The current issue and full text archive of this journal is available at www.emeraldinsight.com/0048-3486.htm PR 38,3 Making the decision to outsource human resources 236 Business School, Oxford Brookes University, Oxford, UK Jean Woodall William Scott-Jackson Received 27 February 2007 Revised March 2007 Accepted 14 March 2008 Centre for Applied HR Research, Oxford Brookes University, Oxford, UK Timothy Newham Think Associates, Bristol, UK, and Melanie Gurney Erinaceous Group, Croydon, UK Abstract Purpose - The purpose of this paper is to explore and describe how the decision to outsource human resources was made by 12 large and five small organisations. Design/methodology/approach - Desk research and key informant interviews with senior HR staff who lead the decision to outsource human resources in a purposive sample of organisations identified through an initial search of the professional literature and nomination by an expert panel. Findings - The research identifies a number of drivers that lead organisations to consider outsourcing their HR. In large organisations cost considerations are dominant, but other factors arise out of the organisational history and context, and very often, senior managers from outside the HR function are very influential. For most organisations, paradoxically, the decision to outsource appears not to be made on the basis of a thorough analysis of costs, with consequences for the quality of HR service offered to line managers, and also for the career paths and skill sets required from HR staff. Research limitations/implications - This study focuses upon the perceptions and experiences of senior HR managers, but excludes the perceptions and experiences of all staff employed in the HR function. Also, while the use of a qualitative research design makes it possible to uncover the individual perceptions and motivations of the key informants in the sample, there are obvious limitations in respect of statistical generalisation. Practical implications - The findings relate mainly to the future shape of the HR function in organisations where HR activity is outsourced, with consequent implications for the skill sets and career paths for HR professionals. Originality/value - The views of HR directors and senior managers have provided a valuable insight into the strategic decision to outsource HR activity and will be of interest to those involved in the same field. Keywords Subcontracting, Human resource management, Outsourcing, United Kingdom Paper type Research paper Personnel Review Vol. 38 No. 3, 2009 pp. 236-252 q Emerald Group Publishing Limited 0048-3486 DOI 10.1108/00483480910943313 In addition to the thoughtful and constructive criticism provided by the anonymous reviewers, the authors would like to thank Professor Mark Saunders, Assistant Dean Business Research at Oxford Brookes University Business School, for his helpful feedback on earlier drafts of this paper. Introduction Research into the management of the human resource function within organisations is based upon the assumption that it is a unitary function, operating in a single workplace or in a uniform manner across multiple workplaces within the organisation. How human resources might be managed and delivered strategically in a multidivisional company has been considered elsewhere (Purcell and Ahlstrand, 2004), but the discussion has assumed that all aspects of HR activity were controlled and delivered in-house. However, it has become increasingly common for organisations to subcontract specific services, including human resource activities. This is evident from the findings of the 2004 UK Workplace Employment Relations Survey (WERS) which revealed that 86 per cent of all workplaces employing ten or more employees had arrangements for subcontracting some activity, including (in descending order of importance) building maintenance and cleaning, computing services, security, payroll, transport and training, temporary employment, printing, catering, and general recruitment (Kersley et al., 2006, pp. 105-107). So, a number of HR activities (such as payroll, training and recruitment) have for some time been delivered by other agencies and consultancies for a number of organisations. That the professional human resource activity for an organisation might also be controlled and delivered elsewhere has only recently been considered. This study seeks to explore the implications of this step change in arrangements to subcontract HR activity: HR outsourcing. It aims to identify the main drivers of the decision to outsource HRM, and to describe and analyse the outsourcing solutions adopted, and explore the implications for the management and delivery of HRM within 12 large and five small organisations drawn from a wide range of industries in the UK. A review of the existing literature on outsourcing will be followed by a consideration of the findings from an exploratory and descriptive study based upon desk research and interviews with a sample of HR directors and senior HR staff. The shift from HR subcontracting to outsourcing A significant finding of the WERS survey (Kersley et al., 2006, pp. 105-7) was that a similar proportion of public (86 per cent) and private (85 per cent) sector workplaces in the UK had subcontracted services, and that 19 per cent of these reported that such services had been carried out by employees of the workplace or organisation five years previously - that is, they had been outsourced. The main difference between the public and the private sectors was that the public sector was more likely to employ former employees as subcontractors (38 per cent) than private sector workplaces (13 per cent). So, subcontracting is extensive, and a significant growth appears to have occurred as a consequence of employees being transferred to the contractor, namely the outsourcing of staff. For the majority of organisations and the majority of employees affected, this relates to work in low skilled occupations such as building maintenance, cleaning and catering. So, we have evidence of a significant growth in outsourced employment in the UK. However, in addition to such low-skilled work, since the early 1990s large organisations, particularly in the USA and the UK, have begun to move from subcontracting to outsourcing various management functions (Kakabadse and Kakabadse, 2002). Starting initially with IT outsourcing, the practice has spread to include core business functions such as finance, marketing and human resources (Logan et al., 2004). Until recently, IT outsourcing (Lacity et al., 1995; Murray and The decision to outsource human resources 237 PR 38,3 238 Kotabe, 1999) received most attention. By contrast, HR outsourcing (Lever, 1997; Shaw and Fairhurst, 1997; Switser, 1997; Woodall and Gourlay, 2002; Dickman and Tyson, 2005; Kosnik et al., 2006), has only recently received attention, and has been approached from a variety of perspectives, including employee relations in outsourced call centres (Kessler et al., 1999; Kinnie et al., 2000; Purcell and Purcell, 1998) and the impact of inter-organisational contracting on employee relationships (Rubery et al., 2002, 2003; Grugulis et al., 2003; Benson, 1998; Logan et al., 2004, and, on trust, Gainey and Klaas, 2005). However, the definitions of outsourcing employed by such studies are often implicit, or where explicit, they are fairly elastic, stretching from the rather minimalist long-term subcontracting of HR service delivery to an external provider, to \"spin-off\" joint ventures or shared services, and finally a contract with a fully independent service organisation. More recently, the model of Business Process Outsourcing (Lacity et al., 2004) where the client organisation participates in a partnership with key suppliers to deliver \"back office\" services, adds further complication to any definition of outsourcing. Several authors have attempted to provide typologies of outsourcing (Adams, 1991; Elfring and Baven, 1994; Fitzgerald and Wilcocks, Reilly, 2000; Walton, 1999). Nonetheless, there is a lack of consensus on what is meant by \"outsourcing\" which can have implications for the validity of findings from the various surveys and case study analyses that form the basis of the research alluded to above. For the purpose of this research, we have taken the following definition: The delegation of one or more business processes to an external provider, who then owns, manages, and administers the selected processes based on defined and measurable performance metrics (Gartner, 1995). We have taken this definition of outsourcing because of its clarity, and because it distinguishes outsourcing from simple sub-contracting: the focus is upon \"process\" (rather than simple tasks) and upon pre-defined performance metrics. But even if we can arrive at such a simple definition, what actually happens in practice when a decision is taken to outsource human resource management? The justification for outsourcing HR - a review of the literature Superficially, it would seem that the most obvious reason for outsourcing would be to make cost savings. However, the \"make or buy\" decision at the heart of outsourcing is often quite complex. While short-term cost savings are usually seen as the major reason for outsourcing, recent research has shown that they are not the only one. A desire to achieve \"best practice\The current issue and full text archive of this journal is available at www.emeraldinsight.com/1401-338X.htm JHRCA 13,4 274 The influence of business strategy on the decision to outsource human resource activities A study of Malaysian manufacturing organisations Hasliza Abdul-Halim and Norbani Che-Ha Faculty of Business and Accountancy, University of Malaya, Kuala Lumpur, Malaysia, and Alan Geare Department of Management, University of Otago, Dunedin, New Zealand Abstract Purpose - This paper seeks to examine whether the decision to outsource human resource (HR) activities and the performance of the HR department are influenced by the particular business strategy espoused by the organisation. Four distinct strategies are considered: quality-based, proactive, breadth, and reactive. Design/methodology/approach - The data for the study were obtained from survey responses from 232 organisations, of which 113 were engaged in HR outsourcing. Findings - The findings suggest that there is a significant relationship between organisations with proactive strategies and the decision to outsource both traditional and transactional HR functions. Breadth strategies demonstrate a negative significant relationship with outsourcing of traditional functions. Outsourcing of both functions has a significant relationship with HR performance - traditional with a positive impact and transactional with a negative impact. Research limitations/implications - The paper focuses on the perceptions, knowledge and experience of senior HR managers. Therefore there are understandable limitations in respect of generalisation. In addition, the impact of HR outsourcing on the performance of the HR department focuses only on the reduction of the number of HR employees from the department. Practical implications - The results indicate that HR outsourcing has the potential to empower HR managers, allowing them to focus on strategic activities that add more value to their organisation. Also, the results show that HR reduces actual HR labour costs. Originality/value - The study applies to a very under-researched area. Keywords Human resource management, Outsourcing, Management strategy, Performance management Paper type Research paper Journal of Human Resource Costing & Accounting Vol. 13 No. 4, 2009 pp. 274-293 q Emerald Group Publishing Limited 1401-338X DOI 10.1108/14013381011010132 1. Introduction Contemporary emphasis on cost, quality, service, and speed has forced many organisations to scrutinise and restructure fundamental business processes. In this search for more efficient organizational designs, organisations resort to an array of approaches that include quality management, business process reengineering, rightsizing and downsizing. Almost invariably, however, there remains the potential for increased efficiency. In recent years, more organizations have attempted to achieve efficiency by transferring processes, together with the associated operational activities and responsibilities, to an outside service provider. This process of outsourcing allows management to refocus scarce resources on core business activities while improving customers' perceptions of quality and reducing the cost of outsourced functions (Marinaccio, 1994). By outsourcing, organizations strive to deploy their limited resources and significantly improve operations to function more effectively in a highly competitive, consumer-oriented market place (Lever, 1997; Insinga and Werle, 2000; Arbaugh, 2003). The trend towards outsourcing is widely practised in manufacturing operations (Wahrenburg et al., 2006), and indeed in some areas of business, outsourcing has been going on for some time. In fact, before the information technology revolution, many organisations in the US had already outsourced their manufacturing operations to countries such as Canada, Mexico and South America in order to reduce costs (Gilley et al., 2004). In contrast, the outsourcing of HR functions is a more recent development, but the practice is growing (Stewart, 1996; Jamrog et al., 1997). Despite the increase in HR outsourcing practices by organisations, research on the subject is not extensive (Leiblein et al., 2002) and research on the effect of HR outsourcing on performance is still at the seminal stage. Intuitively, an organisation will decide to outsource its HR function if the opportunity with an outside provider is there, and the perceived benefits of outsourcing exceed the perceived costs. In reality the situation is not so straightforward. Many organisations have no idea how much their HR services cost to deliver (Woodall et al., 2009), so clearly a cost-benefit analysis is beyond them. This paper is concerned with whether the particular business strategy adopted by the organisation is significantly related to the decision to outsource (Lepak et al., 2005). The issues on HR outsourcing are related to many of the broader \"make\" and \"buy\" issues addressed in transaction cost economics (TCE) (Williamson, 1996; Dickmann and Tyson, 2005). According to TCE, HR outsourcing may be viewed as relying on market contracting as a form of organisation structure as opposed to depending on organisational hierarchy. In such a way, TCE encourages the organisation to evaluate whether it is more efficient to provide a service in-house or to buy it from the market. Outsourcing is appropriate when the organisation achieves lower cost by transacting with external vendors rather than building the internal capacity for a service (Williamson, 1996). Another theory of significance to HR outsourcing is the resource-based view. This suggests that an organisation should focus on those activities that constitute the core competencies and outsource the more peripheral activities (Prahalad and Hamel, 1990; Quinn and Hilmer, 1994). This perspective helps to predict the relationship between strategic types and the decision to outsource HR functions. The reasoning here is that organisations with differentiation or quality based strategies, for instance, should sharpen their focus on activities generating competitive advantage by outsourcing non-core and peripheral activities with low added value (Cooke et al., 2005). By outsourcing these activities, an organisation can direct a greater level of resources to more proactive and strategic roles (Adler, 2003; Delmotte and Sels, 2008). Given that an organisation's strategic types will likely affect the costs and benefits associated with market contracting, this study employs both the TCE perspective and the resource-based view to develop hypotheses concerned with the relationship between business strategy and the outsourcing of HR functions. The paper continues with a discussion on the concept of HR outsourcing, business strategy, and HR performance, in the course of which a number of research hypotheses are formulated. Section three includes brief details of the method, sample and measures used in the study. The results are presented as section 4. The paper concludes with a Influence of business strategy 275 JHRCA 13,4 276 discussion of the findings of the study and their implications, together with some brief thoughts on limitations and future research. 2. Literature review While the growth in HR outsourcing over the last decades has been remarkable, its effects are still vague and inexplicable (Jiang and Qureshi, 2006). Even though practitioner publications demonstrate that HR outsourcing receives significant attention (Cooke et al., 2005), there are very few academic researchers to have examined how decisions on HR outsourcing are made and the impact of outsourcing on performance (Wahrenburg et al., 2006). 2.1 Outsourcing of HR functions HR outsourcing is the contracting out of parts or the whole of the functions of HR to external providers, rather than performing all the HR functions in-house (Adler, 2003; Patry et al., 1999). HR outsourcing ranges from simply transferring non-core activities such as payroll and benefits administration to external providers, to the outsourcing of recruitment, training and even HR strategic planning (Patry et al., 1999; Klaas et al., 1999). Ulrich (1996) suggests the impetus for this change is driven by the need for HR departments to play a much more strategic role. HR managers are expected to be more flexible, responsive, and efficient than personnel managers of old, and to contribute to the strategic decisions of their organisations. In response to this paradigm shift, many HR managers are turning to outsourcing as a way of meeting these demands (Cook, 1999; Lepak and Snell, 1998). However, there is considerable variation in organisational practice. Some organisations make little use whereas others make considerable use of HR outsourcing. Which HR functions are suitable for outsourcing and the degree to which organisations should embark on HR outsourcing remain contentious questions. A popular view is that organisations should keep their core activities in house, together with activities that are critical to organisations' competencies, and should outsource non-core activities to external providers (Barney, 1991; Hamel and Prahalad, 1994; Stroh and Treehuboff, 2003). Non-core activities are considered to have a lower impact on the overall performance of the organisation (Cooke et al., 2005). Clearly, the view as to which functions are core or non-core is subjective, and there is a lack of consistency as to which activities are core or non-core across organisations. Ulrich (1998) suggests that core functions are those that are transformational, creating unique value for employees, customers and investors. Non-core functions are transactional activities that are administrative and routine that can easily be replicated and duplicated. Carrig (1997) is more specific; he defines activities as transactional (benefits administration, record keeping), traditional (performance management, training and recruitment), and transformational (strategic planning, organisation development). While there may be consensus that organisations should perform core functions in-house and outsource those functions that are non-core to their organisations, what is considered core and non-core varies between organisations. Hence, the decision as to which HR functions should be outsourced is often driven by the organisation's business strategy (Miles and Snow, 1978; Lepak et al., 2005). 2.2 Business strategy Business strategy has been defined in many ways. Chandler (1962) considers it to refer to the determination of the basic long-term goals of the organisation, and the adoption of courses of action and the allocation of the resources necessary for executing these goals. Miles and Snow (1978) define strategy as the consistent pattern in the decisions that guide an organisation in competing in a given business. Similarly, Mintzberg (1990) defines business strategy as a set of decisions about the direction of an organisation. From these definitions, business strategy can be regarded as a continuous process of evaluation of the organisation's distinctive competencies and adaptation to the environment in which it operates. In trying to capture the dynamic definition of the term, business strategy in this study integrates the views of Miles and Snow (1978), Porter (1980), Schuler and Jackson (1987) and Miller (1987), and results in four distinct strategies. These are: (1) quality-based; (2) proactive; (3) breadth; and (4) reactive. An organisation that espouses a quality-based strategy attempts to produce and deliver products and services with the highest quality possible (Schuler and Jackson, 1987). If the organisation has a proactive strategy, it concentrates on innovation and the differentiation of its products through unique designs and features (Miles and Snow, 1978; Porter, 1980). This is in contrast to an organisation with a breadth strategy that focuses on many product lines with different bases of customers (Miller, 1987; Miles and Snow, 1978; Porter, 1980). Finally, an organisation with a reactive strategy strives to produce products and services more cheaply than competitors. It stresses efficient scale facilities, cost reduction, and minimisation of expenses of production, R&D, services, selling and advertising (Porter, 1980; Miles and Snow, 1978; Miller, 1987). It carries out little product innovation and differentiation. 2.3 Relationship between business strategy and HR outsourcing 2.3.1 Quality-based strategy and HR outsourcing. Organisations with a quality-based strategy should find it beneficial to outsource transactional HR functions such as payroll and benefits (Gilley and Rasheed, 2000), while keeping traditional HR functions such as recruitment and training (Schuler, 1989) in-house. In this way, they can enact policies and inculcate functions necessary to attract, train, and retain good candidates. Extensive in-house training including on the job training, job enlargement and job rotation, could be offered in order to obtain the highest quality outputs (Schuler, 1989). Giving priority to the quality of output, suggests the organisations wish to rely on internal employees who are knowledgeable of the specific conditions of their organisation. Outsourcing these traditional HR functions could indeed result in higher costs since these processes are based on tacit knowledge (Barney, 1991; Conner and Prahalad, 1996). Therefore, it is hypothesised that: H1a. An organisation with a quality-based strategy will have a higher reliance on outsourcing transactional functions. H1b. An organisation with a quality-based strategy will have a lower reliance on outsourcing traditional functions. Influence of business strategy 277 JHRCA 13,4 278 2.3.2 Proactive strategy and HR outsourcing. Organisations with proactive strategies are frequently innovators and the creators of change in their industries. They need flexibility and the ability to react rapidly to change. For these organisations, maximising flexibility and focusing on strategic practices are much more significant than monitoring day-to-day operations. In view of this, transactional HR functions that are of a routine, standardised, repetitive, and non-strategic nature are often outsourced. These functions include payroll, human resource information systems (HRIS) and benefits (Lever, 1997; Klaas et al., 2001; Stroh and Treehuboff, 2003). Barney (1991) emphasises that organisations with a distinctive and unique approach to managing their workforce would not want to outsource functions such as recruitment and training for fear that this would add costs in the form of upfront investments to enable outside suppliers to understand the particular requirements of the organisation. However, Miller (1987), points out that these organisations may be forced to outsource these functions in times of rapid changes in the market place - that is, when workloads become very unpredictable, dynamic and need frequent changes. Therefore, it is hypothesised that: H2a. An organisation with a proactive strategy will have a higher reliance on outsourcing transactional functions. H2b. An organisation with a proactive strategy will have a higher reliance on outsourcing traditional functions. 2.3.3 Breadth strategy and HR outsourcing. In organizations with a breadth strategy, the HR function is primarily that of handling administrative matters relating to recruitment and training. Although many researchers (e.g. Laabs, 1993; Gainey and Klaas, 2002; Adler, 2003; Gilley et al., 2004) are of the opinion that it is beneficial to outsource all training functions, organisations can capitalise on the advance of technology and expertise of external vendors, employees in a breadth strategy do not possess specialised skills since whatever skills they have are utilised to produce a wide variety of products. Almost by definition, on-the-job training is done in-house. As noted by Klaas et al. (1999), frequent modifications of contract provisions that arise from market-based governance mechanisms expose each party to higher costs and risk. Thus, to avoid unnecessary costs, it is better to perform these HR functions internally. Hence, it is hypothesised that: H3a. An organisation with a breadth strategy will have a lower reliance on outsourcing transactional functions. H3b. An organisation with a breadth strategy will have a lower reliance on outsourcing traditional functions. 2.3.4 Reactive strategy and HR outsourcing. Organisations with a reactive strategy will be more inclined to outsource all functions, both transactional and traditional. This is so because they aim at overall cost reduction, and in particular on repetitive, non-core, and non-strategic functions (Gupta and Gupta, 1992; Laabs, 1993; Kremic et al., 2006). They may use part-time employees, subcontractors, work simplification and measurement procedures, automation, work rule changes, and job assignment flexibility to increase productivity and efficiency (Cook, 1999). Also, since external providers will often focus on a limited set of HR functions, they frequently realise a significant degree of economies of scale. Hence, they may be able to deliver transactional functions as well as the organisation could do so internally (Marinaccio, 1994; Klaas et al., 2001, Stroh and Treehuboff, 2003; Gilley et al., 2004). The tendency to engage outside vendors on traditional functions such as training and recruitment increases with the perception that these functions have become more administrative, and organisations are able to shift the risk of technological obsolescence, skill obsolescence and updating onto the suppliers (Laabs, 1993; Cook, 1999). Moreover, cost savings that accrue from reductions in personnel and higher quality services from the service providers translate into higher value for the customers (Lever, 1997). Organisations with a reactive strategy stand to gain from production effectiveness and efficiency that result from the outsourcing of traditional HR functions (Lever, 1997; Stroh and Treehuboff, 2003). Therefore, it is hypothesised that: H4a. An organisation with a reactive strategy will have a higher reliance on outsourcing transactional functions. H4b. An organisation with a reactive strategy will have a higher reliance on outsourcing traditional functions. 2.4 HR performance Organisations outsource HR functions to increase HR performance. However, there is no general agreement to what is meant by \"HR performance\". Although Jamrog and Overholt (2004) posit that the measurement of HR performance would not be a problem to an organisation since there are many indicators - including employee morale, satisfaction and lower turnover - that could be used to measure HR performance, the fact that there numerous possible measures of HR means agreement among researchers will be unlikely. One simple measure of HR performance is a reduction in staff and general costs within the HR department. Some researchers of HR outsourcing indeed contend that cost reduction within the HR department is the most important measure of HR performance (e.g. Laabs, 1993; Marinaccio, 1994; Mishra et al., 1998). According to Shelgren (2004) and Herbertson (2000), the benefits of HR outsourcing include a greater focus on core business, improvement in service and improved HR performance measured by cost reduction within the HR department. This is consistent with Switser's (1997) opinion that among the potential benefits of HR outsourcing is a lower headcount within the HR department. Therefore, it is anticipated that outsourcing of HR functions will lead to improved HR performance, measured by a reduction in HR employees. It is hypothesised that: H5a. Higher reliance on outsourcing the transactional HR functions will have a positive impact on HR performance. H5b. Higher reliance on outsourcing the traditional HR functions will have a positive impact on HR performance. 3. Methodology 3.1 Data collection This study used a mail survey questionnaire to obtain data. The questionnaires were sent to the head of the HR department of Malaysian manufacturing organisations. The mailing list was obtained from the Federation of Malaysian Manufacturers (2005) Directory. The data for this paper were obtained from the senior HR manager in each operation on the grounds that, in the view of the researchers, they are the best placed to Influence of business strategy 279 JHRCA 13,4 280 provide comprehensive and informed views on the business and HR functions (Abdullah et al., 2007). Some researchers favour the targeting of senior managers as a matter of principle. Bolat and Yilmaz (2009) do so on the grounds that \"middle level managers [. . .] may only evaluate their own fields or departments\". Many other researchers do so for reasons primarily of cost, and Becker and Huselid (2006, p. 913) claim that \"the wisest use of scarce resources should be devoted to increasing overall response rates among well-crafted single-respondent surveys\". However, the authors acknowledge it would be a valuable improvement if future research collected data from multiple respondents. Edgar et al. (2008) have shown that the views of line managers differ from those of HR managers and research by Geare et al. (2009) shows that workforce views on HRM differ to those of managers. The survey yielded 232 useable responses from an eligible sample of 990 organisations, a response rate of 23.4 per cent. Othman et al. (2001) suggest that research surveys in Malaysia tend to get a response rate between 15 and 25 per cent, so this response is at the upper end. The questionnaire was 12 pages long and part of a much larger research project. It is included as an Appendix to this paper. 3.2 Measurement instruments The constructs of the study, which were adapted from established scales, were measured on a six-point semantic differential Likert-type scale. Thirty-two (32) questions were asked on the business strategy construct. Factor analysis (exploratory and confirmatory) was conducted to check on the validity and the reliability of the measurement scales. SPSS version 12 and AMOS 6 were used to analyse and test the hypotheses. The model fit was assesses using x 2/df, goodness-of-fit index (GFI) and the comparative fit index (CFI), Tucker-Lewis fit index (TLI) and root mean square of approximation (RMSEA). The threshold for x 2/df should be less than 3.0 and values of GFI, CFI and TLI should be over 0.90 and value for RMSEA should be less than 0.08 (Hair et al., 2006). From exploratory factor analysis, four factors of business strategy were produced with factor loadings from 0.445 to 0.828, and with KMO and Bartlett's test of 0.910 and 0.000, respectively. The four factors contributed 53.48 per cent to item variance. The Cronbach's a of each factor is as follows: (1) quality-based strategy, a 0:943; (2) proactive strategy, a 0:925; (3) breadth strategy, a 0:806; and (4) reactive strategy, a 0:600 (Nunnally, 1967). Table I shows the confirmatory factor analysis for business strategy of the study. To measure the level of outsourcing of HR functions, an open-ended question was employed that asked for the percentage of each HR function outsourced. The cost Variable Table I. Confirmatory factor analysis for business strategy Quality-based Proactive Breadth Reactive (x 2)/df p-value GFI TLI CFI RMSEA 1.614 1.507 1.304 1.099 0.048 0.040 0.253 0.348 0.941 0.929 0.992 0.985 0.978 0.965 0.989 0.987 0.986 0.978 0.996 0.993 0.074 0.067 0.052 0.030 saving element of HR performance was measured by the resulting reduction in the number of HR employees multiplied by the average salary. 4. Results 4.1 Profile of the respondents Of the 232 respondents, 48.7 per cent (113) claim that they engaged with outsourcing of HR functions and the rest indicate that they do not outsource any HR functions at all. Table II shows the profile of the 113 organisations that outsource HR functions. Influence of business strategy 281 4.2 Path analysis Figure 1 shows the model of the study, while Table III summarises the findings. Overall, the data of the study fit the model well. The results of the fit are as the following: x 2 7:020, p . 0:01, GFI 0:981, TLI 0:978, CFI 0:994 and RMSEA 0:039. The results from Table III show support only for H2a and H2b. These hypotheses indicate that a proactive strategy is positively associated with outsourcing transactional functions (p # 0:1) and traditional functions (p # 0:1). This indicates HR outsourced organisations Percentage Type of industry Food and beverages Textiles Wood products Chemical products Rubber and plastic products Metal products Machinery and equipment Electronics Radio, TV and communication Motor vehicles, trailers and semi-trailers 7.1 8.9 5.4 10.7 8.9 8.0 15.2 14.3 14.3 7.1 Total employees 150-300 employees 301-1,000 employees More than 1,000 employees 26.8 41.1 32.1 Total number of HR employees Less than five employees 5-20 employees More than 20 employees 29.5 46.4 24.1 Year established 1980 or earlier 1981-1990 1991 and later 36.6 34.8 28.6 Cost of HR employees Less than RM20,000 RM20,000-RM50,000 RM50,001-RM100,000 More than RM100,000 5.4 7.5 16.1 3.6 Table II. Profile of the organisations that outsourced HR functions JHRCA 13,4 282 that organisations with a proactive strategy tend to outsource payroll, HRIS and benefits functions. Proactive organisations outsource transactional HR functions to enable them to be more focused on strategic issues and concentrate on creating innovative and differentiated products that will positively impact organisational performance (Laabs, 1993). Moreover, proactive organisations tend to outsource traditional functions as well. These functions are outsourced because certain traditional functions such as training programs must be tailored to meet the unique requirements of the organisations. These programs require substantial investment to implement and the need for the service providers to understand the particular needs of the organisations. In addition, for organisations operating in dynamic and vigorous environments, performing traditional functions requires frequent change, since the needs of the organisations are unpredictable. By outsourcing traditional functions, the service providers are able to monitor the frequent modifications of the functions as well as to avoid significant amounts of investment costs (Stroh and Treehuboff, 2003). Figure 1. Model of the study Hypotheses H1a H1b H2a H2b H3a H3b H4a H4b H5a H5b Table III. Results of the hypotheses SE Quality-based ! lower reliance on transactional HR functions Quality-based ! higher reliance on traditional HR functions Proactive ! higher reliance on transactional HR functions Proactive ! higher reliance on traditional HR functions Breadth ! lower reliance on transactional HR functions Breadth ! lower reliance on traditional HR functions Reactive ! higher reliance on transactional HR functions Reactive ! lower reliance on traditional HR functions Transactional ! HR performance Traditional ! HR performance b Support No 0.090 20.114 0.109 20.083 No Yes 0.077 0.278 * * * * 0.093 0.165 * * * * 0.022 0.031 Yes No Yes 0.102 20.165 * * * * No 0.106 0.031 No 0.127 0.108 0.090 20.037 20.179 * * * 0.233 * * Yes Yes Notes: b values are the standardised regression weights; SE is standard error. Significance levels: *p , 0.001; * *p , 0:01; * * *p , 0:05; * * * *p , 0:1 The study also found that breadth strategy was significantly related to outsourcing traditional HR functions (p # 0:1), but in the opposite direction. This study speculates that organisations with a breadth strategy outsource a lower amount of HR functions because organisations with variety of products tend to have a large number of HR employees to cater for mass production. Outsourcing of traditional functions is positively associated with HR performance (p , 0:01), leading to support for H5b. This indicates that organisations can reduce the number of HR employees by outsourcing traditional functions. The results also show that outsourcing transactional functions had a significant relationship with HR performance (p # 0:05). However, the relationship was in the opposite direction to that predicted. This suggests that an organisation that outsources transactional HR functions does not have as its objective a reduction in the number of HR employees, but rather something else. Probably, its aim is to focus on core activities and outsource non-core activities and become more strategic (Belcourt, 2006) and also to concentrate on activities that contribute value and competitiveness to the organisations as a whole (Lever, 1997; Stroh and Treehuboff, 2003). 5. Discussion and implications This study has provided a useful step towards a better understanding of the rationale for HR outsourcing among manufacturing organisations in Malaysia. To date research that has studied the factors that predict the reliance on HR outsourcing has been very limited. Gilley and Rasheed (2000) have demonstrated different types of business strategy as the moderator between outsourcing and performance. They found several significant interactions with strategy to predict performance. Subsequently, this study has developed business strategy as an antecedent of HR outsourcing. A proactive strategy has a positive significant association with outsourcing both transactional and traditional HR functions. This shows that with a proactive strategy organisations outsource a higher level of transactional HR functions to enable them to be more focused on creating innovative and differentiated products that will positively impact on performance (Laabs, 1993). Additionally, by outsourcing traditional HR tasks, more time and resources can be released for more strategic HR contribution (Delmotte and Sels, 2008). Indeed by outsourcing traditional HR functions, external vendors are able to monitor the frequent modifications of the functions and at the same time the external vendors are able to offer traditional functions that better matches the organisation's business strategy (Stroh and Treehuboff, 2003). A breadth strategy has a negative and significant association with outsourcing traditional HR functions. This indicates that organisations that focus on mass production are likely to maintain large number of HR employees who oriented primarily toward performing training, recruitment and staffing functions as well as the implementation of predetermined systems of control (Heikkila and Cordon, 2002). The majority of employees will probably have narrowly defined, highly specialised jobs. However, the results show that neither a quality-based nor a reactive business strategy has a significant association with HR outsourcing. It is possible that organisations with a quality-based strategy are concerned that HR outsourcing might lead to a deterioration of their quality concept. This is because external vendors would not understand the culture of the organisation or may not possess skills and knowledge to perform the HR functions to the required quality level. Influence of business strategy 283 JHRCA 13,4 Empirical studies on the impact of HR outsourcing on the HR performance are only just starting to emerge (Bolat and Yilmaz, 2009). Although this study focuses on the impact of HR outsourcing on the cost saving resulting from the reduction of HR department employees, it makes a contribution towards understanding the effect of outsourcing on HR performance. 284 5.1 Implications A number of implications can be derived from this study. One is that HR outsourcing is a potential opportunity for organisations to empower their HR function. Outsourcing of transactional and traditional HR functions allows HR managers to focus on strategic activities that add more value, with the potential to make a proactive contribution to business success. A second is that HR managers should rethink the delivery of HR functions. There are alternative delivery mechanisms that remove the delivery of HR practices from the HR department (Lepak et al., 2005). HR outsourcing is not the only option, as there is also some evidence that a large number of HR functions can be shifted to line management (Larsen and Brewster, 2003). For HR managers it is important to scrutinise these alternatives delivery mechanism, to weigh their pros and cons and to select the mechanism that best matches the business strategy of their organisations. A further implication of the study relates to the impact of HR outsourcing on HR performance. While HR outsourcing is broadly considered to have benefits, its specific impact on performance and value has not yet been confirmed by research. This study attempts to provide an input on the impact of HR outsourcing on HR performance. This study also assists HR managers to understand the concept of HR outsourcing and under what conditions the HR outsourcing is most desired. Although a proactive business strategy is the only strategy that is a significant predictor of HR outsourcing, all organisations tend to experience better HR performance by outsourcing HR functions. In short, this study has made important contributions both to managers and to researchers by filling gaps in the area of HR outsourcing research. It specifically contributes in terms of the inter-relationship between business strategy, HR outsourcing strategy and HR performance. 5.2 Limitations The first limitation of this paper is over-reliance on one data source, in which the respondents are the senior HR managers. Although a full consideration of the perceptions of multiple respondents within these organisations has not been possible through this research, the views of senior HR managers have given a valuable insight into the strategic decision to outsource HR functions. Nevertheless, future studies should include the data from other respondents such as line managers and other HR workers. In addition, the respondents of this study are from manufacturing organisations, thus generalising the findings to other industries may be difficult. Therefore, it would be interesting to extend the research to the service industry for example, in order to get more generalised findings. Moreover, although this study has measured the performance of HR department from the reduction of HR employees as the indicator, it may appropriate to include other relevant measures such as turnover rate, absenteeism, employee morale and other HR effectiveness measures. Finally, it may also be useful in future research to examine other variables such as organisational characteristics and environmental factors that could relate to the decision to undertake HR outsourcing. References Abdullah, H., Che-Ros, R. and Kumar, N. (2007), \"Human resource development practices in Malaysia: a case of manufacturing industries\