Section OneOutsourcing as an Alternative to Investment in
Human Resources
As indicated earlier, investments in human resources should
support the organization’s strategies. Unless there is the
potential to build capabilities that provide an advantage over
competition, cost considerations often lead to the rational
decision to outsource through specialized service providers
rather than invest in human resources. In general, strategic
outsourcing is advocated where (1) world-class capabilities and
a strategic advantage cannot be developed, (2) the resources
devoted to services performed internally will be greater than
those needed to outsource the service, and (3) excessive
dependency on suppliers can be avoided. When an activity is
performed internally at a higher cost, the misallocated
resources will put the company at a disadvantage to its
competitors.^17
Firms have been outsourcing human resource activities at a
phenomenal rate. Furthermore, they have been outsourcing a
wide range of activities. For example, firms routinely outsource
the administration of 401(k) plans, executive search activities,
payroll functions, employee assistance programs, human
resource information systems, benefits administration, and
outplacement. As a result of the demand for outsourcing, a
whole new service industry of personnel service providers has