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ABSTRACT
Human resource (HR) outsourcing research has primarily focused on the client with little attention paid to the service provider. As an initial step in understanding this important stakeholder in the HR outsourcing relationship, this study focuses on the financial performance of HR service firms that publicly announce outsourcing contracts. From the provider's perspective, we investigate firm performance changes subsequent to outsourcing contract announcements, using a sample of 94 publicly available press releases. Our tests show that in the long term, small HR service providers contracted by large client firms experience improvements in operating profitability and margins.
Keywords: human resource outsourcing, operating performance, human resource services, return on assets, return on sales
INTRODUCTION
Notwithstanding the challenging economic times, the global human resource outsourcing (HRO) market is expected to increase in value from $26.8 billion in 2006 to $43.7 billion by 201 1 according to Gartner, a global IT research and advisory company (Griffiths, 2008). Public reports indicate that more than 60% of firms engage in some form of human resource outsourcing (Esen, 2004; Adler, 2003; Dell, 2004). As firms continue to outsource HR services to reduce costs, improve service quality, and enhance core competency (Shen, 2005; Miller, 2008), finding the right supplier is essential to the success of outsourcing contracts (Feeny et al., 2005). To meet the demand for services, an industry of providers is developing. Thus, the focus of potential HRO client firms has shifted from the fundamental decision to outsource to selecting the right provider, according to Jay Rising, President of HR Outsourcing for Hewitt (HROT Staff, 2008).
Clients engaged in long term, high dollar value HR arrangements depend on providers for continuous services for the life of the contract. Thus, they have a stake in the providers' long term success. On the other hand, clients also have an incentive to reap maximum benefits from each contract and are therefore likely to behave in ways that erode margins of providers (Feeny et al., 2005). Academic researchers have paid relatively little attention to the performance consequences for HR service providers (Jenster and Pedersen, 2000; Levina and Ross, 2003; Taylor, 2007). A successful outsourcing arrangement requires the provider accept increased risks in exchange for some benefit (Taylor, 2007), the most obvious, increased revenue. HR...