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Aug 4, 2010

In an HR world where outsourcing just about very function imaginable has become standard operation procedure, who in their right mind would question its value? Doesn’t outsourcing simply get rid of administrative and process-oriented functions so managers can focus on the REALLY important things?

That’s the notion, of course, and it has helped to create the $40 billion annual HR outsourcing market we see today. But is there a dark side to outsourcing?

Two business professors have just published a new study that seems to say that there is.

In tough times, many companies slash staff and turn to outsourcing to reduce costs, yet that strategy may ultimately doom their products, according to a study led by Lyda Bigelow, a strategy professor in the University of Utah’s David Eccles School of Business. And she adds, outsourcing in good times, as Toyota did, can mean losing control over critical components that can ultimately contribute to an organizational failure.

Now the outsourcing study – it appears in the August issue of the journal Organization Science – isn’t focused on the outsourcing of HR functions. It’s about vertical integration, or the in-house manufacture of products. Bigelow and co-author Nicholas Argyres of Washington University analyzed performance in more than 100 U.S. auto companies from 1917 through 1931 for their research.

Is there a connection to HR outsourcing?

Why that time period? Well, that’s the period when the American automobile industry made a big shift from innovation to production efficiency. In addition, the economic environment at that time is similar to today – that is, highly competitive — and in both periods, companies had to focus on reducing costs while maintaining value to customers.

Bigelow’s team found that companies were more likely to fail when they outsourced components critical to their competitive position.

“Across the board, we find statistically significant increases in the failure rate for firms that don’t consider transaction costs in their outsourcing decisions,” she said. “Firms need to look beyond production costs to other costs such as poor quality, delivery delays and risk of price increases by suppliers.”

Okay, but what has this got do with HR outsourcing?

Well, it raises the question that too many organizations may just slide over when they are looking to trim costs through outsourcing – what are the key functions that are critical to our competitive position that we need to keep in house?

Yes, payroll is an easy one to outsource, as is the 401(k) or retirement plan, or perhaps even benefits administration.

Ben Bradlee’s perspective on recruiting and staffing

But what about recruiting and staffing, or in fact, anything having to do with hiring? If people are the most important differentiator in the performance of one company over another, why would you possibly consider outsourcing such a critically important function — even in part – to another company? Are the savings you accrue worth the loss of control you ultimately must buy into?

I know, I know, I can hear all the arguments about how HR outsourcing organizations integrate closely with their clients, especially in recruiting and staffing, and how seamless the process can be. How can that possibly be compared to Toyota outsourcing the manufacture of components critical to their competitive position.

Just consider this: I remember hearing Ben Bradlee, the famous and now retired editor of The Washington Post, answer a question once about what made the newspaper so successful. He ticked off a number of items, but one stuck with me: Bradlee said that when he was editor, he made it a point to personally interview every serious candidate for a newsroom position at The Post because the quality of talent that was hired was reflected in the quality of journalism the newspaper produced.

He felt that recruiting and staffing wasn’t something to be left to someone else. He insisted on being personally and intimately involved, and I’m sure that Bradlee would shake his head today if anyone would suggest that outsourcing the hiring process is a good thing.

It’s not a good idea to take one study and go overboard, but this one by these two university professors got my attention. And if you and your organization are outsourcing more than just administrative and clerical functions, it should get yours too.

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