Human resource outsourcing: The impact of managerial decisions on operating and market performance

Outsourcing is one method managers use to reduce costs and focus on value creation. This three paper empirical dissertation investigates the impact of the managerial decision to outsource human resource (HR) services on operating and capital market performance. Using archival accounting and financial data, the research builds upon the limited, primarily survey-method HR outsourcing literature. The results suggest that the impact of human resource outsourcing on operating performance is long run and that investors value the contract announcements for both outsourcing firms and providers. The studies investigate the relation between HR outsourcing and firm operating performance, capital market performance, and cost of equity capital. A search of press releases announcing HR outsourcing contracts resulted in a sample of 410 agreements between 1994 and 2004, representing 370 outsourcing firms and 36 HR service providers. A control group comprised of firms without outsourcing announcements is matched to the outsourcing firms on industry and size. Paper one shows that HR outsourcing is associated with operating performance of outsourcing firms three years after the outsourcing announcement. The effect may be delayed as time is required for the financial statements to reflect the operational changes. The second paper finds a positive abnormal market return for outsourcing firms in a two-day event window and over two and three year buy and hold periods following the contract announcement, suggesting that investors interpret HR outsourcing as a favorable managerial decision or they anticipate positive cash flows to result from this strategy. This study also finds that human resource outsourcing is negatively related to the cost of equity capital. The third study finds that HR service providers also experience positive abnormal returns following agreement announcements in the short and long run. Research on outsourcing traditionally examines issues from the outsourcing firm's perspective. By also focusing on service providers and using archival data, this paper contributes to a more comprehensive understanding of the impact of outsourcing on a broader set of stakeholders, an important issue for managers, investors, and policy makers. Taken together, these three papers establish the association between human resource outsourcing and firm operating and capital market performance.