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14.1: Offshoring, Outsourcing

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  • Learning Objectives

    1. Be able to explain the terminology related to international HRM.
    2. Define global HRM strategies.
    3. Explain the impact of culture on HRM practices.

    As you already know, this chapter is all about strategic human resource management (HRM) in a global environment. If this is an area of HRM that interests you, consider taking the WorldatWork Global Remuneration Professional certification (GRP). The GRP consists of eight examinations ranging from global rewards strategy to job analysis in a global setting1.

    Before we begin to discuss HRM in a global environment, it is important to define a few terms, some of which you may already know. First, offshoring is when a business relocates or moves some or part of its operations to another country. Outsourcing involves contracting with another company (onshore or offshore) to perform some business-related task. For example, a company may decide to outsource its accounting operations to a company that specializes in accounting, rather than have an in-house department perform this function. Thus a company can outsource the accounting department, and if the function operates in another country, this would also be offshoring. The focus of this chapter will be on the HRM function when work is offshored.

    The Global Enviornment

    Although the terms international, global multinational, and transnational tend to be used interchangeably, there are distinct differences. First, a domestic market is one in which a product or service is sold only within the borders of that country. An international market is one in which a company may find that it has saturated the domestic market for the product, so it seeks out international markets in which to sell its product. Since international markets use their existing resources to expand, they do not respond to local markets as well as a global organization. A global organization is one in which a product is being sold globally, and the organization looks at the world as its market. The local responsiveness is high with a global organization. A multinational is a company that produces and sells products in other markets, unlike an international market in which products are produced domestically and then sold overseas. A transnational company is a complex organization with a corporate office, but the difference is that much of the decision making, research and development, and marketing are left up to the individual foreign market. The advantage to a transnational is the ability to respond locally to market demands and needs. The challenge in this type of organization is the ability to integrate the international offices. Coca-Cola, for example, engaged first in the domestic market, sold products in an international market, and then became multinational. The organization then realized they could obtain certain production and market efficiencies in transitioning to a transnational company, taking advantage of the local market knowledge.

    Table 14.1 Differences between International, Global, Multinational, and Transnational Companies

    Global Transnational
    Centrally controlled operations Foreign offices have control over production, markets
    No need for home office integration, since home office makes all decisions Integration with home office
    Views the world as its market High local responsiveness
    Low market responsiveness, since it is centrally controlled
    International Multinational
    Centrally controlled Foreign offices are viewed as subsidiaries
    No need for home office integration, as home office makes all decisions Home office still has much control
    Uses existing production to sell products overseas High local responsiveness
    Low market responsiveness

    Globalization has had far-reaching effects in business but also in strategic HRM planning. The signing of trade agreements, growth of new markets such as China, education, economics, and legal implications all impact international business.

    Trade agreements have made trade easier for companies. A trade agreement is an agreement between two or more countries to reduce barriers to trade. For example, the European Union consists of twenty-seven countries (currently, with five additional countries as applicants) with the goal of eliminating trade barriers. The North American Trade Agreement (NAFTA) lifts barriers to trade between Canada, the United States, and Mexico. The result of these trade agreements and many others is that doing business overseas is a necessity for organizations. It can result in less expensive production and more potential customers. Because of this, along with the strategic planning aspects of a global operation, human resources needs to be strategic as well. Part of this strategic process can include staffing differences, compensation differences, differences in employment law, and necessary training to prepare the workforce for a global perspective. Through the use of trade agreements and growth of new markets, such as the Chinese market, there are more places available to sell products, which means companies must be strategically positioned to sell the right product in the right market. High performance in these markets requires human capital that is able to make these types of decisions.

    The level of education in the countries in which business operates is very important to the HR manager. Before a business decides to expand into a particular country, knowledge of the education, skills, and abilities of workers in that country can mean a successful venture or an unsuccessful one if the human capital needs are not met. Much of a country’s human capital depends on the importance of education to that particular country. In Denmark, for example, college educations are free and therefore result in a high percentage of well-educated people. In Somalia, with a GDP of $600 per person per year, the focus is not on education but on basic needs and survival.

    Economics heavily influences HRM. Because there is economic incentive to work harder in capitalist societies, individuals may be more motivated than in communist societies. The motivation comes from workers knowing that if they work hard for something, it cannot be taken away by the government, through direct seizure or through higher taxes. Since costs of labor are one of the most important strategic considerations, understanding of compensation systems (often based on economics of the country) is an important topic. This is discussed in more detail in Section 14.3.3 “Compensation and Rewards”.

    The legal system practiced in a country has a great effect on the types of compensation; union issues; how people are hired, fired, and laid off; and safety issues. Rules on discrimination, for example, are set by the country. In China, for example, it is acceptable to ask someone their age, marital status, and other questions that would be considered illegal in the United States. In another legal example, in Costa Rica, “aguinaldos” also known as a thirteenth month salary, is required in December2. This is a legal requirement for all companies operating in Costa Rica. We discuss more specifics about international laws in Section 14.3.5 “The International Labor Environment”.

    Table 14.2 Top Global 100 Companies

    Rank Company Revenues ($ millions) Profits ($ millions)
    1 Walmart Stores 408,214 14,335
    2 Royal Dutch Shell 285,129 12,518
    3 Exxon Mobil 284,650 19,280
    4 BP 246,138 16,578
    5 Toyota Motor 204,106 2,256
    6 Japan Post Holdings 202,196 4,849
    7 Sinopec 187,518 5,756
    8 State Grid 184,496 −343
    9 AXA 175,257 5,012
    10 China National Petroleum 165,496 10,272
    11 Chevron 163,527 10,483
    12 ING Group 163,204 −1,300
    13 General Electric 156,779 11,025
    14 Total 155,887 11,741
    15 Bank of America Corp. 150,450 6,276
    16 Volkswagen 146,205 1,334
    17 ConocoPhillips 139,515 4,858
    18 BNP Paribas 130,708 8,106
    19 Assicurazioni Generali 126,012 1,820
    20 Allianz 125,999 5,973
    21 AT&T 123,018 12,535
    22 Carrefour 121,452 454
    23 Ford Motor 118,308 2,717
    24 ENI 117,235 6,070
    25 J.P. Morgan Chase & Co. 115,632 11,728
    26 Hewlett-Packard 114,552 7,660
    27 E.ON 113,849 11,670
    28 Berkshire Hathaway 112,493 8,055
    29 GDF Suez 111,069 6,223
    30 Daimler 109,700 −3,670
    31 Nippon Telegraph & Telephone 109,656 5,302
    32 Samsung Electronics 108,927 7,562
    33 Citigroup 108,785 −1,606
    34 McKesson 108,702 1,263
    35 Verizon Communications 107,808 3,651
    36 Crédit Agricole 106,538 1,564
    37 Banco Santander 106,345 12,430
    38 General Motors 104,589
    39 HSBC Holdings 103,736 5,834
    40 Siemens 103,605 3,097
    41 American International Group 103,189 −10,949
    42 Lloyds Banking Group 102,967 4,409
    43 Cardinal Health 99,613 1,152
    44 Nestlé 99,114 9,604
    45 CVS Caremark 98,729 3,696
    46 Wells Fargo 98,636 12,275
    47 Hitachi 96,593 −1,152
    48 International Business Machines 95,758 13,425
    49 Dexia Group 95,144 1,404
    50 Gazprom 94,472 24,556
    51 Honda Motor 92,400 2,891
    52 Électricité de France 92,204 5,428
    53 Aviva 92,140 1,692
    54 Petrobras 91,869 15,504
    55 Royal Bank of Scotland 91,767 −4,167
    56 PDVSA 91,182 1,608
    57 Metro 91,152 532
    58 Tesco 90,234 3,690
    59 Deutsche Telekom 89,794 491
    60 Enel 89,329 7,499
    61 UnitedHealth Group 87,138 3,822
    62 Société Générale 84,157 942
    63 Nissan Motor 80,963 456
    64 Pemex 80,722 −7,011
    65 Panasonic 79,893 −1,114
    66 Procter & Gamble 79,697 13,436
    67 LG 78,892 1,206
    68 Telefónica 78,853 10,808
    69 Sony 77,696 −439
    70 Kroger 76,733 70
    71 Groupe BPCE 76,464 746
    72 Prudential 75,010 1,054
    73 Munich Re Group 74,764 3,504
    74 Statoil 74,000 2,912
    75 Nippon Life Insurance 72,051 2,624
    76 AmerisourceBergen 71,789 503
    77 China Mobile Communications 71,749 11,656
    78 Hyundai Motor 71,678 2,330
    79 Costco Wholesale 71,422 1,086
    80 Vodafone 70,899 13,782
    81 BASF 70,461 1,960
    82 BMW 70,444 284
    83 Zurich Financial Services 70,272 3,215
    84 Valero Energy 70,035 −1,982
    85 Fiat 69,639 −1,165
    86 Deutsche Post 69,427 895
    87 Industrial & Commercial Bank of China 69,295 18,832
    88 Archer Daniels Midland 69,207 1,707
    89 Toshiba 68,731 −213
    90 Legal & General Group 68,290 1,346
    91 Boeing 68,281 1,312
    92 US Postal Service 68,090 −3,794
    93 Lukoil 68,025 7,011
    94 Peugeot 67,297 −1,614
    95 CNP Assurances 66,556 1,396
    96 Barclays 66,533 14,648
    97 Home Depot 66,176 2,661
    98 Target 65,357 2,488
    99 ArcelorMittal 65,110 118
    100 WellPoint 65,028 4,746
    Source: Adapted from Fortune 500 List 2010, (accessed August 11, 2011).

    Global HR Trends

    (click to see video)

    Howard Wallack, director of Global Member programs for the Society for Human Resource Management (SHRM), talks about some of the global HR trends and gives tips on how to deal with these trends from the HR perspective.