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HR outsourcing: threat or opportunity?

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

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Received 26 September 2006 Revised October 2006 November 2006 Accepted 28 August 2007

Introduction In Human Resources in the 21st Century, Kanter (2003) sets out her view of the future for the human resource (HR) function. According to her, HR may be doomed to disappear as an internal department in the organisation. She does not call into question the huge importance of HRM, but suspects that in the future HR tasks will be carried out elsewhere and in different ways. She distinguishes four developments playing an important role in the formation of the HR architecture: (1) the automatisation of HR tasks; (2) the outsourcing of HR tasks; (3) the devolution of HR tasks to line managers; and (4) the integration of HR tasks into shared service centres.

Personnel Review Vol. 37 No. 5, 2008 pp. 543-563 q Emerald Group Publishing Limited 0048-3486 DOI 10.1108/00483480810891673

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These four developments are expected to reduce the range of tasks allocated to the HR department, leading to a type of HR anorexia (Greer et al., 1999). In this article, we examine this issue in greater depth, focusing specically on HR outsourcing. The literature contains two different views of HR outsourcing. The rst view approaches outsourcing as an opportunity for the internal HR department. Outsourcing generates time and resources for tactical and strategic HR contributions and allows a stronger focus on core activities. In other words, this scenario assumes that outsourcing of transactional and operational HR activities benets the strategic position of HRM. The second view considers outsourcing as an HR cost-cutter. In this case, outsourcing is considered synonymous with downsizing or reductions in HR staff which, at rst sight, generate little value to the core competence of the organisation. The main driving force behind outsourcing is believed to be the quest for maximum cost-cutting in the eld of HRM. This view approaches HR outsourcing as a threat. The purpose of this article is to test these two competing views. In doing so, we want to examine whether HR outsourcing is a manifestation of a strategic HR focus, a cost-cutting HR focus or both. To answer this research question, we rely on survey data collected from 1,264 Belgian organisations. The further outline of this paper is as follows. First, we describe the two most frequently cited drivers of HR outsourcing and formulate the research hypotheses. We then clarify our method, sample and measures and elucidate the results. We close with a discussion and with some suggestions for future research. Theory and research hypotheses Outsourcing activities or services to external organisations is not a new phenomenon. Organisations have always had to take decisions about what they make and what they buy (Gross, 1966; Venkatesan, 1992). Outsourcing grew rapidly in the 1980s and 1990s (Kakabadse and Kakabadse, 2002) and has now become an accepted dimension of corporate strategy. Cleaning, IT, catering and security are well-known examples of activities that are frequently outsourced. Over the past ten years, HR activities have been increasingly outsourced as well (Adler, 2003; Cook, 1999; Galanaki and Papalexandris, 2005; Lilly et al., 2005). A number of empirical studies have tracked this trend of HR outsourcing (Dasborough and Sue-Chan, 2002; Dickmann and Tyson, 2005; Gainey and Klaas, 2003; Wahrenburg et al., 2006). For example, Kakabadse and Kakabadse (2002) studied 747 European organisations and concluded that, along with basic services (e.g. canteen facilities) and IT activities, HRM is one of the functional domains affected most by outsourcing. A large-scale study carried out in 1999 covering 3964 organisations (each with more than 200 employees) in 15 European countries (Vernon et al., 2000) provides further evidence to support this nding. The survey found that 97 per cent of the HR departments outsource some of their HR activities. According to this study, nearly half of all organisations are reporting an increase in the use of service providers over the last three years. Other empirical studies point out that HR outsourcing is not restricted to mere transactional HR activities (e.g. payroll administration, records management, benet management) (Greer et al., 1999). More transformational and strategic HR activities are also being outsourced (e.g. specic high impact training courses, recruitment and selection of core professionals, manpower planning, . . .) (Gainey and Klaas, 2003).

The aforementioned studies indicate that HR outsourcing has increased substantially over the last decade. However, few academic researchers have investigated empirically the reasons why rms outsource HR activities (Klaas et al., 1999; Lever, 1997). Cooke et al. (2005) rightly say that the scarcity of this kind of research is in sharp contrast to the burgeoning prescriptive literature on the nancial and strategic reasons why organisations should outsource. A popular belief is that organisations use HR outsourcing primarily to cut costs in the HR department. However, some studies caution that cost reduction should not be the only factor considered in the decision to outsource (Shelgren, 2004; Stroh and Treehuboff, 2003). For example, a study by Beaman (2004) shows that the real payoff from HR outsourcing is not in reduced costs, but in improved quality. Other drivers of HR outsourcing are gaining specialised HR expertise, achieving exibility, reducing risks and enhancing access to advanced technology (Belcourt, 2006; Lever, 1997; Scott-Jackson et al., 2005). We recognise that there exist many different drivers for HR outsourcing. Yet, in this article, we only focus on the two most often debated drivers for HR outsourcing: focus on core activities (focusing view) and cost reduction (efciency view). These two drivers are closely related to two theoretical perspectives: the resource-based view of the rm (Barney, 1991; Prahalad and Hamel, 1990) and transaction cost economics (Williamson, 1975) respectively. We further use the distinction between focusing view and efciency view to develop our research hypotheses. Focusing view The strategic driver mentioned most frequently in literature, is the possibility to concentrate on core activities (Prahalad and Hamel, 1990). The reasoning here is that organisations should sharpen their focus on activities generating competitive advantage by outsourcing peripheral activities with low added value (Conklin, 2005; Quinn and Hilmer, 1994). By outsourcing the non-core activities, an organisation can direct more resources (time, money and managerial attention) to its core activities (Venkatesan, 1992; Welch and Nayak, 1992). It needs to be remarked that a stronger focus on core activities does not necessarily have to be strategic. The stronger focus could also result in simply delivering and performing the activity better, cheaper and faster. However, most authors start from the idea that the main purpose of a stronger focus on core activities is strategic. The resource-based view of the rm suggests that an organisation must focus on those activities that constitute the core competencies and outsource the more peripheral activities (Prahalad and Hamel, 1990; Quinn and Hilmer, 1994). This perspective helps to identify those core activities that the organisation must perform in-house. From a resource-based perspective it is the possession of certain resources and capabilities that denes what the organisation will do itself and what it can obtain from outside parties (Gilley and Rasheed, 2000). We nd a similar line of reasoning in the strategic HRM literature. Recent literature on HRM strongly emphasises the strategic involvement of the HR function (Lawler and Mohrman, 2003a; Ulrich, 1997). A strategic partnership can be achieved, for instance, by focusing on those activities that are strategically relevant. By outsourcing the transactional and administrative HR activities to an organisation for which those activities are core, an organisation can redistribute its time and resources

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and focus more on strategic activities (Welch and Nayak, 1992). HR outsourcing can liberate HR professionals from their more routine and administrative tasks to perform a more proactive and strategic role (Adler, 2003; Maurer and Mobley, 1998; Switser, 1997). Moreover, we assume that HR professionals who are more strategically involved actively consider which activities belong to the core and which are peripheral. In organisations where HR is recognised as a strategic partner, there may also be less fear within the HR department of the impact of outsourcing on the staffs own positions and tasks. There are signs that in organisations where HR does not play a strategic role, outsourcing may pose a threat to the role and job security of HR professionals, resulting in an inhibiting inuence to outsourcing (Klaas et al., 2001). Based on the above argumentation, we predict that organisations emphasising the strategic role of HR would rely more on HR outsourcing. Thus, our rst hypothesis can be stated as follows: H1. A strong focus on strategic HRM is positively related to the level of HR outsourcing. Efciency view Much of the literature concerning outsourcing has its roots in the make or buy arguments elaborated within the transaction cost perspective (Williamson, 1975). According to this perspective, organisations focus on securing the most efcient form of organising an activity. In such a way, this approach encourages the organisation to evaluate whether it is more efcient to make a service in-house or to buy it from the market. The criterion for deciding where the activity is performed depends on two types of cost that must be minimised: the production cost and transaction (coordination) cost. Outsourcing is appropriate when the organization achieves lower costs by transacting with external agents rather than building the internal capacity for a service (Williamson, 1975). In many studies, HR outsourcing decisions were found to be a response to an overwhelming demand for reduced costs in HR services (Greer et al., 1999; Lever, 1997). Intensifying competitive pressures have forced organisations to be more aggressive in cutting costs. As a result, HR departments are under increasing pressure to nd ways to provide more value at lower cost (Adler, 2003; Cameron, 1994; Yeung et al., 1994). Outsourcing is one potential tool to achieve this. Cost savings can be achieved through increased benets from economies of scale of the providers for whom the provisioning of these outsourcing activities is a core activity (Walker and Weber, 1984). External suppliers can achieve economies of scale by performing the same activity for several customers and consequently lowering the cost per unit (Abraham and Taylor, 1996). In this debate, the reduction of labour costs receives particular attention (Erridge, 1995). The staff, previously engaged in carrying out the activity, can be deployed in other areas, can be transferred to the external supplier or can be laid off (Harris et al., 1998). Thus, outsourcing can be strongly cost-oriented. Based on the above argumentation, we expect that there is a positive relationship between a strong focus on HR cost-cutting and the level of HR outsourcing. This brings us to a second hypothesis that competes with the rst: H2. A strong focus on cost-cutting in HR is positively related to the level of HR outsourcing.

Methodology Sample and procedure The sample for this study was obtained from the Panel Survey of Organizations (PASO). The objective of this Belgian panel study is to map out contemporary trends in HRM and the organisation of work. The panel survey has been organised on a yearly basis during three consecutive years (2002, 2003 and 2004) and used a disproportionately stratied sample of Belgian organisations, with industry and size as stratication variables. The targeted respondent was the HR manager or person responsible for HR (for smaller organisations). While the respondents in this study were well positioned to provide HR data, it remains possible that a general response bias is affecting the results. Indeed, asking HR managers about their own function involves measuring a partial perception of reality (Valverde et al., 2006). To reduce the effects of possible bias, future research might benet from designs that collect data from multiple respondents within each participating organisation. For example, it would be valuable to incorporate data from managers other than HR managers. The questions in the second panel wave (2003) thoroughly examined the organisation of the HR function and the use of HR practices in specic areas (recruitment and selection, training, careers, compensation, performance management and participation). Data were gathered from 2373 organisations, representing a response rate of 25 per cent. Compared to other studies of similar nature, such a response rate seems reasonable (Klaas et al., 1999; Shih et al., 2005). The PASO sample does not apply any exclusion criteria. This means that all organisations with at least one employee are taken into account and that all industries (private and public; prot and non-prot) are represented. Yet, in the analyses below, two exclusion criteria are added. The analyses are restricted to organisations having at least ten employees. Micro organisations fall outside the empirical scope of this contribution because we know from research that smaller organisations make less use of HR practices (de Kok and Uhlaner, 2001; Sels et al., 2006). So fewer activities are considered for outsourcing in this group. In addition, two industries were omitted of the analyses because of their specic nature. The agricultural industry is not included due to the limited number of organisations with ten employees or more. The education industry is excluded because of the specic regulations that apply in respect of personnel management. Eventually, this resulted in a database containing 1264 organisations. Weights were applied when analysing the data. Corrections were made because of differences in the distributions of size and industry between sample and population. All data in this article are weighted to be able to generalise the results. Measures HR outsourcing. Greer et al. (1999, p. 85) refer to HR outsourcing as the performance, by outside parties on a recurring basis, of HR tasks that would otherwise be performed in-house. Cook (1999, p. 4) states that HR outsourcing means having a third-party service provider or vendor furnish, on an ongoing basis, the administration of an HR activity that would normally be performed in-house. In this article, HR outsourcing is dened as the transfer to an external vendor, on a recurring basis, of HR activities that would normally be performed in-house. The level of HR outsourcing is included in the

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analysis as the dependent variable. For a list of ten HR activities (Table I) the respondents were asked to indicate whether the HR activity in question was being provided by an external organisation (value 1 the HR activity is being outsourced; value 0 the HR activity is not being outsourced). The responses to these dichotomous variables were summed to give an overall measure of the rms reliance on HR outsourcing. This new variable HR outsourcing yielded a value between 0 (no HR activities outsourced) and 10 (all HR activities outsourced). The dependent variable
HR outsourcing 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 1. 2. 3. Payroll Training Temporary agency work Recruitment and selection of operational and support staff Advice in HRM Recruitment and selection of managerial staff Development of job or wage classication Outplacement Appraisal Career guidance Developing procedure for selection Implementing selection process Choice of candidate to be recruited Developing procedure for dismissal Decision to dismiss Notication of dismissal Developing appraisal instrument Working out appraisal procedure Following up complaints relating to appraisal Deciding on the consequences of appraisals Developing training plans Detecting training needs Evaluating the effects of training Selection (a) Presence of a procedure for recruitment and selection (b) Use of valid selection techniques Training (a) Provision of training for operational staff (b) Presence of a training plan Career management (a) Opportunities for promotion for operational staff (vertical and/or horizontal) (b) System of internal career guidance for operational and/or managerial staff Compensation (a) Application of prot sharing and/or nancial participation (b) Application of performance-related and/or development-oriented remuneration schemes Performance management (a) Presence of an appraisal procedure (b) Performance and/or development-oriented appraisal Participation (a) Staff are informed of more than three subjects (b) Presence of progress discussions and/or quality circles

HR devolution

HRM intensity

4.

5. Table I. Summary of HR practices used to construct variables 6.

was tested for normality in order to be used in regression analysis. The test applied (Shapiro-Wilk test) indicated that this was the case. Instruments to measure the focusing view. Measures relevant for testing the rst of the competing hypotheses included three variables, which indicate a strategic view of HRM. The rst indicator is the strategic involvement of HRM. This indicator measures the degree to which the HR function is being involved in the strategic management of overall business issues. This dummy variable obtains value 1 if the HR responsible is a member of the management committee and has power in strategic decision-making processes. If an organisation does not full both conditions, then it obtains value 0. In other words, if the HR responsible only attends management committee meetings in an advisory capacity, value 0 is attributed. A second variable is whether an HR scorecard is used in the organisation. The HR scorecard (Becker et al., 2001) is derived from the balanced scorecard (Kaplan and Norton, 1992). It is a strategic planning and measuring system that can be used to assess the contribution of HRM to the strategic objectives of the organisation. In other words, an HR scorecard is designed to provide clarity about areas where HRM can add value. In this sense it may be a valuable instrument in dening core activities. This variable is included in the analysis as a dummy variable (0 HR scorecard not applied; 1 HR scorecard applied). A third indicator is the level of devolution of HR activities to line managers. HR devolution refers to the extent to which HR responsibilities are devolved to line managers. The role of line managers in implementing HR policies and shaping HR practices has long been recognised in the HRM literature (Cunningham and Hyman, 1999; Larsen and Brewster, 2003; McGovern et al., 1997; Renwick, 2003; Whittaker and Marchington, 2003). As line managers become the owners of an increasing number of HR processes, the devolution of HR activities to line managers has an impact on the position of HR professionals. If some of the operational activities (e.g. people management) can be delegated to line management, the HR department can concentrate more on strategic and tactical HRM. This is the reason why the level of HR devolution is taken as an indicator of strategic HRM. The variable level of HR devolution is a 13-point scale, created on the basis of data on the delegation of 13 different HR activities (Table I). In developing the HR devolution index we started from the most common HR domains. To capture these domains, we relied on the Michigan model (Fombrun et al., 1984). This model contains the basic HR areas: selection, recruitment and dismissal, appraisal, training and development and rewards. The HR devolution index covers three of the four HR domains presented in the Michigan model: selection, recruitment and dismissal, appraisal and training and development. The rewards domain was excluded because it is well-known from the HRM literature that rewarding is less devolved to line managers (see for example: Kulik and Bainbridge, 2006; McConville and Holden, 1999). It is important to note that we prefer to use this rather narrow or traditional HR devolution index because it allows for generalisation across organisations, company sizes and industries. Indeed, each organisation deploys specic HR practices in each of the three selected HR domains: each organisation has recruitment activities, selection practices or at least some appraisal and training activities. For example, diversity plans, competency frameworks or career plans on the other hand, are not so

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frequently deployed (certainly not in smaller organisations). The variable HR devolution has a maximum value of 13 (all HR tasks devolved) and a minimum value of 0 (no HR tasks devolved). Instruments to measure the efciency view. To test the second of the competing hypotheses, two variables were included in the analyses that indicate a strong focus on HR cost-cutting. The rst indicator is the number of employees in HR positions (HR ratio). This variable is measured as the number of staff in HR positions as a proportion of the total number of employees (Brewster et al., 2006). In the questionnaire a distinction was made between the number of full-time personnel ofcers and the number of part-time personnel ofcers. In calculating the HR ratio, we assigned a weight of 0.60 to the number of part-time staff. A lower HR ratio indicates those organisations that have proportionately less HR staff (i.e. a larger number of employees for each HR employee). A higher HR ratio indicates those organisations that have proportionately more HR staff (i.e. a smaller number of employees for each HR employee). The second indicator is the evolution of the HR head count. More specically, the question asked was whether the number of jobs in the HR department increased, decreased or remained the same in 2002. Based on this question, dummy variables were created. Remained the same is used as reference category. Control variables. Despite the fact that we are interested in the link between the focus on strategy or cost-cutting, and the level of HR outsourcing, other characteristics of the organisation can have a signicant inuence on these relationships. To ensure that the analyses are not affected by these variables, we control for a number of variables. The rst control variable is the size of the organisation (number of employees). Research shows that large organisations outsource more (Klaas et al., 2001). However, the literature indicates that smaller rms in particular have a greater need of external expertise due to their limited scale (Gilley et al., 2004a; Klaas, 2003). Indeed, SMEs often lack the economies of scale required to build an effective HR system using internal resources (Heneman et al., 2000). The cost associated with in-house delivery of HR is likely to be greater for smaller rms. As a result, SMEs increasingly are outsourcing HR activities to external organisations. In the regression analyses, the logarithm of size was included. The logarithm gives an indication of a linear link. The squared term (ln size)2 was also included. This squared term gives an indication of a non-linear relationship. The second control variable was organisational age. Organisational age was assessed by rst asking the respondent to self-report the year in which their employing organisation was established. Age was then computed by subtracting the reported year from the year in which the data were collected. Research shows that older organisations are more inclined to outsource HR activities (Gilley et al., 2004b). Gilley and Rasheed (2000) therefore suggest including organisational age in the analyses. In the regression analyses, the logarithm of age was included. The squared term (ln age)2 was also included. The third control variable is industry. Since different industries put different emphasis on the importance of HRM, they may adopt different amounts of outsourcing in HR activities (Klaas et al., 2001). Therefore, the variable industry is regularly included as a control variable in outsourcing research. Respondents were asked to

indicate their primary industry. Responses were categorised into eight industries (Table II). These eight industry classications were used as dummy variables. The healthcare sector was used as our point of reference. The fourth control variable is the employment evolution in the organisation in 2002. As mentioned before, the evolution in the number of jobs in the HR department is taken as an indicator for the focus on cost-cutting in HRM. A fall in this HR head count may have two causes. On the one hand, the reduction may be implemented while the workforce in the organisation remains unchanged or increases, as a result of rightsizing in the HR department. On the other hand, it may be a result of a general reduction in staff numbers in the organisation. To measure the pure effect of the evolution in the HR head count, we therefore included the employment evolution within the organisation as a control variable. We calculated this indicator as the net evolution in employment (outow inow) in proportion to the total number of employees at the end of the year.
Average Control variables Industry Chemicals, food and energy Metal and electronics Other industry Financial and business services and other services Trade, distribution and hotel and catering Healthcare Public administration and municipal facilities Construction Size (no. of employees) 10-99 100-499 500 or more Age (years) 0-5 6-10 11 and Focus on strategic HRM Strategic involvement of HRM No Yes HR scorecard No Yes Focus on HR cost-cutting Evolution of the HR head count Reduced Remained the same Expanded F-value 12.02 * 3.41 3.08 2.91 2.75 2.54 2.14 2.06 1.99 45.76 * 2.38 3.59 4.60 0.69 2.49 2.56 2.63 18.31 * 2.46 2.89 61.80 * 2.53 4.45 7.65 * 3.70 2.64 3.50

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Notes: General average on ten-point scale: 2.57; * p c 0:001; gures weighted according to industry and size Source: PASO (2003)

Table II. Level of HR outsourcing according to a number of explanatory and control variables

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The last control variable is HRM intensity. If an organisation has a less intensive HRM, fewer HR activities come into consideration for outsourcing. This is why we include a variable controlling for the overall HRM intensity in the organisation. HRM intensity is measured by means of an index, consisting in the sum of 12 binary variables. The Harvard model of HRM (Beer et al., 1984) guided our selection of the variables for the HRM index. We conned ourselves to six HR domains, each representing one of the central Harvard policy areas. More specically, we chose selection, training and career management as HR domains representing the HR ow policy area; compensation and performance management as domains representing reward systems and participation as the HR domain indicating the employee inuence policy. We used two HR practices for each of the six HR domains. Each of the 12 HR practices is constructed in the form of a binary variable, where 0 indicates the absence and 1 the presence of the practice. These HR practices are represented in Table I. The responses to these 12 binary variables were summed to give an overall measure of HRM intensity. The HRM index ranges from 0 (no HR practices are present) to 12 (all HR practices are present). If an organisation records a lower score on this HRM index, this means that it has a less developed HR policy.

Results Descriptive analyses We begin with a summary of some descriptive statistics. Table III provides information on the level of outsourcing of HR activities. The HR activities most frequently outsourced to external organisations are payroll (71.8 per cent), training (60.5 per cent) and temporary agency work (52.6 per cent). Activities, which organisations outsource less frequently, include determining job and wage classication (7.6 per cent), outplacement (4.7 per cent), appraisal (4.5 per cent) and career guidance (2.0 per cent). Table IV shows that 89.2 per cent of the organisations outsource one or more HR activities. 71.8 per cent of the organisations outsource one to three HR activities. One in six organisations (16.9 per cent) outsources one HR activity. The remaining 28 per cent
HR activity 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Payroll Training Temporary agency work Recruitment and selection of operational and support staff Advice on personnel policy Recruitment and selection of managerial staff Drawing up of job or wage classication Outplacement Appraisal Career guidance Percentage of organisations using 71.8 60.5 52.6 20.0 18.4 15.1 7.6 4.7 4.5 2.0

Table III. Incidence of HR outsourcing

Note: Figures weighted according to industry and size Source: PASO (2003)

Number of HR activities outsourced 0 1 2 3 4 5 6 7-10

% 10.8 15.1 26.6 22.4 11.9 7.9 3.3 2.0

% (HR outsourcing organisations only) 16.9 29.8 25.1 13.3 8.9 3.7 2.3

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Notes: Average (on ten-point scale): 2.57; gures weighted according to industry and size Source: PASO (2003)

Table IV. Level of HR outsourcing

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

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Table V. Descriptive statistics and correlations Mean SD 1 2 3 4 5 6 7 2.57 1.68 1.000 1.64 2.53 0.195 * * * 1.000 1.30 17.28 20.028 0.027 1.000 3.49 3.65 20.190 * * * 20.094 * 0.017 1.000 5.66 2.76 0.382 * * * 0.307 * * * 20.033 20.142 * * 1.000 63.67 196.05 0.221 * * * 0.133 * * * 0.049 20.220 * * * 0.259 * * * 1.000 20.16 24.32 0.023 20.025 0.030 20.017 * * * 20.017 0.115 * * * 1.000

1. 2. 3. 4. 5. 6. 7.

Level of HR outsourcing Level of HR devolution Employment evolution Proportion of employees in HR positions (HR ratio) HRM intensity Size of organisation Age of organisation

Notes: * p # 0:10; * * p # 0:01; * * * p # 0:001; gures weighted according to industry and size Source: PASO (2003)

Regression analyses A series of regression analyses (after multicollinearity test[1]) were conducted to test the hypotheses. The results of these analyses appear in Table VI. In model 1, only the control variables industry, size, age, employment evolution and HRM intensity are included. The analysis conrms the industry differences observed previously. We also observe a positive link between the size of the organisation and the level of HR outsourcing. This seems obvious, but as mentioned previously, it contradicts with a popular belief in the HRM literature that mainly smaller organisations have more need of external expertise (Gilley et al., 2004a; Heneman et al., 2000; Klaas, 2003). It may also be observed that the squared term (ln size)2 is negative (although not signicant). This negative sign indicates that the positive relationship between organisation size and the level of HR outsourcing reaches its limit from a certain size. Regarding age of the organisation, a negative link is observed between the age of the organisation and the level of HR outsourcing. Older organisations are, ceteris paribus, characterised by a lower level of outsourcing. The squared term is positive and signicant. This indicates that the negative relationship between age and the level of outsourcing levels weakens from a certain age. As regards the employment evolution, we observe that changes in respect of workforce are not linked to the level of HR outsourcing. Finally, model 1 shows that there is a (fairly obvious) signicant positive link between the HRM intensity and the level of HR outsourcing. The aforementioned control variables account for 25 per cent of the variance in the level of HR outsourcing. In model 2 we include the variables relating to the strategic focus on HRM. Their relationship with the level of HR outsourcing can thus be tested under control of differences in industry, size, age, employment evolution and varying scores for HRM intensity. The results indicate a strong signicant positive relationship between the strategic involvement of HRM and the level of HR outsourcing. The regression analysis also shows a strong positive link between the use of an HR scorecard and the level of HR outsourcing. This is also the case regarding the third strategic focus indicator, the level of HR devolution. A high level of HR devolution goes hand in hand with a high level of HR outsourcing. At rst sight, HR devolution and HR outsourcing appear to oppose one another. However, research shows that the creation of a more strategic focus on HRM often conicts with the fact that HR professionals have to concentrate too much on purely transactional activities and direct people management (Greer et al., 1999; Marinaccio, 1994). Many of the transactional activities can be outsourced, while direct people management belongs more within the job prole of line managers. Moreover, people-related practices and employee problems could be equally and in some cases more effectively handled by line managers who bear a direct responsibility because of their closer interaction with and greater understanding of employees needs and problems. In any case, the combination of HR devolution and HR outsourcing provides the HR function more time and resources for strategic HR tasks. In summary, we conclude that model 2 indicates a strong positive connection between a strategic focus on HRM and the level of HR outsourcing. These results provide support for our rst hypothesis that rms emphasising the strategic role of HRM would rely more on HR outsourcing. Model 3 includes the indicators of a focus on cost-cutting, alongside the control variables. The rst variable relates to the evolution in employment in the HR

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Intercept Industry (health care ref. category) Chemicals, food and energy Metal and electronics Other industries Financial and business services and other services Trade, distribution and hotel and catering Public administration and municipal facilities Construction Ln size Ln size 2 Ln age Ln age 2 Employment evolution HRM intensity Strategic involvement of HRM HR scorecard Level of HR devolution Evolution of the HR head count (remained the same ref. category) Expanded Reduced Proportion of employees in HR positions (HR ratio) R-square Adjusted R-square F-value 0.251 * * * * 0.226 * * * * 0.142 * * * 0.274 * * * * 0.273 * * * * 0.100 0.111 * 0.530 * * * 2 0.307 2 0.280 * * 0.334 * * * 2 0.018 0.253 * * * * 0.232 * * * * 0.190 * * * * 0.137 * * * 0.281 * * * * 0.238 * * * 0.086 0.115 * 0.418 * * 20.258 20.323 * * * 0.390 * * * 20.014 0.218 * * * * 0.117 * * * 0.140 * * * * 0.083 * * 0.044 20.000 0.25 0.23 16.77 * * * * 0.28 0.26 14.60 * * * * 0.27 0.25 12.55 * * * * 0.284 * * * * 0.235 * * * * 0.189 * * * 0.281 * * * 0.338 * * * * 0.105 0.112 0.371 20.197 20.282 * * 0.357 * * * 20.002 0.301 * * * *

Notes: * p # 0.10; * * p # 0.05; * * * p # 0.01; * * * * p # 0.001; gures weighted according to industry and size Source: PASO (2003)

Table VI. Results of regression analyses with the level of HR outsourcing as dependent variable (standardised regression coefcients) Model 1 0 0 0 0 0.363 * * * * 0.285 * * * 0.213 * * * 0.307 * * * 0.205 * * 0.071 0.021 0.820 * 2 0.593 0.094 2 0.015 0.010 0.228 * * * * Model 2 Model 3 Model 4 Model 5 0 0.281 * * * * 0.226 * * * 0.203 * * * 0.292 * * * 0.325 * * * 0.121 0.132 * 0.291 20.162 20.322 * * 0.407 * * * 20.002 0.264 * * * * 0.101 * * 0.112 * * * 0.092 * * 0.042 20.009 0.172 * * 0.26 0.22 7.00 * * * * 0.29 0.26 10.02 * * * *

department. Regression analysis shows that changes relating to the workforce in the HR department are not related to the level of HR outsourcing. The variable that measures the proportion of staff in the HR department (HR ratio) is included in a separate analysis as it proved to be a high non-response item (model 4). Here again, it is remarkable to note that (contrary to the results of the correlation analysis), there is a positive connection between the size of the workforce in the HR department (HR ratio) and the level of HR outsourcing. Thus, we see that it is precisely the organisations with a higher HR head count that also outsource in more HR areas. The results of models 3 and 4 do not conrm the hypothesis relating to the focus on cost-cutting. A strong focus on HR cost-cutting is not related to a high level of HR outsourcing. In model 5, all variables (indicators of focus on strategic HRM and cost-cutting) are integrated into a single regression analysis because it may be possible that both types of outsourcing (focus on cost-cutting in HR and strategic focus on HRM) can occur together. Analogous to the previous analyses, this regression does not provide conrmation for the hypothesis that organisations with a strong focus on HR cost-cutting show a higher level of HR outsourcing. The analysis conrms that organisations emphasising strategic HRM outsource more HR activities than organisations where this is not the case. Discussion and conclusions Conclusion Two divergent perspectives dominate the literature on HR outsourcing. Some observers approach outsourcing as an opportunity for the HR department. After all, outsourcing creates more time and resources to focus on strategic and value creating HR activities. Other observers, however, portray outsourcing as a threat for the HR department. In this view, outsourcing is seen as a cost-cutting instrument causing HRM without HR managers. The purpose of this study was to examine whether HR outsourcing is a manifestation of a strategic HR focus, a cost-cutting HR focus or both. The analyses highlight two main results. First, the results indicate that organisations with a strong focus on HR cost-cutting do not outsource more than organisations with a weaker focus on HR cost-cutting. The analyses show a positive relationship between a strong focus on strategic HRM and the level of HR outsourcing. A second important nding is that HR devolution and HR outsourcing are closely related. However, this does not necessarily mean that the HR department is being eroded. By outsourcing operational HR tasks and delegating people management to line managers, more time and resources can be released for more strategic HR contributions. In other words, HR devolution and HR outsourcing offer the HR function the opportunity to reposition itself and prepare for the role of strategic business partner (Lawler and Mohrman, 2003b). Implications for HR managers Three important implications for HR managers can be derived from this study. First, HR outsourcing is a potentially strong instrument for organisations attempting to empower their HR function. Outsourcing of transactional and operational HR activities allows HR managers and departments to focus on strategic activities that add more value. Hence, it strengthens HRs potential to make a proactive

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contribution to business success. Therefore, HR outsourcing cannot be merely considered as a danger for the HR department, undermining HRs power in the organisation. Second, HR managers are responsible for a plethora of tasks. They are expected to be strategic partner, employee champion, change agent and administrative expert at the same time (Ulrich, 1997). In attempting to meet this multitude of expectations, many organisations are rethinking the organisation of the HR function. There are many alternative delivery mechanisms that remove the delivery of HR practices from the HR department (Lepak et al., 2005). HR outsourcing is not the only option available. There is also some evidence that a greater portion of HR tasks is shifted to line management (Larsen and Brewster, 2003; Whittaker and Marchington, 2003) and that an increasing number of organisations heavily rely on HR information systems to design and deliver HR practices (Gardner et al., 2003). For HR managers it is vital to scrutinise these alternative delivery mechanisms, to weigh their pros and cons and to select the mechanisms that match HRs objectives, the organisational strategy and structure. Third, the combination of several delivery mechanisms affects HRs competency prole. Managing and developing a complex web of relationships with internal and external HR providers requires substantial skill in, for example, supplier management, customer service and project management. Even when HR tasks are spread among several actors, HR still has the unique responsibility and accountability to guarantee that each HR task is fullled. For HR departments, it is also important to pay attention to the impact alternative delivery mechanisms have on internal customer satisfaction with the HR services provided and to guarantee that outsourcing, devolution to the line or employee self-service systems result in similar or better service quality. Limitations of the study and implications for researchers Although this study represents an important step in understanding various aspects of HR outsourcing, it contains a number of limitations that must be addressed in future research. First, this study only considers the breadth of the HR outsourcing phenomenon (i.e. the number of HR activities outsourced) and consequently only indicates the presence or absence of external provision in each HR activity. However, outsourcing strategies can be conceptualised as having two fundamental characteristics: breadth and depth (Gilley and Rasheed, 2000). Depth may be described as the extent to which an organisation outsources a given activity. According to Gilley and Rasheed (2000), an accurate picture of the outsourcing phenomenon can only be obtained if it is measured both in terms of breadth and depth (Gilley and Rasheed, 2000; Wahrenburg et al., 2006). HR outsourcing is indeed not necessarily a binary decision. An organisation can simultaneously opt for both outsourcing and insourcing for the same HR activity. Future research efforts that incorporate both breadth and depth will likely provide a more complete understanding of HR outsourcing. Second, because our results are based on cross-sectional data, we cannot draw causal inferences. As the level of HR outsourcing can evolve over time, it is important to use longitudinal data in the future. The analyses discussed above, show a positive relationship between the strategic focus on HRM and the level of HR outsourcing. However, this cross-sectional analysis cannot be used to distinguish cause from

effect. Do organisations applying a strategic focus on HRM outsource more? Or can organisations that outsource HR activities spend more time to strategic HR matters? We recommend future research designs be longitudinal. Third, the analyses discussed above show that the HR department can release more time and resources for more strategic HR contributions by outsourcing operational HR tasks and delegating people management to line managers. If the HR department is to take on a more strategic role, this raises a number of issues as to how it develops and manages the complex internal and external relationships that relate to its different roles: managing the relationship with external providers, managing the relationship with line managers, providing the in-house HR tasks, being a strategic partner, . . . (Cooke et al., 2005). Managing these relationships requires management time and management expertise. There is a paucity of empirical research in this area, which leaves a number of unanswered questions. Empirical research is therefore required to identify how the in-house HR function can manage its multi-sourced functions. Finally, future research might focus on the impact of HR outsourcing. For example, very few empirical studies have examined the impact of HR outsourcing on the organisation of the HR function. In addition, further research is also necessary to investigate the impact of HR outsourcing on the perceptions of several internal customers of the HR function (internal HR customer satisfaction). It would be worthwhile to devote more attention to the nature of these relationships in future research.
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the perceived effectiveness of the HR function. His current research focus is on the features of strong HR systems, stakeholder perspectives on the HR function, the relationship between HRM and performance, personnel management in small and medium-sized enterprises and HR outsourcing. Luc Sels is full Professor at the Research Centre for Organisation Studies and Vice-Dean of the Faculty of Business and Economics of Katholieke Universiteit Leuven. His primary substantive research interests center around individual and organisational career management, the measurement of features and content of psychological contracts, the relationship between investments in HR management and rm performance (ROI) and features of strong HR systems. He has published articles in several high-standard journals such as Human Relations, Journal of Organizational Behavior, Journal of Vocational Behavior, Small Business Economics, Work Employment and Society. Luc Sels is the corresponding author and can be contacted at: luc.sels@econ.kuleuven.be

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