Human Resource Outsourcing: Performance of Service Providers

Considerable anecdotal evidence suggests that there is a linkage between organizational outsourcing and performance. However, few empirical archival studies of the outsourcing-performance relationship have been conducted. Using an archival approach, this paper evaluates the market and operating performance for a rarely studied stakeholder in the outsourcing agreement: the human resource (HR) service providers. Due to their influence on the most important asset of the firm, human capital, we focus on HR providers performing all aspects of HR services, including HR management, HR technology, regulatory compliance, risk management, and payroll. We base our tests on transaction cost economics theory (Coase 1988; Williamson 1979, 1985) which predicts that the performance of the service provider firms should be influenced by the types of services provided and the risks and costs associated with performing those functions. Both experienced and inexperienced providers undertake HR services that require asset specificity and assume additional risk. We first examine whether the market recognizes and reward the providers' undertaking additional risks. Next, we investigate whether the risks undertaken by experienced and inexperienced service providers impact subsequent performance. Using a performance-matched sample, we examine our performance predictions in three ways: 1) market reaction to human resource contract announcements, 2) long-run market returns subsequent to those announcements, and 3) operating performance before and after those announcements. In examining one of the fastest growing trends in the business world today, namely outsourcing to service providers, we find evidence of positive market reaction to HR service provider contract announcements, and we find some evidence of differential effects on subsequent firm performance. The results of this study may inform management of the possible benefits of releasing outsourcing contract award information and also inform stakeholders of the possible economic benefits of HR contracting on the performance of service providers.