Having found that for several personnel services other triggers were more
important than a changed manpower requirement or endowment, we expect that our
models will not work for all personnel services.

4.3 Results of logistic regressions for triggers of explicit HR procurement decisions for
separate HR functions
In our models, we always used the measurement of the dependent variables described
above. The first set of independent variables refers to manpower requirement, whereas the
second set refers to changes in manpower endowment. These two sets are followed by a
third set which corresponds to the imbalance between manpower requirement and
manpower endowment in the HR department. Finally, some control variables, e.g. firm
size and branch, are also considered in the models.
To begin with, we look at the first group of models logistic regressions for all personnel
services, showing how triggers affect an explicit HR outsourcing decision, regarding the
demand of all interviewed firms for the individual personnel services (see Table 4).
Starting with the variables that measure changes in manpower requirement, the results
of the logistic regressions show that organizational change, e.g., in terms of restructuring,
reorganizing, insourcing and outsourcing processes in other departments, has a positive
and significant influence on explicit decisions for all personnel services except for interim
management where the results are not significant. When organizational change occurs, the
probability of an explicit decision on the external HR procurement is much higher than
when there is no such change. Furthermore, an explicit decision on the use of temporary
agency work, headhunting and training services is significantly more probable when there
is an increasing trend in the order situation of the firm. The respective results for the other
services are not significant. By contrast, an explicit decision for the use of management
consultancy, legal advice services and complete outsourcing of HR is less probable when
there is a rising trend in the firms order situation. Fluctuations in the firms order situation
show non-significant results for almost all personnel services except for miscellaneous
services in the selection of personnel. While such fluctuations increase the probability of
an explicit decision on outsourcing of HR functions in headhunting, placement services,
outplacement and training services as well as payroll accounting and legal advice services,
this is not the case for the other personnel services.
Moreover, we included variables which indicate changes in manpower endowment,
especially changes in headcount, as well as the percentage of newly recruited staff with
management functions in relation to the total number of management personnel. One
result we observed is that changes in headcount lead to differing results concerning single
personnel services: the results for temporary agency work, headhunting and outplacement
services show that when there are changes in headcount, an explicit decision on using the
respective personnel service becomes more probable. In contrast, for almost all of the other
personnel services an explicit decision is less likely in case of such changes. The results
are significant for placement services, miscellaneous services in the selection of personnel,
management consultancy and the complete outsourcing of HR. As regards legal advice
Table 4. Logistic regression of triggers (independent variables) of explicit HR procurement decisions for the respective HR function/service as dependent
1612

variable (users and conscious non-users of the respective personnel service (explicit decision) in contrast to never considered external procurement (no explicit
decision)).

Triggers (indepen-
dent variables)
of explicit decisions
on HR
procurement for the
respective person-

Temporary agency work


Interim- management
Headhunting
Placement services
Miscellaneous services in the
selection of personnel
Outplacement services
Training services
Management consultancy
Payroll accounting
Legal advice services
Complete outsourcing of HR

nel service
Changes in man- Rising trend in order situation 1.670** 1.073 1.667** 1.094 1.008 1.047 1.484* 0.926 1.084 0.908 0.798
power requirement Fluctuation in order situation 0.963 0.777 1.077 1.169 0.706 1.16 1.113 0.887 1.171 1.014 0.895
Organizational changes 2.238*** 1.394 1.588** 1.435* 1.567* 1.678* 1.834** 2.130*** 1.443* 1.700** 1.691*
Changes in man- Changes in headcount 1.007 0.988 1.011 0.989 0.984* 1.015 0.998 0.988* 0.998 1 0.987
power endowment % of newly recruited staff 1.004 1.000 1.020*** 1.003 1.001 1.005 1.010 0.996 0.997 1.013* 0.994
with management functions
Manpower balance Workload in HR too high 1.400* 1.594 2.285*** 1.634** 1.007 1.558* 1.27 1.113 1.283 0.923 1.490
in HR department Risen no. of employees in HR 1.596 1.770 0.966 1.068 0.823 0.661 0.683 1.155 0.578* 0.642 0.545*
D. Alewell et al.

Short planning horizon in HR 1.097 0.570* 0.685* 0.958 0.822 0.571** 0.614* 0.823 0.797 0.806 0.741
Control variables Firm size 1.549*** 1.442*** 1.652*** 1.275*** 1.410*** 1.498*** 1.693*** 1.430*** 0.961 1.223*** 1.150
Industry (1 service sector) 0.383*** 0.649 0.808 0.905 1.025 0.835 1.492* 1.045 1.385* 1.436* 0.852
Existing works council (1 yes) 1.150 0.996 1.167 0.667 1.437 1.279 1.048 0.952 0.666* 1.046 0.962
Region (1 Western Germany) 1.033 1.270 1.926*** 0.816 0.787 1.956** 1.705** 0.824 0.9 1.07 0.907
Constant (/Sig.) 0.000 0.000 0.000 0.001 0.000 0.000 0.021 0.001 0.139 0.926 0.112
Constant Exp. (B) 0.076 0.005 0.012 0.14 0.066 0.015 0.152 0.14 2.228 0.945 0.342
N (number of firms datasets included) 881 877 877 876 876 874 882 871 877 881 879
x2 (Hosmer-Lemeshow-Test) 9.024 7.717 4.372 9.845 6.535 13.843 6.186 4.806 6.21 24.166 10.2
Cox-Snell R2 0.23 0.068 0.302 0.063 0.098 0.173 0.241 0.137 0.037 0.096 0.049
Nagelkerke R2 0.315 0.143 0.406 0.088 0.162 0.281 0.343 0.183 0.05 0.13 0.086

Note: Levels of significance: p , 0.1, *p , 0.05, **p , 0.01, ***p , 0.001.


The International Journal of Human Resource Management 1613

services, changes in headcount neither increase nor decrease the probability of an explicit
outsourcing decision.
An explicit decision on headhunting, training services and legal advice services is
triggered with a significantly higher probability by higher percentages of newly recruited
management staff. Exceptions where this does not hold are management consultancy,
payroll accounting and complete outsourcing of HR, even though these results are not
significant.
Thus, our data only partially support Hypotheses 1_1 and 1_2. Altogether it can be
stated that changed manpower requirements as measured by organizational changes
significantly increase the probability of explicit outsourcing decisions for almost all of the
personnel services, interim management being the exception.
Regarding the third set of variables which measure manpower (im)balance in the HR
department, the results show that a workload in this department, which was considered too
high by the interviewees, has a positive influence on the odds ratio in favour of an explicit
HR procurement decision for all personnel services except for legal advice services. The
results are significant for several personnel services, such as temporary agency work,
interim management, headhunting, placement services, outplacement services, payroll
accounting and complete outsourcing of HR. In contrast, a risen number of employees in
the HR department has less significant effects and points in different directions for the
separate personnel services. For most of these services, more employees in HR decrease
the probability of an explicit outsourcing decision on the respective personnel service.
This is, for instance, true for payroll accounting, legal advice services as well as complete
outsourcing of HR, for which the results are also significant. The reason may be that a risen
number of employees in the HR department is in itself a reaction to a higher workload in
the past or to previous imbalances between HR requirements and endowment in general,
indicating that such imbalances have already been eliminated. Thus, the data only partially
support Hypothesis 2_1.
Firms with a short horizon in HR planning (up to 1 year) are significantly less likely to
make an explicit decision for or against interim management, headhunting, training and
outplacement services. The results for the other personnel services are not significant, but
show a similar tendency. This result clearly contradicts our Hypothesis 2_2. However, an
exception is temporary agency work, where our hypothesis is supported. We expected that
an extremely short planning horizon would often force firms to cooperate with external service
providers in order to cope with strong or intensive fluctuations in demand for HR functions.
But our data show that if there is a short planning horizon in HR and we control for some
organizational changes it is usually less probable that a firm explicitly decides on an
outsourcing of the respective personnel service. An explanation might lie in the fact that such
an explicit decision may necessitate gaining information about the service and qualified
service providers, price structures and contracts, and that this will probably take time. As a
result, HR departments with a short planning horizon may be unable or disinclined to prepare
for such decisions in time and stick to internal procurement.
The fourth set of variables includes control variables. The larger the firm, the higher
the probability of an explicit decision on the external procurement for all HR functions
except of payroll accounting. This is in line with recent other research (e.g., Jack et al.
2006; Marlow 2006; Mayson and Barrett 2006) which demonstrates the effects of firm size
on various aspects of HR management. An explanation may be, as mentioned, that
information has to be obtained about external service providers (the necessary information
processes for cooperation with external service providers cited above): if larger firms
employ more HR specialists, then this information will be available at a lower additional
1614 D. Alewell et al.

transaction cost, thus fostering explicit decisions. Firms in the service sector are significantly
less probable to make an explicit decision on temporary agency work and interim
management. This effect may be due to a closer contact between customers and employees in
service firms which may therefore want to avoid the potential hazards involved in deploying
temporary agency workers or interim managers. By contrast, firms in the production sector
show a significantly higher probability to explicitly decide on services that tend to be used
regularly by firms, such as training services, payroll accounting and legal advice services.
Firms in the western part of Germany also show a significantly higher probability to make
explicit decisions on the use of headhunting, outplacement and training services. A works
council, on the other hand, significantly reduces the probability of such a decision on the use of
placement services and payroll accounting. The results for all other personnel services point in
different directions and are not significant.
It is clear, then, that there are only some variables that have a similar bearing on
explicit decisions for all or most of the personnel services: organizational changes; an
excessive workload in HR; and firm size. For all other variables, the results are quite
different for individual personnel services, both in terms of the direction of the effects and
the significance of the results.
The predictive power of the models also differs noticeably. While the models work
fine for temporary agency work and headhunting, they are less efficient for, for example,
management consultancy and payroll accounting. As for temporary agency work and
headhunting where the models work well, it can be concluded that changed manpower
endowment and manpower requirement are triggers that sufficiently explain why explicit
outsourcing decisions are taken.
Interestingly, changes in manpower endowment rather reduce the odds ratio in favour
of explicit outsourcing decisions for personnel services for which other factors than
manpower endowment and manpower requirement were mentioned as being more
important triggers. This is the case for management consultancy, payroll accounting and
the complete outsourcing of HR. Here other factors may be more important triggers for an
explicit outsourcing decision. Such factors can be quite different from changes in
manpower endowment or requirement in the firm. For example, service providers may
trigger an outsourcing decision by informing firms about the kind of services they offer.
Moreover, the anticipation of expected costs or benefits by using an external service
provider may trigger an explicit decision on outsourcing a special personnel function.
There may be some additional factors that are particularly relevant for specific personnel
services. For instance, a firm may consider outplacement services only if it wants to
dismiss a difficult employee, or if it is undergoing an economic crisis.
The model for placement services is hardly predictive. The reason could be that the
interviewees may have mixed up private and public placement services, although they
were asked to refer to placement services by private employment agencies only.
So far, we have analyzed which variables increase (decrease) the probability of an
explicit decision of firms on the respective personnel service. Next, we turn to the second
group of models and analyze how the variables influence the number of explicit decisions
on differing HR functions in individual firms.

4.4 Results of linear regression of triggers on the number of explicit HR procurement


decisions in firms
As mentioned, we could construct an index on the number of explicit HR procurement
decisions (out of nine analyzed HR functions) for each firm interviewed. This enabled an
The International Journal of Human Resource Management 1615

analysis of the relationship between the triggers and the number of explicit HR
procurement decision firms made for different HR functions. Of course, as we no longer
differentiate between the separate personnel services in this context, Hypothesis 1_2 is
irrelevant. In order to ensure homoscedasticity for all variables, we had to manipulate two
variables. For the variable region we extracted the root while for the variable risen no. of
empl. HR we squared all measures. All Variance Influence Factors were below two, thus
multicollinearity is absent. Additionally, we checked the Durbin-Watson statistic for first-
order autocorrelation but found no evidence to assume autocorrelation.
The finding that organizational change, an excessive workload in the HR department
and firm size have a positive significant influence on the number of explicit HR outsourcing
decisions is completely in line with our earlier results. However, in contrast to the previous
section, increasing manpower requirements, as measured by the rising trend of a firms order
situation, have no significant influence on the number of explicit decisions made by firms.
Thus, imbalances of the type lack of personnel only seem to trigger decisions on external
staffing arrangements (temporary agency work and management consultancy), but do not
further increase the total number of HR outsourcing decisions within a firm.
With regard to the control variables, the relationship between firm size and explicit
decisions has been confirmed. The larger the firm, the higher is the total number of
explicit decisions on HR outsourcing. All other control variables have no significant
influence on the total number of outsourcing decisions in firms.

5. Discussion of results and outlook


Our results clearly show that the question of why, when and how explicit HR procurement
decisions are triggered in firms is highly relevant for the outsourcing debate. A high
proportion of firms have never considered outsourcing or other ways of procuring HR
functions besides internal procurement. This is even true for widely known HR services,
such as temporary agency work or payroll accounting.

Table 5. Results of the linear regression of triggers (independent variables) on the number of
explicit HR procurement decisions in the firms (dependent variables), N 862.
Beta T
Changes in Manpower Rising trend in order situation .046 1.546
requirements Fluctuations in order situation .003 .098
Organizational change .181*** 5.837
Changes in Manpower Changes in headcount 2.030 2.979
endowment % of newly recruited staff with .049 1.633
HR department management functions
Manpower balance in HR Workload in HR too high .099*** 3.207
department Risen no. of empl. HR 2.033 21.042
Short planning horizon in HR 2.076 22.551
Control variables Firm size .379*** 8.782
Industry (1 service sector) .002 2.058
Existing works council (1 yes) .005 .110
Region (1 Western Germany) .045 1.514
Constant 1.112
R2 .301
Adjusted R 2 .291
Note: Levels of significance: p , 0.1, *p , 0.05, **p , 0.01, ***p , 0.001.
1616 D. Alewell et al.

Furthermore, our results indicate that triggers of explicit decisions on HR outsourcing


are strongly related to organizational changes like restructuring decisions, in- and
outsourcing decisions as well as innovations in processes and products in firms in
general. Such changes, together with the related shifts in quantitative and qualitative
manpower requirements, are important triggers of explicit HR procurement decisions.
Firm size also seems to be a decisive factor. Larger firms show a higher probability of
making explicit HR procurement decisions. These results may help service providers to
concentrate and focus their marketing activities: direct offers of HR services may be
much more successful for firms which are large and/or are undergoing organizational
change, while for other firms an explicit HR procurement decision has to be triggered in
the first place.
Further research should address the following four questions. We assumed that firms
start with the internal procurement of HR functions, and that an explicit decision to buy
HR services from external providers is needed to change this institutional design decision.
However, in our group of users of external HR services, some firms may have always used
external services so accordingly no explicit decision may have been triggered in this
group. In our dataset, no differentiation is possible between users who made an explicit
decision and those who started with external HR services right away and simply stuck to
this decision without making explicit decisions. Further research could help to develop a
distinction between the two groups.
Second, we examined whether explicit decisions were triggered. There was one
potential hypothesis we didnt formulate or analyze in this paper, namely that a higher
number of explicit decisions would increase the intensity and frequency with which firms
outsource HR functions (as a result of such explicit decisions). Further research could be
directed to evaluating the validity of this assumption.
Third, our data have limited predictive value in terms of the time structure of
the imbalances occurring and the reactions to the problems that may ensue. This makes the
interpretation of some of the results problematic. Further research could produce data
that would allow for a better defined time sequence.
Fourth and finally, further research could try to identify and analyze other types of
triggers which we did not include in our dataset and analysis, e.g., to name one, the
marketing activities of service providers as another trigger of decisions on an outsourcing
of HR functions.

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