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Outsourcing: friendly trend or foe?

The changing building blocks of the modern company and implications for labour.

SWELLENDAM – There is a strong ironic link to university student protests and their cause against outsourcing of certain tasks on campus. Those very students who so vehemently protested against outsourcing are most likely going to enter an environment where they too may be “outsourced”, joining the so-called “precariat class”. In that world they can either see themselves as victims or masters.

The transition from sheltered and largely legally protected employment to an independent supplier is not easy. After leaving a fulfilling and secure career in broadcasting and then founding the company transformation consultancy Schuitema Associates with two others, I quickly discovered the fine dividing line between being self-employed and unemployed. This was even more onerous when one, in the early years at least, was the main source of income and sole financial risk taker for others.

But what really sustained us then, and what constantly fuelled determination and hope for the future, was that we knew we were doing something that could make a difference to others lives. It is that force, so often absent in the day-to-day life of the average worker, that really defines the difference between a job and work.

Ultimately there may be fewer jobs, but there will always be work. It is the ability to focus on the latter, rather than the former, that will be the hallmark of a successful productive life. Indeed, one could argue that it always has been. But it has become severely muted as employees, over time, have become conditioned into the belief that a successful career follows a simple path of rungs on a corporate ladder.

Inexorable forces are radically scrambling the parameters of organisational theory. Modern trends may not change the principles at stake, but will certainly change conventional company structures. And by the looks of it, they could spell a change of organised labour’s role as we know it, while the latter tries to cling to outdated theories that are rapidly becoming irrelevant. We can see evidence of this tension not only in public debate, but in megatrends of technology and mechanisation; declining labour participation rates; new company structures; inequality and the explosion of financial services.

A recent insight into how the modern company is reinventing itself was given in this article in the Economist. They use services such as Uber, AirBnb, and cloud computing as examples of where “across industries, disrupters are reinventing how the business works.”

The appeal of the “insurgents’ model”, the Economist says, is partly a result of the growing dissatisfaction with the public company. “After a century of utter dominance, the public company is showing signs of wear. One reason is that managers tend to put their own interests first. The shareholder-value revolution of the 1980s was supposed to solve this by incentivising managers to think like owners, but it backfired.”

The article argues further that in insurgent companies there is a much tighter link between ownership and responsibility, and founders, staff and backers exert control directly. “It is still early days but, if this innovation spreads, it could transform the way companies work.”

The insurgent model implies a flattening of hierarchical structures, a much slimmer and streamlined organisation, greater participation by employees, incentivising them with ownership stakes and performance related rewards. Keeping the organisation tight means buying in services as and when needed, in turn relying far more on outsourced services.

In short, these forces imply using traditional labour to a much greater extent as outside suppliers in the creation of wealth, rather than partners in it. That’s a rather oversimplified mental graphic based on the conventional understanding of wealth creation and completely ignores all the behavioural nuances that are forged in that model. But I’m using it to illustrate that in theory at least, a shift of labour from partner to supplier should not impede wealth creation itself which is ultimately measured in Gross Domestic Product. What it does mean is that the combined value-added is more fragmented. There are many pros and cons to that, but most are the effect they have on behaviour which is a subject on its own.

Given the increasing shift away from large corporate and company structures as we know them, the increased use of outsourcing and with it the much maligned labour broker, seems inexorable. Insisting that companies cannot outsource when it makes business and sound supply chain management sense to do so will be highly counter-productive. It will clearly impede the “insurgent” model, new start-ups, and SMEs – all of which are the way of the future. Large companies and corporate structures encourage large and powerful labour organisations. They find far less sustenance in lean, streamlined operations where there is a high degree of employee operational involvement or even ownership.

The key strength of these new organisations is their very high level of flexibility. If organised labour facilitated the same degree of flexibility in conventional organisations, they will ensure their continued relevance in a rapidly changing world.

While still mostly subtle and gradual, outsourced activities, despite their multi-faceted nature, should be approached as a new sector, worthy of its own institutional constructs, legislative protection, umbrella organisations, and developmental support that can even explore its role in import replacement and establishing new training platforms. In particular, concerns about the treatment of labour in these services have to be addressed. Large companies using outsourced services can adopt a highly supportive and developmental role towards these suppliers.

Instead of seeing outsourcing as a threat, it could become a new and vibrant sector which is an incubator for entrepreneurship, SME’s and co-operative type ventures. It not only fits in with employment needs of our time, but with the creative and adventurous spirit of the new generation.

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Thank you Jerry for promoting discussion and debate around social issues.

The issues with a public company has nothing to do with the agency problem (which is a problem, of course) and everything to do with efficiencies, particularly efficient use of capital. Flat structures, participation and incentivisation are the not result of efficiencies nor the cause: they are edifices towards which efficient companies naturally gravitate. Just think of the shackles of a Taxi company (meters, hours, rates, bosses, zones) versus the wings of Uber? Flexible pricing allows one to get an Uber at 1am on the 1st of January- at a price, naturally. All rate 2 taxis are busy.

I know we disagree by SA is capital starved but business is savagely competitive and return on capital (and equity) is the primary driver of where capital flows. SA currently is undergoing large capital outflows and efficient capital use is paramount to prevent an economic collapse.

Someone once said “stick to the knitting”. Do what you do do well. Core business. There are many textbook examples of where unbundling (de-merging) produced enormous shareholder wealth. British gas is but one textbook example that I love. I am sure that if the large Japanese keirethsu and Korean Chaebol conglomerates such as Mitsubishi and Hyundai de-merged they would create incredible shareholder wealth. Outsourcing is really about efficiencies and concentrating oncore business.

I recently had a call from Mr. M about some work that had been given to Ms. H. to do. Ms. H was about to start essential but non core business preparing inputs into a core process while Mr M waited impatiently.

I then called an associate,Mr K, whom I told that we would be paying Ms H the going wage and she would have to drive around collecting stuff from suppliers. If you add up the wages, supplies, in house stocks used and various inputs, petrol etc we are looking at about $300 for the non core inputs. What would he charge me – mates rates? He immediately quoted me $500. Did I accept? of course- damn sure…he had an order number in a few minutes… he knew what I knew: the opportunity cost of Ms. H doing non core business was a lot more than $500 in fact more than 3 times that so the $500 freed Ms. H to earn the company $1800 a day doing Mr M’s work for 3 weeks.

Let me tell you this: organised labour will be the biggest casualty because those who add value commensurate with their wage will prosper; whereas those who don’t will wonder where all the jobs went.

End of comments.

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