A COMPARATIVE STUDY OF THE DETERMINANTS OF HR OUTSOURCING IN TURKEY AND THE EUROPEAN UNION Dr. Cem Tanova Eastern Mediterranean University

Outsourcing Generally, outsourcing arrangements involve a company that contracts with a vendor that rents its skills, knowledge, technology and manpower for an agreed upon price and period to perform functions that the client no longer wants to deal with in-house (Adler, 2003).

Outsourcing and HR HR generalist activities such as performance appraisal, Transactional activities such as payroll, Human capital activities such as, training and Staffing activities such as recruitment and selection

In the related literature… In-house HR staff will be able to focus on strategic issues by allowing administrative work to the external organisation. Pooling resources can allow economies of scale for smaller companies. It may not be cost effective for them to keep in house HR staff specialized in all areas. Specialization may improve services.

Worries… HR outsourcing may be problematic if an organisation’s HR activities rely on tacit knowledge. There may be a problem of understanding and responding to the corporate culture of the company. Organisations may lose the advantages associated with their distinctive practices. The service provider may adopt opportunistic behaviour.

Tacit Knowledge Practices and HR activities Organisations that rely on tacit knowledge, as part of their organisational culture, are likely to manage their HR activities without utilizing outsourcing. These organisations opt to maintain a connection with their newly hired employees. Thus, even for recruitment activities they tend not to use outsourcing, because they want their newly hired employees to feel that they have been hired by the organisations that they will be working with (Stroh & Treehuboff, 2003). Moreover, organisations that rely on tacit knowledge have to invest more on codifying the information (Barney, 1991; Corner & Prahald, 1996), therefore the cost associated with outsourcing will increase which in turn can erode the economies of scale (Klaas, McClendon, Gainey, 1999). In line with the argument of codifying the information, these organisations will have to develop contracts in order to outsource HR activities. Since they lack codified information they are likely to be subject to opportunistic behaviour of the suppliers. Consequently, the risk associated with outsourcing will increase and these organisations will be less likely to outsource HR activities (Klaas, McClendon, Gainey, 1999). Another argument is that organisations that rely on tacit knowledge, as an important component of their organisational culture, prefer not to share their information with other organisations. The organisations where HR activities are closely connected with tacit knowledge are less likely to use outsourcing in their HR activities. H1: The organisations that rely on tacit knowledge tend to outsource less.

Strategic Role of HR Recently, HR department has come to perform strategic role for organisations by focusing on better organisational performance (Wright, Gerhard, Snell, & McMahan, 1997). Thus, as HR department focuses on the core competences, “those competences that define a firm’s fundamental business” (Teece et al., 1997), allows non-strategic activities such as payroll administration to be outsourced. This enables the HR professional to be more involved in the strategy development of the organisation as a whole (Laabs, 1993). When the HR department has a strategic role the core business activities can be performed by high-level, in-house professionals while outsourcing transactional and administrative activities which are core activities for vendors (Adler, 2003). A further argument can be from the viewpoint of a cost benefit analysis. As the strategic role of HR department increases, the business will focus on the core competences and will outsource more the routine activities. As one HR executive said: “I like doing the value-added strategic aspect of my job, not the administrative, paper-pushing pieces.” Due to using specialized firms in outsourcing, the costs associated with HR activities will decrease. (Greer, Youngblood, Gray, 1999). H2: As the strategic role of HR department increases the outsourcing increases

Internal Recruitment Practices Organisations in which career opportunities are emphasized and continued contributions are rewarded will tend to have lower costs associated with in-house HR activities (Doeringer & Piore, 1997). It can be said that organisational culture is the most important element that influences internal recruitment practices. Organisational culture of Is Bankasi, the largest private bank in Turkey, is a good example for internal recruitment. In order to be high level executive in Is Bankasi, employees start from bottom to up. Therefore, in that type of organisations reliance on outsourcing activities in HR activities will be less. H3: As internal recruitment increases, the outsourcing will be less.

Firm Size As firm size increases it is more likely that the firm will benefit from economies of scale. Needless to say, HR activities require specialized expertise and substantial training (Ulrich, 1996). Following this line of argument, the costs associated with HR activities will be high for the small firms due to the infrequent use of these services. Because of infrequent use of these HR activities, per unit cost associated with in-house performance will be high. This causes diseconomies of scale. On the contrary, per unit cost of large firms will be lower because of the frequent use of these services (Abraham & Taylor, 1996; Williamson, 1996). H4: As the firm size increases, the outsourcing will decrease.

Samples 13 EU member countries, and Turkey UK, France, Germany, Spain, Denmark, The Netherlands, Italy, Sweden, Ireland, Portugal, Finland, Austria, Belgium and Greece.

Variables Dependent Variable “use of HR Outsourcing”, independent variables; “tacit knowledge”, “Strategic Role of HRM”, “Internal Recruitment”, “Size of the organization”. Use of HR outsourcing = Payroll + Recruitment + Training + Other HR activities (0 – 4) Tacit Knowledge = Presence of unwritten HR strategy (0 – 1) Strategic Role of HR = HR is represented on the Board (0 – 1) Internal Recruitment = Recruitment of Top + Middle + First line managers from within (0 – 3) Organization size = Total number of employees (200 – X)

Outsourcing Strategic role of HR Use of Tacit knowledge Internal Recruitment Size – + – – Appearence of Rational benefits Legitimacy concerns Regulatory Bodies Market vs Hierarchy Friendly Higher Order Inst. Top Management Convictions

H1: The organisations that rely on tacit knowledge tend to outsource less. Indpendent Samples t test EU sample: t=2.54, p<0.05, N=2533M written =2.33, sd=1.59 N=1490M tacit =2.20, sd=1.54 Turkish sample: t=1.72, p<0.1, N=142M written =1.66, sd=1.25 N=72M Tacit =1.36, sd=1.11

H2: As the strategic role of HR department increases the outsourcing increases Independent Samples t test. EU sample: t=6. 40, p<0.001, N=2790M Strategic =2.36, sd=1.58 N=2298M operational =2.09, sd=1.50 Turkish sample: t=2.50, p<0.01, N=121M Strategic =1.69, sd=1.31 N=135 M operational =1.31, sd=1.09

H3: As internal recruitment increases, the outsourcing will be less. H4: As the firm size increases, the outsourcing will decrease. Correlations EU sample: internal recruitment and use of outsourcing r=0.12** Size and use of outsourcing r=0.03* Turkish sample: internal recruitment and use of outsourcing r=0.11 Size and use of outsourcing r=-0.08 ** p<0.01 * p<0.05 H3 and H4 were not supported.

General Implications The organizations that do not have written policies and procedures are less likely to use outsourcing; these organizations may lag behind their competitors in the increasingly competitive business environment and globalization. The organizations that rely on tacit knowledge seem to have more difficulty in outsourcing HR activities. These organizations need to have more explicit information in order to be able to outsource effectively. As the strategic role of HR increases the routine activities tend to be outsourced. This provides a comparative advantage to organizations where HR plays a strategic role. The debate on the determinants of outsourcing can benefit from a more holistic approach which blends institutionalism with contemporary research on outsourcing. The existing literature on determinants considers outsourcing decisions as mainly rational choices. These choices, however, are embedded in particular contexts the institutional aspects of which have remained largely uninvestigated.