The social cost of outsourcing

National carrier Philippine Airlines (PAL) recently decided to outsource its catering, call center and ground handling services. This will affect over 2,600 employees but will give PAL billions of savings in operating costs.

PAL contends that outsourcing is the norm in the industry worldwide and is necessary if they want to remain competitive. Despite a ruling from Department of Labor and Employment allowing PAL to do this, its union recently held a protest motorcade and is threatening work stoppage.

This situation is certainly not unique as outsourcing has become a strategy that more and more companies are considering.

Pros of outsourcing

Many organizations believe that in today’s cutthroat environment, they have no choice but to cut down costs if they are to remain competitive. Outsourcing presents an opportunity for cost cutting.

Contractual employees do not need to be given the benefits of regular employees. Nor do their salaries escalate because annual increases are not required. Contractual employees cannot also be part of a company’s  labor union and are thus not entitled to any negotiated increase in  pay or benefits.

There are also those who argue that outsourcing has the potential to increase productivity. Given stringent labor laws regarding letting go of employees, it is easier to fire a contractual than a regular employee if they are not performing.

This puts pressure on workers to constantly prove themselves and prevents them from relaxing on the job.

As technology drives changes in systems and processes, it is also changing the nature of jobs and their skill requirements. For employers who do not have the capability inside their organizations it is simpler to outsource these jobs.

Cons of outsourcing

But the benefits also come with social costs. Most outsourced workers have little in the way of benefits. Unless they are able to put aside money conscientiously, there will be little to spend in case of emergencies or medical needs.

Outsourced workers will also have no retirement benefits. Once they are of retirement age, who will bear costs of support for elderly? This puts immense pressure on the state to have a robust social welfare system.

There are also psychological costs of outsourcing. In her article ‘Managing Contingent Employees,’ Katrina Supangco found out that contractual workers feel like outsiders or second-class citizens in an organization. They are insecure about their employment and worry about the future because of the absence of insurance and pension benefits.

In the study, even line managers expressed difficulty in managing contractual employees because of the constant need for training and the inability to supervise them directly. They also note that contingent employees do not have a sense of loyalty to the organization. Yet how can we expect them to feel engagement or malasakit for an organization that they are not really a part of? It is not surprising if contractual workers have adopted a transactional mind-set that does not bode well for employers.

Organizations may also find that outsourcing and the constant flux of talent it creates makes it difficult to develop a reliable pool of talent and their desired culture.

This is not to say that companies shouldn’t outsource. It is certainly a legitimate business strategy and can help an organization become more competitive. But companies should also be cognizant of the costs of outsourcing especially when carried to the extreme.

Organizations that are thinking of outsourcing should consider the following questions:

— Are the positions essential to the business?

— Are the service level expectations clear?

— Are there adequate service providers who meet the company’s standards of quality?

— Are there systems to adequately train and evaluate performance of contractual employees?

— Are there mechanisms to ensure that contractual workers are treated humanely by their agency?

— Are there means to ensure security of critical information?

Beyond assessing the necessity for and what to outsource, organizations need to ensure the readiness of their leader to motivate and manage employees who are not really theirs.

Organizations also need to be able to manage the impact of outsourcing on company culture.

The decision to go into outsourcing is not a simple one. Organizations need to consider the social costs of outsourcing and assess their readiness for it. Strategies can be copied. Technology can be bought.  Ultimately, it will still be people who will implement strategy and use technology in organizations. Whether full time or not, the success of organizations still depends on their people.

(The author is the executive director of the Ateneo Center for Organization Research and Development (Ateneo CORD) and an associate professor of Psychology at the Ateneo de Manila University. For inquiries or feedback contact [email protected].)