What’s wrong with outsourcing?

What’s wrong with outsourcing? Gede Arya Wiryana ;  An Industrial Relations Mediator at the Mojokerto Manpower and Transmigration Agency in East Java, Pursuing A Master’s Degree in Human Resources Management at the University of Canberra, Australia

JAKARTA POST, 8 Oktober 2012

The negative impacts of outsourcing on Indonesian workers have been widely debated in the last decade. It is an important issue because it is related to the wealth and future of the workers, which was clearly the message of the latest mass rally against outsourcing staged in a number of industrial regions across the country.

Generally, outsourcing is defined by Beaumont and Sohal (2004) as the possibility of using external resources to conduct product or process that used to be produced by internal stakeholders.

As a system on industrial relations, outsourcing is widely used by many companies in the world, including Indonesia. It began in 1776, when Adam Smith, the pioneer of political economy, argued that firm would operate more efficiently if some unit businesses were distributed to other companies that were specialized in handling production process.

Since 1980, many companies have outsourced their customer service operations and call centers. After a decade, due to mounting pressure to compete in a global economy, outsourcing has become the most strategic option for managers to develop more flexible workforce. According to Mercer and Cranfield, more than 90 percent of firms in Europe and North America outsource some aspect of their human resource management.

Outsourcing is a fashionable way of solving some business problems, such as efficiency, labor cost, maintenance work and organizational size.

From 2000 onward, outsourcing was not just associated with simple cost cuts, but also with the transformation of organizations, optimization and efficiency as a tool for human resources development. A company can concentrate more on core and specialized business in order to deal with competition.

After an initial decision to outsource, a firm does not necessarily provide manpower planning services, such as recruitment, training and development, payroll, administration and pension schemes, for workers.

However, there are negative impacts of outsourcing. Outsourcing tends to reduce management’s initiative, quality products and customer service because it increases “hidden costs” that a company has to pay in the future, such as lack of skilled employees, dependence on suppliers and legal disputes in case suppliers fail to provide a safe workplace.

In Indonesia, outsourcing adversely affects employees and labor unions, rather than employers. Some consequences of outsourcing in the country include lower wages and unfavorable conditions at the workplace.

Casual or contract workers resulting from outsourcing are the worst-off beneficiaries of the practice. They have no right to social insurance, pension schemes or gradual increases in wages that correlates with the length of service. Outsourcing can cause disputes as well, due to different treatment in terms of salary and benefits between casual workers and permanent workers.

Recently, implementation of outsourcing has tended to shift the role of labor unions and bring down the number of their members. Union membership has dropped significantly in some countries, such as Canada, the US and Australia. In Australia many private companies have outsourced their employee-related services under short contracts since the mid-1990s.

In many cases, however, outsourcing has neither been rejected nor sparked industrial relation dispute. One-third, or more than 1,500 workers, of Canadian utility company BC Hydro’s workforce are outsourced and there have been no reports of industrial dispute related to the scheme.

The main reason behind opposition to outsourcing in Indonesia is its implications for workers. The government, therefore, needs to immediately take action to end misperceptions.

First, outsourcing should not discriminate against the status and rights of workers. Outsourcing is a temporary job that needs to be urgently handled in the event of a peak season.

Second, a company may outsource workers with lower wages to other units or areas, but their rights and status must remain intact.

Third, the aim of outsourcing is to achieve efficiency by handing over jobs to specialists so that a company does not have to make everything itself.

It’s high time for the government to draft new rules concerning outsourcing that will not deprive workers of their rights so as to minimize labor protests and disputes. ●