Some executives prefer to take a passive role when investing in employees, attempting to minimize or avoid the investment altogether. While highly dysfunctional, this approach has proven effective for some organizations, depending on their strategic focus. This chapter explores the strategy of letting others do the investing, the forces behind this strategy, and the consequences—both positive and negative—of implementing it.
The strategy is simple—let other organizations provide the investment for human capital. The motivating forces behind this strategy are grounded in cost management—the organization is either looking to cut costs or to avoid costs related to employees. This focus on cost is often due to instability in an organization or industry or to an organization’s need for expertise in a specific area; it is also often indicative of a company with a short-term focus or one that is just trying to survive.
This strategy is implemented using three different approaches. Some executives use one or more of these approaches, while others use all three. The first approach is to recruit fully competent and capable employees who will not need training to successfully function in the job. With this approach, little or no additional development is provided to enhance the employees’ performance or to develop them for future jobs. The second is to use contract and temporary employees in place of permanent employees. This arrangement allows the organization to add and remove employees with little or no commitment to them, thus reducing the expense connected to employee acquisition and termination. The third approach is to use outsourcing to get the job done, often at lower cost. Taken to the extreme, employers can outsource most of the functions that would be performed by regular employees in the organization. Figure 1-1 presents an overview of this strategy.
Many organizations apply the “let others do it” strategy to avoid human capital cost. Consider, for example TechCo (not the actual name), a technology systems company that thrives in the market by recruiting capable staff from competing organizations. With this approach, TechCo recruiters eagerly lure systems engineers and specialists (trained and developed by their competitors), so they can hit the ground running. TechCo keeps track of the training programs of their competitors, particularly programs designed for new computer science and engineering graduates. Ideally, recruiters strike just as new graduates are completing a one-year training program. The new graduate, eager to take on “real” work, jumps to TechCo for a higher salary than he or she is being paid as a “trainee.”
These new employees are expected to perform immediately when they are hired, are paid above-market wages, and are provided little additional development in their careers. There is an immediate impact on TechCo’s bottom line due to their immediate level of performance. Although employees may not be committed for long periods of time, the company reaps rewards quickly because their investment in training, development, and employee socialization is virtually zero. Organizations such as this have a vulture-like reputation, preying on those companies that do invest in their employees.
KLA-Tencor Corporation uses this strategy. This $1.6 billion company with 5,500 employees is the leading producer of tools used to identify semiconductor defects during manufacturing. At KLA-Tencor, new employees hit the ground running (most of the time in sixty days or less from the time the company starts the hiring process). What does this mean for KLA-Tencor? Higher productivity, higher morale, and higher shareholder value[1]
The National Aeronautics and Space Administration (NASA) is an example of an organization that uses contract and temporary labor. During the past two decades, NASA has subcontracted much of their work. This approach reduces the full-time employee payroll, part of the U.S. government’s move to reduce head count. Frequently, the work is handed off to employees of well-known contractors, with NASA paying a higher direct wage for the service. In a typical meeting at NASA, it is not unusual to find more contract employees in attendance than NASA employees, even though the purpose of the meeting might be to discuss an essential core issue. This practice has evolved over time and has proven to be the most effective approach for NASA to manage its overall employment costs.
Nike is a company that has taken outsourcing beyond that of most organizations. Nike essentially outsources all of their functions, maintaining only a very small corporate staff. Their basic philosophy is to minimize the number of employees and rely on outsource vendors and outsourced services to make the firm successful. Dell and Cisco Systems are two of many companies addressing the possibility that there are activities inside their firms that would best be carried out by someone else (outsourcing) or somewhere else (off-shoring). Each company orchestrates a global supply chain for product delivery comprising many different companies and competencies—partnering, for example, with two electronic manufacturing services companies, Solectron Corp. (based in Milpitas, California) and Flextronics Corp. (headquartered in Singapore) for assembly, as well as FedEx and United Parcel Service for shipping.[2]
These examples underscore a trend of minimizing investment in employees or of avoiding the act of hiring employees altogether. There are many forces driving firms to pursue this strategy; however, two are critical. One is the cost of developing competent human capital and the other is the complex nature of HR development.
Several factors motivate executives to pursue one or more of these approaches. The first and foremost issue is cost control or cost avoidance. Executives are concerned about (or are afraid of) the cost of employees. They know the cost of human capital is a major expenditure and they take a proactive approach to avoiding these costs.
Another factor is that to maintain a highly motivated, committed, and satisfied employee team, organizations are required to make a significant investment in employee systems and processes. Some executives cannot or will not build the infrastructure to support an effective employee group. For example, some executives will provide learning opportunities, yet will not invest in the support needed to transfer learning to the job, thus wasting resources.
A third motivating factor is the need to bring stability to the organization, particularly as expansion and decline occur in cyclical or seasonal industries. Letting others make the investment in human capital enables an organization to balance employment levels, address particular needs, and control costs at the same time.
A fourth factor is to use this strategy to tap into expertise that may be unavailable in the organization. It may not be feasible or practical to grow or develop the experience needed, so executives will take advantage of external expertise.
Still other executives pursue this strategy because they have a short-term focus instead of a long-term view. The company may not be as successful or as financially strong as it should be and executives try to maximize short-term successes.
Finally, in a related factor, some executives pursue this strategy for survival. They cannot afford to invest in human capital, at least not to the levels needed to build a successful team. They must rely on contract employees, outsourcing, or they hire only those who are fully competent. For an immediate period of time, this may be the only way to survive.
Collectively, these motivating forces drive executives to pursue one or more of the approaches outlined in this chapter. For some, it is the only strategic option available; for others it is the preferred strategy.
Many of the organizations using this strategy realize that successful employee acquisition and maintenance is expensive. Table 1-1 shows the cost categories for acquiring and maintaining competent staff. Executives in some organizations realize the magnitude of these expenses and have a desire to avoid part or all of them. Although the costs do not include the costs for office spaces and support expenses, they are still significant, often two to three times the annual pay.
Table 1-1. Total cost of developing and maintaining competent human capital.
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Recruiting trained employees avoids the cost of indoctrination, orientation, socialization, initial training, development, and on-the-job training. Although the salary and benefits may be higher than that of less-skilled employees, other costs are avoided.
Executives hire contract employees in an attempt to avoid all of these costs, particularly the benefits and exit costs and some of the acquisition costs. Contract employees should be ready to work and make an immediate contribution. An example is in the U.S. Federal government. Contract employees are often not allowed to attend training courses offered to civil servants and military personnel. The total cost of a contract employee is usually less than what the organization is experiencing on a total cost basis.
Executives sometimes outsource major functions to lower their total cost of human capital. Most outsource providers offer needed services at lower cost. This often means that the pay and benefits structure may be less or the provider is using other ways to keep costs to a minimum.
Organizations using this strategy realize that human resources development involves several different processes. Figure 1-2 shows the differences in training, education, and development in terms of the focus, cost, time for payback, and risk for payback of each. Within this context, it is easy to see that the low-risk, short-term payback approach focuses only on job-related skills and avoids the costs for education and development. Executives hiring competent employees avoid the costs of providing them with job-related skills as well as some of the costs of providing them with education and development.
Table 1-2. Human resources development issues.
Focus | Costs per Employee | Time for Payback | Risk for Payback | |
|---|---|---|---|---|
Training | Job-Related Skills | Low | Short | Low |
Education | Preparation for the Next Job | Moderate | Medium | Moderate |
Development | Cultural Change and Continuous Learning | High | Long | High |
Job-related training represents most of the traditional budget for developing human resources, providing an incentive to avoid this cost. When other education and development programs are scaled back or omitted, it is a plus. The result: organizations avoid a tremendous expense.
This approach is controversial because it implies a negative view toward employee development. However, a few studies indicate that certain types of development can actually hurt organizational performance. One major study shows that training can actually decrease shareholder value, perhaps by training people into jobs that are not available, therefore, sending them to the competition.[3] Recruiting fully competent employees is basically an approach to control expenses and avoid delays. Employers investing heavily in education and development activities are often creating an opportunity to lose the individual, or they are investing in skills that may not be used. Either way, this investment represents a waste of resources for the organization.
Investing in job-related training is the low-risk option where a quick payback is ensured. MIT economics professor Lester Thurow touched on this problem in an article on building wealth.[4] He noted that rather than training employees, it is advantageous for companies to hire people who already possess the necessary skills. As Thurow indicates, when new knowledge makes old skills obsolete, firms want workers who already have that knowledge. They don’t want to pay for retraining.
How does anyone rationally plan an educational investment? What skills would pay off? No one wants to waste investment funds on skills that will go unused. “You train, I’ll hire” is the American way. This approach presents a dilemma for organizations, particularly from a public policy perspective. If organizations are not willing to train or develop employees, an underdeveloped or underprepared workforce may result. Companies who do train will be penalized through poaching, a practice traced back to fourteenth-century Germany. Poaching became a significant influence in modern-day corporate recruiting in the early 1990s, when conventional recruitment methods were deemed neither quick enough nor effective enough to find top talent.[5]
A challenge of the “let others do it” approach is to have adequate sources from which to select fully trained employees. Executives adopting this strategy often seek employees from successful organizations that:
Enjoy a technological edge with high levels of investment in IT spending as a percent of revenue.
Are leaders in the industry, usually in the top two or three organizations.
Have achieved superior financial performance in terms of earnings before interest, taxes, depreciation, and amortization (EBITDA).
Enjoy a reputation for innovation within the industry, particularly in the area where employees are being targeted for recruitment.
Have significant growth in the industry in terms of revenue and productivity.
Invest heavily in human capital, with a reputation for developing people.
Any or all of these criteria represent ideal targets for recruiting. The difficulty lies in enticing employees to leave these successful organizations.
Tactics for implementing this approach are straightforward and involve several key challenges. One approach is to use innovative and successful recruiting processes, often going beyond the traditional processes of attracting employees. KLA-Tencor’s approach places emphasis on netting the passive seeker by way of the Web.[6] Their methods of using the company’s Web site to attract job seekers are critical to their success. For example, competitors visiting KLA-Tencor’s Web site will see job opportunities scrolling in a banner window on the screen. The company attempts to brand itself as the employer of choice with stimulating and challenging opportunities and invites potential employees to share the excitement. This allows the company to attract and bring competent employees on board in minimum time.
KLA-Tencor is launching new products offered by its Web-solutions vendors that will improve efficiencies in HR’s hiring practices, allowing the company to shave off valuable time during the offer-to-acceptance cycle for a new hire. The company has developed and is testing a job-profiling process that streamlines the hiring process and can also be used to assess employee development after hiring. Beyond just determining whether the employee has the necessary skills to do the job at the time of hire, the job-profiling process can also be used in workforce planning, performance assessment, compensation decisions, and leadership-development opportunities.
To attract and acquire passive job seekers, organizations need to pay higher-than-average salaries and benefits. Compensation may be higher than the organization’s target for recruiting. Employees recruited through this approach must see immediate opportunities to entice them to leave their current position. They are often positioned as key employees in the organization and are given as much responsibility as they can absorb so they can make a contribution quickly and help others in the organization.
The challenge for a company is to build a reputation for high pay and achieve an image of the organization being a good place to work. This helps to attract and retain employees.
This approach has disadvantages that make it undesirable for some employers. It is a short-term strategy for many organizations as they avoid the cost of initial development and training. Long-term employees may not be willing to stay with the organization; thus the stability of a tenured, long-term workforce is in jeopardy.
There are potential pitfalls to poaching. In most cases, poaching involves individuals who are not looking to change jobs. To entice them, a premium usually must be paid for their talent. Employers are likely to pay more for these candidates than they would for people recruited through other methods.
Another pitfall is that new talent is lured only by the promise of greater financial gain and does not give enough consideration to other employment needs. If people move only for the paycheck, chances are they will soon grow dissatisfied and regret accepting the position. This suggests a potential loss in effectiveness, and a disappointment for the new employer.[7]
Higher than desired turnover may result because of the organization’s unwillingness to develop skills and invest in employees’ careers. Continuous employee development is an important retention factor in today’s organizations—even if it is in skills that they do not use immediately. Recent studies reveal a positive correlation between investing in new skills and retention. Thus, employees may desire to work for an organization that invests in them routinely.
Finally, with this approach, it may be difficult to develop a team-based organization necessary for success at some firms. Hiring fully competent, ready-to-compete employees may create mavericks and loners who pride themselves on their knowledge and skills but not as much on their ability to work as a supportive, helpful team member. Thus, the team-based approach that is often needed to provide seamless service to customers—internally and externally—may not exist.
As we have noted, a principle advantage of this approach is the low cost of developing fully competent employees. Figure 1-3 shows the payoff of this process. The lower line shows the traditional learning curve of an employee trained and developed in the organization. The upper line shows the learning curve for the individual recruited through a quick acquisition process where they are fully competent to perform the task. The shaded part of the curve shows the payoff in the first six to twelve months. Even if the recruit does not become a long-tenure employee, there is still a significant short-term payoff to the firm. This approach also avoids the disruptions and lag times in traditional education and development roles. For example, firms using the opposite strategy may employ MBA graduates direct from the university and then require their participation in a one- or two-year development program to prepare them for their assignments. Not only does this represent a tremendous expense, but there is also disruption and delay in the process of on-boarding talent.
Because of the high cost of attracting and retaining employees, particularly in cyclical industries, some firms resort to employing contract workers. This practice is based on the belief that the ups and downs of the employment cycle can create an unnecessary expense to acquire and remove employees. Table 1-2 shows all the cost categories related to turnover. In recent years, the departing costs have become significant, as employers spend large amounts on severance packages and services to enable employees to find other jobs. Coupled with the high cost of attracting and developing employees, these costs lead some organizations to conclude that a highly capable contract employee is the best option.
Table 1-2. Turnover cost categories.
Orientation/Training Costs |
|---|
Pre-employment training
|
Orientation program
|
Initial training
|
Formal on-the-job training
|
Departure/Exit Costs Exit interview costs Administration time Management time Benefits termination/continuation Pay continuation/severance Unemployment tax Legal expenses (if applicable) Outplacement (if applicable) |
Replacement Costs Recruitment/advertising Recruitment expenses Recruitment fees Sign-up bonuses Selection interviews Testing/pre-employment examinations Travel expenses Moving expenses Administrative time (not covered above) Management time (not covered above) |
Consequences of Turnover Work disruption Lost productivity (or replacement costs) Quality problems Customer dissatisfaction Management time Loss of expertise/knowledge |
An organization’s volatility is often a primary impetus for its decision to employ temporary and contract workers. When an organization’s performance is in question, shareholders, customers, suppliers, and employees share the risk. Employees also recognize that volatility in the business means variability in their jobs and pay, as shown in figure 1-4.
Source: Adapted from Nalbantian, et al., Plan to Your Strengths (New York: McGraw-Hill, 2004).
Figure 1-4. Risk and its consequences.
Many organizations manage performance fluctuations by reducing the number of employees, often through a “last-in, first-out” process, which is frequently used by unionized organizations. This leaves the most senior employees, but not necessarily the most productive employees, on the payroll.[8]
To avoid lowering employee morale by placing pay and jobs at risk and to prevent a loss of productivity, temporary and contract workers are hired.
Temporary employment is not limited to lower-level clerical, technical, or professional employees. Executives find opportunities in the temporary help arena. The largest poultry producer in the western United States found itself in need of technical expertise. Foster Farms, a 10,000-employee, privately held company headquartered in Livingston, California, had been plagued with technical problems while attempting for four years to convert its supply chain into an integrated $28 million SAP/ERP platform. Specialists contracted to implement the system charged the company $800,000 a month; as the problems mounted month after month, so did the bills. Instead of hiring a consultant or initiating a search for a technically skilled permanent CIO, Foster Farms chose a different model. It sought an experienced corporate leader with strong technical expertise and a flair for steering troubled companies back on course, a chief willing to come in-house, but only for as long as it took to get the job done. What Foster Farms wanted was a temporary executive. The company hired a seasoned CIO executive who had served at the corporate level for more than twenty years at companies such as True Value Hardware and The Stride Rite Corporation.[9]
A temporary person with the appropriate skills starts out with a clean slate and can be more efficient than those workers with a history at the company. When a company is in urgent need for skills, the person who steps in should be someone from outside rather than a reassigned in-house employee. Otherwise, jealousy and infighting can thwart any progress. Another practical reason for bringing in a person from the outside is that often the skills required for a rapid transformational change simply do not exist within the organization.
Several tactics are important for success with this approach. First, it is important for the organization to secure great sources and work with them on a routine basis so that the best possible contract employees can be obtained. This relationship needs to be developed and nurtured. There are many sources for contract employees. For administrative and clerical employees, a variety of temporary services can provide quality employees, often at reasonable rates, to staff certain functions. In some professional areas such as accounting, engineering, and IT, professional agencies are available that specialize in a particular profession. Other agencies are also industry specific. For example, Lockheed-Martin, a leader in the aerospace industry, hires contract service employees for a variety of jobs through professional firms. These firms usually follow major government contracts from one company to another and offer contract services. Another alternative is to utilize leasing companies, which provide temporary employment. These companies become the employer and lease the employees to the organization. This concept is usually implemented in smaller companies that attempt to avoid the administrative and legal costs associated with maintaining employees.
Second, organizations should make contract employees as much a part of the team as possible. This helps create a cohesive unit as the contract employees interact with the permanent staff. Leaving contract employees out of key meetings, isolating them from permanent staff, and treating them differently will usually destroy the opportunity for teamwork.
A third consideration for success with temporary employees is to have them establish a clear set of goals at the beginning of their assignment. Without concrete deliverables, such as increasing performance by a specific percentage in a set period, temps can find themselves spending valuable time struggling to gain support for their ideas rather than just working to implement them. Still, experts say that even with industry expertise, fresh eyes, and clear goals, the early days of a temporary assignment can prove trying. Success is contingent on blending immediately, and contract employees must be perceptive enough to sense potential interpersonal trouble spots and deal with them quickly and smoothly.
Finally, organizations must show the cost versus the benefits of contract employees. Some employees (and managers) question the use of contract and temporary employees. They may think there is a sinister motive to eliminate jobs. Executives should show that hiring temporary staff enables the organization to maintain a stable, permanent group of employees, providing stability to the workforce and saving the company money.
This approach has several disadvantages. It is an approach chosen by some organizations while they are trying to develop a more stable workforce to ensure short-term financial success. However, relying heavily on contract employees can generate morale problems, as the permanent employees feel that the best way to receive more compensation is to separate from the organization and be employed as a contract worker.
To better appreciate the kinds of problems that result when companies focus on temporary employment, consider the story of a healthcare provider referred to here as HealthCo.[10] HealthCo was struggling to reduce its costs as were other companies in the healthcare industry; insurance and government payouts were reducing reimbursements. The only way HealthCo could maintain profitability was to maintain their level of spending in some areas and cut spending in others. One of the cost-reduction options explored was to reduce its employee outlays—a major segment of its total cost structure—by focusing on the way it staffed its facilities, especially with regard to the use of part-time employees, to the amount of overtime worked, and to the managerial head count. After some deliberation, HealthCo decided to reduce overtime, to reduce the number of managers in its facilities, and to replace many full-time employees with temporary, part-time workers who cost less per hour in base wages and received fewer or no benefits.
The decision to rely on temporary, part-time employees appeared to give HealthCo both greater flexibility and lower costs. The schedules of temporary workers could be shifted with rising and falling patient censuses, and the pay and benefits of the temporary employees would be measurably less than those of their full-time counterparts.
Unfortunately, the company understood only half the equation. While it recognized its reduction in wage costs, HealthCo had data representing the contribution its staffing decisions had had on the organization. With the help of Mercer Consulting, it found that excessive use of temporary, part-time employees had actually hurt HealthCo’s overall productivity.
The use of temporary and contract workers often generates an “us and them” mentality that diminishes team spirit. Contract employees are sometimes excluded from certain projects and issues, inhibiting the collaboration often needed. Organizational loyalty is seldom displayed by contract workers when compared to their permanent counterparts. Contract workers realize they can be replaced at any time; subsequently, there is no solid connection to the organization.
Finally, the accountability and commitment needed in the workforce may not be there with contract employees. Contract workers may feel that they do not have to perform—and certainly may not perform at the level necessary for top-notch organizations.
Cost containment and stability are the huge payoffs of using temporary and contract workers. The primary advantage is cost control, enabling organizations to lower recruiting and departure costs of employees. In some cases, the total compensation costs may be reduced because contract employees often have a smaller benefits package. Another advantage is that contract employees allow organizations to manage the ups and downs caused by the cyclical nature of an industry, the economic variations, or the seasonal fluctuations. This provides stability for the permanent workforce, with contract workers coming and going as needed. Another advantage is the skill and expertise of some contract employees. Contract employees may be able to complete tasks or assignments that regular employees cannot accomplish. Finally, using contract workers can help circumvent some of the costs of benefits and compliance. Regulations aimed at providing benefit structures for employees who are terminated often apply to employees and not contract workers, although the lines are becoming blurred.
Recognizing the high cost of maintaining employees, particularly on a long-term basis, some organizations have resorted to outsourcing to keep their employee head count to a minimum. This approach essentially creates a small number of employees and a tremendous network of subcontractors providing services that regular employees provide in other firms or that regular employees previously performed. Outsourcing usually costs less and sometimes brings in much needed expertise and specialization.
When a company wants to ferret out costs and promote innovative management, all parts of the enterprise are fair game. Targets for outsourcing should be carefully selected and usually involve three general areas. As shown in figure 1-5, the first area is the nonessential activities, which are the easiest to outsource with little risk. Ideal targets are functions such as security, maintenance, cafeteria services, and facilities management. These can often be contracted for a much lower cost than when maintained as permanent functions of the organization. This approach is a “no-brainer” for many organizations.
Table 1-5. Outsourcing areas.
Functions | Difficulty | Costs | Risk |
|---|---|---|---|
Nonessential | Easy | Low | Low |
Essential, non-core | Moderate | Moderate | Moderate |
Core | Difficult | High | High |
The next group represents the non-core but essential parts of the organization and includes functions such as information technology, payroll, learning and development, and a variety of administrative support functions. Although more expensive than nonessential functions, these services can usually be outsourced at lower costs as well. There are many success stories for this type of outsourcing. One of the most significant is the outsourcing of payroll. In the last two decades, huge payroll processing firms have been developed to provide these services more efficiently and effectively than can be operated in-house.
The last group represents core processes. Sometimes, outsourcing core strategies follows the basic strategy of the organization. For example, consider Dell Computer. Dell manufactures nothing; it purchases parts from an array of suppliers, assembles them into computers, and sells them direct to consumers. To do this, it is wired into its suppliers and customers to the extent that it does not order a part until the equipment into which the part will be integrated is already sold.[11] Dell’s basic strategy is not to be in the business of making parts. Outsourcing can go even beyond this, however, to almost every part of the business. This is true with Nike, where the company makes nothing and has outsourced even the marketing function. Thus, the company keeps both its head count and its employee human capital investment low.
Beyond the question of what is core, many companies are simply asking themselves which of their processes are location-independent and which locations would be best for those processes. HSBC, for instance, carries out credit card and loan processing from India; Allstate Corporation and Prudential Property & Casualty Insurance Company have application designers and call center personnel working out of Ireland. Lost your luggage? Delta Airlines’ India-based call-center staff will help you find it.
When companies decide on their outsourcing strategy, including the basis of core competencies and optimal location, the question of optimal governance of these processes arises. For some companies, it is attractive to contract with local service providers in India, Ireland, Malaysia, and elsewhere. British Petroleum, for example, has relationships in different parts of the world to take advantage of the competition among the service providers. The main advantages of this approach are flexibility and scale of operations. But this flexibility creates the need for investments in relationship management. (BP, for instance, has developed a set of Web-enabled tools for effective governance, including performance dashboards and stakeholder maps for managing relationships.)
Even the human resources function is subjected to outsourcing. The 1999 decision by BP to outsource HR administration to the startup Exult Inc. was a bold move that has triggered growth in the number of full-service human resources outsourcers (HROs). Others companies building positions as full-service HROs include companies well-known in IT outsourcing, such as Accenture, and established HR consultants, such as Hewitt Associates Inc. and Fidelity Investments. The “soup-to-nuts” HROs handle HR-process design and provide a full range of HR administrative services—payroll and benefits management, compensation, planning, recruiting, training of administrators, and management relocations. By offering integrated services, these HROs avoid the difficulties of coordinating and managing multiple vendors. Similar to IT outsourcers, the HROs have a level of expertise and a scale of operations that allow them to achieve efficiencies and service levels their customers cannot match.[12]
Four important issues are essential for successful outsourcing. The first is to identify the appropriate targets for outsourcing, carefully analyzing the difficulty, cost, and risks, and consider the short-term as well as the long-term consequences. Selecting the wrong function or underestimating the cost, difficulty, and risks can be disastrous.
The second issue is to outsource for multiple reasons, not just to lower employee costs. Effective outsourcing can bring a variety of improvements, ranging from an increase in services to adding capability that does not currently exist in the organization. Outsourcing solely to avoid employment costs may not be viable in the long term.
Third, organizations should plan implementation carefully to enable a smooth transition. Planning the assignments, preparing the team, communicating regularly, and following through on action items will enable an effective implementation. Ineffective implementation can destroy the advantages of outsourcing. Many outsourcing projects fail because of implementation miscues.
Fourth, organizations should develop an appropriate measurement system to monitor the success of outsourcing with a long-view perspective. When the measures indicate a problem, corrective action can be taken. Measures should reflect the short and long term and include productivity, quality, time savings/efficiencies, costs, employee satisfaction, and customer satisfaction.
This outsourcing approach comes with several disadvantages. While there may be lower costs in the short term, sometimes outsourcing results in problems in the long term. Service delivery, morale, bottlenecks, and inconveniences sometimes are generated through malfunctioning outsourcing arrangements. While the initial advantages look good on paper, the long-term realities can be disastrous. The services provided by the outsource supplier may not be at the same level as that achieved by in-house employees. The outsource supplier may not have the interest of the organization in mind at all times and may not be committed to provide the quality of service for which the organization is known. Finally, there is less control with outsourcing. Even though service-delivery agreements are in place, the employer may lack control over the outsourced supplier and be unable to take corrective action quickly.
The principal advantage to outsourcing is cost savings. Employers using this strategy report reduction in the overall employment cost compared to what they would have incurred had they staffed the function themselves. Sometimes these firms have developed cumbersome bureaucracies that are difficult to manage. Not only are direct employee costs lowered, but the number of employees can often be reduced through an outsourcing arrangement, adding to the employee cost-saving advantage. Another important advantage is that there are fewer employee problems and issues to address. Employee concerns can demand a tremendous amount of time, even at executive levels. Providing the support and processes necessary to effectively address these concerns is beyond what some companies are willing to invest. Most of this can be completely avoided with the outsourcing arrangement. Some companies outsource to avoid restrictive work rules inherent in unionization. Outsourcing also can provide increased productivity or the same levels of productivity with fewer employees. Finally, outsourcing provides executives the focus they need to drive the critical parts of the operation. It allows them time to concentrate on more important issues and processes.
This chapter explored a human capital investment strategy that is often considered dysfunctional—“let others do it.” While there may be a short-term benefit where survival is an issue, many firms are successfully using the approaches described here to keep their business viable even on a long-term basis. Hiring fully competent employees, using contract or temporary employees, or outsourcing major parts of the organization are the three basic approaches explored in this chapter. These three approaches represent serious alternatives to minimize human capital investment and ensure that it is not excessive or beyond what the organization can afford. The advantages and disadvantages of each were discussed, leaving possibilities for almost every firm.