Outsourcing HR Functions. Development of an Explanatory Approach to Firms' (Non-Existent) Demand for Personnel Services**

By Alewell, Dorothea; Bähring, Katrin et al. | Management Revue, January 1, 2007 | Go to article overview

Outsourcing HR Functions. Development of an Explanatory Approach to Firms' (Non-Existent) Demand for Personnel Services**


Alewell, Dorothea, Bähring, Katrin, Canis, Anne, Hauff, Sven, Thommes, Kirsten, Management Revue


This paper develops a comprehensive explanatory approach to the outsourcing of Human Resource (HR) functions and the resulting demand or non-demand for personnel services by companies (e.g., interim management, outplacement services, consulting in the field of HR management). Starting from the deficits of approaches that currently dominate the outsourcing debate (cost accounting approach, transaction cost approach, resource-based view of the firm), a modified and expanded framework to explain outsourcing HR management/functions is presented which includes other theoretical approaches as well. On the one hand, potential costs and benefits of outsourcing HR functions are systematically analysed, incorporating so far neglected aspects. On the other hand, triggers as well as situational and structural factors which potentially influence the outsourcing decision via the perceived alternatives or via the expectations that are formed concerning cost and benefits of outsourcing HR functions are also included in the analysis.

Key words: Outsourcing of HR Functions, Personnel Services

1. Introduction: State of research related to HR outsourcing

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, HR-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 (HUM). Personnel services provide an external, market-based alternative to the internal procurement of HR functions and HR management. Thus, by analysing companies' demand for personnel services, we essentially address a HR make-or-buy decision with regard to the whole spectrum of HR functions and do not restrict the term "personnel services" to administrative or operational functions.

Research on outsourcing has a long-standing history in economic research. Building on the work of Coase in 1937, transaction cost theory nowadays serves as the central approach to the analysis of make-or-buy decisions (see, e.g., Williamson 1990; Williamson et al. 1975; Picot et al. 2003). However, classical methods of comparing operational costs and strategic management approaches - as, for example, the resourcebased view and core competence approaches - continue to be used to analyse makeor-buy decisions (Vosberg 2002; for an overview of U.S. and German studies see Mellewigt/Kabst 2003 and Matiaske/Mellewigt 2002). In this tradition, authors often argue that (production or transaction) cost differences between make-or-buy are crucial for the outsourcing decision (see, e.g., Burke/Ng 2006; Canez et al. 2000; Walker/Weber 1984). More broadly, Grover et al. (1996) argue that important benefits of outsourcing like the ability to focus on the core business and strategic issues, the utilisation of expertise and economies of scale of the service provider, and better management of the cost structure need to be assessed against an increase in transactional cost and a decrease in flexibility.

Many early articles on outsourcing decisions focus on the IT sector (see, e.g., Aubert et al. 1996; Grover et al. 1996; Slaughter/Ang 1996; Ang/Cummings 1997; Ang/ Straub 1998; Bruch 1998; Lacity/Willcocks 1998; Poppo/Zenger 1998; Canez et al. 2000; Klein 2004; Calmfors 2005; Jenster et al. 2005). While much of the research on outsourcing IT still focuses on the classical theoretical approaches for analysing outsourcing decisions, there is nevertheless a growing awareness of deficits and shortcomings of these approaches. Thus, some complementary approaches explaining IT outsourcing decisions have already been published. Ang and Straub (1998), for example, examine the influence of financial slack as a possible explanation for IT outsourcing. They argue that organisations that possess slack resources may enlarge the scale and scope of their operations by deploying slack resources toward building up internal IT resources. …

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