Mitigating the Adversity of Outsourcing: Outsourcing from the Employees Perspective Schillen & Steinke

Communications of the I I MA 2011 63 2011 Volume 11 I ssue 1

Mitigating the Adversity of Outsourcing:
Outsourcing from the Employees Perspective


Sarah J. Schillen
Seattle Pacific University
USA
sschillen@gmail.com

Gerhard Steinke
Seattle Pacific University
USA
gsteinke@spu.edu


ABSTRACT

This paper explores how outsourcing activities and decisions put the well-being of the remaining
employees at risk, ultimately affecting productivity and creating further costs to the employer. It
highlights four potential threats to remaining employees: trust, job satisfaction, motivation, and
stress. The paper provides several suggestions for mitigating these impacts, including
communication to retain trust, acting ethically to ensure satisfied employees, seeking an
understanding of employee perspectives to build employee motivation, and providing good
planning along with training and development to reduce employee stress.

INTRODUCTION

Globalization provides organizations with more options than ever before. Business leaders are
continuously encouraged to adapt, reevaluate, and strategically improve processes and
approaches. Best practices are reinvented rapidly in attempt to keep up with market trends. The
quest to recognize new methods for increasing revenue has become the inspiration for exploring
new management techniques and strategies. One such rising trend in the advent of global
markets is that of outsourcing. Common purposes for outsourcing include improvements to
performance, cycle time, cost-savings, market share, productivity, customer service, and quality
(Elmuti & Kathawala, 2000) in industries such as information systems/technology, human
resource, logistics and administrations, real estate, transportation, marketing, sales and finance
(Logan, Faught, & Ganster, 2004). Outsourcing benefits are publicized and cited in business
journals and among professional management circles, leading to the commonly held perception
that outsourcing holds the key to cutting costs and maximizing productivity. What is less
commonly understood, however, are the serious risks that accompany outsourcing.

Outsourcing is a strategy whereby companies decide to utilize outside resources for activities
that were previously accomplished using internal staff and resources (Elmuti, 2003). As global
supply markets have continued to increase, businesses now have the opportunity to reassess
which functions are best to remain in-house and those that are suited for outsourcing
(Barthlemy, 2003). Ideally, organizations who seek to outsource should focus on delegating
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Communications of the I I MA 2011 64 2011 Volume 11 I ssue 1
major, non-core functions to specialized and efficient service providers (Elmuti, 2003, p.33).
Most often, the purpose of such a decision is a strategy to reduce cost, improve service, and
allow management more time to commit to activities more directly tied to the firms core
strategic goals (Logan et al., 2004).


OUTSOURCING TRENDS AND OUTCOMES

Over the last 10-15 years, global outsourcing activities have continued to increase. Research
suggests that this trend is expected to continue. Continued outsourcing growth presents a need
for the development of expertise around successful outsourcing management and a
comprehensive understanding of relevant trends and issues.

Based on anecdotal evidence and empirical research regarding the growing trend of outsourcing,
the benefits tend to appear insurmountable. Outsourcing has the potential to decrease costs,
increase focus, improve productivity, add flexibility and innovation, and simplify tasks and costs
related to personnel management (Barthlemy, 2003; Elmuti, 2003; Logan et al., 2004; Walsh &
Deery, 2006). Decreased costs may result from improved financial performance, increase in
profitability, increase operating income, reduced risks and costs associated with innovation, and
cheaper labor (Barthlemy, 2003; Elmuti, 2003; Logan et al., 2004). Outsourcing often increases
an organizations ability to focus on their core competencies. Outcomes tied to increased focus
include improved productivity, improved and increased capacity, and improved organizational
effectiveness (Barthlemy, 2003; Elmuti, 2003). Further, companies may notice increased
productivity in terms of access to new technologies, improved quality in work outcomes,
increased speed of task and product completion, increased ability to respond to customer needs,
and the ability to establish a smaller core workforce (Elmuti, 2003; Elmuti & Kathawala, 2000;
Walsh & Deery, 2006). Outsourcing can also increase an organizations access to innovation and
improve their flexibility. This is often accomplished through access to new skills of offsite
personnel, increases in organizational competitiveness and the ability to gain in markets that
might otherwise be inaccessible or uneconomical (Elmuti, 2003). Finally, through downsizing
and simplifying the number of key personnel a company employs, outsourcing can save on time,
energy, and resources spent toward personnel management in such areas as recruitment,
screening and selection, training, managing, and even employment benefits and pensions (Walsh
& Deery, 2006). From this data, the evidence would appear to clearly support a strong business
case for the use of outsourcing to achieve a variety of positive results.

Outsourcing, however, is not without its challenges. In fact, 75% of U.S. managers admitted that
outsourcing initiatives do not necessarily fulfill all their expectations (Barthlemy, 2003, p.
87). Further, 55% of outsourcing relationships fail with the first five years of implementation,
and of the remaining 45%, 12% are unhappy and regret the decision to outsource in the first
place (Elmuti, 2003). To add to these bleak statistics, it is often the case that customers express
dissatisfaction with the outsourcing decisions as well. Inevitably, a host of factors play into the
lack of success in outsourcing endeavors.
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THE EMPLOYEE PERSPECTIVE: RISKS TO PERSONNEL

This paper intends to reveal important areas of employee well-being that may be hindered by
outsourcing decisions. Four primary personnel risks must be considered when implementing
outsourcing strategies: trust, job satisfaction, motivation, and stress. These four personnel risks
may each lead to a variety of negative organizational outcomes if left unmanaged. However,
businesses can attempt to mitigate these negative outcomes through taking the proper action
when developing and planning outsourcing strategies.

In identifying the seven deadly sins of outsourcing, Barthlemy (2003) recognized the fourth
most common outsourcing mistake is overlooking personnel issues that stem from outsourcing
endeavors. Analysis showed that 38% of companies, who failed in outsourcing attempts,
committed this mistake (Barthlemy, 2003). As outsourcing has grown, thousands of employees
have become subject to drastic organizational change. Yet, strangely, management researchers
have nearly ignored the employees perspective on the matter (Logan et al., 2004). The attitudes,
perceptions, and behaviors of employees influenced in outsourcing initiatives are vital aspects
are that should be considered when outsourcing.

Employees who remain within an organization that has reduced its workforce experience real
challenges. These challenges must be recognized, considered, and addressed if the organization
wishes to maintain a healthy workforce that is able to function at its maximum capacity. The
potential risks to employees are vast. For example, an older outplacement firm survey of
companies that had downsized, reported that 74% of senior managers observed a reduction in
morale, trust, and productivity (Cameron, 1994). Workers may also experience issues around
occupational stress, job security, commitment, satisfaction, burnout, motivation, psychological
contracts, confusion, job involvement, turnover intention, job embeddedness, loyalty, attitudes,
and organization-based self-esteem (Brooks, 2006; Chattopadhyay & George, 2001; Elmuti &
Kathawala, 1993; Logan et al., 2004). These risks to employees are not surprising as outsourcing
is often initiated with major organizational change and restructuring with little regard for the
effect on remaining personnel. Seemingly abrupt organizational change may lead to employees
resistance to change, low morale, reduced efficiency, a decrease in organizational citizenship
behaviors (proactive behaviors performed out of goodwill), and malfunctions in corporate culture
(Bruce & Martz, 2007; Chattopadhyay & George, 2001; Elmuti & Kathawala, 1993). Why
should organizations care? The ultimate impact for the organization is reduced performance and
productivity, and increased turnover. The following illustrates the importance of effectively
monitoring turnover:

Research studies have indicated that customer satisfaction and loyalty can be
influenced by employees perceptions of equity as well as job satisfaction and
organizational commitment. High employee turnover has been correlated to
high customer turnover. An inability to build a stable long-term workforce can
deprive an organization of an accumulated knowledge of products, customers
and work processes that are seen as crucial to the provision of high-quality
service. (Walsh & Deery, 2006, p. 575)

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If, for example, an original goal of outsourcing is to increase productivity, companies may be
thwarting their own efforts by ineffective outsourcing processes.

Ample evidence suggests that employee job satisfaction is positively correlated with customer
satisfaction in industries such as fast-food restaurants, insurance, software, and sales (Homburg
& Stock, 2004). It is thus worthwhile to suggest further examining the effect of outsourcing on
employees involved. The outsourcing process affects several varying subsets of employees such
as those employees laid off due to downsizing, those employees acquired by the new vendor,
those employees remaining within the company, and those employees working offshore for
potential vendors.

This paper focuses on those employees remaining within the organization as these employees
most directly affect organizational outcomes and performance. This paper explores how
outsourcing activities and decisions put the well-being of withstanding employees at risk,
ultimately affecting productivity and creating further costs to the employer. It highlights four
potential threats to personnel: trust, job satisfaction, motivation, and stress, and explains why
these also put the company at risk. Finally, this discussion provides several suggestions for
mitigating these impacts. These include increasing communication, acting ethically, seeking an
understanding of and providing training and development to employees, and developing a
comprehensive strategic plan.

Trust

Trust in organizations is defined by an employees willingness to be vulnerable to the actions of
the organization, whose behavior and actions he or she cannot control (Tan & Lim, 2009, p.46).
It is an exchange of confidence that represents the employees belief that they will not be put at
risk or in harms way by the actions of the organization (Jones & George, 1998). Trust has been
recognized to aid in soliciting important organizational outcomes such as leadership satisfaction,
increased stability, decreased turnover, open communication and information sharing,
cooperation, increased discretionary behaviors such as organizational citizenship behavior,
perceived leader effectiveness, and organizational performance and success (Burke, Sims,
Lazzara, & Salas 2007; Tan & Lim, 2009). For example, employee trust in an organization
relieves the need to worry whether or not the organization will treat the employee unfairly or
withhold basic support (Tan & Lim, 2009). Logically, it follows that these conditions lessen
organization-related woes and motivate employees to focus on work performance (Tan & Lim,
2009, p.52). The decision to outsource may impact the level to which an employee continues to
trust their employer where employees begin to question the extent to which the company will
remain loyal to their workforce (Logan et al., 2004).

J ob Satisfaction

Job satisfaction or the pleasurable or positive emotional state resulting from the appraisal of
ones job and job experience (Locke, 1976, as cited in Valentine, Godkin, Fleischman, &
Kidwell, 2010) is an important component of the employees perception. A pivotal meta-analysis
revealed that job satisfaction is correlated with job performance at .30, a rather significant figure
(Judge, Thoresen, Bono, & Patton, 2001). Other studies have found job satisfaction to lead to
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Communications of the I I MA 2011 67 2011 Volume 11 I ssue 1
organizational citizenship behaviors (Latham, 2007). Overall job satisfaction has also been
linked to profitability, turnover intentions, customer satisfaction, and productivity (Judge et al.,
2001; Valentine et al., 2010). Further, increased organizational commitment is also an important
outcome of job satisfaction as committed employees are more likely to accept and invest in
organizational change (Farndale, van Ruiten, Kelliher, & Hope-Hailey, 2011). In essence, high
morale leads to high productivity (Latham, 2007). Outsourcing options can certainly affect job
satisfaction.

Motivation

Motivation is goal directed behavior that takes place with respect to an individuals self-
regulatory function (Seo, Barrett, & Bartunek, 2004). Motivation contributes to the achievement
of collective and individual goals (Ellemers, Gilder, & Haslam, 2004). In a meta-analysis of 259
studies involving 219,625 participants, Humphrey, Nahrgang, and Morgeson (2007) found that
motivation explained 25% of the variance in subjective employee performance. Motivation is an
important consideration as a company introduces outsourcing to its operations:

As individuals perceive risk or challenges to their jobs, especially when the
risks are associated with their continuance in a particular role, motivations
change. It has been shown that change resulting from downsizing can impact the
workers motivation, which in turn impacts the productivity of the organization.
(Brooks, 2006, p.48)

Organizations must consider the implications on employee motivation when making changes to
the workflow and organizational structure during the outsourcing activities.

Stress

Occupational stress may likely occur in light of foreseen job insecurity. The adverse impact and
side effects on employees, called survivor sickness syndrome, occur as a result of organizational
change and downsizing and are more intense than those that occur from routine organizational
change efforts (Strseth, 2006). Long-term perceived job insecurity predicts both short-term
stress reactions such as decreases in job satisfaction, and long-term stress reactions, such as
increases in physical symptomatology (Strseth, 2006, p. 542). Further, outsourcing and
subsequent downsizing can often lead to burnout and stress for those employees who have
received an increased work load, a work role stressor commonly referred to as role overload
(Eatough, Chang, Miloslavic, & Johnson, 2011; Elmuti & Kathawala, 1993). Also, unclear
definitions of the newly fused roles may lead to role ambiguity, where employees experience
vague or unclear role expectations (Eatough et al., 2011). Role stressors such as role overload
and role ambiguity can lead to anxiety, tension, and conflict which may ultimately hamper the
employees ability to focus on achieving their own personal and professional work goals. Such
prolonged stress and hindrance is expected to decrease job satisfaction, organizational citizenship
behaviors, and may also curb enthusiasm and friendliness ultimately impacting customer
perception (Eatough et al., 2011; Elmuti & Kathawala, 1993). Long-term occupational stress
leads to both mental and physical symptoms of poor health, eventually leading to absenteeism
(Schaufeli, Bakker, & van Rhenen, 2009). The impact of outsourcing on employee occupational
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stress has the potential to reduce productivity through burnout, work overload, and the long-term
mental and physical symptoms of stress.


PRACTICAL IMPLICATIONS

Trust, job satisfaction, motivation, and stress issues not only put employees at risk, but may also
have real consequences for the organization. Organizational-level outsourcing decision-making
and implementation ultimately affects the capacity at which the employee operates therefore
further affecting the companys bottom line. Fortunately there are strategies managers and
executives can use to avoid these dangers and lessen the impact of choosing to outsource.

Communication to Retain Trust

Corporations who decide to introduce outsourcing should ensure that they use open and frequent
communication with their employees. Managers who attempt to maintain secrecy may find that
rumors leak due to failed silence, leading to counterproductive anxiety and premature resignation
notices (Barthlemy, 2003). Communication must be present throughout the outsourcing process
(Elmuti, Kathawala, & Monippallil, 1998). Employees should be privileged to information about
the new outsourcing partnership and their human resources related concerns must be addressed.
Vigilant communication should include issues such as the employee selection process, culture,
policies and benefits of the new expected outsourcing partner (Elmuti, Kathawala, &
Monippallil, 1998). Further, the commonly held fear of change and fear of job loss is cited as one
of the most serious problems that successful firms face when attempting to begin global
outsourcing (Elmuti & Kathawala, 2000). Two important techniques in managing this risk are
communication and honesty. By curbing fear and allowing open communication, companies can
retain trust. Another focus when building trust should include effective communication between
cross-functional departments. This is expected to reduce the negative effects of outsourcing
projects on the morale and performance of the remaining employees (Elmuti, 2003, p. 39).
Effective communication is a vital piece of successful implementation of outsourcing by
reducing fear and anxiety and retaining trust in management and coworkers.

Understanding the Employee Perspective Facilitates J ob Satisfaction

Managers must pursue a true understanding of employee perceptions and fear around
outsourcing and display acts of commitment to those remaining employees. Such an
understanding will allow managers to address concerns as they arise throughout the transition
process (Logan et al., 2004). Vigilant personnel management may be able to aid in shaping
employee opinions of outsourcing implementation. Without this pledge to monitor employees
perceptions, companies are likely to experience a drop in productivity (Logan et al., 2004).
Working toward realignment of company and employee goals, vision, and values may be a
useful tool in this process, especially during the outsourcing process. Collins (2009) suggests
taking innovative steps toward motivating purpose in your employees. Creating a higher purpose
for employees, as opposed to numbers-driven accomplishments, provides employees with the
opportunity to give meaning to their work and also unifies the organization (Collins, 2009).
Organizations can also consider aligning the business strategy and goals with the employee
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Communications of the I I MA 2011 69 2011 Volume 11 I ssue 1
vision by measuring success through client satisfaction and service levels. Establishing a strong
corporate culture with visible top management support is expected to assist in effectively
restructuring the organization (Elmuti & Kathawala, 1993). Further, maintaining those key
employees who remain within the organization after outsourcing occurs is important. Often,
these employees hold firm-specific knowledge about how to make operations run smoothly
(Barthlemy, 2003). Along with understanding their perspective and providing higher purpose, it
may be necessary to offer higher salaries and benefits (Barthlemy, 2003). Continued
development of employees will aid in rebuilding employee commitment. Training, retraining,
and cross-training will aid in employee adaptation to downsizing (Cameron, 1994). Treat
employees remaining within the organization as assets whose ideas and contributions are
respected by encouraging and offering ongoing career development opportunities (Cameron,
1994). The extent to which employees feel like valued assets in the companys pursuit for
change, largely determines the extent to which those employees remain satisfied of their role
within a greater purpose.

Ethical Decisions Target Motivation

Research also suggests that companies must maintain ethical behavior throughout their decision-
making and implementation process to retain motivated employees. Given the aforementioned
plausible onset of decreased motivation, organizational citizenship behaviors, and performance,
the following suggestions are ideal for outsourcing scenarios:

Leaders with strong ethical commitments who regularly demonstrate ethically
normative behavior can have an impact on the job characteristics model
elements of task significance and autonomy, thereby affecting an employees
motivation (willingness to exert effort), which in turn will be evidenced by
indication of enhanced task performance and organizational citizenship
behaviors. (Piccolo, Greenbaum, den Hartog, & Folger, 2010, p. 259)

Ethical decision-making, according to Henderson (1997), can assist in circumventing a majority
of personnel issues related to outsourcing (as cited in Barthlemy, 2003). Ethical behavior
includes the involvement and support by top managers (Elmuti & Kathawala, 2000). It is
unreasonable for organizations to expect acceptance for change on the part of the affected
employees without support starting at the top. The entire organization needs to be on board with
the expected changesexecutive level managers are of no exception. Top management should
aspire to think of themselves as the standard bearers, mood setters, and moral leaders of their
organizations (Hunt et al., 1989, as cited in Valentine et al., 2010, p. 365). Throughout the
process it is necessary to continue to treat employees with value. Employees who feel that they
are valuable resources for the company as opposed to commodities that are easily purchased and
discarded are likely to have more commitment toward the organization (Brooks, 2006). Acting
ethically as a business includes investing in the well-being of your employees and making
decisions for the long-term success of the organization. Outsourcing is not a short-term fix for
unruly spending or poor financial planning; outsourcing is a long-term business strategy that
seeks to re-evaluate the core of the business.
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Thorough Planning Addresses Occupational Stress

It is essential that organizations commit to see through the change process step-by-step. This
includes creating a comprehensive plan for change management, laying out the specific long-
term goals of outsourcing, and training and developing the necessary skill sets to manage the
outsourcing process and the personal issues that are likely to stem from its onset (Elmuti, 2003).
Managers must ensure strategic alignment of company and employee visions and goals, seek to
understand the employee perspective, and display commitment to continued employee
development. Further, the company must prepare to reevaluate various job positions and
workloads using job analysis as the organization experiences a major restructuring through
implementation of outsourcing.

Insufficient planning for implementation is a commonly cited reason for failed attempts at
outsourcing (Elmuti, 2003; Elmuti & Kathawala, 2000). Major change is always stressful and
painful for people, especially when it involves a prolonged transition period of adjustment,
disruption, and dislocation (Yukl, 2010, p. 317). When planning for the outsourcing transition,
it is important to look at current change management literature. A few such pertinent concepts
include: create a sense of urgency around the opportunities that outsourcing provides,
communicate a clear vision about how these opportunities will benefit the company and its
employees, and build an expansive alliance of change supporters (Elmuti et al., 1998; Yukl,
2010). Additional steps for preparing personnel involve explaining how the change process will
affect employees, providing support for coping with the potential trauma of change, and ensure
that employees will experience and/or see the success of the initiative in early stages of the
transition (Yukl, 2010). Preparing employees for change is a vital piece of the planning process.

Comprehensive planning should also consider detailed objectives, expectations, requirements
and expected benefits of the projects, and management support for the project before the firm
begins implementation (Elmuti & Kathawala, 2000). The strategy for outsourcing should have a
specific goal that can produce a measurable objective and quantifiable outcome (Elmuti 2003;
Elmuti & Kathawala, 2003). Organizations must clarify their long-term business objectives
before deciding to outsource portions of their labor. Companies that overemphasize the short-
term benefits of outsourcing in their decision-making process put themselves at risk of failure
(Elmuti et al., 1998). In addition, such a plan must provide for reevaluation throughout the
transition and during maintenance of its implementation. The planning phase is an important tool
that should include reevaluation of the plans progress, its effects on the staff, and its
effectiveness toward implementation. Further, as job positions are subject to change,
reevaluation must consider that various positions might also need reassessment (Elmuti, 2003).
This will help avoid the potential burnout and stress resulting from increased work load. The
strategic plan should include performance of a thorough job analysis for those positions that have
been affected by the decision to outsource. Job analysis will establish the knowledge, skills, and
abilities needed to perform the job in addition to the duties and tasks that are expected of a
person within this role (Cascio & Aguinis, 2011). This process will help determine to what
extent individuals are working under fair expectations. The simple fact that employers take a
vested interest in employee well-being and workload is expected to increase commitment to the
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organization and job satisfaction through perceived organizational support (Eisenberger,
Huntington, Hutchison, & Sowa, 1986).
CONCLUSION

Given that the quality of the workforce is the key to customer satisfaction (Thite, 2010, p. 7),
consideration of the impact of outsourcing and restructuring upon employees is vital to the
success of the change effort. Walsh and Deery (2006) succinctly highlighted customers
perceptions of service quality are critically affected by the organizational commitment of
employees. Moreover, high turnover rates of employees have been found to have a negative
impact on customer sales in various service settings. If subcontracting leads to less committed
employees and an increasingly unstable workforce, it will likely affect the quality of service
provided and require firms to recalculate the net benefits of outsourcing. Outsourcing provides
great benefits when implemented effectively, yet also exposes a host of risks to personnel and
therefore the organization as a whole. To combat the risks of trust, job satisfaction, motivation,
and stress, companies contemplating outsourcing must adhere to open communication with staff,
ensure that decisions are made ethically, seek out the employee perspective and provide
appropriate support in response, and outline a detailed and comprehensive plan that gives
thought to each phase of the process.

Future research questions around outsourcing strategies are countless. In terms of addressing
employee well-being and functionality, the following questions for further research are pertinent:
1a.) What types and frequencies of communication best facilitate the cultivation of trust once
companies decide to outsource? 1b.) From whom within the organization is communication most
essential? Direct manager? CEO? President? 2a.) To what extent should companies measure job
satisfaction during the outsourcing process? Is this a variable that should be monitored at regular
intervals? 2b.) What changes in job satisfaction metrics have occurred in companies who have
undergone the outsourcing shift? What change processes were used in these companies? How
was performance affected? 2c.) Aside from understanding the employee perspective, what other
techniques can increase job satisfaction throughout the structure change? 3a.) What other
variables can moderate a decrease in employee motivation during organizational change such as
outsourcing? 3b.)What are the interventions that successful companies have used to keep
employee motivation at an ideal level? 4a.) To what extent should employees be involved in job
position reevaluation? 4b.) What is an appropriate timeline for preparing employees for the
upcoming change to utilize outsourcing? 4c.) What techniques aid in reducing the stress
associated with a perceived decrease in job security? 4d.) What specific measurable goals and
outcomes of outsourcing lead to successful initiatives and what are those that have led to failed
outcomes?

Given the increasing challenge and variety of potential complications, firms that use outsourcing
might benefit from implementing a unique department that is devoted to providing outsourcing
management expertise (Barthlemy, 2003). Outsourcing is on its way toward becoming a unique
field with distinctive issues. Developing field-specific expertise of all aspects of outsourcing
benefits, challenges, and best practices will be increasingly valuable given the vast array of
common pitfalls. Many firms are unknowingly operating under experimental conditions without
privilege to the existing research around outsourcing best practices. Ideally, as outsourcing
continues to grow, the risks and issues associated will become more commonly acknowledged.
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Communications of the I I MA 2011 72 2011 Volume 11 I ssue 1
Until then, we must hope that business leaders take the initiative to seek out pertinent
information useful for making decisions that are valuable for the affected employees and rational
for the long-term sustainability of the company. Further research will help determine the impact
that an outsourcing department has, on the outsourcing process overall, and on employee
perspectives in particular.


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