Outsourcing can hurt within

Geelong Advertiser, Saturday 23 September 2006, p, 33.

Public bodies and private corporations throughout Australia have been engaged in a massive restructuring of their operations. It has been going on for some time and in the case of the operations in publicly funded institutions involves an apparent reversal of a strong trend of the previous generation. There are various names for what is happening, outsourcing, off-shoring, sub-contracting, public-private partnerships, focusing on core business and so on. There is even an outsourcing institute with free membership to supply firms with information on how to do it and contacts in a whole range of activities. Outsourcing is not new of course. Manufacturing has been involved in it for decades. The process is in the news today because it is white-collar jobs that are most affected.

At heart is a shift from the production of goods and services within the organisation to buying these from other suppliers. The argument from within is that it is cheaper to buy these services than to produce them. Sometimes this is reinforced by the claim that concentrating internal resources on certain specific activities and sloughing off peripheral ones enables the business or the public body to be more efficient for the benefit of its shareholders or the citizens and voters respectively. Many public utilities have been privatised and others have sub-contracted or outsourced a range of activities following the example of private companies. Services outsourced include information technology, customer relations (hence the growth of call centres in countries like India), cleaning and various subsidiary parts of manufacturing.

So it seems like the whole economy is being restructured with a relatively smaller number of large enterprises and a host of medium- and small-sized suppliers of services which have to respond to the demands of their markets. This applies to the supply of both goods and the labour force. For consumers this may result in a reduction rather than an increase in choice.

Many of the costs of change and flexibility are being outsourced as well. And that is where we, as workers, customers, consumers and citizens, come in. What about the people who are being retrenched? In many, if not most, cases they bear the costs of retraining and relocating. When we are made redundant we might be lucky to win on the lottery and get some government support, as the South Australian Electrolux workers are promised, because of electoral considerations affecting the federal government? More commonly we will be left to our own devices and our own savings.

While it may be true that moving production to its most efficient location will result in higher levels of total employment, there is no guarantee that that employment growth will happen in one city or one country rather than another.  We have relatively free movement of capital in this global economic system, but we do not have free movement of labour. Does outsourcing cause unemployment? Not according to its devotees. As Daniel Drezner, an American writer put it, ‘Believing that off-shore outsourcing causes unemployment is the economic equivalent of believing that the sun revolves around the earth: intuitively compelling but clearly wrong’.

If we broaden our perspective, what happens to those who may be indirectly affected when outsourcing takes jobs right out of Australia? Are we getting value for money or the kind of services we require? If the outsourcing is overseas then our import bill, already large and growing much faster than exports, expands further.

At a deeper level have we lost some of the advantages of a collective provision of the optimum level of services to the whole of society which was one of the key reasons why many public bodies were set up in the first place? Ken Davidson is one of the few public commentators who keeps hammering the point that it is cheaper for governments than private firms to borrow funds to build infrastructure projects. Also, though one of the arguments for public–private partnerships is that some of the risk is shifted to the private sector, in the last resort it is the state that has to step in, as we have seen in Victoria with much of Melbourne’s transport system.

Some firms and public utilities are discovering that they lose some degree of control of their operations when they outsource, that cost savings may be less than anticipated and that customer relations are adversely affected. So it is not self-evident that outsourcing as a strategy is the best way to go.