HR Outsourcing and Service Quality: Theoretical Framework & Empirical Evidence

The purpose of our article is to analyse the relationship between HR outsourcing and service quality by focusing on motivational and incentive aspects. We apply a game-theoretic model of procurement decisions allowing for variable degrees of vertical integration and confront the implications of our analysis with HR outsourcing data on a large sample of German firms. We present evidence for HR service quality being generally higher when procured from an external instead of an in-house provider. Furthermore, the relationship between HR outsourcing and service quality is considerably stronger if the provided services are complex and if the potential for monitoring an internal provider is low. Our findings have immediate practical implications concerning the make-or-buy decision of HR services: the more complex the HR service under consideration and the lower the potential to monitor its in-house provision, the more attractive is the external provision of HR services.