Potential Benefits of Outsourcing
Summary:
Optimistic Views of
Outsourcing
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From reviewing information and data, the lesson is that most sources depict an overly optimistic view of outsourcing. Three reasons were identified to explain the optimism. First, reports are made during the honeymoon period when organisations first sign an outsourcing contract. At this point, the organization and vendor possess high expectations. Second, sources only report projected savings instead of actual savings. Therefore, the claims that outsourcing can save 20, 30 or 60% on current internal functions, is largely based on expectations. Sources neglect to report that some outsourcing organizations are charged excess fees for above baseline measures. Third, reports under-represent outsourcing failures because few organizations wish to advertise a mistake. As a result, the literature misrepresents the range of outsourcing experiences by focusing only on the success stories.
Several items are noticeably absent from most public information sources. First, outsourcing is not a cure-all for HR problems. FirmA suffered, or perceived a severe service decline and paid significant excess charges that erased expected savings. This outsourcing failure was a clear warning to others that outsourcing vendors are not partners because the profit motive is not shared. Second, outsourcing may be a workable alternative, but winning outsourcing relationships require considerable contract negotiations. The negotiation process may take months or more to adequately measure services and to secure service expectations in a detailed contract.
An overwhelming majority of the employees, professionals and managers alike, view HR as a cost burden. As such, HR could not appeal to effectiveness or strategic importance to justify their existence. Instead, they must somehow demonstrate their worth to the organization. Human Resources will have difficulty demonstrating efficiency because overhead accounts camouflage HR’s contribution, meaningful measures evade the majority of HR services and increases in user demand burden HR to request more and more resources, which haven’t been, for the most part, tied to the organization’s profitability.
In the outsourcing context, we saw the HR department’s inability to demonstrate value was tied to outsourcing evaluations in several ways. HR managers may use outsourcing evaluations to demonstrate efficiency by showing that vendors cannot provide a less expensive service. Second, HR managers may use outsourcing evaluations to justify resource requests. By combining the resource request with an outsourcing evaluation, the manager proves that their request is justified. Third, HR managers may use outsourcing to demonstrate their alignment with corporate objectives. By relinquishing part of their HR “turf” for the good of the organization, HR managers demonstrate that they are good corporate citizens.
When some organizations decide that outsourcing is the favoured design for achieving HR objectives, they may feel their vendors are also their partners. This assumption, however, is incorrect. Vendors are not partners because profit motives are not shared. Remember, money out of the organization coffer is money in the vendor’s wallet. An outsourcing contract is the only way to ensure an even-handed balance of power. Service level measures, arrangements for growth, penalties for non-performance and other contract terms must be agreed to prior to outsourcing beginning.
Interviewees identified a variety of reasons for initiating outsourcing decisions: react to the efficiency imperative, acquire or justify additional resources, react to the positive outsourcing reports, reduce uncertainty, eliminate a burdensome function and enhance credibility. From a rationale perspective, managers responded to the efficiency imperative. However, since actual HR efficiency is intangible, HR managers reacted to their perceptions of efficiency. From a political perspective, managers initiate outsourcing to promote their self-interests at the expense of others. Likewise, members did not proactively make outsourcing decisions but rather reacted to popular management trends. From a bureaucratic view, managers wished to avoid decision making since risk-taking behaviour is not rewarded. In summary, the interpretation of outsourcing experiences extends far beyond the economic rationale purported in the literature, costs are only one reason why people consider outsourcing.
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Introduction and Overview | Potential Benefits of Outsourcing | Unintended Consequences | Lessons Learned | Summary
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Updated on January 17, 2003
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