HR outsourcing and service quality: theoretical framework and empirical evidence

Purpose – The purpose of this article is to analyse the relationship between HR outsourcing and service quality by focusing on motivational and incentive aspects. Design/methodology/approach – The paper applies a game‐theoretic model of procurement decisions allowing for variable degrees of vertical integration and confronts the implications of its analysis with HR outsourcing data on a large sample of German firms. Findings – The paper presents 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. Practical implications – The 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. Originality/value – While most of the literature on HR outsourcing is based on transaction cost theory or follows a resource‐based approach, this paper uses a game‐theoretic model to analyse the make‐or‐buy decision of HR services, allowing the incentives of an internal or external provider to deliver high‐quality services to be focused on. Furthermore, for the empirical analysis the paper uses an original data set comprising more than 1,000 German firms.