Consistent with the trend toward outsourcing, many HR functions and programs are now being referred to outside vendors. Many recent surveys indicate that over 90% of all firms today outsource some aspect of HR. Many of the tasks historically outsourced by HR are either administrative or transactional.
However, today there is a growing trend toward outsourcing HR functions of a more strategic nature as well. This shift in paradigm raises its own set of unique questions about how this practice might serve to the advantage and/or disadvantage of an organization.
For this reason, Klaas and Gainey, has conducted research that focused exclusively on the outsourcing of training and development. Below are the highlights of their study.
Purpose of Study
Firms are increasing the use of outside vendors to meet their training and development needs. However, the strategic importance of certain training and development programs can introduce unexpected and unique challenges for organizations outsourcing this important function. To better understand the effects of outsourcing in this strategic area, the authors used three methods of analysis to identify factors thought to impact client satisfaction with external training vendors: transaction cost economics (TCE), social exchange theory and the resource-based view.
Methods of Analysis
Transaction cost economics (TCE): When firms outsource an activity, they are relying on “market governance” to protect their business interests. However, due to the difficulty involved with defining a deliverable between a client and a vendor that is explicit enough to guarantee a high level of client satisfaction, this alternative makes the client vulnerable to opportunism by the vendor. When opportunistic behavior occurs, the client perceives that the psychological contract between vendor and client has been breached, and client satisfaction suffers as a result.
Social exchange theory: All relationships have give and take, although the balance of this exchange is not always equal. Social exchange explains how we feel about a relationship with another person or entity depending on our perception of the following factors: the balance between what we put into the relationship and what we get out of it; the kind of relationship we feel we deserve; and the chance of having a better relationship with another party. In deciding what is fair, we develop acomparison level against which we compare the give/take ratio. This level will vary between relationships, with some giving more than others, and will also vary greatly in what is given and received.
Resource-based view: Training and development programs that are tailored to meet the unique needs of a firm have the potential to cultivate and create resources that may allow for sustainable competitive advantage. When training and development has the potential to create such resources, outsourcing these activities may well increase the risk of imitation by competing firms. An important concern raised by the resource-based view is that the outsourcing of the training and development function may make it difficult to develop core competencies that lead to competitive advantage. This is because core competencies normally develop through a complex process requiring a high degree of social interaction (i.e., social capital) in a natural work setting.
- Respondents provided an interesting profile of the nature and extent of outsourcing in the training area. On average, firms indicated that they used outside suppliers for approximately 30% of their overall training needs and 26% of their training budget was spent on outside vendors. Additionally, 58% of the respondents noted that they used five or fewer outside suppliers to provide their training.
- In terms of the type of training outsourced, 25% of the respondents indicated that they used training suppliers most often for management development programs, while 23% indicated that they outsourced technical training most often.
- Survey results revealed that there were no significant differences in client satisfaction in relation to the primary type of training outsourced.
- Of the 10 relationships hypothesized in the model, eight received substantial support and two were not significant: vendor dependency, and idiosyncratic training and client satisfaction.
- Vendor dependency—It was anticipated that suppliers who rely on a particular customer for the majority of their work would voluntarily adapt to meet the needs of that customer. And, because adaptive behavior is the foundation upon which trust is built, it was thought that trust would increase as a result. However, when a vendor is highly dependent, it was discovered that adaptive behavior is not seen as an indicator of genuine concern for the other party, i.e., the client. It is possible that adaptive behavior is instead seen as behavior to serve the vendor’s own interests. If true, the client would be less likely to reciprocate. Reciprocation is needed if socially-oriented trust is to emerge (see definition of social exchange theory above).
- Idiosyncratic (company-specific) training and client satisfaction—The authors predicted that when company-specific training was entrusted to outside suppliers, client satisfaction levels would be lower. This prediction turned out to be inaccurate. Apparently, client firms did not feel as vulnerable to opportunistic behavior from training vendors because they were able to engage successfully in adaptive behaviors to reduce concerns to protect their interests before entering into their contractual agreements for training and development (see definitions of transaction cost economics and resource-based view above).
The trend in outsourcing is expected to continue unabated for the foreseeable future. The study conducted by Klaas and Gainey offers a number of practical recommendations and insights for the HR practitioner to follow when preparing a request for proposal for the outsourcing of a training and development program.