The Importance of Outsourcing: The New Paradigm in Human Resource Management
Introduction Human Resource Management
With the advent of the Internet and increasing use of technology, organizations have been better able to communicate, implement, research, and embark on strategic changes in “real time” experiences. This has lead to global changes in how a business conducts their strategy to remain competitive. Outsourcing has become a major factor in this desire to have a competitive advantage over their competition. Outsourcing has been done in manufacturing of goods, provision or services and exchange of ideas primarily to reduce operating cost. One way in which organizations accomplish this cost reduction feature is by outsourcing some of its management functions especially in marketing, logistics, human resources and accounting (http://www.wisegeek.com). These features not only save money in salaries and wages but also decrease other fiduciary responsibilities of the business.
Benefits of Outsourcing
As addressed previously, future business engagement on a business to business basis (B2B) are no longer bound by restrictive forces of time, geography, culture and regulations. Businesses now have the option of outsourcing to some of its primary functions to virtual organizations as a part of its cost cutting initiatives. Wages and benefits in some industries continue to rise and is a main factor in determining production cost. High-payroll inputs have the possibility of creating a negative impact on a company’s ‘bottom line”. It is estimated that outsourcing in the 21st century will be a fast growing trend in wage and labor cost management systems (Appleyard, Field and Cobb, 2006).
During periods of growth an organization quite possible can have conflicts in allocated space in their business environment. Often times, back-office operations, will be crowded out by the front office requirements which might necessitate the need of additional floor space, this requirement can possible be a temporal and needs based requirements of addition facilities, and requirement will increase cost of labor. Outsourcing these functions has the potential of not only reducing expansion cost, but also exponential benefits in increased available capital.
Outsourcing allows corporate entities to examine and consolidate employee wages and benefits into outsourcing packages, which removes, the need for the company to focus on employee issues. Companies can now use this energy in focusing on other organizational task. Employers are able to remove the cost of providing staff benefits such as healthcare, training, maternity/paternity leave, sick leave etc. These costs usually have a contributory input by both employee and employer. The removal of the cost of employers input has the potential of freeing up capital and other resources which can be utilized in areas of research and development and strategic planning (Mentzer, Myers, and Stank, 2007).
Amado (2011) in the article, “How Does Human Resource Outsourcing Affect the U.S. Economy?”, states 85% of organizations which used outsourcing of its human resources produced cost savings, which equaled the amount spent and additionally 25% of those companies surveyed had doubled their saving (http://useconomy.about.com).
Management of Risk
Outsourcing of human resources removes risk directly associated with labor disputes. The removal of direct contact with this process and the ability to enter into contractual agreements with providers such as EinsteinHR, allows the organization to budget payroll cost. This process also allows for stability in the workforce. Additional organizations can source a pool of specialized employee, removing the need for training, and issues concerning employee retention. Employees provided by outsourcing organizations also offer skill sets which might be required on an ad hoc basis. In fact, the organization only pays for the work performed and does not have to factor in employee down-times which occur during periods of low productivity.
Additional benefits in outsourcing labor and the use of labor pools are the removal of some if not all insurance liabilities in areas of workers’ compensation insurance as organizations would not be required to meet regulatory requirement. The onus of compliance would remain firmly with the source company and any potential risk would not impact on the organization.
Outsourcing offers to business entities possibilities of retrenching sectors of the organizations which are either nonproductive or cost deficient. Business operations can also benefit from the flexibility of assignment to employees. An example of this would be in areas where full time employment or skill appropriate employees are not readily available. This flexibility is important for companies who have outgrown their current market levels and require additional staff. Outsourcing also offers the opportunity to obtain the services of technical or highly specialized employees at a reduced cost. Normally some of these skills sets would be provided by consultants whose cost might make their services prohibitive (Buchi, 2011)
Outsourcing, as a human resource tool offers a new paradigm in the way business offers strategic response in the current global economy. Great strides have been taken in the expansion of outsourcing as an efficient tool in the management of human resource cost. The accrued benefits offer in this sector of business can possible lead to organizational growth and offer a strategic path to greater financial reward.
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