Exploring Human Resource Outsourcing Trends in Malaysia

Available online at www.sciencedirect.com

ScienceDirect Procedia - Social and Behavioral Sciences 224 (2016) 491 – 498

6th International Research Symposium in Service Management, IRSSM-6 2015, 11-15 August 2015, UiTM Sarawak, Kuching, Malaysia

Exploring Human Resource Outsourcing Trends in Malaysia Sim Siew-Chena,*, Yee Seow-Voonb a,b

Nottingham University Business School, The University of Nottingham Malaysia Campus, 43500 Selangor, Malaysia

Abstract Globally, many organisations outsource human resource functions selectively to achieve operational efficiency and transformation. Research in the M alaysian context is limited and insights on the latest HRO trends which are important to understand the HRO phenomenon in M alaysia are unavailable. The questionnaire survey was used to elicit data in this study . 145 HR managers from various sectors responded. 58 of them have partially outsourced the HR functions. Findings indicate that firms from manufacturing and services sectors were both outsourcing at about 40 percent. Large firms appeared more receptive toward HRO compared to smaller firms. Training, recruitment and payroll were the top three HR functions outsourced. M ore than half of the HRO decisions were made by the top management. This study found that the two main drivers of HRO were resource-based benefits and cost benefits. Among the benefits investigated were keeping up with changes, less investment in and maintenance of, software, access to best practices or new development, and converting fixed costs to variable costs. The future direction of the M alaysian HRO is likely to revolve around HR traditional functions such as t raining, recruitment and performance management in the next five years. ©©2016 Authors. Published by Elsevier Ltd. This 2016The The Authors. Published by Elsevier Ltd. is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/). Peer-review under responsibility of Universiti Teknologi M ARA Sarawak. Peer-review under responsibility of the Universiti Teknologi MARA Sarawak Keywords: outsourcing, human resource outsourcing, trends, Malaysia

1. Introduction Traditionally, almost all human resource (HR) act ivities were performed in -house with many HR staff responsible for a broad range of ad ministrative and strategic HR activit ies (Greer, Youngblood , & Gray, 1999; Klaas, 2008). Today, internal HR team can concentrate on strategy and change by outsourcing transactional HR activities. Cu mu lative pressure on cost-saving has driven the use of human resource outsourcing (HRO) further, causing many HR activities being outsourced to external HRO service providers (Glaister, 2014).

* Corresponding author. Tel.: +6-038-924-8294; fax: +6-038-924-8019. E-mail address: [email protected]

1877-0428 © 2016 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/). Peer-review under responsibility of the Universiti Teknologi MARA Sarawak doi:10.1016/j.sbspro.2016.05.425

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The magnitude of HRO impact is pervasive especially in the western countries such as Europe, Canada and North A merica (Ch iang, Chow, & Birtch, 2010) wh ile the global HRO market continues to burgeon and is estimated to worth $199.6 b illion by 2017 (Bodimeade, 2012). Nevertheless the Asian market has just begun to show signs of growth in recent years with 80 to 90 percent of the HR Executives considering HRO as a solution to key HR challenges (Talent2, 2011). Recently, Malaysia has positioned itself as one of the prominent outsourcing destination s in the Asia-Pacific region with 340 outsourcing and shared services centers, emp loying 82,000 people. It accounts for 16 percent of the Malaysian GDP (SSON Market Update, 2015). In particular, the HRO segment demonstrates potential growth with many manufacturing firms willing to outsource to gain access to expert services (Outsourcing Malaysia, 2013). Unfortunately, despite Malaysia being ranked third most preferred outsourcing destination after India and China by AT Kearney (2014), HRO research specific to the Malaysian context remains very limited (Abdul-Halim et al., 2014) and updated informat ion about HRO trends in this country is unavailable . For this reason, this study aims to extend the coverage of HRO trends studies and provide the latest HRO t rends in Malaysia through an explo ratory approach. 2. Literature review and theoretical background Driven by the race to increase business competitiveness, organisations are fighting to be come leaner and more efficient. A ll business units including HR are pressured to cut costs and deliver mo re value (e.g. Lever, 1997; Greer et al., 1999; Klaas, McClendon, & Gainey, 2001; Shelgren, 2004). One way to ach ieve this is through outsourcing a tool that can be used to boost HR productivity by eliminating low value yet time consuming activit ies (Adler, 2003; Woodall et al., 2009) wh ile permitting a quick fix to a problem (Greer et al., 1999; Mah mud, Billah, & Chowdhury, 2012; Susomrith & Brown, 2013). Outsourcing for cost savings is normally governed by the theory of transaction cost economics (TCE) because the decision would be dependent on the comparative efficiency and costs of each respective transaction (Williamson, 1975). On the other hand, outsourcing for acquiring resources usually anchors on resource-based view (RBV). Th is theory suggests that core HR act ivities should be retained in -house while noncore ones should be outsourced (Prahalad & Hamel, 1990). There are three recent HRO studies that exist, predo minantly that of Abdul-Halim & Che-Ha (2010; 2011a; 2011b) who have examined HRO phenomenon among manufacturers in the Malaysian context. A reas that have been examined include reasons for and against HRO, organisational size and maturity impact on degree of HRO, degree of HRO by types, human resource management (HRM ) strategy impact on HR depart ment size, and degree of HRO on HR depart ment size. Additional areas such as the HR manager’s involvement in making HRO decision, HRO effectiveness and future HRO d irection that have been examined in other outsourcing contexts (CIPD, 2009; SHRM, 2004; Talent2, 2011; Raja 2012; Ku mar, 2007) but not included in Abdul-Halim’s work, if researched, would likely expand the knowledge on current HRO trends in Malaysia. The literature indicates no clear agreement as to which HR activity should be outsourced because what constitutes a core or noncore activity is subject to the judgement of individual organisations (Gilley & Rasheed, 2000). Accordingly, the HR functions outsourced might differ across different countries due to varying degree of HRO maturity characterised by different needs. Just as HRO researchers continue to understand HRO practices across various contexts, research findings on the influence of firm size and sector on outsourcing HR has not been conclusive. Several researchers such as Susomrith & Bro wn (2013), Sheehan (2009), Greer et al. (1999), Delmotte & Sels (2008) and Butler & Callahan (2014) found that larger firms are mo re likely to outsource HR services. Ho wever, Lever (1997), Chiang, Chow, & Birtch (2010), Klaas et al. (2001) found that smaller firms are more likely to rely on HRO whilst Galanaki & Papalexandris (2007) found that firm size did not have effect on the degree of HRO. So far, studies on the degree of HRO among firms in the services sector appear almost next to none, leaving behind no clue if co mparison with other sectors is to be made. Top management support has been highlighted as one of the crucial factors affecting outsourcing success (Ee, Abdul-Halim, & Ramayah, 2013), but research into examining the top management and HR manages’ involvement in HRO decision is s carce. Moreover, the majority of the extant HRO literature examined the ‘what’, ‘when’, and ‘why’ of outsourcing and had its predominance

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revolving around outsourcing decision-making (Lievens and Corte, 2008; Wehner, Giardin i, & Kabst, 2012). The much needed insights are lacking in the ‘who’, ‘how’ and ‘where’ of HRO. Consequently , HRO researchers such as Khatri & Budhwar (2002), Shen (2005) and Ch iang et al. (2010) have called for mo re research in the Asian context so that appropriate guidance can be provided to organizations in the developing countries such as Malaysia because HRO trends tend to vary at different points across countries. Against this background, this study aims to explore the latest HRO trends in Malaysia with greater depth by answering the following questions: x x x x x x x

To what extent are firms from the services and manufacturing sector outsourcing HR in Malaysia? What are the HR functions outsourced by firms in Malaysia? What are the impacts of firm size on the degree of outsourcing in Malaysia? Who makes the decision to outsource HR functions among firms in Malaysia? What outsourcing benefits are expected among firms in Malaysia? How effective is outsourcing HR among firms in Malaysia? What is the future trend of HRO among firms in Malaysia?

3. Research methodology The targeted respondents for this study are the HR Managers fro m organisations that practice HRO. Convenience sampling with random selection was conducted by distributing questionnaires at HR related events such as conferences, training and round table talk for senior HR executives. The questions in the questionnaire were adapted fro m Abdul-Halim & Che-Ha (2010; 2011a; 2011b), Susomrith & Brown (2013), Chiang et al. (2010), CIPD (2009), SHRM (2004) and Talent2 (2011). A total of 892 sets of questionnaires were d istributed within a period of a month and fro m that samp le, a total of 147 sets were co mpleted. Th is resulted in a response rate of 16.5%. Two sets of questionnaire fro m the sample were removed due to incomp lete information, resulting in a total usable sample of 145 sets (effective response rate of 16.3%). Th is response rate was considered satisfactory, reflecting the standard response of 15% to 25% for surveys conducted in Malaysia (Saracheck & A ziz, 1983; Ro zhan, Rohayu, & Rasidah, 2001). A T-test and descriptive statistics were employed for the analyses. Additionally, it is noteworthy that getting responses from HR Managers might suffer fro m general response bias, but they were still the best choice as they were in a position to allow accurate report ing of the HRO practices and outcome of their respective firms (Susomrith & Brown, 2013). 4. Results Respondents fro m d ifferent industries were classified into manufacturing, services, and other sectors classified according to the Malaysia Standard Industrial Classification (M SIC) 2008. The nu mber of firms who have outsourced their HR function fro m different sectors is presented in the last colu mn o f Table 1. Interestingly, around 40% of the respondents fro m both manufacturing and services sectors have outsourced their HR functions respectively. This is rather unexpected as the emphasis of HRO resea rch in this country has been on the manufacturing sector (Abdul-Halim & Che-Ha, 2010; Outsourcing Malaysia, 2013). Th is shows that outsourcing in this country still has plenty of room to grow. The findings for the other sectors such as oil and gas and agriculture will not be discussed further due to low representation from these sectors. Table 2 presents the number of firms which outsourced versus those that did not, by firm size. 58 firms (40%) were found to be outsourcing and 87 (60%) were found to be not outsourcing fro m the total of 145 firms surveyed. Most of the respondents were fro m large firms with more than 250 emp loyees (55.9%). Fro m preliminary observation, it appears that larger firms are mo re receptive towards the practice of outsourcing. The level of outsourcing seems to demonstrate an ascending pattern as the organisational size increases.

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T able 1. Respondents profile and degree of outsourcing by sector. Re spondent’s firm

O utsourcing

Electrical and Electronics

10

2

Automobile

3

3

Food & Beverage

3

1

Other Manufacturing

21

9

37

15

Education

17

5

Consultancy

14

6

Healthcare

10

4

Information Technology

9

7

T ransportation/Logistics

6

2

Retail

5

5

Hotel

5

0

Construction

5

0

T elecommunications

3

1

Other services

27

9

101

39

Oil & Gas

6

3

Agriculture

1

1

Se ctor Manufacturing Sector

Total Services Sector

Total O ther Sectors

Total Grand Total

7

4

145

58

T able 2. Degree of outsourcing by firm size. Firm Size

O utsourcing

Not O utsourcing

Total

Less than 5 employees (Micro firm) 6-50 employees (Small firm)

0 12

2 15

2 27

51-150 employees (Medium-sized firm) Above 150 employees (Large firms)

12 34

15 55

27 89

T otal

58

87

145

Fro m the sample, it was found that 40% (58 out of 145) of Malaysian firms outsourced at least one of their HR functions. The degree of outsourcing for each function is illustrated in Table 3. Topping the list are HR functions that are transactional and traditional in nature. Training (55.17 %), Recru it ment (55.17%), Payroll (50%), and Benefits (31.03%) are the most outsourced HR functions. The least frequently outsourced functions are Expatriate Management (6.9%), Exit Interview (8.62%), Relocation (8.62%) and HR Policy and Strategy (8.62%). These results are fairly consistent with the results of Abdul-Halim & Che-Ha (2010) although their study only covered manufacturers and did not cover as many functions.

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Sim Siew-Chen and Yee Seow-Voon / Procedia - Social and Behavioral Sciences 224 (2016) 491 – 498 T able 3. T ypes of HR function outsourced. O utsourced HR Function T raining Recruitment Payroll Benefits Foreign Worker Management Employee Welfare T ravel and Expenses Employee Data Management Vendor Management Selection Compensation Employee Relations Performance Management Workforce Outplacement & Reduction Management Reporting HR Policy and Strategy Relocation Exit Interview Expatriate Management

Frequency

Pe rcentage (%)

32 32 29 18 12 12 11 10 10 9 9 9 7 7 6 5 5 5 4

55.17 55.17 50.00 31.03 20.69 20.69 18.97 17.24 17.24 15.52 15.52 15.52 12.07 12.07 10.34 8.62 8.62 8.62 6.90

In order to determine whether there is a difference in the level of outsourcing across the manufacturing and services sector, the independent samples T-test was conducted. The results of the analysis are presented in Table 4. The Significant value for Leven’s Test is larger than 0.05, indicating that equal variances are assumed. There was no significant difference in the level of HRO between firms fro m manufacturing (M = 3.40, SD = 2.53) and services (M = 3.92, SD = 3.38) sector, t (52) = 0.542, p = .590, α = .05. The effect size, eta squared value = 0.005 indicating that the differences in the means was very small (Cohen, 1988). T able 4. Results of Independent -samples T -test comparing degree of HRO between firms from manufacturing and services sector. Dependent variable

Le ve ne’s Te st for Equality of Variances

T-test for Equality of Means

F

Sig

t

df

Sig. (2-tailed)

Mean Difference

Std. Error Difference

.391

.535

-.542

52

.590

-.52

.96

De gre e of outsourcing

95% Confidence Interval of the Difference Lower

Upper

-.2.45

1.41

To answer the question of who makes the HRO decision, Table 5 presents a clear figure. It can be seen that more than half (60%) of the HRO decisions was made by the top management, undertaking an authoritative approa ch. About 24% of the outsourcing decisions were made by empo wering the H R Managers fully while only a very s mall percentage (16%) reported that their outsourcing decision was made together with the top management. T able 5. HR outsourcing decision making. Frequency

Pe rce nt

Outsourcing decision involves both top and HR Managers Decision making involves HR Managers only Decision making involves top management only

9 14 35

15.5 24.1 60.4

Total

58

100.0

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Driven by various reasons behind an outsourcing decision, HR Managers in Malaysia expect and intend to achieve the ten HRO benefits exh ibited in Tab le 6. The ten items of the Intended outsourcing benefits were then factorised to exp lore potential clustering of the benefits. Inspection of the correlation ma trix revealed the presence of many coefficients of .3 and above. The Kaiser-Meyer-Olkin value was .81, exceed ing the reco mmended value of .6 (Kaiser, 1970; 1974) and Barlett’s Test of Sphericity (Bartlett, 1954) reached statistical significance, supporting the factorability of the correlation matrix. Principal co mponent analysis revealed the presence of two components with eigenvalues exceeding 1, explain ing a total of 66.3% of the variance, with Co mponent 1 contributing 52% and Co mponent 2 contributing 14%. Co mponent 1 is denoted as resourced-based benefits whereas component 2 is denoted as cost benefits. T able 6. Factor analysis on HRO benefits. Component 1 Access to best practices, new developments Acquire specialised HR capabilities Improve discipline/accountability Keeping up with changes (i.e. regulations) Obtain better/more HR-related technology Align resource supply to demand/minimise capacity gap Minimise HR workload Less investments in software/maintenance Convert fixed costs to variable costs Reduce HR staff/downsize HR department Extraction Method: Principal Component Analysis. Rotation Method: Oblimin with Kaiser Normalization. a. Rotation converged in 4 iterations.

2

.888 .823 .807 .780 .780 .767 .683 .879 .814 .711

Based on the intended outcomes or benefits expected fro m outsourcing, it is imperat ive to investigate whether firms that opted for HRO have achieved what they intended to achieve. The mean fro m these ratings will be used to determine how successful firms are in achieving their goals; the higher the mean, the g reater the success. The mean and standard deviation is shown in Table 7. T able 7. HRO Effectiveness based on benefits achieved. Goals

Me an

SD

Keeping up with changes (i.e regulations) Less investments in software/ maintenance Access to best practices, new developments Convert fixed costs to variable costs Align resource supply to demand/ minimise capacity gap Acquire specialised HR capabilities Minimise HR workload Reduce HR staff/ downsize HR department Obtain better/ more HR related technology

3.73 3.71 3.69 3.69 3.68 3.66 3.65 3.61 3.59

.972 .890 .875 .776 .862 .815 .955 .940 .909

Improve discipline/ accountability

3.47

.938

It appears that the majority of the firms achieved greater success in keeping up with changes (M = 3.73, SD = .972), followed by less investments in software/ maintenance (M = 3.71, SD = .890). Both access to best practices (M = 3.69, SD = .875) and convert fixed costs to variable costs (M = 3.69, SD = 0.776) a re equally achieved. Meanwhile, the achievement in cost reduction is ranked with the lowest mean (M = 3.41, SD = 0.898).

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According to Table 8, t wenty five firms will increase the outsourcing of training or learning and develop ment within the next two to five years. This is followed by recruit ment, performance management, payroll and emp loyee data/ record management. T able 8. Future HRO directions. Functions intended to be outsourced in the future

5 ye ars

Total

T raining/Learning and Development Recruitment Performance Management

13 10 9

12 9 8

4 5 4

29 24 21

Payroll Employee Data/Record Management

10 10

5 5

4 4

19 19

Vendor/3rd Party Management Foreign Workers Management Compensation Employee Relations Employee Welfare Benefits Relocation Expatriate Management HR Policy and Strategy T ravel and Expenses Workforce Outplacement and Reduction Exit Interview Management Reporting

7 9 6 6 6 8 6 7 5 10 7 5 4

6 5 6 4 5 3 5 4 7 2 2 3 5

5 3 5 6 5 5 5 4 3 3 5 5 4

18 17 17 16 16 16 16 15 15 15 14 13 13

5. Discussion and conclusion Overall, 40% of the firms in Malaysia are engaged in HRO , demonstrating that the practice of HRO in Malaysia is still at its nascent stage. Despite the overwhelming belief that cost benefits are the key conce rn of HRO, the majority of the firms reported HRO effectiveness by achieving non -financial benefits. Most of the HRO decisions are made by the top management without the HR Managers’ involvement, indicating the need fo r HR to undergo transformation if they are to be a step closer to the strategic table. The future HRO t rends are likely to revolve around traditional and transactional HR functions with more than half of the firms p lanning to outsource more in the near future. In short, the outsourcing trend is unlikely to fade away; instead, it is very likely that the degree of HRO in Malaysia will experience incremental growth. Acknowledgements This work is supported by the Ministry of Education Malaysia through the Fundamental Research Grant Scheme under grant no. FRGS/ 1/2013/SS05/UNIM/03/ 1. The author is indebted to PSMB, HR Matters, Dr Go wrie and Mr SJ Wong for their contribution. References Abdul-Halim, H., & Che-Ha, N. (2011a). Embarking on HR outsourcing – do organisational size and maturity level matt er? International Journal of Economics and Management, 5(1), 19 – 37. Abdul-Halim, H., & Che-Ha, N. (2011b). The perspective of Malaysian manufacturing organisations on strategy, HR outsourcing and HR costs. Economia, Seria Management, 14(1), 14 – 24. Abdul-Halim, H., & Che-Ha, N. (2010). HR outsourcing among Malaysian manufacturing companies. Business Strategy Series, 11(6), 363 – 370. Abdul-Halim, H., Ee, E., Ramayah, T., & Ahmad, N. H. (2014). Human resource outsourcing success: leveraging on partnership and service quality. Sage Open, 4(3), 1 – 14. Adler, P. S. (2003). Making the HR outsourcing decision. MIT Sloan Management Review, 45(1), 53 – 60.

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