OUTSOURCING

What is outsourcing?
Chaffey (2003) defines outsourcing as "the contracting out of specified services
to a third party with a controlled, flexible relationship". He points out that the
decision of outsourcing usually takes place when a firm does not want to use
its internal resources to build or operate in-house functions; it can hire an
external organisation that specialises in providing these services to do the
work.
Types of outsourcing
HR outsourcing services generally fall into four categories: PEOs, BPOs, ASPs,
or e-services (Lee, 2002).
PEOs
A Professional Employer Organisation (PEO) assumes full responsibility for a
company's human resources management. It takes full legal responsibility for a
companys employees, and is actively involved in such vital HR functions as
recruitment and selection, de-layering and performance appraisal. The PEO
and a company become partners, essentially, with the PEO handling all the HR
aspects and the business handling all other aspects of the company. In other
words it is total outsourcing, since all activities are performed by an external
company.
Armstrong (2001) introduces the following list of HR areas that are outsourced:

Training

Recruitment

Health & safety monitoring and advice

Employee welfare and counseling activities

Payroll management

Specialist legal advisory services

Occupational health and fitness services.

However, due to the specific features of human resource management and the
developing practice of HR outsourcing, PEO might also imply for joint
venture/strategic alliance sourcing where certain duties and responsibilities
are shared between organisation and a supplier
BPOs
Business Process Outsourcing is a broad term referring to outsourcing of
different managerial and operational functions. Specifically in HR, a BPO is
designed to ensure that a company's HR system is supported by the latest
management information systems, with self-access and HR data warehousing
options.
ASPs
Application Service Providers host software on the web and rent it to users
some ASPs host HR software. Some are standardised off-the-shelf applications
(People Soft) while others are customised HR software developed by the vendor.
These software programs can manage payroll, benefits, and more.

THE RATIONALE FOR HR OUTSOURCING

General rationale for outsourcing.
According to Mintzberg et al. (1995) the overall rationale for any outsourcing
activity is that outsourcing provides:

Greater economies of scale

Flexibility

Levels of expertise

Cost effective

Reduced costs and improves add-value throughout the value chain.

He states that implementing a function internally that can be bought in more

economically

compromises

competitive

advantage.

Outsourcing

enables

concentration on core activities, and reduces internal costs, time delays and
political pressures, leading to a more compact organisation, flatter hierarchy,
and sharper focus on recruiting, developing and motivating key personnel in
terms of core competencies.
Ratnam (2001) emphasises the strategic dimension of outsourcing. He suggests
that heavy investments, coupled with the challenges of a dynamic marketplace,
means that outsourcing strategy, which is focused on strategic supplier
partnerships, is a key value differentiator. He claims that in the current
business environment, which can be characterised as turbulent, every
company needs flexibility to meet its current and future opportunities.

Outsourcing provides the ability to adjust to changing market conditions to

remain competitive.
Rationale for HR outsourcing
Though HR outsourcing is based on similar rationales, it is important to
mention that it became possible with recent development of information and
communication technologies. According to Wright (2002, cited in Gunsauley,
2002), with the emergence of various management decision support systems
and databases, organisations realised the new opportunities of e-HRM.
Outsourcing is becoming more and more popular as employees become more
comfortable with web-based self-service. New portal technology offers users
deep knowledge content, decision-support tools and transaction capabilities in
one place.
At the same time, the in-house development of e-HRM applications required
sufficient investments and expertise and the cost of owning, maintaining and
upgrading technology continues to escalate. Therefore, the decision to
outsource became a reduced risk and cost cutting solution.
Armstrong (2003) points out the other important tendency that made a strong
case for HR outsourcing. He claims that it has become a widespread tendency
of shift from the view of HR services being the business own responsibility, to
the stance that it can be purchased from external suppliers, outsourced. At the
same time the excuse for resorting to this practice is "prove it can not be
subcontracted". (Armstrong, 2003)
According to the Institute of Personnel Development (1999, cited in Armstrong,
2003) the single biggest cause in the increase of outsourcing has been the

concept of the core organisation which focuses its in-house expertise on its
primary function and purchases any necessary support from a range of
sources in its periphery.
This view is supported by the words of Cable & Wireless manager, who pointed
out that after some HR entry-level services were outsourced, the firms
management were freed up to focus more on strategic HR issues such as
internal-consulting skills, change-management skills and project-management
skills (Pollit, 2004). He believed that these three functions were absolutely vital
as they enhanced the skill capability of HR. This enhancement was believed to
be influential, gaining access and entry to senior people, running projects and
representing senior management in changing the entire organisation.
This view is supported by Switser (1997) who argues that HR outsourcing
represents a strategic tool for achieving competitive advantage. He states that
outsourcing of the transaction-based HR activities frees HR managers and
other managers to deal with strategic business issues.
According to Klass (2003) the other major rationales for HR outsourcing are to
cut administrative and high transaction cost activities, minimise the workload
of regular workers, reduce costs, reap economies of scale, improve quality and
efficiency, and gain expertise from outside vendors.
Summing up all the points, the following list of pull factors of outsourcing can
be made:

Cost saving HR costs are reduced because the services are cheaper and
the size of the function can be cut back;

Concentration of HR effort members of the function are not diverted

from the key tasks which add value; and

OMTNaining expertise know-how and experience that is unavailable in

the organisation ca n be purchased.

THREATS OF HR OUTSOURCING
According to Gunsauley (2002) when managers decide whether to outsource,
the need to retain sufficient skills in-house to fulfil the role of vendor-manager
and intelligent customer is often overlooked, as is the need to ensure there is a
cost-effective exit if the outsourcing arrangement does not work
On the basis of the Information Systems outsourcing Chaffey (2003) draws the
following picture:

Loss of control,

Loss or degradation of internal services,

Corporate security issues,

Qualifications of outside personnel,

Negative impact on employee morale.

Stating that outsourcing is driven by a desire to reduce costs while improving

the quality of IS and user services, he casts serious douMTNs over whether
these objectives are feasible.

The other important issue is raised by Khatri (1999) who points out that
different strategies differ in their requirements for HR practices and may imply
varying needs for HR outsourcing.
From these issues two major points arise:

How to link organisational strategy with outsourced HR functions; and

What shall be the criteria for measuring the adequacy of the expertise of
HR service supplier.

Greer & Youngblood (1998) suggest that it is difficult to control the quality
since the process of production is external. During an internal process a
company can apply quality improvement tools. Receiving an off-the-shelf
product or solution a company may face the problems of hidden flaws in quality
(so called "floating" flaw or error). With outsourcing, a company may be
dependent on its suppliers, which reduces its flexibility capacity.
Another vital point is raised by Armstrong (2003) who speaks about
commitment and the survival syndrome. Delayering may lead to "survival
syndrome". It may cause the loss of trust and commitment. As a result, the
staff turnover may increase and the productivity might decrease significantly.
Morton & Wilson (2003) believe that HR outsourcing is a faddish trend, and will
not take off to the extent that has been predicted. They urge firms to question
whether an external source can ever know the business as well as the business
owner does, and though there may be a place for outsourcing routine tasks like
payroll, it is unwise to let a vendor make important decisions for the firm.
MTN CASE STUDY

Background information
MTN Uganda, Ltd. Is a private telecommunications company that provides
fixed, fixed wireless, and mobile telecommunication services in Uganda. The
company offers voice and fax, high speed data, and multi-media services; and
broadband services to corporates, businesses, and individuals. It also provides
voice and messaging solutions, connectivity and APN solutions, managed
hosted services, integrated payment solutions, data centre services, and
multimedia solutions for businesses. The company was founded in 1998 and is
based in Kampala, Uganda. MTN Uganda, Ltd. operates as a subsidiary of MTN
International (Mauritius) Ltd. The company works in a changing and
competitive environment. The nature of the environment requires innovation
because of a short product life cycle. Its principal activities include local, long
distance and international telecommunications, internet services, broadband
network solutions, and providing web hosting and other IT solutions.
MTN outsourcing
MTN serves around 10 million customers in Uganda. These customers
represent different customer groups with particular needs. The nature of
market and industrial context requires permanent innovation and introduction
of new, more sophisticated solutions.
MTN is a "heavy hitter" in the outsourcing stakes, sitting in third and fourth
position in the overall outsourcing and mega-deal leagues respectively.
The fundamentals of MTNs strategy include customer satisfaction, financial
discipline and diverse, skilled and motivated people. MTN has outsourced backoffice functions: accounting and financial services; printing and dispatch; HR;

Internet Service; their real-estate management; and call centre functions. This
is "in line with MTNs strategy of maximising shareholder value by focusing on
core business" (Livingstone, 2002). Price (2002) explains that these measures
will provide companies (for example MTN) with costs savings, service quality
and development opportunities for company staff.
MTN HR outsourcing
According to MTN (2013) the recognition of the need for the transformation of
HR services evolved out of fundamental transactional needs of the rapidly
changing company. The functional restructuring of the company, to provide
greater focus on customer needs, highlighted a clear need to consolidate the
administrative operations separately from the business-unit HR activities. This
step was believed to set the basis for rapid realignment of people as the
companys evolution continued. After a series of consolidations, the senior
management came to the decision of creating a totally consolidated internal
transactional service on the basis of a stand-alone subsidiary, joint venture or
separate business entity.
To increase shareholder value, sustain progress and cope with the pace of
change, MTN decided on an entirely new approach to HR outsourcing its
transactional HR functions: the moves, changes, employment data, employee
records, administrative call centre and payroll - as well as the nontransactional recruitment function, part of the training function, and later part
of the HR business-partner function.

MTN management decided to deal with a single outsourcing provider because it

wanted to have a long-term strategic relationship covering a range of HR
processes.
The company started with ASP outsourcing, with the gradual switch to BPO.
Besides cost-reduction and the increase of operational efficiency, the company
sought the solution that would enable the remaining in-house HR people to
focus on much more strategic issues. This solution was expected to free MTN's
HR executives to focus on strategic people matters, with a secure base of sound
transactional services behind them. It was also expected to create a real
commercial opportunity the opportunity to compete and win in the new
marketplace for outsourced HR services.
The partners created a full-scale, end-to-end HR transactional solution that
covered the complete employee life cycle, with services in resourcing, learning,
managing performance, performance appraisal, employee relations, safety,
health and delayering.
MTN retained the right to set and implement strategic HR issues related to
organisational development, including specialist centres of excellence focused
on policy formulation and close-in HR account management in each of its
business units.
MTNs HR service is based on the following principles (MTN, 2013):
Standardisation: HR solution is tailored from a standard platform of assets and
capabilities that implement client-wide processes and systems;

Integration: The provision of one-stop HR contact centre with a single point of

coordination for third-party offerings;
Centralisation: Delivery of consistent, high-quality HR services through
specialised service centres;
Technology: The continuous improvement of information systems
Labour: Delayering solutions;
Discipline: Commercial rigour and discipline to HR, including service processes
management and operational management.

THE CONSEQUENCES OF HR OUTSOURCING FOR MTN

The problem of strategic alignment
The recent decision to outsource 100% of HR functions raises the question of
strategic alignment of different strategies. According to Johnson & Scholes
(2001) the human resource function is vital for strategic formulation and
implementation phases. It comprises the roles and relationships that need to
be defined in aligning business and operational activities with strategic issues.
Mullins (2001) extends this view claiming that the HR function enables the
management to sense the nature of the organisational culture and of the
presence of various formal and informal procedures that create communication
networks and knowledge chains within the organisations.
The case study does not clearly distinguish the way the outsourced HR
function is aligned with the strategy formulation process. Moreover, serious
doubts arise regarding the existence of efficient communication and knowledge
transfer

channels

that

are

necessary

to

provide

the

flexibility

and

responsiveness of the operations.

As Ulrich (1996) argues, where HR services are provided by outside
contractors, the strategic alignment is likely to require substantial assetspecific investment in order for service providers to understand strategic issues
facing the firm. At the same time, Klaas (2003) points out that, where a firm
pays for this investment, it is likely to be at risk of opportunistic behaviour by
the contractor. Where the contractor pays for this investment, it risks
opportunistic behaviour by the firm and is likely to adjust its fees accordingly.
In other words, the probability of opportunistic behaviour can create perfect

prisoners dilemma, where both firms will refrain from commitment to risky
investment.
Thus, it becomes clear that MTN might face serious problems of aligning HR
strategic issues with other organisational functions such as marketing,
operations management, and information systems management.
Organisational culture
According to claims of the firms management MTNs organisational culture is
innovative with teams that deal with strategic elements of MTNs operations:
looking to see how advances in technologies can be applied to benefit MTN and
its customers and looking at better ways of doing things and implementing
them. This represents a culture in which everyone is involved and ready to
embrace; a strategy in which everyone works closely together to achieve
company aims.
Before speaking about the content of cultural change in MTN, it is important to
define the notion of organisational culture. Tran (1998) argues that culture is
studied as an object to be manipulated to achieve productivity and
organisational improvements, culture can thus be changed over time. In this
context, culture is something that an organisation has. However if culture is
accepted as being "... the basic, taken-for-granted assumptions and deep
patterns of meaning shared by organisational participation and manifestations
of these assumptions..." (Johnson, 2002) then culture is seen as something an
organisation is. In this respect culture is difficult to change as it is ingrained in
the psyche of individuals.

To outline the content of cultural context in MTN after HR outsourcing, the

cultural web will be applied. The following table shows the content of the
organisational culture with HR outsourcing.

As it becomes clear from the table the organisational culture impinges

collective learning in the organisation. Within this approach the individuals
perceive each other as a rival, rather than a partner. Survival syndrome poses
the question who is next?. According to Mullins (2001) this paradigm creates
various obstacles for learning within the organisation, that usually arise due to
rivalry, power conflicts and absence of network communication channels.
The disadvantage of this power structure is explained by Mullins (2001) who
claims that such the approach decrease the effectiveness and efficiency of
operations management, as participants are detached from the decisionmaking.
The new organisational structure is bureaucratic, with the emphasis on
standard procedures and operational routines. The new structure might
significantly slow down the communication process, with the absence of

feedback channels and unnecessary mediatory layers that might increase the
noise and cause various distortions in the communication process (Graham
& Bennet, 1998).
The company puts its employees after revenues. The management does not take
into account individual needs of the employees and develops a coercive rather
than participative approach. Within this approach people are being treated as
liabilities rather than the core elements of the operations management process,
where people become the primary determinant of the outcome quality
(Armstrong, 2003).
The organisational culture implies for traditional type of performance appraisal
system, which utilises various types of monetary techniques. Following the
argument of Wright (1993) the utilisation of monetary tools does not provide
the development of a higher level of effective commitment or higher degree of
intrinsic motivation and provides a blurred understanding of the relationship
between their performance and corresponding appraisal.
The communication component is an integral part of all above-mentioned
changes. According to McGregor (1960, cited in Mullins, 2001) in order to get
people to direct their efforts towards organisational objectives, management
must tell them what to do, judge how well they are doing and reward or punish
accordingly. There is also an informative and a motivational purpose. He claims
that a clear and thorough description of individual duties and rights within the
framework of the organisation may prevent the rise of unmet expectations.
As it is obvious from the table, the communication in the company is of a topdown nature, without proper feedback. This type of communication scheme is

good for conveyer-type organisations, but is pernicious for innovative marketled companies.
Change management issues
The new requirements for adaptation made it necessary for the company to
undertake the reengineering of the whole business process, including both
hard and soft elements. According to Senior (1997) hard system change
implies "an attempt to use the benefits of a scientific method while recognising
that in the real world of business where things are happening fast, there may
not be time to be as scientific as one would like". In MTNs case, hard system
change referred to the introduction of new operations management systems,
equipment and business facilities, designed to speed up existing operations
and reduce the cost per a single transaction. It was designed to maximise the
efficiency of every single operation within the business process.
Senior (1997) suggests that Soft System changes imply for the change of the
organisational culture. It comprises such elements as core vision, mission,
actors and structure. The main idea of this approach is listening to the
organisation, good communication, developing a shared vision, gaining real
commitment to the change and the vision, education and training, and
understanding the tools and techniques for the process.
Williams et al. (1993) suggest that to facilitate effective adaptation of the
employees to new working conditions, managers shall reduce restraining forces
and reinforce driving forces. However, it shall be considered, that not all
measures are equally effective. As Hetzbergs maintenance theory (cited in
Mullins, 2001) shows, the presence of certain factors may act as a powerful

motivating factor, while the absence of other elements may produce slight
dissatisfaction. At the same time strategic priorities shall reflect the current
organisational aims.
The case study shows that the current goal of the company is to increase
productivity in order to reduce costs and improve customer service. The
company put great emphasis on hard systems change, keeping soft systems in
low profile. The current outsourcing of MTNs HR functions has set a
centralised

decision-making

pattern,

reduced

employees

loyalty

and

motivation, and removed the creativity enablers. At the same time, the nature
of the communication industry environment requires a structure that
encourages flexibility, adaptability and responsiveness.
Under such conditions in order to improve the situation and meet objectives
(create a better customer focus) the high involvement of senior managers, who
act as a link between operational and business levels of the organisation, is
required. Senior managers shall act as major change agents. Taking the role of
change agents, it is important for senior managers not to ignore, avoid or resist
employees' natural resistance to new systems, but to create appropriate
incentives to fasten the transitional process from resistance to commitment
(Graham & Bennet, 1998). The ignorance of or resistance to changes will
introduce different open and latent conflicts, which will significantly worsen the
organisation environment affecting its performance level and flexibility. The
eventual result of such the scenario can be the failure to raise performance and
attract or retain customers. This can translate into significant costs and even
reduce the companys chances to survive and succeed in changing market
conditions.

Conclusion
The analysis of this case study showed that MTN undertook PEO outsourcing
of its HR function in order to reduce costs and increase organisational
performance.
The analysis of the new management system showed that issues such as trust,
motivation and commitment are treated as low priority. Besides, the
introduction of new working practices, new organisational structure and
organisational change was expected to create natural resistance of employees
and reduce their trust in organisational values and commitment to its
activities.
The further analysis showed that HR outsourcing created a new context of
organisational culture. Instead of fostering innovative, flexible marketing-led
culture, new organisational structure introduced the opposite conditions:

profit-led business processes;

top-down bureaucratic communication;

monetary performance appraisal;

coercive leadership.

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