HR Outsourcing in China and India: Practices and Pitfalls for Western MNCs

Fang Lee Cooke

Global trends in HR outsourcing

HR outsourcing can be defined as "placing responsibility for various elements of the HR function with a third-party provider"(Turnbull, 2002, p.11). There is now a global trend of continuing growth of HR outsourcing. This growth is pushed by organizations’ needs to acquire outsourcing services, as well as pulled by international HR outsourcing provider firms which are keen to expand their services in different business areas and geographical locations. Large multinational corporations (MNCs) are the main user firms of HR outsourcing. Equally, outsourcing providers are mainly large MNCs, offering an increasing number of HR services delivered in innovative manners.

However, the growth of HR outsourcing has not followed the anticipated speed predicted by some commentators. Nor has the scope of the outsourcing been as radical as some may assume. For example, only 3 per cent of organisations surveyed by SBPOA in 2005 reported that they outsourced the entire HR function (Pickard, 2006). This is because the diversity of the HR function makes it difficult for firms to outsource its HR function as a whole to a single service provider to gain economies of scale. Instead, organisations tend to outsource single processes to different service providers to take advantage of their unique strengths. Single-process outsourcing is therefore believed to be the main growth area (Pickard, 2006). Nevertheless, multi-business-process outsourcing has been on the increase too in recent years. This is a result of the growing maturity of the HR outsourcing providers.

Differences exist in the use of HR outsourcing in different parts of the world. These differences arise from the size of the businesses, the degree of sophistication of the HR function, the extent of development of the HR outsourcing market, cultural norms, employment regulations, and labour market characteristics in specific countries and regions. In general, the use of HR outsourcing is much less common in Asian countries than in Europe and the US. A major reason for the relative low uptake of HR outsourcing and shared services activities in Asian countries is the perceived poor quality of service and competency level of consultants in the market and the associated lack of options. Concerns about data security and loss of management control are also important reasons for not outsourcing.

The majority of outsourcing user firms in the Asia region appear to be western MNCs. Perceived benefit of cost reduction and the desire to focus on core competencies are the main reasons for outsourcing the HR function. Social security benefits, payroll processing, legal compliance, recruitment, and training and development are the main HR activities to be outsourced. Recruitment is the first and most common HR process to be outsourced by MNCs in Asia Pacific countries because it is an area in which they rarely have core competency (Beaman and Eastman, 2003) and can benefit from the specialist services from well-established HR outsourcing provider firms such as recruitment agencies.


HR outsourcing in China and India


In China, HR outsourcing is still a relatively new concept unfamiliar to the majority of Chinese organizations. Chinese companies also find it difficult to justify a decision to outsource on the basis of potential cost reductions because administrative labour is still relatively cheap. It may actually cost more to outsource the function than to keep it in-house. By contrast, western MNCs are the main drivers of HR outsourcing in the Chinese market both as user firms and as supplier firms.

It must be noted that although the concept of HR outsourcing is novel to Chinese organizations, using external providers for certain HR activities is by no means a new practice. Chinese firms have started to use external providers for their training and development activities since the early 1980s. There has also been an increasing use of external providers for recruitment since the 1990s, especially for headhunting managerial and professional staff. Given the rapid growth of the number of recruitment and headhunting agencies in China in recent years, some of them large MNCs such as Manpower, recruitment is undoubtedly one of the major outsourcing activities.

The year 2008 saw the rapid growth of Chinese-owned HR outsourcing provider firms that specialize in employment and dismissal, payroll and benefits administration, personal income tax, personnel file management, and labor dispute resolution. In addition, the country also saw the growth of employment agency firms. These growths are partly a result of the enactment of the new Labour Contract Law (LCL) from 1st January 2008. LCL provides a much tighter framework of employment relationship than previous labor regulations, including job security and the provision of social insurance benefits. It also gives employees more power to seek justice through legal channels when labor laws are violated by employers. Many firms have dismissed their employees and rehired them through employment agencies to bypass employers' obligations. Others have to rely on external service providers to handle some of the HR functions as identified above. Sourcing advisor EquaTerra reported that the Chinese market was experiencing rapid growth and would expand by at least 25% by the end of 2009. Five years ago, the market was valued at only £8bn. It is expected to be worth more than £41bn at the end of 2008 (Ranjan, 2008).

The growth of HR outsourcing market in China is also likely to be fuelled by the Chinese government’s new industrial policy to boost service industries, with outsourcing being listed as one of the industries in which investment is most encouraged. Industrial policy interventions include financial support to enterprises and the launch of a project by the Ministry of Commerce with an annual budget of at least $12.5 million to set up 10 bases for service outsourcing over the coming three to five years. The Ministry hopes to persuade 100 multinational corporations to transfer their partial outsourcing businesses to China, as well as creating 1,000 large-scale international service outsourcing enterprises. It is hoped that this will help improve domestic outsourcing services. The Ministry plans to focus on 10 enterprises with over 10,000 employees, which will carry out international service outsourcing. Although currently trailing well behind India, China aims to become the main international outsourcing service base within the next five to 10 years (People’s Daily Online, 2006).


Contrary to its bourgeoning business process outsourcing market, HR outsourcing in India has not developed in the expected momentum that is in line with the global trend. Nevertheless, HR outsourcing in India is projected as the fastest growing segment of BPO over the next three years with large-scale offshoring already taking place. Large international players like Fidelity, Exult and Hewitt have set up their delivery centres in India. The revenue from HR outsourcing in India is expected to increase to $3.5 billion by 2008, according to a Nasscom-McKinsey survey (see 2005; Singh, 2007). Indian firms share the same view as their Chinese counterparts in HR outsourcing. They believe that it is more effective to manage their HR processes in-house due to cost factors and potential risks in confidentiality, quality, security breaches, ethics and control. The most common HR processes outsourced include: training, payroll processing, surveys, resume management services, online performance management solutions, benefits administration, travel and expense management, compensation consulting, benchmark studies and statutory compliance ( 2005; Sehgal, 2004).

Very small and very large firms are the main outsourcing users, the former due to the absence of in-house expertise and capacity, whereas the latter outsource routine HR processes in order to focus on core businesses (Jasrotia, 2003). Nevertheless, experts in the field believe that HR outsourcing in India is going through a transitional phase regarding its acceptance and movement from a corporate domain (mainly MNCs) to public sector undertakings. Given the Indian offshore advantage, it is predicted that India will be a significant HR outsourcing venue for the majority of western MNCs (Hunter, 2006). However, the challenge facing this sector to flourish in India rests with the quality, sustained cost advantage, and security of information.

Implications of HR outsourcing in China and India for western MNCs

Outsourcing certain elements of their HR function in offshore countries where they operate enables MNCs to tap into local expertise and to focus on core competence. This practice helps firms to acquire the necessary expertise resource in a relatively short period of time without having to go through the traditional life cycle stages assumed for internationalizing firms. However, this ‘short-cut’ to acquiring HR competence requires a corporate HR structure that is different from one that may evolve through in-house development. Indeed, the advent of HR outsourcing and shared services centres has led to significant changes to the corporate HR structure for many firms as a prerequisite for adopting these services. Offshored outsourcing of the HR function adds further challenges to the complexity of centralisation, decentralisation, control and coordination that are exhibited in managing HR in MNCs and the outsourcing relationship.

Outsourcing transactional activities (e.g. payroll) and specialist HR activities (e.g. legal compliance) enables client firms to gain cost efficiency and access specialist knowledge with relatively little negative impact to the corporate HR. However, outsourcing human capital activities (e.g. recruitment and training and development) may present additional challenge to the maintenance of corporate culture and value, which is already a difficult task to manage for MNCs. Local employees from HR outsourcing service providers may have their own cultural values and ethical norms which do not necessarily conform to the western ethical standards and stakeholders’ values. They may impose these cultural values and ethical norms consciously or subconsciously and in the process of providing the HR services. For example, discrimination in recruitment is a widespread phenomenon is both China and India. They also have a much more relaxed attitude towards the observation of employment laws and regulations. When HR functions are outsourced, MNCs may have little control to ensure that HR services are provided in a professional and fair manner. The quality of HR services has a direct impact on the employees’ perception about the organization and is crucial in the attraction and retention of talent. Divergence from the corporate value by the outsourcing provider not only creates a distorted image about the MNC in the host country, but may also undermine the development of a corporate culture.

China and India share a collective culture where relationship management is important at workplaces and in the society. The outsourcing of HR activities (a transactional process) inevitably take away the opportunity of interaction between line/HR managers and the employees (a bonding process). Employees may feel less valued when they have to deal with an external provider for issues that may be private and confidential. The reduced bonding between employees and managers may in turn reduce employees’ engagement with the firm. This is particularly the case in India where the talent retention problem is even more acute than that in China and developing a good relationship with the employees and their extended family is highly important in effective management of the workforce.