Job Security and Outsourcing

Job Security and Outsourcing

So the meeting could have gone better. There was Mark Campbell, president of his own printing company, presenting to Kraft Canada Inc., executive level, in suburban Toronto. Initially, the meeting played exactly as Campbell had hoped. Campbell prefers not to make his pitch to corporate lower lifes - managers and their ilk. There is a simple reason for this. Campbell is an outsourcing vendor, which means he contracts to take over a company's entire printing division, from napkins to posters to stand-up displays with little lights. If it is made from paper, Campbell is your guy. And he likes to pitch his talents to vice-presidents, because the folks lower down, in the trenches, tend to feel threatened by the outsourcing phenomenon. "They think we're out to take their jobs," he says.

By mid-meeting, Campbell thought he had Kraft onside - till one of those managers walked in. "She said I was a lying, dirty, stinking scumbag," he recalls, sounding as though he is underplaying the scene. Ms. Manager reminded Mr. V-P that Kraft already had all the services Campbell was promising, charged that the projected cost savings were inflated, and placed her nemesis, says her nemesis, "right in there with used-car salesmen." Ouch. Campbell did not get the contract.

But he has won others, and has bet his future on the expectation that this thing called outsourcing is not just a current cost-cutting trend but a new way of doing business. In that, he is right. But as Campbell's Kraft experience shows, the move to outsourcing has workers worried. Canadian Auto Workers president Buzz Hargrove expressed that most clearly as the CAW wrestled with Chrysler Canada Corp. in labor negotiations last week. "We're not going to accept putting our jobs up for sale," Hargrove said. Employers, he added, have to adopt "a new principle of work ownership." In the end, Chrysler was willing to give the CAW a taste of that, agreeing to negotiate replacement work for union members when Chrysler turns again to outside contracts with auto-parts suppliers. For Chrysler, the concessions were not that substantial. The company has already moved forcefully to outsourcing - roughly 70 per cent of its vehicle components come from outside suppliers, a hotly competitive group that includes Frank Stronach's hyper-aggressive Magna International Inc. Chrysler has also won plaudits for unit profits as it has brought costs down - its worldwide operations claimed a per-employee profit last year of $24,000. Nevertheless, CAW economist Jim Stanford says the agreement marks a significant philosophical shift. "For 50 years, the labor movement has said management rights are management rights. You run the business, we'll negotiate over what you pay us for our work. Now, we want a say in how the business is run, at least as far as it impacts on workers."

For Hargrove and the CAW, the next battle starts this week as talks move to Ford Motor Co. of Canada Ltd. and General Motors of Canada Ltd. The outsourcing issue is particularly sensitive for GM, far bigger than Chrysler but with a profit per employee of just $12,500 last year. GM is under pressure to make top-quality vehicles faster if it hopes to compete on the world auto stage. Japanese automakers rely on production keiretsu - clusters of related companies - to accomplish just that, individually using hundreds of suppliers to feed in pieces to what automakers see as their "core competency" - final assembly, distribution and marketing of trucks, cars, sport-utility vehicles and the ubiquitous minivan. Honda, by example, has been particularly nimble.

The Big Three have, gradually, moved that way, too. To watch a GM assembly line today is to see a blue Buick Regal following a red Chevy Monte Carlo following a grey Chevy Lumina down the line, each being fit on a just-in-time basis with a blue, then red, then grey outsourced steering column. Chances are those steering columns are made by non-unionized workers. There is very little chance that those workers are getting paid wages on par with their union peers. "No one pays car-plant wages," says the head of one parts supplier, preferring to stay out of the spotlight in a week that for his industry has been a public relations horror. His counterargument, which has oft been expressed, is that if GM does not focus on its core business, it cannot hope to be world-class, and its future will be increasingly bleak. If the automaker ever closed a plant in Oshawa, Ont. - GM currently employs 14,000 people in that city - "then you'd see news. That would really impact the Ontario economy."

But outsourcing is not just an auto issue and it is certainly not specific to Ontario. Some might argue that it is not even new. Haven't we always seen work "out-tasked," "contracted out" and "time shared"? Didn't the Kelly Girl turn 50 this year? Yes. But this is different.

Perry Harris is director of management strategies for the Yankee Group in Boston. Yankee does outsourcing research and helps connect outsourcers to customers. The term itself, which is deadening even for "bizspeak," was coined in 1989, when Eastman Kodak Co. handed over its information technology department to three providers, including IBM and Digital Equipment Corp. Computer companies, most powerfully Electronic Data Systems, the company founded by two-time U.S. presidential hopeful Ross Perot 34 years ago, have always been in the business of providing computer services for corporations. But the customer base was small- to midsize companies that did not have the financial ability, nor the expertise, to do the work in-house.

"Kodak caught the eye of all of us," says Harris, "because it was not small and it was not poorly run." The message to the marketplace was this: why manage information technology in-house when it can be done better, cheaper, outside? And weren't there strategic advantages to be gained by getting outside experts to take on tasks that had been supervised by in-house generalists? And if Kodak can do it, having overcome the attendant psychological barriers - fear of loss of control, concerns over quality - why can't we? Cost containment was an obvious benefit for Kodak; maximization of profit was the motivator for the vendors. Some companies seized the information technology idea strictly for its surface value: cost-cutting. Loads of companies, says Frank Casale, executive director of the Outsourcing Institute in New York City, just "closed their eyes and pulled the trigger."

And so was born the first wave of outsourcing, with information technology as its engine. And, yes, the experts say, it has become a trend through a multitude of industries, from financial services to office procurement - big savings in that, says Harris - from human resources to trucking. The arrangements are contracted for anywhere from one to 10 years and, says Harris, are constantly evolving. In information technology, he says, vendors have even started writing software for their customers, the likes of banks and insurance companies, a handover that not long ago would have been considered heresy.

The question that everyone wants answered is, what happens to the workers when their work is hived off? In the case of Kodak, 1,400 people had been employed in-house in data processing. Roughly half of those moved over to the computer companies. But there was scant change to their wages and benefits, dispelling the view that being outsourced necessarily means getting one's wages gouged.

Harris says employee transfers are common. And he adds that union contracts have, in some cases, been transferred with them. But there are no statistics yet to indicate whether outsourcing nets down to job loss, job growth, or a wash. "Because it's corporate management that's seeking it," says Harris of the outsourcing, "the employee's initial reaction is that it's another euphemism for downsizing."

Now that's a term that workers are intimately acquainted with. John Challenger, vice-president of Challenger, Grey and Christmas management consultants in New York, depressingly points out that downsizing in the United States is up 24 per cent so far this year over last year. Challenger asks the question that cannot be answered: "Are there going to be an equal number of good companies that take care of employees and put their needs first?"

In his book The End of Work, Jeremy Rifkin, head of the Washington-based Foundation on Economic Trends, offers this dispiriting vignette: "Typical is the case of the former pipe fitter employed by U.S. Steel at the Gary Works. He earned $13 an hour and enjoyed a generous company benefits package. After being laid off, he was only able to find a job for a small subcontractor at $5 an hour with no benefits. His new job was making parts for his former employer."

That is the kind of anecdote that rings intuitively true. So it is no wonder corporations are hypersensitive about how news of outsourcing will play to the rank and file. "The sensitivity has to do with the perception of outsourcing as a job killer," says Casale. When Blue Cross-Blue Shield in Massachusetts announced a surprise information technology deal with Electronic Data Systems in 1992, workers were given a mere week's notice. In this case, it was the transferred workers who were peeved, launching a class-action suit against their former employer for not offering severance packages to all. They won the case.

Perry Harris says such treatment is rare, and goes on to make the case that outsourcing can be good news. "If you're an information technology person working for an insurance company or a bank, you're in the minority, a specialist in an area that's not the business of the company," he says. Getting placed in an information technology company, he says, presents opportunity for advancement and even chances of wage enhancement. Many people do well by outsourcing. But not, he adds, "the goldbricks."

To goldbrick - to shirk duty, to goof off. Nothing like having one's employer proclaim one to be "non-core," only to have a new employer assess one as a goldbrick. And if corporations can be allowed to repeatedly proclaim their need to focus on their "core competencies" in order to compete in a global market, workers can be forgiven for suspecting that all these manoeuvres are aimed at paying for less labor, at cheaper rates, with lousy benefits to boot.

There are no figures available to illuminate whether in the long run workers win or lose. Richard Raysman, a New York attorney who has done the legals on numerous outsourcing contracts, and who says the billion-dollar deals are as complex as any merger or acquisition, says transferred employees usually get wage parity, at least for a limited amount of time - often six months. "Ultimately, employees begin to fall within the wage rates of the employer," he says. Often that means lower wages. Sometimes it means the reverse, particularly when a worker finds himself or herself moved out of the back office of a disinterested employer for whom their work was simply part of a cost centre, to a dynamic vendor where the work is a profit source.

Raysman concedes that employee morale is a huge issue. Neither party wants to wear the laundry for not taking care of the workers. What is common, says Raysman, is that the vendor will contract to keep workers for six months, maybe a year, but not longer. "The vendor wants to be able to shed employees as quickly as possible," he says flatly, while keeping those deemed key. And then there is the issue of benefits. "Very sticky," says Raysman. Take an old-line bank. Look at a 20-year employee there, vested benefits and all. The old-line bank may insist in a transfer deal that benefits be maintained. Deals have fallen apart over this, he says. Vendors hate to make promises to one customer that are inconsistent with deals it has struck elsewhere.

And there are outsourcing arrangements that are simply bad news all round for employees. Raysman saw a deal recently in which a company shifted its software maintenance not just off-site, but offshore, to India. The whole lot was terminated.

Conversely, when Air Canada recently announced that it was outsourcing the maintenance of nine Boeing 747s to Air France, it quickly made clear that it would be "in-sourcing" the maintenance of half a dozen 767s. The company called it simply "a strategic shift in aircraft maintenance."

A more common example can be found in Xerox Corp. The company brought its outsourcing department, Xerox Business Services, to Canada in 1991. Since then, it has moved XBS into 80 companies across the country, the likes of the Investors Group in Winnipeg. And while Xerox talks about the business of managing documentation in complex terms, what it really means is that they run print shops and mail rooms for companies like Investors. For Xerox, "managing the document" is, yes, its core competency. For Investors, which would rather concentrate on selling mutual funds, document management is distinctly non-core.

Xerox is really just a bigger Mark Campbell. What Campbell does is take on a company's entire printing portfolio, which, when added to other contracts, allows Campbell, theoretically, to get cheaper prices through economies of scale. At Molson Companies, Campbell's biggest client, each brand manager, from Coors Lite to Export, was shipping out individual poster projects to preferred design studios. But all in all, Molson was printing two million beer posters each year. "There was no aggregation of buying power," he says, adding that he has saved the company almost $3 million, a third of its old printing tab, annually.

Money is the heart of the matter. And employees, as consumers, play a bigger role than they may realize. "The cause of this issue is new buying behavior," says the Outsourcing Institute's Casale, taking the story back to the auto shops. "People like you and I want to buy a high quality, inexpensive car. With the global economy, the automobile manufacturers are not only forced to be the best and cheapest in the United States, but the best and cheapest in the world." And to re-examine what is "core." As one parts manufacturer puts it, GM was once so almighty that it practically wanted to mine the ore out of the ground, which would make the stainless steel, which would make the car, and so on. Final car assembly is a rather diminished concept by contrast.

But as Casale says, to blame the problem on outsourcing is to blame the pail for the roof leaking above it. That's an interesting metaphor. Corporate kingpins have seen this division, that division, their print division, as a writeoff. Mark Campbell sees them as a potential profit centre. And despite the Kraft follies, he is feeling upbeat that others will soon get it. He has an RFP - that's a request for proposal - in at one of the major banks. "I'm confident that I can capture that business," he says. If only he can keep the middle managers at bay.

Maclean's September 30, 1996