AN EXPLORATORY STUDY ON HUMAN RESOURCE …eprints.uthm.edu.my/9903/1/Choong_Pui_Ying.pdf · 3.2.1...

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PERPUSTAKAAN TUNKU TUN AMINAH

AN EXPLORATORY STUDY ON HUMAN RESOURCE OUTSOURCING

CHOONG PUI YING

A thesis submitted in

fulfilment of the requirement for the award of the

Degree of Master of Technology Management

Faculty of Technology Management and Business

Tun Hussein Onn Malaysia University

DECEMBER 2016

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DEDICATION

I would like to dedicate this research to my Savior, my Lord and my Inspiration,

Jesus Christ who gave me all the blessings in terms of finance and resources for my

research. I am glad because His grace is always sufficient for me. In addition, I

would also like to express my gratitude to my family members; especially my parents

and God’s family members who always encourage me throughout the progress of

fulfilling this research. It would have been an arduous task for me to accomplish this

research without all your support and encouragements.

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ACKNOWLEDGEMENT

With a sincere and deep gratitude to my supervisor, Dr Ng Kim Soon, I would like to

thank him for his patience and intellectual guidance in leading me throughout the

journey of completing my master’s degree. He motivates me to give my best in this

study. Moreover, I would also like to express my gratitude to several lecturers who

provided me with some constructive comments in regards to improving my research.

I wish to convey my appreciation to the Faculty of Technology Management

and Business for providing me with journals and theses from senior postgraduate

students. I also want to thank the office staff there who always helped me to prepare

the documents that I needed for the interview.

Besides this, I would like to express my thankfulness to my church members

who gave me encouragement and financial support during times of hardship which

allowed me to experience the goodness of this great family of God. My sister in

Christ, Peniel Ang is the one who gave me guidance in my study and even

brainstorm how to continue when my thesis reached the bottleneck. I would also like

to especially thank my shepherd, Calebie Tan, who proofread my thesis and gave me

full support in this journey.

I would also like to take this opportunity to thank my parents who always

encourage me and gave me financial support. I feel glad and find it hard to express

my thankfulness in words because all that they have done are very precious to me. I

would like to thank them for praying and always being listeners to my heartfelt

words. I thank them for their lives.

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ABSTRACT

Malaysia is a developing country with a competitive environment. Hence,

there is an in full potential to grow in the market. In the era of rapid economic

growth, HR department plays an important role in company. HR function

outsourcing is important as it helps companies to be more efficient and deemed to cut

cost. Outsourcing is defined as a delegation of non-core tasks by company to the

outsourcing company due to the substantial amount of time and resource required by

employee management. This research is aimed to explore current issue and challenge

of HR, factors affecting HRO and the benefits of HRO in manufacturing industries,

Malaysia. In this qualitative study, data were collected from six manufacturing

companies by using multiple case study method. Purposive sampling had been

chosen and semi-structured interview was used to collect the relevant data. In this

research, it was found that the HR decision for adopting HRO is to improve

manpower effectiveness, and not only to reduce cost, which is one of the most cited

reason in the previous studies. Manpower management is very important because it

can generate many benefits in many areas of the company, such as production and

administration are managed properly. The productivity of the operation and the

quality of the products are determined by the effectiveness of manpower

management through outsourcing. Outsourcing produces benefits in financial terms.

Therefore, if a company channels the resources to the right places and maximises

their function, it will help the company to achieve high returns with low cost in the

upcoming years. As for outsourcing training, once the company experienced the

transformation of the employees’ mindset, the positive mindset will then increase

their motivation at work.

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ABSTRAK

Malaysia ialah sebuah negara berdaya saing dan berpotensi tinggi untuk berkembang

di pasaran. Pada zaman yang ekonominya bertumbuh pesat, bahagian sumber

manusia memainkan peranan yang penting dalam sesebuah industri. Penyumberan

luar sumber manusia merupakan langkah strategik yang penting untuk membantu

industri menjadi lebih efisien dan mengurangkan kos. Penyumberan luar sumber

manusia didefinisikan sebagai pembahagian aktiviti-aktiviti yang bukan teras

daripada industri kepada syarikat yang penyumberan sumber manusia oleh kerana

kebanyakan kuantiti masa and sumber digunakan dalam permintaan pengurusan

pekerja. Tujuan kajian ini dijalankan adalah untuk meneroka isu-isu semasa dan

cabaran dalam sumber manusia, faktor penyumberan luar sumber manusia dan

kebaikan penyumberan luar sumber manusia dalam industri pengeluaran, Malaysia.

Dalam kajian kualitatif ini, data yang dikumpulkan daripada enam industri

pengeluaran dengan menggunakan kaedah kajian kes. Purposive sampling telah

dipilih dan temuduga struktur separa digunakan untuk mengumpulkan data yang

berkaitan. Dalam kajian ini, didapati bahawa tujuan penyumberan luar sumber

manusia dilakukan adalah untuk meningkatkan keberkesanan sumber manusia, dan

bukan sekadar mengurangkan kos yang merupakan salah satu sebab yang paling

banyak dipetik di dalam kajian-kajian yang lalu. Pengurusan tenaga kerja adalah

sangat penting kerana ia dapat menjana banyak manfaat dalam banyak bidang seperti

pengeluaran dan pentadbiran syarikat. Produktiviti operasi dan kualiti produk

ditentukan oleh keberkesanan pengurusan tenaga kerja melalui penyumberan luar

sumber manusia. Penyumberan luar sumber manusia menghasilkan manfaat dari segi

kewangan. Oleh itu, jika sesebuah syarikat menyalurkan sumber pada tempat yang

betul dan memaksimakan fungsi sumber syarikat, ia akan membantu syarikat tersebut

untuk mencapai pulangan yang tinggi dengan kos yang rendah pada tahun-tahun

akan datang. Bagi latihan penyumberan luar, apabila pekerja mengalami transformasi

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dari segi mindanya, pemikiran yang positif akan meningkatkan motivasi mereka di

tempat kerja.

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CONTENTS

TITLE i

DECLARATION ii

DEDICATION iii

ACKNOWLEDGEMENT iv

ABSTRACT v

ABSTRAK vi

CONTENTS viii

LIST OF TABLES xiv

LIST OF FIGURES xv

LIST OF APPENDICES xvi

CHAPTER 1 INTRODUCTION 1

1.1 Introduction 1

1.2 Background of Study 2

1.3 Problem Statement 3

1.4 Research Questions 4

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1.5 Aims of the Study 5

1.6 Objectives of Study 5

1.7 Significance of Study 5

1.8 Scope of Study 6

1.9 Organization of Thesis 6

1.10 Definition of Key Term 7

1.11 Summary of Chapter 8

CHAPTER 2 LITERATURE REVIEW 9

2.1 Introduction 9

2.2 HR Functions 9

2.3 The Current Issues and Challenges of HR 11

2.4 The Emerging Trend of HRO 12

2.5 Definition of HRO 13

2.6 Benefits of HRO 14

2.7 Theories of Framework 16

2.7.1 Labour Division Theory 16

2.7.2 Transactional Cost Theory 17

2.7.3 Core Competencies Theory 17

2.7.4 Relational Exchange Theory 18

2.7.5 Resource-Based Theory 19

2.7.6 Institutional Theory 21

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2.7.7 Summary of Theories of HRO 21

2.8 Factors of Affecting Decision to Adopt HRO 23

2.9 The Impact of HRO 25

2.9.1 Positive Impact 25

2.9.2 Negative Impact 29

2.10 Manufacturing Companies in Malaysia 32

CHAPTER 3 METHODOLOGY 33

3.1 Introduction 33

3.2 Research Design 33

3.2.1 Case Study 34

3.2.1.1 Defining a Case 35

3.2.1.2 Selecting One of Four Types of

Case Study Designs 35

3.3 Conceptual Framework 36

3.4 Process of Research 37

3.4.1 Issues and Problem Statement 38

3.4.2 Methodology 38

3.4.3 Data Collection 39

3.4.4 Data Analysis 39

3.4.5 Finding of the Research 40

3.5 Research Questions 40

3.6 Purposive Sampling 41

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3.7 Case Study Data Collection 42

3.7.1 Interview 42

3.7.1.1 Semi- Structure Interview 43

3.8 Case Study Protocol 43

3.9 Validity and Reliability 43

3.9.1 Member Checking 44

3.10 Conclusion 44

CHAPTER 4 DATA ANALYSIS 45

4.1 Introduction 45

4.2 Companies' Profile 45

4.3 Data Transcription 48

4.4 Data Analysis 49

4.4.1 Objective 1: To Identify the Existing

Outsourcing HR in the Electronic and

Automotive Companies 49

4.4.1.1 Summary 55

4.4.2 Objective 2: To Explore the Current Issues and

Challenges of HRO for Electronic and


4.4.3 Objective 3: To Explore the Factors of HRO

that Drive Existing HR Practices for Electronic

and Automotive Companies 61

4.4.3.1 Summary 66

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4.4.4 Objective 4: To Explore How Has HRO

Benefited Human Resource Management 67

4.5 Summary of Chapter 75

CHAPTER 5 DISCUSSION AND CONCLUSION 76

5.1 Introduction 76

5.2 Discussion 77

5.2.1 Research Objective 1: To Identify

The Existing Outsourcing HR in the

Electronic and Automotive Companies 77

5.2.2 Research objective 2: To Explore the Current

Issue and Challenge of HR for Electronic and


5.2.3 Research Objective 3: To Explore the

Factors of HRO to Drive Existing HR

Practices For Electronic and Automotive

Companies 79

5.2.4 Research Objective 4: To Explore how has

HRO Benefited Human Resource

Management 81

5.3 Limitation of Study 82

5.4 Implication of Research 82

5.4.1 Implication for Human Resource Practice 82

5.4.2 Implication for Future Research 83

5.5 Conclusion 84

REFERENCES 86

VITA 95

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APENDICES 96

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LIST OF TABLES

Table 2.1 Differences between core and non-core tasks 11

Table 2.2 Definition of HRO 14

Table 2.3 Summary of theories of HRO 21

Table 2.4 Negative Impact of HRO 31

Table 3.1 Sample size 42

Table 4.1 List of respondents 46

Table 4.2 Data coding of existing outsourcing HR in the electronic and

automotive companies 49

Table 4.3 Summary of existing outsourcing HR in the electronic and

automotive companies 55

Table 4.4 Data coding of current issue and challenge of for electronic

and automotive companies. 56

Table 4.5 Themes on current issues and challenges of HRO for

electronic and automotive companies 60

Table 4.6 Data coding of HRO factors to drive existing HR

practices for electronic and automotive companies 61

Table 4.7 Themes on factors of HRO for electronic and automotive

companies 66

Table 4.8 Data coding of how HRO benefited human resource

management 67

Table 4.9 Themes on benefits of HRO for existing HR management to the

electronic and automotive companies 74

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LIST OF FIGURES

Figure 1.1 Global Outsourcing Trend 2

Figure 2.1 Traditional HR Department 10

Figure 2.2 A practical Framework of The Resource-based Approach to

Strategy-Analysis 20

Figure 2.3 Effectiveness of HR 27

Figure 2.4 The Business Driven Objectives and HR Driven objectives 28

Figure 3.1 Types of Case Study Designs 36

Figure 3.2 Conceptual Framework OF HRO 37

Figure 3.3 Research Process Flow 38

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LIST OF APENDICES

Factors and benefits of Human Resource

Outsourcing Organization Performance

Questionnaire protocol 96

Company A Interview Transcript 118

Company B Interview Transcript 122

Company C Interview Transcript 124

Company D Interview Transcript 131

Company E Interview Transcript 136

Company F Interview Transcript 137

Result of Turnitin Report 138

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CHAPTER 1

INTRODUCTION

1.1 Introduction

Human resource outsourcing is a delegation of non-core tasks by the company to the

outsourcing company or service provider due to the inadequacy of time and resource.

According to Sriwongwanna (2009), outsourcing HR task is one of the ways to

improve the company’s efficiency. Outsourcing is a strategic tool that is being used

by companies in a competitive environment (Corbett, 2004). It can allow HR

administrative work to gain more strategic value (Hern & Burke, 2006), re-focus on

strategic activities, decentralize structure, mitigate bureaucratic load if HR

administration is centralised, and approach new ideas from external service providers

(Seth & Sethi, 2011). Cost reduction is not only the key driver to attract companies to

adopt outsourcing, it also opens an entry for company to access specific knowledge,

expertise and tools in Northern Europe, such as Sweden, Norway and the UK

(European Outsourcing Survey, 2013). Outsourcing is not only limited to the IT

sector (Singh, 2006), it encompasses business processes which are Information

Technology (IT), HR, manufacturing, management service, distribution and sales of

products or services, manufacturing of the final product or purchasing, ,product

design, engineering, and Research & Development (R&D) ( Halim et al., 2011).

Outsourcing is a widespread activity which has become a common and accepted

business practice (Bradac & Sirec, 2008). HRO has also increasingly become popular

among the organisations (Azhar & Shehzadi, 2013). The global market for HR

outsourcing is estimated to achieve US$53.9 billion by 2020, stimulated by the

growing need among enterprises to increase operational efficiency, reduce cost,

streamline operations and step up compliance management (Global company

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analysts, 2016). Figure 1.1 shows the trend of global outsourcing. It can be seen that

it has been a transformation process of the global outsourcing from the past until

recent years.

Figure 1.1: Global outsourcing trend (Mida, 2012)

1.2 Background of Study

Malaysia is considered as a developing country with a competitive environment

hence there is an enormous potential to grow in the market. In the era of rapid

economic growth, HR department plays an important role in a company. The

appearance of HR outsourcing in Malaysia is becoming a trend especially in the

manufacturing sector. According to Halim et al., (2011), many organisations realised

that outsourcing is important to expand the organisation operation by helping the

organisation to focus the strategy and planning on the core competencies. Malaysia is

also among the world’s top 20 trading nations, so the government’s emphasis on

HRM is focussed on the manufacturing sector (Halim & Che-Ha, 2011). Based on

the observation of SHRM (2008), HR is growing continuously and it is transforming

from an operational function to a more strategic function where results need to be

evaluated and cost controlled. The employees in the organisation play critical roles

that make outsourcing a vital strategy to deliver high-performing workforce (Brown,

2010). However, the study by Choi and Wan Ismail (2008) revealed that HR

Past

Value added Value added

and R&D

Global

outsourcing

Component

suppliers

Integrators and

assemblers

Solution

providers

Past Present Current transformation

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Professionals in the Malaysian manufacturing sector are still weak in certain roles

and lack of knowledge.

Shortage of skills and several other factors have driven organisations to adopt

new ways to effectively manage the human capital (Wiblen, Grant & Dery, 2010).

The improvement of the organisation’s performance is very critical nowadays in

order to increase the competitive level of the organisation. Competitiveness can be a

key driver of the economy (Productivity Report Malaysia, 2014). The organisation’s

HR and administrative activities are not obvious ways to boost manufacturing

productivity (Halim et al., 2011). As Corbett (2004) mentioned, there is no

organisation which can stay competitive longer if the organisation relies solely on

internal resources.

Outsourcing is one of the business tools that can help the company to perform

fully to their competencies in the business. Outsourcing is a technique to strengthen

organisation core competencies; therefore, company should identify the core activity

and main area of the respective company, so that can avoid spending resource in non-

core competencies (Corbett, 2004). The company can also reduce the need to hire

specialised staff and lower the operating expenses thereby cutting down the

processing time. Generally, organisations would outsource services such as catering,

cleaning, employee transportation and security to the third party because those

activities are the non-core activities which are considered non-core competencies that

would not affect the benefits of the organisation (Kamyabi, 2011). Through this

study, it is the researchers’ intention to bring out the latest HR issues in Malaysia and

the research questions are drawn out from the highlighted HR issues. This chapter

includes the background of the study, aim, significance, scope of study and

organisation of the thesis.

1.3 Problem statement

Based on the results of the APAC survey report, HRO is still in its embryonic stage

(Mandy, 2012). HR outsourcing as a competitive strategy in Malaysia is still quite

new and it contains tremendous potential benefits which are still not fully

comprehended (Ee, Halim & Ramayah, 2013). According to Delmotte & Sels (2008),

future research should be focused on the impact of HRO, because there are very few

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studies which investigate the impact of HRO on the organisation of the HR function

(Internal human resource customer satisfaction). Consistent with the research of

Halim & Che-Ha (2010), despite increasing HRO practice, the empirical

investigation in this area in Malaysia is still limited. Studies carried out in this area

encouraged future researchers to collect information in this area regardless of the size

of employees and the year of establishment in order to generate the scenario of the

small organisations. Even small companies that might not get noticed much in big

studies of outsourcing trends turn to outside services for help on such chores, such as

payroll, benefits administration, training and recruitment (Seth & Sethi, 2011). As

HR outsourcing development in Malaysia has not been intensively studied, managers

may still encounter a lack of information on how to select the right service providers

and how to manage the outsourcing relationship (Ee et al., 2013).

Manufacturing based firms face a variety of challenges as today’s business

market) is greatly competitive and aggressive if compared to 20 years ago. In other

words, technological expansion is happening from time to time, and around the

world (Hilman & Warokka, 2011). The change of industrialization strategy in

Malaysia toward building a nationally owned and controlled automotive industry in

the early 1980s is indicated by the Heavy Industrial Policy has indicated

(Govindaraju, 2011). The local automotive industries maintain relatively good

achivement in the year 2014 and 2015 (Malaysian Automotive Association, 2016).

Othman (2008) believed that Malaysian electrical and electronics companies make

up a strategically influential sector which plays important roles to the country’s

manufacturing productivity, exports and employment. Moreover, with increased

globalization and global competition, mergers and acquisitions, organizations in their

sector are facing increased challenges in their constant quest to extend new

knowledge and employee commitment, pursue innovation and creative scheme; and

manage change. Therefore, strategic deployment of their human resources is required

1.4 Research Questions

The research questions formulated for this research are as follow:

i) What is the existing outsourcing HR in the electronic and automotive

companies?

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ii) What are the issues and challenges of existing HR faced by electronic and

automotive companies?

iii) What are the factors that drive existing HR practices to adopt HRO in the

electronic and automotive companies?

iv) How has HRO benefited human resource management?

1.5 Aims of the study

This research aims at exploring current issues and challenges of HRO in

manufacturing companies. In this research, it also explores the factors that drive

existing HR practices to adopt HRO and to understand the benefits of HRO for

existing HR practices to the manufacturing companies.

1.6 Objectives of Study

The objectives of this research are

i) To identify the existing outsourcing HR in the electronic and automotive

companies.

ii) To explore the current issues and challenges of HRO for electronic and

automotive companies.

iii) To explore the factors of HRO that drive existing HR practices for electronic

and automotive companies.

iv) To explore how has HRO benefited human resource management.

1.7 Significance of Study

The outcome of research is expected to benefit future researchers by providing

knowledge for academic purposes. It identifies the factors and impacts of HRO

which can be a reference for manufacturing companies that are interested to adopt

HRO in their management.

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1.8 Scope of Study

The respondents of this research would cover the automotive and electronic

companies located within the state of Selangor, Malaysia. This research was

conducted in Selangor due to the fact that there are numerous manufacturing and

outsourcing companies in this state. National Automotive Policy (2014) was

implemented to initiate more investment prospects as the nation’s automotive

industrial direction is geared towards the manufacturing of energy-efficient vehicles.

Malaysia has been graded third largest automotive market after Indonesia and

Thailand in terms of total vehicle production and sales in year 2013. According to

MITI report (2014), the Electrical and electronic companies are Malaysia’s largest

manufacturing sub-sector in terms of GDP contribution. It is also one of the key

drivers of Malaysia’s exports and industrial growth. These companies have

developed a significant volume in the manufacturing of a wide range of

semiconductor devices, high-end consumer electronic goods and information and

communication technology products.

1.9 Organisation of Thesis

This thesis is organized into five chapters.

Chapter 1 includes an introduction, background of the study, problem

statement, research questions, objectives of study, significance of the study, scope of

the study, the organisation of the thesis and summary.

Chapter 2 presents the introduction, HR functions, the current issues and

challenges of HR, emerging trend of HRO, definition of HR management, definition

of HRO, and benefits of HRO. This chapter will also discuss the factors affecting HR

functions outsourcing; theories of the framework and the impact of the HR functions

outsourcing.

Chapter 3 describes the methodology used to carry out the research, such as

introduction of methodology; research design; process of research; purposive

sampling; case study data collection; case study protocol; validity and reliability; and

data analysis technique.

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Chapter 4 comprises of results and data analysis. Four parts of the interview

are analysed. Part A is regarding the description of the companies; Part B is about

exploration of the issues and challenges of existing HR faced by manufacturing

companies; Part C is about exploration of factors of HRO for manufacturing

companies; Part D is the exploration of the benefits of HRO for existing HR practice

to the manufacturing companies.

Chapter 5 consists of discussion from the data analysis. It examines the

analysed result with regards to the objective. Further discussion relating to the

current issues and challenges of HRO; factors of HRO; and the benefits of HRO for

existing HR practice to the manufacturing companies will be covered in this chapter.

Besides this, the limitations of this research and further recommendations are also

proposed. Finally, a conclusion of this research shall be made based on the research

questions and objectives.

1.10 Definition of Key Term

Human resource outsourcing : HRO is defined as delegation of non-core tasks by

outsourcer to the third party due to the lacking of

time, resources, skills and certain knowledge.

Human resource functions : Human resource functions are categorised into 2

groups, which are core and non-core task. The

purpose of HR function is to support HR with

business strategy.

Company performance : Company performance is the impact of HR functions

outsourcing, such as financial, service or product

quality and productivity.

Member checking : The process of member checking involves the

researcher who will pass the data to the respondents

in order to check the validity of the narrative account.

Chapter 5 this will also look into the second objective and third obejective which will identify how the physical and social environment of low cost housing in Batu Pahat relates to sustainability and identify any relationship

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1.11 Summary of Chapter

This chapter provides the background of the study. It covers the introduction of the

chapter, background of the study, the problem statement, the research questions,

objectives of the study, significance of the study, scope of the study, organisation of

the study and a summary of chapter. In this research, the current issues and

challenges of HR, factors of HRO, and benefits of adopting HRO are investigated.

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CHAPTER 2

LITERATURE REVIEW

2.1 Introduction

This chapter presents an overview of HR functions outsourcing. It reviews factors

affecting the company‟s decision and determines the challenges in adopting HRO.

The impacts of HR functions are examined from the performance of the automotive

& electronics companies. A summary of the main issues discussed and the findings

from the review of the literature are also presented here.

2.2 HR Functions

Based on Brown (2010), HR functions are being requested to support HR with

business strategy as organization desires to attract, attain and develop employees. HR

functions included core (for example HR planning and development) and non-core

tasks (for example: payroll and benefits administration) (Azhar et al., 2013). Some

tasks help HR functions to shape its investment or policies in order to sustain critical

core knowledge (Sparrow, 2013).

Figure 2.1 shows the cost and value of the HR tasks (administrative, service

development and strategy) in the traditional department. About 60% of time and

resources are committed to the administration, such as record-keeping and

paperwork; 30% of the time and resources are devoted to the service delivery, such

as development, training, compensation and management; 10% of time and resources

are spent on strategy-planning. However, the value of administration is relatively

lower than strategy planning though the cost of administration is much higher than

strategy-planning (Robert, 2005). Traditionally, HR functions are performed in-

house (Braun, Pull, Stormer & Thommes, 2011). However, many administrative

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works are presently outsourced to the outsourcing company with the intention of

releasing the potential of the HR team to be involved in a more strategic role (Brown,

2010; Sarwar et al., 2013).

10% 60%

30% 30%

60% 10%

Figure 2.1: The traditional HR department (Robert, 2005)

HR management is categorised into two groups which are functional and

strategic. These two groups of activities are designed to coordinate the HR of the

company. Functional HR is related to day-to-day tasks and the processes which have

to be completed every day in order to enable the organization‟s processes to run

smoothly.

Strategic HRM is a practice that incorporates vertically with business strategy

and horizontally with one another. The strategies define scheme associate to overall

organizational consideration, such as resourcing, learning and development, reward

and employee relations (Cania, 2014). The strategy of the HR must be aligned with

the organization‟s goal and future. Peoples are very important resources because this

is related to human capital which is related to structure, quality, culture, values and

commitment. The organization will gain benefits as long as the organization realizes

and recognises their employees‟ value because employees are valuable and capable.

Cost Value

Strategy

Service

development

Administration

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Strategic HR has a few characteristics namely (Ramona & Anca, 2013):

a. it has a business impact,

b. it has a broad impact on the organization‟s goal,

c. it focuses the organization future‟s needs; it has the potential to provide the

competitive advantage,

d. it has a direct impact for long-term impact on the organization‟s goal,

e. it has the potential to generate revenue.

Table 2.1 tabulates the difference between core and non-core tasks. Core

tasks are tasks that generate benefits for the company and non-core tasks are merely

involving the day by day administrative work.

Table 2.1: Differences between core and non-core tasks (Reilly & Wolfe, 2004)

Core Non-core

Skills specific to the company Generic skill requirements

Limited labour supply Minimal supply restriction

Hard to define task Well-defined but limited task

Activities which are well-integrated Job easily separated from other work

Easy to fund work Resource intensive (in financial terms)

Stable work demand Fluctuating work demand

Mature technology Subject to rapid technology change

2.3 The Current Issues and Challenges of HR

In the research of Salleh, Rosline & Ag. Budin (2015), Malaysian organizations

perhaps face several difficulties and challenges in managing human resources.

Organizations had a transformation in the 1970s from a producer of raw materials to

a developing multi-sector economy.

a. Massive absence of highly skilled workforce (Salleh et al., 2015)

The challenges that Malaysia is facing now would be a massive absence of highly

skilled workforce. Malaysians need to acquire relevant skills that can fulfil the

immediate needs of the industry.

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b. Lack of intellectual HR professionals (Abdullah, 2009)

The core and the focal challenge are the lack of intellectual HRD professionals in

manufacturing firms, causing employers to view HR training and development as a

secondary function to HRM and perhaps consider it as being less important. This

implication could lead to the ineffective implementation of HR training &

development activities and ambiguity and failure in effectively managing HR

training & development as a whole.

c. The ageing workforce and position (Abdullah, 2009)

The ageing workforce and their position within the company also pose a major

challenge in terms of developing older workers to become knowledge workers,

particularly with regards to their levels of education.

d. Lack of commitment in training (Abdullah, 2009)

Lack of commitment in training can be seen in organizations, from the top

management to shop floor employees. The top management and managerial level

employees are found to be uncooperative towards HR training and development,

whilst lower level employees lack the commitment to participate in training and

development activities.

2.4 The Emerging Trend of HRO

Outsourcing has appeared in the world since the early 1990s as a response to the

trend of globalisation (Chen, Pham and Yuan, 2013). The appearance of HRO in

Malaysia has become a phenomenon for the manufacturing sector, it is because

Malaysia has committed to international competitiveness in terms of trade and

investment (Halim et al., 2011).

HRO can bring about effectiveness to the company by allowing it to focus on

the core tasks of the business (Torrington, Hall and Taylor, 2008). Some researchers

found that outsourcing is a key trend that is shaping the future of HR (Adler, 2003)

as some other researchers realized that outsourcing is a more strategic decision and

should be built on the basis of supporting the business for expansion; generate

tangible benefits and leading cost reduction (Brown, 2010).

For the past decade, outsourcing was used for assisting the company to

refocus scarce resources on the core value activity, to change the perception of

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customer toward the company and reduce unnecessary cost (Halim et al., 2010).

Although this is not a new strategy in the HR field, some countries are still trying

until they find some value or benefit from the strategy. HRO is an effective approach

to enhance efficiency by gaining access to obtain the expert in HR area (Halim et al.,

2010).

There are two principles of HRO that take part in this tight economy. The

first principle is that outsourcing save direct expenses on HR functions that do not

bring financial benefit to the company such as payroll and recruitment. The second

principle is outsourcing can help the company to focus resources on its core business;

therefore, the resources can be used for generating benefits through developing the

quality of the product (CPEHR, 2015).

2.5 Definition of HRO

HRO is the process of transferring the element of HR tasks to the external

organizations. The activities that are outsourced include payroll, recruitment,

training, etc. Table 2.2 tabulated the definition of HRO by different authors.

According to Sriwongwanna (2009), outsourcing the HR tasks is one of the ways to

improve organization‟s efficiency. The outsourcing strategy can help the

organization to focus on core competencies without investing in the HR and

technology in the department. If the organization is unable to gather the resources for

its needs, it will cause the organization to be in an unstable condition (Roy & Dugal,

2005). Besides, the resources of organization will not necessary be drained because

outsourcing helps to allocate the resources in HR wisely. The organization will be

effective because it is able to meet the needs of the department or division in that

organization. Moreover, outsourcing can meet the demand of the organization,

achieve company goal, gain competitive advantage, increase access to advanced

technology and improve focus on the core task.

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Table 2.2: Definition of HRO

2.6 Benefits of HRO

Denisi and Griffin (2008) has shown that the purpose and benefit of outsourcing are

that the company is able to spend more money to attract better quality employees to

work within the company and convince the employees to work harder for the

company. An example of HR non-core task is employee‟s benefits which are non-

wage salary; its nature is not strategic and it does not bring apparent benefit to the

organization (Saba, 2010). Therefore, an organization should outsource this task to

the outsourcing organization since it is non-strategic. This can retain the employee‟s

commitment in the organization and at the same time, the organization will be able to

focus on value-added activities. Outsourcing is the trend of HR management in the

future (ADP, 2012). Some of the advantages are discussed below:

Author Year Definition

Reilly and Tamkin 1996 Tasks that are carried out in-house by a third party who

performs it on their behalf.

David Madison 2005 Researcher defined that the work done by the organization

other than their own company‟s full time employee but in the

modern setting, the reason of outsourcing is because the

organization may not do the job.

IDS 2000 Outsourcing is mean that the suppliers of services are involved

in the administrative and transactional task that across the HR

function with the purpose of cost-saving through cost control

through investment in technology.

Cicek and Ozer 2011 It is contracting out the whole part of HR functions to external

service provider. Their opinion is outsourcing the task rather

than performing in-house by transferring the entire non-core

task (HR functions) such as payroll and benefit administration.

Halim et al., 2011 Transfer of functions previously performed internally to an

external provider. It plays an important role as strategic tool to

the firm.

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a. Cost-saving and reducing the operational cost of organization

Cost reduction is one of the primary reasons for outsourcing though many

researchers disagree that cost reduction should be the only factor to be considered

while making outsourcing decision (Azhar et al., 2013). From the study carried out,

the results proved that outsourcing could save cost and avoid huge investment in

non-core tasks. According to the work carried out by Sriwongwanna (2009), HRO

can assist the organization to forecast HR budget so that they could estimate the

amount of HRO fees and it is easier to set the budget for the HR department.

Organization needs to utilise a lot of time, resources and energy for HR functions

such as looking for talents, interview, recruitment, training and examination. The

management cost will be reduced if the HR functions are outsourced to specialized

company (Guo, Liu, & Liu, 2008). However, the cost is no longer the sole driver of

outsourcing (Shelgren, 2004)

b. Release the organization to focus on core tasks

Outsourcing has a close relationship with core competency (Chen et al., 2013). It is

one of the methods that delegate the non-core work to the service providers. The

main advantage is not only cost-saving. On the other hand, productivity, flexibility

and innovation in the core competency of the organization will be increased (Elmuti,

2003). The organization is able to focus on their core tasks which are related to

upgrading the performance of organization such as planning, development and

others. Outsourcing could also reduce the workload of employees and make them

more effective, especially when the production operation is the key strength and core

task for the production factory. Thus, HRO releases the HR department of the

production factory from the non-core tasks and trifle jobs in order to achieve its main

goals which are to pay attention to core tasks, generate more profit, and focus on

market competency (Guo et al., 2008). It frees the internal HR staff to focus on

strategic activities that add more value than administrative work (Seth et al., 2011)

c. Improve quality of HR activity

Outsourcing can lead the organization to its best performance in the entire HR

process when the outsourcing company can deliver better value to the business and

employee, such as recruitment, training, compensation, talent-planning, and HR

administration (Brown, 2010). The increasing demand of HRO will bring a rapid

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growth of HR activity. It can also provide specialised service for HR departments

because professional service and consultation advice of HR activity are provided

(Guo et al., 2008). It enables decentralised structures that support higher rates of

innovation and flexibilities. It alleviates the bureaucratic burden of centralized HR

administration (Seth et al., 2011)

2.7 Theories of Framework

The theories below are applied to support the theoretical framework and it builds an

understanding of adopting HRO.

2.7.1 Labour Division Theory

HRO is the extension of the division of labour theory which is the specialisation of

workers in a specific task or certain function (Li & Li, 2010). For Adam Smith‟s

theory, the potential of labour division is in increasing the quality of production and

labour division is described as the dynamic tool to motivate the progress of the

economy. This is because the workers are very experienced and professional in

certain knowledge, therefore, they can very effectively do to the best in their field

and it will lead to economic growth. However, Adam Smith criticised that labour

division is a way that causes mental-mutilation. This is because the worker may

become bored, ignorant and limited in exploring more new knowledge due to their

long term repetitive work. In terms of the HR management function, the rise of the

so-called knowledge economy has had a major effect with a considerable

transformation from HR management as a bureaucratic „personnel management‟

operation to the development of separate HR management functions over the past

few decades (Chivu & Popescu, 2008). From this theory, it shows that HR

management is gradually following the trend which is able to retain highly skilled

staff. The service that HR can provide to the market is staffing agencies, training and

others. Labour division will be more efficient and it provides quality to achieve the

goal faster.

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2.7.2 Transactional Cost Theory

Transaction cost theory was founded by John R. Commons. It is not the exchange of

commodities but division and acquisition. However, as indicated by Ronald Coase

(1937), there are a number of transaction costs being performed in the market.

According to Coase, a good manager needs to take into account bureaucratic

costs of the outsourcer. When the transaction costs of monitoring another company

are lower than the bureaucratic costs of the company, outsourcer will consider

outsourcing the activity to the third party. According to the transaction cost theory,

company can cut down the internal transaction cost (overhead cost) rapidly through

outsourcing or allocating the HR function to the third party. It can achieve the

purpose of cost-saving and enable the in-house HR management to be more effective

and reduce burden. When the internal transaction cost is higher than the transaction

cost in the market, outsourcing is the choice to reduce the internal transaction cost

and to maintain the quality of in-house HR management. It is a pressing issue

because it does not only involve short term solution but also long-term strategy.

Besides, it may influence the overall organization performance. Therefore, it is not

merely a cost-saving decision but also a decision to maximise the value of the

company and reduce unnecessary problems that arise to hinder the growth of the

company.

2.7.3 Core Competencies Theory

The core competency is the factor which determines the survival and development of

the competitive advantage of a company. Theoretically, the company understands

that it should focus on the core business such as strategic planning, quality of

product, research and development activity of company. In core competencies

theory, the company will concentrate on core tasks such as planning, development

and production. There are three standards are further discussed in the core

competencies theory, which are (Xu, 2009)

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i. Acknowledged by the market and it can offer opportunities to approach

potential markets

ii. Offer customers with increasing special benefits. Core competency of the

firm has to produce value to the firm and increase customer‟s benefits

through decreasing cost

iii. Core competency must be difficult to duplicate as to support the competitive

advantage on the basis of core competency

Outsourcing is very closely related to core competencies theory because one

of the actions to build up core competencies in a company is to divest non-core

capabilities to release resources that can be used to develop core capabilities (Bain &

Company guide, 2015). Outsourcing is itself a relocation of the non-core activities to

the third party so that the company can focus more on the in-house core activities and

long-term planning (Halim et al., 2010). It is about transferring their non-core

activities to the external so that the internal (in-house) can more have more time,

resource and energy to plan long term goals and implement them.

The value chain of the primary activity shows that development of core

competency and every value chain can also generate value. Core competency assists

a company to achieve target quality as they focus on their core tasks. There are three

tests to determine a core competencies, which are (Hamel & Prahalad, 1990)

a. Provides potential enter to a wide and diverse market

b. Makes a contribution and it bring the benefit of products to the

customers.

c. A core competency is hard to be imitated by competitors. (same as

above)

2.7.4 Relational Exchange Theory

Relational exchange theory is viewing HRO from the perspective of relationship and

partnership. Past research has shown that it may neglect the relationship aspect

between vendors and client. It is not a separate issue from the transaction and

economic theory. The partnership plays a significant role in HRO because it

determines the success of outsourcing. However, many companies are facing

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challenges to building partnership in HR outsourcing (Halim et al., 2014). A

successful partnership can assist the client to express the details to vendors and help

in the coordination of the outsourcing work. A successful outsourcing requires both

party‟s cooperation and a good relationship.

2.7.5 Resource-Based Theory

The resource-based view is an economic tool that is employed for investigating

strategic practice and distribution of resources within the firm. In Penrose (1959), the

author explains that internal resources have significance influence on firm strategy.

Figure 2.2 is the practical framework of a resource-based approach to strategy

analysis and it involves 5 stages of strategy formulation.

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Figure 2.2: A practical framework for the resource-based approach to strategy -

analysis (Grant, 2001)

For Barney (1991), resources encompassed huge areas, such as assets,

capabilities, organizational process, firm attributes, information and knowledge.

Barney states that the competitive advantages of firms are drawn from its

heterogeneity. The heterogeneity is presumed as resource or strategies of firm and

the variety of resources affect the firm‟s decision to adopt different strategies to

allow some firms to gain competitive advantage. In the resource-based theory, the

HR tasks are outsourced when the task does not meet the criteria of deliverability and

durability of the HR task. Resource-based theory provides the perspective that the

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HR task should be considered for outsourcing when it brings advantages to the firm

(Woodall, Jackson, Newharm & Gurney, 2009).

2.7.6 Institutional Theory

The institutional theory concentrate on the relationship the organization with the

environmental factor, internal and external environment that influence firm‟s

decision (Lundgreen, 2013).

2.7.7 Summary of Theories of HRO

The table below shows a summary of the theories that are used in HRO and the

findings of the researches. Table 2.3 states the reason and outcome of using the

theory on HRO from 2004 to 2014.

Table 2.3: Summary of theories of HRO

Year Authors Theory Remark

2004

Gilley,

Greer &

Rasheed

Transaction cost,

resource-based view

Outsourcing enables the firm to focus on

specific and high value task. High value task

should not be outsourced.

2004

Reilly &

Wolfe

Core competencies,

transaction cost

economics

Atkinson and Meager (1986) proposed a

model that differentiating the core and non-

core tasks will affect the decision of

outsourcing for a company. According to

Williamson‟s theory (1975, 1985), the

company should seek the structure that

allows? most economic domination.

2007 Perunovic Core competencies,

transaction cost

economics,

relational view,

resource-based

The relational view, neoclassical economic

theory and core competencies theory will

influence the decision factors of outsourcing

relationship. The finding of research is that the

company should be focused on cost-based;

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view, agency theory,

knowledge-based

view, neo classical

economic theory,

social exchange

theory

then moves on to resource-based and core

competencies; the final stage is partnership

(relational view).

2009

Xu

Core competency,

transaction cost

The focus of outsourcing is not only cost

economic, but also a strategic decision. Core

competency has potential to develop and re-

inforce

2009

Woodall,

Jackson,

Newharm

and Gurney

Transaction cost,

and resource-based

view

The end results of HR outsourcing for the

future of organization HR functions are

therefore quite critical. This research revealed

that it was often difficult to reallocate the HR

staff that stay within the organization to higher

value-added work. This problem can be solved

by raising the HR budget.

2010

Halim et al.,

Transaction cost

economics, core

competency theory,

Resource-based

view

Transactional Cost Economics theory not

merely provide lower cost by channelling non-

core activities to third party, it also sharpen the

core competency value and emphasize

resource-based view.

2012

Tayauova

Transaction Cost

Theory, Resource-

based view, Core

competencies

Organization should fill in the gap in resources

and cost effectiveness to maintain an

inimitable products and competitive

advantage. (Original: Organizations will plug

gaps in resources and capabilities in the most

cost-effective manner

to maintain a distinctive product and its

competitive advantage)

2013

Samuel

Relational exchange

theory, resource-

Relational exchange theory will assure cost

effectiveness, quality and speed of production.

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2.8 Factors of Affecting Decision to Adopt HRO

A significant amount of resources is still focused on the non-core tasks (Halim et al.,

2010). The intention of the company to outsource HR administration is to release HR

staff from day-to-day administrative works and to focus on more strategic tasks

(Brown, 2010). Company should focus on goal-planning, customer satisfaction, core

competencies and decision-making in order to maximize the competencies of the

companies. The decision of outsourcing is made on the basis of service cost and

performance. If the outsourcing company is able to provide service of lower cost or

the cost is equal with the internal service, and the service provided from external

service is in higher return, it is worthwhile and therefore makes sense to outsource

this service to outsourcing company (Brown, 2010). From the finding of this

research, it proved that the relationship between HRO and service quality is stronger

when the outsourcing company provided complicated service. Therefore, the finding

proved that the quality of HR service will be elevated when obtained from external

instead of an in-house provider (Braun et al., 2011). From the literature review, it

concludes that there are five factors affecting the decision to adopt HRO.

a. Transaction cost

HR professionals have many titles and positions, so it may make people confused.

Besides this, the company needs to invest huge amount of money (Guo et al., 2008)

to support the department. Outsourcing is able to keep the task simple and effective

because company can outsource it to the professionals who are more expert in

handling since they are focused in this area. Cost is the key driver for an outsourcing

based, institutional-

based theory

2014

Halim, Ee,

Ramayah &

Ahmad

Transaction cost and

relational exchange

theory

Both of the theories provided insights into the

motivation for outsourcing. Both of the

theories are not separate issues but they are

related to each other.

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initiative. According to the transaction cost theory, transaction cost will arise at the

contracting (negotiating, and drafting) or implementation (operational and

establishment). The decision maker must measure and compare the cost related when

executing a transaction between their organisation (in-sourcing) and outsourcing.

The theory also suggests that the managers need to take production cost and

coordination cost (controlling cost, monitoring cost and managing transaction) into

consideration when arriving at the outsourcing decision. The researcher also shared

that information system (IS) service vendor lowers the transaction cost through

allocating the fixed cost to some greater end clients (Claver, Gonzalez, Gasco &

Llopis, 2002). This variable is a measurement of how outsourcing becomes a method

to reduce the operating cost in the organisation. By outsourcing the non-core tasks,

capital can be saved to further invest in the core business and gain revenue for the

organisation (Islam & Sobhani, 2008).

b. HR Strategy

HR strategy guides the process by which the company enhance the competitiveness

by maximising human capital (Snell, Shadur & Wright, 2000). Strategic business is

able to reposition through outsourcing (Craumer, 2002). They can create new

segments at a price below the current market and dominate the market when they

grow. They can produce higher returns compared to their competitors at a lower cost

through higher asset productivity. The research of Beaman (2004) shows that the

outcome of the HR functions outsourcing is not only in cost reduction but also in

quality improvement. Based on the research of Azhar et al., (2013), the drivers of

HRO are gaining specialized HR expertise, achieving flexibility, reducing risk and

improving access to advanced technology. HRO strategy can help the organisation to

specialise services from different expertise and to achieve benefit over their

competitors (Azhar et al., 2013).

c. Manpower

Weak employee organisational linkages often cause the phenomenon of turnover.

The issue of staff retention and job motivation have continued to plague

organisations in Malaysia (Chew, 2005). Organization will not able to sustain their

workers without proper human resource practices. Training and development are also

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