Uncorrected Proof
1Human resource outsourcing and organizational performance
2in manufacturing firms
3
K. Matthew Gilley
a,1, Charles R. Greer
b,*, Abdul A. Rasheed
c,24 a
Department of Management, College of Business Administration, Oklahoma State University, Stillwater, OK 74078, USA
5 b
Department of Management, Neeley School of Business, Texas Christian University, Fort Worth, TX 76129, USA
6 c
Department of Management, College of Business Administration, University of Texas at Arlington, Box 19467, Arlington, TX 76019, USA
7
8 Received 9 January 2001; accepted 14 March 2002
9 Abstract
10 Considerable anecdotal evidence suggests that an organization’s use of outsourcing will have an influence on its performance. However, 11 few empirical examinations of the outsourcing – performance relationship have been conducted. In this study, we analyze the relationship 12 between the outsourcing of human resource (HR) activities, namely training and payroll, and firm performance. In addition, we hypothesize 13 that the outsourcing – performance relationship is not the same for all firms. As a result, we test for the potential moderating effects of firm 14 size. Our sample consists of 94 manufacturing firms representing 16 two-digit SIC code industries. Results indicate that both training and 15 payroll outsourcing have implications for firm performance. However, findings regarding a moderating effect of firm size were inconclusive. 16 D 2002 Published by Elsevier Science Inc.
17 Keywords: Human resource outsourcing; Organizational performance
18
19 1. Introduction
20 In recent years, firms have outsourced an expanding 21 variety of activities in an attempt to improve service and 22 product quality, reduce production cycle times, lower costs, 23 increase their focus on core competencies, and, in general, 24 enhance organizational effectiveness. Firms appear to be 25 focusing on a relatively narrow set of functions and are 26 contracting with outside suppliers to perform the others. 27 This trend toward a focus on activities key to competitive 28 advantage and the outsourcing of low-value-added activities 29 has found enthusiastic proponents among both scholars and 30 practitioners (Quinn, 1992; Hirschhorn and Gilmore, 1992). 31 Despite the trend toward outsourcing, evidence of its 32 performance effects is scarce. Appealing arguments have 33 made the case both for and against outsourcing as a means 34 of achieving long-run competitive advantage. On the one
35 hand, by outsourcing tasks to specialist organizations, firms
36 may better focus on their most value-creating activities,
37 thereby maximizing the potential effectiveness of those
38 activities (Dess et al., 1995; Kotabe and Murray, 1990;
39 Quinn, 1992). In addition, as outsourcing increases, costs
40 may decline, and investment in facilities, equipment, and
41 manpower can be reduced (Bettis et al., 1992). On the
42 other hand, anecdotal evidence suggests that increased
43 reliance on outsourcing may lead to reduced innovation
44 (Kotabe, 1992), eventual competition from outsourcing
45 partners (Bettis et al., 1992), and reductions in control of
46 the task in question. Thus, the performance effects of
47 outsourcing are uncertain.
48 In the current study, we attempt to shed light on the
49 relationship between outsourcing and firm performance by
50 testing the relationship empirically. More specifically, we
51 address the performance effects of the outsourcing of two
52 types of human resources (HR) activities, namely training
53 and payroll. Recent studies, such as those by Frayne and
54 Geringer (2000) and Harel and Tzafrir (1999), have found
55 that the training function can yield positive firm performance
56 effects. However, training efforts can be phenomenally
57 expensive as U.S. companies spend an estimated US$55.3
58 billion in this area each year (Bassi and Van Buren, 1998).
0148-2963/02/$ – see front matterD 2002 Published by Elsevier Science Inc. PII: S 0 1 4 8 - 2 9 6 3 ( 0 2 ) 0 0 3 0 4 - 1
* Corresponding author. Tel.: 7565; fax: +1-817-257-7227.
E-mail addresses: [email protected] (K.M. Gilley), [email protected] (C.R. Greer), [email protected] (A.A. Rasheed).
1 Tel.: +1-405-744-7530; fax: +1-405-744-5180. 2 Tel.: +1-817-272-3867; fax: +1-817-272-3122.
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59 Because of such costs, HR professionals have reported60 greater pressure to produce returns on investments in training 61 (Bassi and McMurrer, 1998; Morrow et al., 1997). It appears 62 that many HR departments are using outsourcing to enhance 63 the value received from training expenditures, as a recent 64 survey found that 32% of companies outsource training (HR 65 Focus, 1997). Nonetheless, the performance effects of out-66 sourced training have remained mostly unexplored. 67 Similarly, survey results indicate that 38.4% of firms 68 outsource their payroll functions (HR Focus, 1997). Com-69 pletion of the payroll function oftentimes requires manager-70 ial attention, as well as additional personnel. This can be 71 especially problematic for smaller enterprises, which may 72 not have enough employees to achieve economies of scale 73 for payroll processing. This makes payroll an attractive 74 candidate for outsourcing, but like training, there is no 75 research of which we are aware on the performance effects 76 of outsourced payroll activities.
77 The present study addresses these gaps in the literature 78 by examining the performance effects of outsourcing these 79 activities in manufacturing firms. In addition, we hypothes-80 ize and test a moderating effect of firm size on the out-81 sourcing – performance relationship.
82 2. Conceptual framework
83 A key principle of strategy is to concentrate resources in 84 selected areas that have the potential to provide competitive 85 advantage (Henn, 1985). The corollary of this principle is 86 that firms gain no competitive advantage by simply dis-87 tributing their resources in the same manner as their 88 competitors (Ohmae, 1988). Because of resource limita-89 tions, few firms have the ability to apply world-class 90 resources to all areas of competition. Thus, in order to gain 91 competitive advantage they must select areas in which they 92 will concentrate their resources (Hamel and Prahalad, 93 1994). By applying these principles to outsourcing, it can 94 be argued that to increase performance, firms should 95 concentrate on activities providing a source of competitive 96 advantage, such as improved quality of service or innova-97 tion, and outsource all other activities that outside firms can 98 do better and more efficiently.
99 As noted earlier, outsourcing, and HR outsourcing in 100 particular, have become pervasive phenomena, with surveys 101 reporting that as many of 91% of respondents outsource 102 some activities (Harkins et al., 1995). While this level of 103 activity has been accompanied by an evolving outsourcing 104 literature and predictions of performance effects, relatively 105 few empirical studies have examined the performance ef-106 fects of outsourcing. A recent study by Gilley and Rasheed 107 (2000) addressed the general topic of outsourcing with a 108 measure of outsourcing intensity that tapped breadth of 109 outsourcing across a wide range of business activities, as 110 well as depth of outsourcing within each activity. While they 111 found no direct effect of outsourcing on performance, they
112 did find that certain types of outsourcing had a positive
113 effect on performance for firms pursuing cost leadership and
114 innovative differentiation strategies, as well as those
oper-115 ating in more stable industry environments. However, there
116 have been no empirical investigations of the performance
117 effects of HR outsourcing. 118 119 2.1. Outsourcing of HR activities 120 Lepak and Snell’s (1998) model of virtual HR provides
121 guidance to help determine which HR activities should be
122 outsourced. Their model draws on transaction cost
econom-123 ics (Coase, 1937; Williamson, 1975, 1985) and a
resource-124 based perspective. The transaction cost theory perspective
125 suggests that activities that are not firm-specific are more
126 likely to be outsourced, while the resource-based
perspect-127 ive suggests that activities not critical to core competencies
128 should be outsourced. The two-by-two model’s value
129 dimension categorizes activities in accordance with their
130 contribution to the firm’s core competencies, while its
131 uniqueness dimension categorizes activities in accordance
132 with the extent to which they are rare in the external market.
133 The cross-categorization of these two dimensions produces
134 four categories. Unique and high value activities make up
135 the category of core HR activities, which are not candidates
136 for outsourcing. In contrast, peripheral HR activities (low
137 uniqueness and low value), idiosyncratic HR activities (low
138 value and high uniqueness), and traditional HR activities
139 (high value and low uniqueness) are all candidates for
140 outsourcing. These strategic principles indicate that to
141 enhance organizational performance, HR departments
142 should retain activities providing a competitive advantage
143 and outsource the rest.
144 Additional guidance for which HR activities to outsource
145 is provided by a strategic typology developed by Alan
146 Speaker (Greer, 2001). The two-by-two typology classifies
147 HR activities on two dimensions: (1) type of activity, with
148 transactional and relationship activities as anchors, and (2)
149 strategic value of the activity. The model incorporates the
150 evolving wisdom of strategic HR that the greatest
perform-151 ance impact can be obtained with relationship-oriented –
152 high strategic value activities. Activities in this category
153 include performance enhancement, consulting within the
154 firm, employee relations, labor negotiations, and executive
155 compensation. In contrast, transactional – low strategic value
156 activities, such as payroll, benefits administration, employee
157 records, retirement administration, and relocation
adminis-158 tration are clearly candidates for outsourcing. Outsourcing
159 these activities enables the firm to achieve more efficient
160 workforce utilization by focusing on higher value activities.
161 Thus, HR executives should see an imperative to move
162 toward activities in the relationship – high strategic value
163 category where they can make the most impact on
organ-164 izational performance. Baron and Kreps’ (1999) diagnostic
165 model also indicates that activities of low strategic
import-166 ance and low task and social interdependence should be
Uncorrected Proof
167 outsourced and that the key criteria for such decisions are168 cost and flexibility.
169 In addition to the theoretical rationales provided by 170 transaction cost economics, the concept of competency, 171 and the strategic HR perspective, there are additional 172 rationales for HR outsourcing. These include specialized 173 expertise, cost savings, reductions in liability or risk, and 174 temporary expansion of HR capabilities to meet extraord-175 inary circumstances (Greer et al., 1999). Nonetheless, there 176 are exceptions to these rationales, such as when outsourcing 177 an HR activity would make the firm vulnerable to being 178 held hostage by a vendor. Another exception occurs when 179 an activity cannot be outsourced without compromising 180 critical information that would make a firm vulnerable to 181 its competitors. For example, a firm could be vulnerable if 182 it outsources its executive compensation function and 183 confidential information is leaked to competitors that may 184 then conduct raids on its executive talent. In addition, HR 185 departments get into trouble very quickly when outsourced 186 activities such as payroll, employee records, and retirement 187 administration are not handled well (Speaker, 1999). 188
189 2.1.1. Performance effects of outsourced training activities 190 Theorists, such as Becker (1964) and Goldstein (1986), 191 have made compelling arguments for the performance 192 effects of training. In recent years, the theory has been 193 complemented with several studies that have found positive 194 effects of training on measures of organizational perform-195 ance such as cost savings and productivity (Frayne and 196 Geringer, 2000; Jones, 1998), gross profit per employee and 197 market-to-book ratios (Bassi and McMurrer, 1998), return 198 on investment (Morrow et al., 1997), sales revenue (Frayne 199 and Geringer, 2000), and perceptual measures of perform-200 ance (Delaney and Huselid, 1996; Harel and Tzafrir, 1999). 201 Thus, training has been shown to be an important contrib-202 utor to organizational success.
203 While there have been studies of the performance effects 204 of training and of the performance effects of outsourcing in 205 general, no empirical studies have specifically addressed the 206 performance effects of outsourced training. Nonetheless, 207 there are several ways in which such outsourcing may 208 positively affect firm performance. One important potential 209 effect is cost reduction, as outsourced training provides a 210 means of reducing the fixed costs associated with maintain-211 ing a training staff. Further, outsourcing of training can add 212 value through the higher quality available from specialized 213 training providers. Because many firms may lack the ex-214 pertise to conduct training in-house, better performance may 215 be obtained with outsourced training. By outsourcing train-216 ing to outside specialist organizations, firms may achieve 217 superior levels of employee performance and productivity, 218 thus leading to higher financial performance and improved 219 customer and vendor satisfaction. Improved training also 220 should enhance innovation because well-trained employees 221 have a better knowledge foundation for improving processes 222 and products. In addition, by outsourcing training activities,
223 the firm will be better able to focus on the value-creating
224 activities that drive competitive advantage.
225 Hypothesis 1: Outsourcing of training activities is
226 positively related to firm performance.
227 228 2.1.2. Performance effects of outsourced payroll activities
229 In contrast to training, payroll activities have lower
230 strategic importance. Even when the activities are performed
231 flawlessly, they do not have the strategic impact of other HR
232 functions. Nonetheless, while payroll activities are not
233 strategic and are transactional rather than relational, they
234 must be performed well because service failures can have
235 strong negative effects on employee morale. As Lepak and
236 Snell (1998) have noted, there is increased emphasis on
237 making HR more cost-efficient and outsourcing has been
238 used to reduce costs of peripheral HR functions such as
239 payroll services. Indeed, an industry of HR service
pro-240 viders has evolved in part to provide lower transaction costs
241 for activities such as payroll processing. For example, firms
242 such as Synhrgy HR Technologies, Strategic Outsourcing,
243 Paymaxx, Paychex, and Pro Pay provide outsourcing
serv-244 ices for such activities as payroll processing, benefits
245 administration, and workforce development (Synhrgy HR
246 Technologies, 2001; Strategic Outsourcing, 2001; Paychex,
247 2001; Paymaxx, 2001; Pro Pay, 2001).
248 In addition, because payroll activities are transactional
249 rather than relational, vendors can perform them with little
250 loss of value to the organization. They also have low task
251 and social interaction requirements and can be performed in
252 relative isolation from other organizational activities with
253 only limited amounts of information and coordination from
254 other organizational units. Thus, according to the guidance
255 provided by the Lepak and Snell (1998) model, the Speaker
256 typology (Greer, 2001), and the Baron and Kreps (1999)
257 model, firms should outsource payroll activities to increase
258 firm performance, because these activities are of low
stra-259 tegic value, are transactional in nature, are nonunique, and
260 do not provide a source of competitive advantage.
261 In addition, as a result of outsourcing, HR departments
262 may be able to obtain better service and lower costs from
263 vendors than from in-house sources, because payroll service
264 providers have the advantages of scale, expertise, and
up-to-265 date technology as well as more in-depth process knowledge
266 that may enable them to provide better service as well as
267 lower costs (Jarvis, 1999). Thus, we hypothesize that the
268 outsourcing of payroll activities should be associated with
269 greater firm performance.
270 Hypothesis 2: Outsourcing of payroll activities is
271 positively related to firm performance.
272 273 2.1.3. Moderating effects of firm size
274 It is likely that the relationships between training and
275 payroll outsourcing and firm performance are not the same
276 for all firms. Rather, the performance effects of these types
Uncorrected Proof
277 of outsourcing may be contingent on characteristics of the278 firm itself. One potentially important firm-level contin-279 gency is the size of the firm. The size of organizations 280 has been widely discussed in the strategy and organization 281 theory literatures and has often been tested as a moderator 282 variable. For example, firm size has been shown to affect 283 the influence that a CEO can have on the firm (Miller and 284 Droge, 1986; Miller and Tolouse, 1986), the level of or-285 ganizational formalization (Hall, 1987; Pugh et al., 1968), 286 and the relationships between internal and external succes-287 sors and firm performance (Reinganum, 1985).
288 We contend that firm size will moderate the effects of 289 training and payroll outsourcing on performance in similar 290 ways. In general, transaction cost theory would suggest that 291 payroll and training outsourcing by smaller firms should 292 produce lower costs than when those activities are per-293 formed in-house because smaller firms lack the vendors’ 294 efficiencies that result from scale and experience effects. In 295 addition, the resource-based view would suggest that the 296 limited capabilities of smaller firms make it necessary for 297 them to acquire resources from other organizations (Hadji-298 manolis, 2000). By relying on outsourcing, smaller firms 299 can obtain the capabilities they need from vendors. 300 Some types of training require a great deal of specialized 301 knowledge and managerial and financial resources, which 302 smaller firms may frequently lack. Indeed, reasons for 303 outsourcing training, discussed by Parry and Ribbing 304 (1976), are to obtain specialized expertise and capacity that 305 do not exist within the firm. Because smaller firms are 306 generally more resource constrained than larger, more 307 established entities (Robinson, 1982), they often lack the 308 specialized staff and dedicated budget necessary to provide 309 high quality training. Compared to larger firms the training 310 function in smaller firms typically is less specialized, has 311 less capacity, is less formal, is less systematic, and is less 312 subject to formal evaluation.
313 Furthermore, because firms make real cash outlays when 314 they outsource training, it is likely that awareness of such 315 costs will help insure that the training will be meaningful, 316 and thus will have greater potential for a positive impact on 317 performance, especially for smaller firms. As a result, these 318 small organizations will likely achieve higher levels of firm 319 performance by outsourcing their training functions to 320 outside specialists. The opposite may be the case for larger 321 organizations. Larger firms are more likely to have the 322 resources required to design and implement sophisticated, 323 successful in-house training activities. In addition, for these 324 types of organizations, hiring and equipping a specialized 325 training staff may be more easily justified due to scale 326 economies for the number of employees being trained. 327 Therefore, larger firms may see less benefit to their per-328 formance as a result of outsourced training relative to 329 smaller firms.
330 Lepak and Snell (1998) have noted that while compre-331 hensive internal training programs can produce a highly 332 talented workforce, the costs of such activities can reduce
333 their value and, therefore, value is dependent upon the
334 firm’s strategic context. We believe that firm size is an
335 important contextual variable that will influence the HR
336 outsourcing – performance relationship. We argue that small
337 size is likely to tip the balance on the value dimension
338 toward outsourcing because in smaller organizations the
339 costs of conducting training in house may be
disproportion-340 ately high.
341 Hypothesis 3: The effects of outsourced training on
342 firm performance are moderated by firm size such that
343 the benefits of outsourced training are greater for
344 smaller firms.
345 Similar arguments can be made regarding the moderating
346 effects of firm size on the relationship between payroll
347 outsourcing and firm performance. Because small firms
348 may typically have only a few HR staff members who serve
349 as generalists across a wide range of HR activities, some
350 reduction in efficiency is expected with regard to the entire
351 spectrum of HR activities. While payroll specialists are
352 often employed by all but the smallest firms, the absence
353 of a critical mass of payroll specialists may reduce
effi-354 ciency in other ways. For example, with smaller numbers of
355 specialists, there are more limited opportunities for the staff
356 members performing payroll functions to adopt specialized
357 payroll efficiencies. By outsourcing payroll activities to
358 outside specialist organizations, HR staffs within smaller
359 firms may focus on more value-enhancing activities, thereby
360 increasing overall organizational effectiveness. Larger firms,
361 by contrast, are less likely to see a significant increase in
362 their performance through payroll outsourcing. Because of
363 scale and technology issues, larger organizations will likely
364 achieve comparable efficiency with respect to payroll
pro-365 cessing relative to their potential external outsourcing
part-366 ners. Therefore, we would expect the benefits of payroll
367 outsourcing to decrease with increasing organization size.
368 Hypothesis 4: The effects of payroll outsourcing on
369 firm performance are moderated by firm size such that
370 the benefits of payroll outsourcing are greater for
371 smaller firms. 372 3. Research method 373 374 3.1. Sample and sampling procedures
375 To test the above hypotheses, surveys were mailed to the
376 CEOs of 558 firms that were listed in a directory of
377 manufacturers from a single southwestern state. The survey
378 implementation process closely followed the suggestions of
379 Dillman (1978). Ninety-four usable surveys (17%) were
380 returned. To test for nonresponse bias, differences in total
381 employees and industry representation for responding and
382 nonresponding firms were examined (Greer and Ireland,
383 1992). No significant differences were detected.
Uncorrected Proof
384 The sample includes independent, nondiversifiedman-385 ufacturing firms employing more than 50 people. The firms 386 in the sample represent a total of 16 manufacturing indus-387 tries. Firms ranged in size from approximately 50 to 7500 388 employees. Median firm size was 100 employees, and the 389 average firm had been in operation for 38 years. The 390 average respondent was 49 years old and had been with 391 the firm for 12 years.
392
393 3.2. Measures 394 3.2.1. Outsourcing
395 To measure the extent of outsourcing of payroll and 396 training activities, respondents were asked to indicate the 397 extent to which each activity is currently being performed 398 by outside suppliers. Following Gilley and Rasheed (2000), 399 responses were coded on a 100-point scale (0 = none of the 400 value of the activity is being outsourced to 100 = all of the 401 value of the activity is being outsourced) for both payroll 402 and training outsourcing.
403
404 3.2.2. Firm performance
405 Since smaller, privately held firms are unlikely to provide 406 objective financial data, subjective financial performance 407 data were collected as described by Dess and Robinson 408 (1984), Pearce et al. (1987), and Priem et al. (1995). 409 Respondents were asked to indicate how their firm’s return 410 on assets, return on sales, and overall financial performance 411 compared to similar firms in their industry for two time 412 periods: during the last 12 months and 5 years ago (the latter 413 being used as a control variable). Following Venkatraman 414 and Ramanujam’s (1986) suggestion, broader measures of 415 firm performance were examined. To determine each firm’s 416 nonfinancial performance, respondents were asked to rate 417 their firm’s research and development (R&D) outlays, 418 stability/growth of employment, process innovations, prod-419 uct innovations, employee compensation, employee morale/ 420 job satisfaction, customer relations, and supplier relations 421 relative to their competitors. For both financial and non-422 financial performance, responses were coded on a five-point 423 scale (1 = at the bottom of similar firms in the industry to 424 5 = at the top of similar firms in the industry). Comparisons 425 of firm performance relative to similar firms in the same 426 industry were requested to minimize industry effects (Dess 427 et al., 1990) and strategic group effects (Hatten et al., 1978). 428 Exploratory factor analyses, using principal axis extrac-429 tion techniques and an oblique rotation (Ford et al., 1986), 430 revealed that past performance and current performance 431 each had three distinct factors (see Table 1). For both past 432 and current performance, the financial performance items 433 comprise one factor. However, the nonfinancial perform-434 ance items created two separate factors. One nonfinancial 435 performance factor deals with innovation performance, 436 while the second factor concerns stakeholder performance. 437 As a result of these exploratory factor analyses, the current 438 and past performance measures were split into financial
439 performance (three items summed—return on assets, return
440 on sales, and overall financial performance), innovation
441 performance (three items summed—R&D outlays, process
442 innovations, and product innovations), and stakeholder
443 performance (four items summed—employment growth/
444 stability, employee morale, customer relations, and
sup-445 plier relations).
446 The results of confirmatory factor analyses (CFA)
447 suggest that our measures of performance are valid. For
448 performance over the last 12 months, our CFA revealed
449 that both the confirmatory fit index (CFI) and the
good-450 ness of fit index (GFI) were acceptable (.93 and .86,
451 respectively). For performance over the prior 5 years, the
452 CFI was .89 and the GFI was .86, indicating a reasonable
453 fit (Moorman et al., 1998). The internal reliability
coef-454 ficients (Cronbach, 1951) for performance over the last
455 12 months were .93 (financial), .80 (innovation), and .76
456 (stakeholder performance). For historical performance,
457 reliabilities were .89 (financial), .72 (innovation), and .67
458 (stakeholder performance).
459 In addition to historical firm performance, we controlled
460 for industry, firm size, and firm age. For industry controls,
461 15 dummy variables were created using each firm’s
two-462 digit SIC code and included in each regression model. Firm
463 size was measured by asking respondents to indicate how
464 many people currently worked for their firm and firm age
465 was measured by asking respondents to indicate the number
t1.1
Table 1
Results of exploratory factor analyses of performance items t1.2
Factor 1 Factor 2 Factor 3 t1.3
A. Current performance items t1.4
1. Return on assets .91 t1.5
2. Return on sales .92 t1.6
3. Overall financial performance .80 .28 t1.7
4. R&D outlays .64 t1.8 5. Process innovations .71 .32 t1.9 6. Product innovations .85 t1.10 7. Employment growth/stability .28 .39 .45 t1.11 8. Employee morale .33 .59 t1.12 9. Customer relations .71 t1.13 10. Supplier relations .60 t1.14 Eigenvalue 2.58 1.95 1.64 t1.15 t1.16
B. Past performance items t1.17
1. Return on assets .84 t1.18
2. Return on sales .84 .29 t1.19
3. Overall financial performance .71 .41 t1.20
4. R&D outlays .71 t1.21 5. Process innovations .64 t1.22 6. Product innovations .77 t1.23 7. Employment growth/stability .31 .32 .46 t1.24 8. Employee morale .62 t1.25 9. Customer relations .27 .66 t1.26 10. Supplier relations .61 t1.27 Eigenvalue 2.25 1.80 1.77 t1.28
Survey question: ‘‘Please rate your firm’s performance relative to similar firms in your industry for the following two time periods: (1) over the past
12 months and (2) 5 years ago.’’ t1.29
Uncorrected Proof
466 of years the firm had been in business. Both firm size and467 firm age were skewed, and thus log transformations were 468 used in the analyses.
469 4. Results
470 Means, standard deviations, correlations, and estimated 471 reliabilities are found in Table 2.
472
473 4.1. Direct effects of HR outsourcing on performance 474 Prior to testing for the direct effects of training and payroll 475 outsourcing on firm performance, we included only the
476 control variables in regression models with the three types
477 of current performance as dependent variables. The results of
478 these tests are shown in models 1, 4, and 7 of Table 3. These
479 were used as baseline models to allow for interpretation of
480 the performance effects of the two outsourcing variables as a
481 set, in addition to examining their influence individually.
482 Hypotheses 1 and 2 were then tested to examine the extent to
483 which outsourced training (Hypothesis 1) and payroll
out-484 sourcing (Hypothesis 2) influence firm performance. The
485 results of these one-tailed tests are shown in models 2, 5, and
486 8 of Table 3. A linear combination of the two types of HR
487 outsourcing and the control variables, adjusted for the
488 number of independent variables, explained 30% of the
489 variance in financial performance, 48% of the variance in t2.1 Table 2
Descriptive statistics and correlations
t2.2
Internal
reliability Mean S.D. 1 2 3 4 5 6 7 8 9
t2.3
1. Current financial performance .93 10.31 2.97
t2.4
2. Current innovation performance .80 9.32 3.01 .30**
t2.5
3. Current Stakeholder Performance .76 14.78 2.60 .44*** .38***
t2.6
4. Past financial performance .89 10.13 2.72 .56*** .29** .30**
t2.7
5. Past innovation performance .72 8.58 3.01 .36** .65*** .14 .38***
t2.8
6. Past stakeholder performance .67 14.08 2.97 .27** .19 .42*** .58*** .40***
t2.9
7. Training outsourcing – 10.02 19.56 .15 .03 .08 .23* .07 .02
t2.10
8. Payroll outsourcing – 33.49 44.13 .13 .19 .03 .13 .02 .13 .01
t2.11
9. Firm size (log) – 4.72 1.01 .18 .12 .03 .11 .27* .08 .04 .01
t2.12
10. Firm age (log) – 1.35 0.32 .17 .02 .15 .08 .02 .08 .12 .03 .05
t2.13 * P < .05. t2.14 ** P < .01. t2.15 *** P < .001. t2.16 t3.1 Table 3
Results of regression analyses for moderating effects
t3.2
DV = Financial performance DV = Innovation performance DV = Stakeholder performance
t3.3
Predictors and controls Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9
t3.4
Control variables
t3.5
Past performance .45*** .42*** .43*** .69*** .69*** .72*** .42*** .42*** .42***
t3.6
Log of firm size .08 .08 .12 .06 .07 .00 .00 .02 .02
t3.7
Log of firm age .12 .14 .14 .07 .11 .12 .04 .08 .09
t3.8 t3.9 Independent variables t3.10 Training outsourcing .08 .45 .14y 1.02 .21* .64 t3.11 Payroll outsourcing .00 .18 .24** .44 .06 .29 t3.12 t3.13 Interaction terms t3.14
Training outsourcing Firm size .39 .88 .44
t3.15
Payroll outsourcing Firm size .18 .22 .36
t3.16 t3.17 F (full model) 3.18*** 2.83** 2.58** 4.26*** 4.81*** 4.49*** 1.55y 1.58y 1.45 t3.18 R2 .46 .46 .47 .54 .61 .62 .30 .33 .34 t3.19 Adjusted R2 .31 .30 .28 .42 .48 .48 .11 .12 .11 t3.20 Change in R2 .01 .01 .06 .01 .03 .01 t3.21 F .30 .20 5.11** 1.05 1.62 .38 t3.22 df 18,68 20,66 22,64 19,68 21,66 23,64 19,69 21,67 23,65 t3.23
Industry dummy variables were omitted from this table for clarity of presentation.
t3.24 y < .10. t3.25 * P < .05. t3.26 ** P < .01. t3.27 *** P < .001. t3.28
Uncorrected Proof
490 innovation performance, and 12% of the variance instake-491 holder performance. In all three cases, the majority of the 492 variance was explained by the control variables.
493 As shown in Table 3, the regression analyses reveal that 494 training was a significant predictor of the firm’s stakeholder 495 performance ( P < .05) and innovation performance ( P < .10). 496 In addition, payroll outsourcing was a significant predictor 497 of innovation performance ( P < .01). In the case of innova-498 tion performance, the change in R2 beyond the baseline/ 499 controls model was significant, indicating that the set of 500 outsourcing variables themselves explained a significant 501 amount of variance beyond the baseline model. However, 502 for stakeholder performance, the change in R2 was non-503 significant. Nevertheless, as predicted by Hypotheses 1 and 504 2, it appears that the outsourcing of training and payroll 505 activities has a positive effect on key measures of organiza-506 tional performance.
507
508 4.2. Moderating effects of firm size
509 Hypotheses 3 and 4 proposed that the effects of HR 510 outsourcing on firm performance would be contingent on 511 the size of the organization. Linear-by-linear interaction 512 terms were created, as suggested by Stone and Hollenbeck 513 (1989), by multiplying outsourced training (Hypothesis 3) 514 and payroll outsourcing (Hypothesis 4) by the log of firm 515 size. After entering the proposed main effects and control 516 variables into the equation, the multiplicative terms were 517 added. The regression weights for the multiplicative terms 518 were then examined.
519 As shown in models 3, 6, and 9 of Table 3, our results do 520 not support Hypotheses 3 and 4. These nonfindings with 521 regard to moderating effects are not surprising in light of our 522 relatively small sample.
523 5. Discussion 524
525 5.1. Performance implications of HR outsourcing
526 As predicted, our results indicate that there are some firm 527 performance implications of HR outsourcing practices. 528 More specifically, we found that firm innovativeness is 529 related to higher levels of HR outsourcing. Both training 530 and payroll outsourcing were found to be significant pre-531 dictors of innovation performance. Although these results 532 do not warrant an inference of a cause – effect relationship, 533 they seem to indicate that firms may potentially achieve 534 higher levels of focus on those activities that drive innova-535 tion and other forms of competitive advantage by entrusting 536 training and payroll activities to outside specialists. (While 537 our study does not test whether outsourcing allows firms to 538 focus on a narrower set of functions or to concentrate on 539 core competencies, the use of outsourcing is consistent with 540 such approaches.) Our results also suggest that outsourced 541 training may enhance stakeholder performance. In addition,
542 our findings indicate that outsourced training may enhance
543 the ability of organizations to add value for their
stake-544 holders. As noted earlier, better relationships with suppliers
545 and customers may occur when employees are well trained
546 by outside experts.
547 Although no effect of HR outsourcing on financial
548 performance was detected, it is highly likely that a financial
549 performance effect will result over the long term. For
550 example, with training in performance coaching there would
551 be a lag between the manager’s acquisition of coaching
552 skills and the opportunity to use coaching with employees
553 experiencing performance problems. Unfortunately, due to
554 our cross sectional design, longitudinal effects of
outsourc-555 ing such as this were not measured.
556 557 5.2. Suggestions for practitioners and academics
558 Our conceptual framework has predicted that training
559 and payroll outsourcing should produce positive
perform-560 ance effects. Several theoretical rationales predict positive
561 benefits from outsourcing, such as the following: lower
562 administrative costs, greater efficiencies potentially
avail-563 able from vendors, greater focus on core competencies,
564 elimination of the overhead costs of a training staff, and
565 specialized expertise and capabilities provided by vendors.
566 As noted earlier, although we cannot claim causality, our
567 findings suggest that firms outsourcing their training
activ-568 ities tend to have higher performance in terms of
stake-569 holders—which in the current study includes employment
570 growth/stability, employee morale, customer relations, and
571 supplier relations. Our results also suggest a strong, positive
572 relationship between outsourced payroll activities and
573 innovation, as well as a weaker relationship between
out-574 sourced training and innovation.
575 There are strong theoretical rationales for expecting
576 higher quality training from the expert training staffs of
577 specialized vendors to produce increased innovation,
578 improved employee morale, and better relationships with
579 customers and suppliers. Thus, practitioners should have
580 confidence that such performance relationships exist and
581 should be more likely to justify their investments in
out-582 sourced training and payroll activities with objective data
583 and comprehensive evaluations of their own. However, the
584 outsourcing of training is often inconsistent with the
585 political context and self-interests of executives who have
586 made decisions to use in-house staff to conduct training
587 (Tannenbaum and Woods, 1992; Kerr, 1975). Accordingly,
588 it is unsurprising that the effectiveness of training has
589 seldom been subjected to rigorous examination in firms.
590 Nonetheless, demands for increased HR accountability
591 make rigorous evaluation more likely in the future. Firms
592 should be able to measure the effectiveness of outsourced
593 training with techniques that are currently available
(Tan-594 nenbaum and Woods, 1992; Greer, 2001) and with greater
595 precision because the costs are better specified with
out-596 sourced training.
Uncorrected Proof
597 The marginally significant, positive relationship between598 outsourced training and innovation provides a promising 599 area of inquiry for academics. Such a positive relationship is 600 consistent with an earlier analysis of cases that found a 601 tendency of small innovative firms to outsource training 602 (Hadjimanolis, 2000). An interesting area of inquiry for 603 academics would be to determine potential rates of return in 604 terms of increased innovation, for firms that invest in 605 outsourced training. Similarly, future studies can determine 606 the rates of return in terms of increased innovation resulting 607 from outsourced payroll as well as other nonstrategic, 608 transactional, or nonunique HR activities. Practitioners 609 may be similarly interested in the determination of such 610 returns for both innovation and stakeholder performance in 611 their own firms.
612
613 5.3. Limitations
614 This study has several limitations. First, the generaliz-615 ability of this study’s findings may be limited. Although the 616 sample was representative of the population of interest based 617 on firm size and industry type, the firms did not vary greatly 618 in their stage of industry development or level of unioniza-619 tion. In addition, because all of the firms in the sample were 620 manufacturers, generalizing the findings to service firms 621 may be difficult. Another potential limitation of this study 622 is common method bias, which may have played some role 623 in our analyses and must be acknowledged.
624 6. Conclusions
625 This study has attempted to shed additional light on the 626 relationship between outsourcing and firm performance by 627 examining HR outsourcing practices and their influence on 628 financial, innovation, and stakeholder performance meas-629 ures using a sample of manufacturing firms. Our results 630 suggest that certain types of HR outsourcing activities do 631 indeed have a significant, positive influence on firm per-632 formance. Specifically, our findings indicate that outsourced 633 training has a positive effect on both innovation and 634 stakeholder performance. In addition, payroll outsourcing 635 was found to positively influence firm innovativeness. 636 Although hypotheses concerning the moderating effects of 637 firm size on outsourcing and performance relationships were 638 not supported, move intensive examinations of organiza-639 tional and environmental contingencies provide a promising 640 avenue for future research.
641 Finally, much of the prior work on outsourcing has 642 focused on the aggregate level and has theorized about its 643 organizational consequences in terms of impact on financial 644 performance. We have attempted a finer-grained study by 645 focusing on the outsourcing of specific value creating activ-646 ities. Similarly, we also have adopted a broader perspective 647 of organizational performance. We believe that future studies 648 can gain further insight into the performance implications of
649 outsourcing decisions by focusing on intermediate outcome
650 variables such as satisfaction with the decision to outsource
651 and ability to focus on areas of core competence.
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