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Strategic decisions regarding the vertical integration of human resource organizations: evidence for an integrated HR model for the financial services and non-financial services industry in Germany, Austria and Switzerland

We examine the drivers of vertical integration for an integrated and unified HR-process model for 42 large companies from the financial services (13 companies) and the non-financial services sector (29 companies). The basis of this paper is formed by the results of a survey analysing the structures, processes and sourcing activities of human resource organizations. We sent the survey to 500 companies in Austria, Germany and Switzerland. The survey is based on an integrated process model that uses an employee life-cycle approach and differentiates between eight HR activities. The purpose of this paper is threefold: first, to gain insights into the current status of HR outsourcing and understand the differences between the financial services and the non-financial services industry. Second, to develop a theory-based framework (transaction-cost, resource-based, principal agent) enabling us to derive and test eight hypotheses using Ordinary Least Squares (OLS)-regression analysis in order to examine the determinants of the vertical integration of HR processes. Third, to analyse the impact of the vertical integration of HR departments on company performance and characteristics. We find significant differences in the level of vertical integration between the HR subprocesses analysed. Even the processes with increased outsourcing activities (i.e. a lower degree of vertical integration) still show a relatively high proportion of in-house production. Regression analysis reveals a significant negative interrelationship between the relative size of the HR department compared to company size and vertical integration. This finding holds for the HR subprocesses ‘Personnel Administration’, ‘Payroll and Benefits’, and ‘Off Boarding’. Second, we find a significant negative correlation between financial performance in terms of Return-on-Equity and vertical integration of ‘HR-IT’. We also find support for the theoretical framework for the subprocess ‘HR-Top Management’. Six hypotheses (out of eight) are supported by the analyses; two of these are highly significant. Three major findings are noteworthy when analysing company performance and the vertical integration of HR departments. First, we find that large companies (in terms of total staff and total assets) display significantly high levels of vertical integration for subprocesses which include a large amount of manual work and crucial managerial, controlling and reporting tasks (‘HR-Top Management’ and ‘HR-Controlling and Reporting’). Second, large companies (in terms of total company staff) show lower levels of vertical integration for the HR subprocess ‘HR-IT’. Third, companies that show superior financial performance in terms of Return on Equity (RoE) display lower levels of vertical integration for the HR subprocess ‘HR-IT’.