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  Title: How Human Resource Outsourcing Affects Organizational Learning in the 
  Knowledge Economy. By: SCHLOSSER, FRANCINE, TEMPLER, ANDREW, GHANAM, DENISE, 
  Journal of Labor Research, 01953613, Summer2006, Vol. 27, Issue 3
  Database: Business Source EliteHow Human Resource Outsourcing Affects 
Organizational Learning in the Knowledge Economy 
Contents
  I. Introduction 
  II. HRM Outsourcing 
  III. The Strategic Role of HRM in Developing Organizational Learning 
  IV. Outsourcing and Organizational Learning 
  V. Dualism: The Threat to Congruency 
  VI. An Integrating Model 
  VII. Contributing Through the Psychological Contract 
  VIII. Integrating the Concept of Internal Marketing 
  IX. Future Research 
  NOTE 
  REFERENCES 
Adaptability and knowledge management, key elements of organizational learning, 
are critical to organizational success as a result of a fundamental shift 
towards a knowledge economy. HR outsourcing and the growth in contingent work 
can result in a significant loss in learning capital through a breakdown in the 
psychological contract. We explore how to preserve HR's strategic role in 
facilitating organizational learning in the new outsourcing and offshoring 
context. The problem is compounded if outsourcing is introduced for cost control 
rather than strategic re-focusing reasons. We suggest that managers can 
positively influence the relationship between outsourcing and organizational 
learning through internal marketing tactics and enriched psychological 
contracts.
I. Introduction 
The global shift toward a knowledge economy highlights adaptability and 
knowledge management inherent in organizational learning as critical to 
organizational success. Yet, as the Economist Special Survey on Outsourcing 
(Edwards, 2004) points out, this very adaptability of new Internet technology is 
driving the growth of outsourcing. Of particular concern in North America is 
offshoring — the outsourcing of work to lower wage economies overseas, 
particularly those of China and India. Additionally, more companies seek to 
maintain flexible employment by expanding their contingent workforces.
Outsourcing and contingent employment contracts make it more difficult to 
maintain organizational learning and identity. Employees play a critical role in 
enhancing organizational learning; hence HRM contributes strategically to 
outsourcing by enhancing organizational learning and maintaining corporate 
culture.
Temporary staffing strategies place considerable stress on employment 
relationships, particularly on the psychological contract (Rousseau and 
Wade-Benzoni, 1995), which can result in a significant loss in learning capital, 
though benefits may result from the infusion of new ideas from outside the firm. 
This individual contribution must be captured through the active involvement of 
HRM at the strategy table. The outsourcing of many HRM functions may complicate 
this solution. Therefore, the research question of interest is: How can HR's 
strategic contribution to organizational learning be preserved and cultivated 
within this new context of outsourcing and contingent work?
Although organizational learning has become a popular research topic, spawning 
research agendas in knowledge management and learning orientation literatures, 
and although it touches on the role of HR in fostering this learning 
orientation, there has been little conceptual and empirical research on the 
effect of temporary HR staffing strategies. Practitioners may consider this a 
purely academic issue that is trumped by the need to make outsourcing decisions 
anchored in the current competitive business environment. However, we believe 
that understanding our research agenda will provide practitioners with greater 
insight and, indeed, a greater toolbox to foster competitive advantage linked to 
the retention of organizational learning. To begin, we contend that the loss of 
learning capital may be driven by the reason for outsourcing. For example, the 
outsourcing choice may be determined by cost reduction (competitive emphasis), 
or by a strategic re-focusing on core competencies (customer emphasis), and 
cultural strengths (internal user emphasis). When outsourcing is undertaken to 
reduce costs, it becomes more challenging but even more crucial, for HRM to 
create a strategy for managing human capital and to prevent the loss of 
organizational learning.
Herein we focus on the issues related to the outsourcing of human resource 
professionals. There is a strategic risk that in-house expertise will be lost 
permanently when HR functions are outsourced (Greer et al., 1999; Stroh and 
Treehuboff, 2003; Belout et al., 2001 ; Laabs, 1998). Organizations relinquish 
some control over processes and strategic issues relating to the outsourced 
function (Laabs, 1998; Greer et al., 1999; Adler, 2003; Stroh and Treehuboff, 
2003). With diminished dynamic capabilities and reduced strategic advantage a 
firm can end up owning nothing. "There's nothing left that's unique, that's 
proprietary, that's distinctive. It's merely a web that bring together all the 
various sundries and suppliers. It becomes a completely hollow shell, and it can 
be blown away with the slightest of pressures" (Vu, 2004a: 1).
II. HRM Outsourcing 
The current dynamic HRM environment demands specific expertise, particularly in 
the law around employment practices. However, many small- and medium-sized 
enterprises do not have the breadth of HRM staff to ensure such a specialized 
skill base. It is easier and more cost effective to outsource those requirements 
when the need arises (Adler, 2003; Klaas, 2003; Friesen, 2003). Outsourcing 
occurs when a company requires temporary or specialized expertise and decides to 
contract for temporary workers. A 1996 survey of large North American firms by 
Hewitt Associates found that 93 percent of respondents outsourced some of their 
HR functions (Greer et al., 1999), but a more recent survey by the Conference 
Board of Canada (Brown, 2004) suggests that most Canadian HR professionals do 
not place a high priority on outsourcing.
What does seem important is maintaining strategic direction. Stroh and 
Tree-huboff (2003) offer three guidelines for outsourcing based on their 
research: ( 1) retain a degree of in-house expertise in any outsourced function, 
( 2) never outsource a core competence, and ( 3) prioritize company culture.
Although HR is commonly outsourced by function (Tomback, 2003), there is no 
clear agreement in the literature on which functions can be successfully 
outsourced. Outsourcing in one area may have performance implications for other 
areas. Some activities may not be practically separable, meaning that either 
they are kept in-house, or can only be outsourced as a bundle. Functions deemed 
transactional by a firm's own assessment can be separated most easily. Payroll 
and benefits are the two most often outsourced tasks, whereas training and 
development are often outsourced because of the availability of highly qualified 
sources (Jensen, 2003; Adler, 2003; Wolman and Hay ward, 2003). One of the 
biggest outsourcings in Canada was the ten-year, $750-million deal between 
BMO-Financial and outsource provider Exult to take over payroll and benefits 
administration, HR Call-center management, employee records, and other 
technology-driven administrative functions (Vu, 2004b).
In contrast, functions which are strategic and transformational in nature should 
not be outsourced, but must be maintained in order to create dynamic capability 
and allow the firm to configure itself effectively in changing markets. A 
dynamic capability is defined as "The firm's processes that use resources — 
specifically the processes to integrate, reconfigure, gain and release resources 
— to match and even create market change" (Eisenhardt and Martin, 2000: 1107). 
In this context, Greer et al. (1999) conducted interviews with HR executives to 
find out what functions were appropriate or inappropriate for outsourcing. 
Respondents suggested core competencies such as labor relations, employee 
relations, and performance management should remain in-house, as these involve 
employee trust and confidentiality.
Outsourcing choices are critical for HR practitioners and other strategic 
managers. If sustainable competitive advantage rests in effective use of human 
capital, and the current trends are moving towards outsourcing portions of the 
HR functions, organizations will need to be confident that the remaining 
in-house HR functions truly provide strategic advantage and the "right" 
functions have been outsourced. It is important to distinguish outsourcing that 
is driven by cost (competitive) pressures versus outsourcing driven by strategic 
re-focusing and consolidation. Additionally, actions must be taken to ensure 
that outsourced functions are aligned with the strategic responsibility to 
promote a learning orientation throughout the organization.
III. The Strategic Role of HRM in Developing Organizational Learning 
This trend toward outsourcing has complicated the strategic role of HRM in 
developing the knowledge infrastructure and core competencies necessary for a 
learning organization. The two building blocks of organizational core 
competencies are human capital (including training, experience, judgment, 
intelligence, relationships, and insights of individual managers and workers), 
and organizational capital (including the firm's formal reporting structure, 
formal and informal planning, controlling, and coordinating systems, and 
informal relations among groups within a firm and those in its environment) 
(Barney, 1991). HRM expertise is demanded to effectively align human capital 
with organizational capital, which can be done through the retention of 
organizational learning.
Organizational learning, also referred to as "a learning orientation" is 
described as a "set of values" by Baker and Sinkula (1999). Higher order 
learning is necessary to prioritize and act on important market information, 
while discarding information that has become obsolete. In this way, 
organizational learning creates competitive advantage by enhancing 
knowledge-producing behaviors with knowledge-questioning values (Baker and 
Sinkula, 1999: 413).
An organizational learning orientation is composed of three dimensions: shared 
vision and experience, commitment to learning, and open-mindedness (Liu et al., 
2003; Baker and Sinkula, 1999; Sinkula et al., 1997) and sustains competitive 
advantage through innovation (Atuahene-Gima, 1996; Han et al., 1998; Hurley and 
Hult, 1998).
IV. Outsourcing and Organizational Learning 
Levitt and March (1988) outlined four traditional sources of organizational 
learning: ( 1) learning by direct experience; ( 2) interpretation of history 
(reflecting shared perspectives); ( 3) retrieval of knowledge from 
organizational memory (using established communication channels and routines); 
and ( 4) learning from the experience of others. The first three sources are 
adversely affected by outsourcing because the temporary nature of outsourcing 
weakens the traditions and routines associated with a strong organizational 
culture. HR is often responsible for communicating this organizational culture. 
However, an outsourced HR function may not be familiar with the organization's 
culture and, through poorly aligned recruiting practices, could eventually 
weaken this culture. Culture is strongly related to the concept of a learning 
orientation as a set of values (Baker and Sinkula, 1999). De Long and Fahey 
(2000) described cultural characteristics that shaped social interaction and 
behaviors that leverage knowledge, including learning-oriented characteristics 
such as orientation to existing knowledge and expertise, knowledge sharing, 
teaching, and learning from mistakes. When HR is outsourced, such culture is 
difficult to maintain both in the HR department and across the company.
The fourth source of organizational learning can be improved through 
outsourcing. For example, a specialized HR outsource-firm models high-level 
expertise and experience that can be a source of individual learning for the 
host firm. To explain, managers who value learning approach key events as 
opportunities to learn, but only about 10 percent of the organizational 
population is believed to display a learning agility that produces colossal 
results (Williams, 1997). In contrast, outsourced employees may be a rich source 
of learning agility, derived from their career resilience and quest for 
employability security over employment security (Iles, 1997). Individuals with a 
learning agility tend to persist in spite of failure, pursue more challenging 
tasks, and use more complex learning strategies (Bell and Kozlowski, 2002).
Transferring individual knowledge to others within the organization is 
important, as is introducing opportunities for experiential learning (Kolb, 
1984). Temporary outsourcing might have a significant negative effect on the 
ability of individuals to relay this knowledge to others and to facilitate the 
adaptive learning cycle. This challenges HR to develop a strategy to harvest 
outsourced knowledge and expertise in a way that builds their organizational 
learning base.
V. Dualism: The Threat to Congruency 
In addition to difficulties in knowledge transfer between outsourced and 
in-house firms, the origin of the outsourcing arrangement may create differences 
in the internal and external knowledge base of the outsourced personnel. For 
example, outsourcing arrangements composed of employees who previously performed 
the function in-house (a type of "spin-off" outsourcing arrangement) may yield a 
stronger understanding of company culture and customer targets. Such outsourced 
employees can build existing relationships with company employees and customers. 
In contrast, outsourcing tendered to personnel previously unaffiliated with the 
company will not have deep knowledge of company-specific philosophy, but they 
will provide a greater knowledge of the external market. These differences in 
knowledge base may reflect parallel differences in commitment established with 
the firm. The originally unaffiliated outsource is more likely to service 
multiple firms/competitors, whereas the outsourced, previously inhouse 
arrangement is built on a stronger firm-specific relationship. Accordingly, the 
history of the outsourcing arrangement might require different strategies to 
strengthen potential organizational learning in the home company.
In sum, organizations can increase knowledge and diversity through outsourcing, 
but this will not translate necessarily into increased organizational knowledge. 
Nonaka and Takeuchi (1995) described how the tacit knowledge of employees 
(knowledge rooted in their experiences and values) must be transformed into 
explicit knowledge useful to the organization. Although individual learning is 
necessary, alone it is not an adequate base for organizational learning (Argyris 
and Schon, 1978). Kogut and Zander (1992) developed a dynamic perspective of how 
organizations learn new skills when employees transform personal to social 
knowledge (within the work group) and stimulate a new combination of firm 
capabilities. Outsourcing may negatively affect this commitment to the 
workgroup, as employees perceive only a temporary bond with the company. They 
may also experience conflicting loyalties if they are contracted to work for 
competing firms. The issue of personal commitment is exacerbated when strategic 
functions are outsourced.
VI. An Integrating Model 
Figure 1 depicts how the concepts of the psychological contract and internal 
marketing present strategies for organizations to strengthen organizational 
learning threatened by outsourcing. We show organizational learning at the core 
of an organization. Successful organizations seek to create greater competitive 
advantage by fostering widespread organizational learning potential. The 
expansion of this adaptability and knowledge sharing within the organization is 
indicated by the arrows aiming outward from the core organizational learning. HR 
outsourcing is shown as a yoke that can potentially limit or expand the growth 
of organizational learning. The outward arrows represent the potential for 
organizational learning to be expanded through strategies aimed at strengthening 
organizational culture and transforming individual learning to organizational 
learning. The inward arrows represent the potential for outsourcing to weaken HR 
processes if HR does not strategize to combat this deterioration.
HR outsourcing may expand organizational knowledge in the short term by 
introducing new ideas from independent parties. For example, HR consultants 
build their knowledge of the external environment by working with multiple 
companies in the industry. However, HR outsourcing may weaken the organization's 
learning processes over time as these consultants finish their assignments and 
move on to other contracts with other companies. The individual and tacit 
knowledge that consultants have gained regarding the organization's unique 
culture and routines is not easily retained by the organization.
Previous solutions to the scattered nature of the outsourced knowledge base have 
resided in increased process documentation. For example, Morgan (2004) suggested 
that organizational learning transcends the individual because continuity is 
established through the development of operating procedures and collective 
mental models that exist in organizational memory. However, increased 
documentation of processes and jobs does not fully take account of the broad 
knowledge base of temporary workers. This type of documentation is often 
narrowly focused on the specific elements of the mandated job contracted for by 
the employee. In response, the following sections describe two areas of 
potential development. The first relies on the development of a stronger 
psychological contract with outsourced HR practitioners. The second considers 
the use of internal marketing to communicate organizational culture.
VII. Contributing Through the Psychological Contract 
HR professionals can become the driving force for building the kinds of 
relationships that turn social capital into competitive advantage (Lengnick-Hall 
and Lengnick-Hall, 2003: 53). They link HR's strategic role to the facilitation 
and development of relationships encompassing individuals, groups, and the 
organizational entity itself. In addition to its pragmatic role in designing the 
explicit employment contract, HR also requires knowledge of socialization 
processes, organizational citizenship behavior, and cultural fit with the 
organization. These responsibilities place HR in a unique position to influence 
the psychological contracts of employees throughout the organization.
The psychological contract reflects an obligation in response to a promise — 
more specifically, it captures the exchange of promises between employee and 
organization, as perceived by the individual (Rousseau and Tijoriwala, 1998). 
The organization provides inducements in the form of wages, fringe benefits, the 
nature of the job, and working conditions (March and Simon, 1958). These 
inducements are realized when employers fulfill their obligations and can be 
differentiated from anticipated or future obligations (Coyle-Shapiro, 2002). 
Obligations require that the employee trusts the employer to deliver them in the 
future. When that trust is present, the employee responds with increased 
involvement (Coyle-Shapiro, 2002; Paul et al., 2000). A more recent study of the 
outsourcing of IT functions concluded that behavioral issues such as 
psychological contracts within inter/intra work groups, power and trust are 
highly significant managerial issues in the success or failure of an outsourcing 
strategy (Parker and Russell, 2004).
Psychological contracts may be transactional (short-term, closer to an economic 
exchange) or relational (longer term, involving organizational commitment and 
job satisfaction). Previous research into psychological contracts and temporary 
staff is conflicting. For example, Coyle-Shapiro and Kessler (2002) found 
differences in the psychological contracts between a British firm and its 
contingent and permanent workforce, perhaps because outsourced employees are 
more likely to have the terms of their employment specified explicitly. 
Additionally, the temporary nature of their work makes it less likely that they 
will develop the commitment needed for a strong relational contract (Rousseau 
and Wade-Benzoni, 1995; Cooper, 1997, 1999). However, Guest (2004) concluded 
that the evidence on flexible employment contracts challenges the assumption 
that temporary workers are disadvantaged. Guest found that knowledge workers 
pursuing boundaryless careers are more likely to report positive outcomes. 
Similarly, McDonald and Makin (2000) found that the level of relational and 
transactional psychological contracts did not differ between temporary and 
permanent workers, and temporary workers had higher levels of satisfaction and 
commitment to the organization.
Such conflicting research conclusions may be related to differences in the 
origin of the outsourcing arrangement which, as noted earlier, may create 
differences in the internal and external knowledge levels of outsourced 
personnel. These differences may reflect base psychological contracts that are 
stronger for the spin-off outsourcing arrangements. Supporting this idea, 
McLean-Parks et al. (1998) proposed a typology of contingent work arrangements 
that map differently onto psychological contracts. There is a need to follow 
this up by empirical investigation of the psychological contract as it relates 
to the origin of outsourcing arrangements and, indeed, the origin of the 
outsourced employee's interest in temporary employment.
Irrespective of the base level, finding ways to strengthen relational contracts 
with outsourced personnel is important because the long-term nature of 
relational contracts permits a focus on long-term strategic implications for 
firm-value. Strategically, outsourced HR staff may provide a rich source of 
expert information, because the impermanence of their employment makes it 
necessary that they keep their fingers on the pulse of the market and provide 
superior services. Without a strong relational contract, this knowledge may not 
be shared with the firm.
VIII. Integrating the Concept of Internal Marketing 
In order to prompt employees to reciprocate with the sharing of knowledge, 
employers must be prepared to invest in relational psychological contracts with 
temporary workers. This may be done informally or formally by using a strategy 
of internal marketing aimed at outsourced employees. The concept of using 
marketing strategies to strengthen organizational values and commitment has been 
introduced in the area of internal marketing (George and Gronroos, 1991). We 
suggest a research focus that will address different types of temporary HR 
staffing found in the use of contingent employees (internal partners) and 
outsourced employees (external business partners). We explain how internal 
marketing provides a strategic way to strengthen the host firm's psychological 
contract with both types of employees.
Internal marketing can bolster the culture of an organization. Davis (2001: 124) 
proposed that internal marketing programs "be designed to fit the management 
style and culture of the firm." In his relationship theory of internal 
marketing, Ballantyne (2004) suggested that learning activity and knowledge 
renewal were connected through relationships. We build on this and suggest that 
the psychological contract be studied in tandem with internal marketing. Ideally 
this would involve a consultative or relationship-oriented interaction style, 
effectively transforming an internal marketing strategy from a one-way to a 
bi-directional tool. This combines the strength of marketing persuasion with the 
buy-in associated with participative management to shape stronger commitment and 
a relational psychological contract between employer and temporary employees.
Researchers have examined internal marketing from three perspectives. The first 
perspective considers internal marketing as a strategy that builds relationships 
between internal customers and suppliers (Llewellyn, 2001). A second perspective 
defines internal marketing as the use of external marketing strategies to 
promote internal initiatives, thereby convincing employees in the same way they 
would convince customers (George and Gronroos, 1991). George and Gronroos' 
(1991) thoughts parallel the concept of an internal market orientation involving 
internal market research, communication, and response to the internal market of 
employees recently expressed by Lings (2004). The third perspective on internal 
marketing involves the promotion of a general customer mindset at all levels 
within the company (Kennedy et al., 2002). This third perspective builds on the 
notion of a market orientation, which describes a focus on the acquisition and 
sharing of information about external customers and competitors. This diversity 
of opinion as to what internal marketing entails provides many potential options 
for strengthening organizational culture.
We suggest that elements of each perspective can be used to communicate the 
cultural context of the organization to outsourced workers. For example, an 
internal advertising campaign aimed at temporary employees might include photo 
calendars that reflect the company's values. The second view using external 
marketing strategies may take the form of promotional trips which have been used 
frequently in the financial services industry to encourage independent sales 
representatives to sell sponsored products. Additionally, the organization might 
stimulate a market orientation by establishing periodic "outsourcing partner" 
satisfaction surveys similar to those sent to valued customers. By communicating 
its values to all internal customers, the organization helps to develop 
relationships and reciprocal commitment obligations. This obligation and 
reciprocity then strengthens the psychological contract of all workers. Finally, 
by promoting a customer mindset unique to the organization's client base, the 
organization encourages relationships between customers and outsourced employees 
anchored in the organization's products and services.
IX. Future Research 
Outsourcing provides significant knowledge resources that augment an 
organizational learning orientation. Effective harvesting of this knowledge 
might be aided by future empirical and field-based research targeting the 
relationships between internal marketing strategies, psychological contracts, 
and organizational learning. Although HR practitioners may be reluctant to 
contemplate outsourcing (Brown, 2004), this is probably a carryover from the 
days in which department size was synonymous with contribution. Outsourcing may 
actually increase contribution as nonstrategic elements are outsourced and 
resources freed up to enable a greater concentration on the more significant 
strategic elements. It may even make sense to treat outsourcing like zero-based 
budgeting in which the HR function has to make a case for each of the elements 
they choose to keep in-house.
We examine how the strategic contribution of HRM to organizational learning 
might be preserved and cultivated in an outsourcing and contingent work context. 
In this world of interconnected outcomes, considering HRM effectiveness within 
just one perspective is no longer acceptable. In searching for an answer, this 
discussion takes a multi-disciplinary research agenda that builds on knowledge 
in the areas of HRM, organizational behavior, marketing, and strategy. Our 
framework identifies issues associated with the outsourcing of HRM, and 
potential strategic solutions. This is only the first step in a research agenda 
to address the very real threat to organizational learning and competitive 
advantage. We call on future researchers to investigate the relationships 
between these constructs, and to develop practical tools for use by 
practitioners.
The changing landscapes of HRM, and implicitly also of strategy, revolve around 
the need to quickly identify and react to dynamic environments. James (1997), a 
leading HR consultant, writes that HRM going forward will be characterized by 
the focus on "human capital," by the continuing need to reduce costs, and by 
managing the work/family balance. This will be facilitated by better use of HR 
expertise and technology management. HR outsourcing augments the dynamic 
capabilities only if this expertise and technology management is transformed 
into organizational knowledge. In the words of Hurley and Hult (1998: 462), 
"Success in the information age will be linked to a firm's ability to manage, 
develop, and leverage its knowledge resources."
NOTE 
*A previous version of this paper was presented at the Administrative Sciences 
Association of Canada (ASAC) Annual Meeting, Toronto, Canada, June 2005.
DIAGRAM: Figure 1: Outsourcing and Organizational Learning
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By Francine Schlosser, University of Windsor, Ontario, Canada, N9B 3P4; Andrew 
Templer, University of Windsor, Ontario, Canada, N9B 3P4 and Denise Ghanam, 
University of Windsor, Ontario, Canada, N9B 3P4


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