Role of Human Resource Management (HSC SSCE Business Studies): Revision Notes

Outsourcing

What is outsourcing?

Outsourcing (also called contracting out) involves hiring external, specialist businesses to perform specific business functions rather than doing them internally. For example, a business might hire a recruitment agency to find and hire new staff, or a payroll company to manage employee wages.

Modern workplace changes are largely driven by the need to cut costs and boost productivity. Globalisation and rapid technological advancement have intensified competitive pressure on businesses. This has led to new organisational structures and the growth of outsourcing as a strategic approach.

Why businesses outsource

Research shows businesses outsource for several strategic reasons:

Reason	Percentage
Reduce costs	$36%
Focus on core business	$36%
Improve quality	$13%
Increase speed to market	$10%
Foster innovation	$4%
Conserve capital	$1%

Outsourcing human resource functions

Why outsource HR?

Outsourcing HR functions offers businesses two key advantages:

1. Focus on growth: As businesses expand, outsourcing allows management to concentrate on core business activities while HR specialists handle workforce planning, development and staff management.
2. Independent review: External consultants can review business practices objectively and implement transformation strategies without internal biases or political agendas.

Commonly outsourced HR functions

Businesses typically outsource two categories of HR work:

Direct HR functions:

• Recruitment: Finding and hiring suitable candidates
• Induction: Introducing new employees to the organisation
• Leadership training: Developing management capabilities
• Mediation: Resolving workplace conflicts
• Outplacement: Supporting employees leaving the organisation
• Payroll: Managing wages, salaries and superannuation

HR development and review areas:

• Human Resources Information Systems (HRIS)
• Change management programs
• Payroll systems
• Training needs analysis
• Compensation structures (wages and salaries)
• Performance management systems
• Succession planning
• High performance coaching
• Employee surveys
• Policy and program development
• Training and development initiatives
• Benchmarking against industry standards

Using contractors

What are contractors?

A contractor is an external provider of services to a business. Contractors may be individuals or businesses hired on a temporary or project basis.

Why use contractors?

Modern businesses use contractors primarily to:

• Create cost savings
• Access greater expertise and capabilities
• Improve competitiveness

Contractors are particularly valuable for processing functions—repetitive, easily measured tasks where cost savings and productivity gains can be clearly quantified.

Risks of contracting

Despite many successful examples, outsourcing carries significant risks that increase as more activities are contracted out:

• Cost overruns: Expenses may exceed initial estimates
• Quality loss: Service standards may decline
• Coordination difficulties: Managing multiple contractors can be complex
• Performance monitoring: Tracking quality and output becomes harder
• Loss of competitive advantage: One Australian firm lost its proactive maintenance capability when contractors adopted a more reactive approach, leading to costly production breakdowns

Statistics: Australia has $1.1 million independent contractors, demonstrating the scale of this employment arrangement.

Forms of outsourcing

Domestic subcontracting

Domestic subcontracting involves hiring contractors within Australia rather than employing permanent in-house staff. This approach avoids the overhead costs associated with full-time employees.

Benefits for businesses:

• Focus resources on essential activities
• Access specialist expertise for support or compliance functions
• Obtain fresh perspectives and innovative ideas
• Particularly beneficial for small to medium-sized businesses lacking capacity for internal auditing, compliance, research or professional-level functions

Common areas for domestic subcontracting in Australia include:

• Property and facilities management
• Financial processes (especially payroll)
• Administration support services
• Internal auditing
• Call centres
• Maintenance services
• Human resource functions

Types of contractor arrangements

Different contractor arrangements suit different business needs:

1. Labour hire/employment agency workers

These workers are employees of the labour hire company, not the business using their services (the "host company"). The labour hire company manages all employment obligations including superannuation, insurance and workers' compensation.

2. Dependent contractors through agencies

These workers are contractors rather than employees, with the agency acting as a broker. However, they have limited autonomy:

• No control over working procedures
• Cannot subcontract their work to others
• Cannot work for multiple clients simultaneously

3. Independent contractors

These individuals operate their own businesses with full autonomy:

• Set their own terms and conditions
• Engaged under commercial contracts, not employment contracts
• Do not have employee legal status
• Generally arrange their own superannuation, insurance and workers' compensation

4. Outsourced suppliers

These are established businesses that:

• Supply goods and services to multiple clients
• Employ and supervise their own staff
• Control their own work procedures
• Work for multiple clients
• Manage all employee entitlements and obligations

Global subcontracting

Why businesses outsource globally

Global subcontracting (also called offshore outsourcing) involves contracting work to businesses in other countries. Over the past decade, many businesses under competitive pressure have turned to offshore contractors in countries like India and the Philippines to reduce costs significantly.

Some businesses use international outsourcing strategically as a first step toward entering new markets. This allows them to understand market needs before committing to a larger physical presence.

Disruptive outsourcing

A recent trend called disruptive outsourcing is transforming the outsourcing industry. This approach uses advanced technologies including:

• Robotics
• Automation systems
• Cloud computing

Two forms of global outsourcing

1. Process outsourcing

This is the most common form of international outsourcing. It involves repetitive, easily measured and documented work such as:

• Recruitment processes
• Multi-country payroll management
• Customer complaint handling
• Food preparation for airlines
• Garment manufacturing for fashion companies

Characteristics:

• Clear, measurable tasks
• Easy to document and monitor
• Lower risk due to predictability
• Suitable for routine operations

2. Project outsourcing

This form is commonly found in strategic areas including:

• Human resources projects
• Marketing campaigns
• Design work
• Information technology development
• Research projects

Characteristics:

• Greater use of intellectual property
• Requires strategic business knowledge
• Longer time frames
• More difficult to measure outcomes
• Quality cannot be fully predicted in advance
• Carries higher risk than process outsourcing

Advantages and disadvantages of global outsourcing

Potential advantages

Global outsourcing can deliver significant benefits:

Operational benefits:

• Expand capacity and flexibility: Scale operations up or down quickly without permanent staff changes
• Improve quality: Access world-class expertise and standards
• Allow focus on core activities: Free up management time and resources for strategic priorities

Financial benefits:

• Save costs: Major reductions in labour and operational expenses
• Conserve capital: Avoid large investments in facilities, equipment and staff

Strategic benefits:

• Access new networks: Connect with international markets and suppliers
• Help manage complex issues: Use specialist expertise for challenging problems
• Transform culture: Implement change through external facilitators
• Improve legal compliance: Ensure adherence to regulations across jurisdictions

Knowledge benefits:

• Train staff: Develop internal capabilities through exposure to external best practice
• Access experts: Use specialist knowledge in practice management, systems and research

Potential disadvantages

However, global outsourcing also carries substantial risks:

Organisational challenges:

• Less integrated organisation: Coordination across locations becomes harder
• Quality may fall: Standards may not match internal expectations
• Consultants may not understand your culture: External providers lack organisational knowledge
• Less face-to-face client contact: Distance reduces personal relationships

Financial risks:

• Costs may increase: Hidden expenses or contract variations can exceed savings
• Hidden costs: Additional expenses for management, coordination and quality control

People and knowledge issues:

• Morale and motivation may be damaged: Staff may feel undervalued or fear job losses
• Reduce business learning: Over-reliance on experts limits internal capability development
• Loss of security and confidentiality: Sensitive information becomes vulnerable

Specific risks of global outsourcing

International outsourcing introduces additional complications:

• Quality and reliability control: Distance makes monitoring service standards difficult
• Cultural differences: Language barriers or accent issues can impact customer service quality
• Security concerns: Risks of confidential information being shared or clients being poached by contractors
• Legal limitations: Foreign legal systems may offer limited remedies for contract breaches or disputes
• High labour turnover: Call centres particularly experience staff changes, affecting service consistency
• Staff replacement issues: Well-qualified employees may be replaced by less experienced staff, reducing quality

COVID-19 impact on outsourcing

The pandemic disruption

The COVID-19 pandemic fundamentally challenged traditional outsourcing practices. Australian businesses across telecommunications, finance, government and service industries discovered their contracted overseas partners became unavailable with little notice.

What happened:

• Call centres in India and the Philippines shut down or operated with minimal staff
• IT support services were severely disrupted
• Process outsourced activities stopped functioning
• Unlike Australian businesses, remote working was not viable for overseas contractors due to inadequate technology, poor telecommunications infrastructure and unsuitable home working conditions

Business response

Although some Australian businesses had contingency plans for overseas partner failures, the pandemic's unprecedented scale forced immediate action. Many businesses brought services back in-house temporarily.

This crisis prompted a fundamental reassessment of outsourcing strategies. Businesses realised their vulnerability when relying heavily on international contractors who cannot maintain service during global disruptions.

Case study: Telstra's strategic shift

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