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.

Source:http://business.inquirer.net/15561/the-social-cost-of-outsourcing

An injunction prohibiting the city from outsourcing employee-performed work to private companies will remain in place after the California Court of Appeal in Santa Ana threw out the city’s petition to have it lifted.

The three-judge panel — consisting of Acting Presiding Justice William Rylaarsdam, and associate justices Richard Aronson and Raymond Ikola — dismissed Costa Mesa’s 43-page petition for a writ of mandate on Thursday, according to the Daily Pilot.

“Courts continue to reject any justification for the City Council majority’s outsourcing scheme,” Orange County Employees Assn. spokeswoman Jennifer Muir said in a news release. “We sincerely hope this latest rebuke by the courts will motivate the council to abandon its needless campaign against its employees and all the residents who have urged them to stop dismantling the city.”

In a prepared statement of their own, city officials said they were undeterred. “Obtaining writ relief is difficult,” City Attorney Tom Duarte said in a news release. “It is even more difficult still where there is a right to appeal the original ruling, which is the case here. The city will now proceed with a formal appeal of the trial court’s preliminary injunction ruling.”

Source:http://latimesblogs.latimes.com/lanow/2011/08/costa-mesa-barred-from-outsourcing-jobs.html

Deutsche Boerse has won a key outsourcing deal with ASX Ltd, giving the German group a boost in the battle between the world’s top exchanges to supply emerging stock markets.

Deutsche Boerse, which plans to merge with rival NYSE Euronext, said on Monday its settlement arm Clearstream had struck a deal with ASX to provide collateral management services.

“There is immense pressure on trading firms to make better use of their collateral, and this is only going to increase as tighter regulation takes effect next year,” head of global securities financing at Clearstream Stefan Lepp said.

Outsourcing will enable ASX to offer clients a collateral service more quickly and cheaply than if it had built a platform itself – a key requirement with banks facing tough collateral restrictions, the companies said.

Global regulators are clamping down on banks’ liquidity management practices following the financial crisis and plan sweeping changes to make firms more accountable for their market exposure.

The agreement, the value of which has not been disclosed, comes just six weeks after Boerse delivered a similar collateral management service in Brazil.

Deutsche Boerse said the service was proving popular among international exchanges, regulators and central banks because it handled collateral remotely, meaning the liquidity itself remained in the domestic banking system.

“This is the first service that outsources collateral management functionalities for another country without requiring the underlying collateral to move out of the domestic infrastructure,” Mr Lepp said.

The deal is the latest example of the world’s largest exchange groups moving to reduce their financial reliance on trading and focus on recurring revenue sources.

Exchanges, which draw the majority of their income from fees charged on orders, have suffered in the past three years as trading has stayed way below the record levels of activity prior to the financial crisis in late 2008.

The value of share trading on all exchanges was just $US63 trillion ($A60.45 trillion) last year and $US61 trillion in 2009, down from $US114 trillion in both 2007 and 2008, World Federation of Exchanges data shows.

In the seven months to the end of July this year, $US37 trillion had been traded globally.

Deutsche Boerse, with rivals the London Stock Exchange, NYSE Euronext and Nasdaq OMX , has sought to offset this decline with more reliable income sources, such as data and technology licences.

Packaging and selling their systems to smaller, growing exchanges allows the large stock market groups to draw additional revenue from the investments they made in their own technology.

The world’s main exchanges plough tens of millions of dollars into systems to stay competitive and meet the needs of increasingly tech-savvy clients, so the groups relish the opportunity to claw some of this back by re-selling systems.

The LSE struck deals with the Central and Eastern European clearing house in June and the Mongolian Stock Exchange in April.

NYSE Euronext backed the Qatar Exchange last September, and Nasdaq signed the Swiss Exchange and Russia’s RTS in June.

Deutsche Boerse and NYSE Euronext agreed a $US10.2 billion merger in February this year but need the approval of the European Commission, which is studying the proposed combination to ensure the deal would not hurt competition.

Source:http://www.businessspectator.com.au/bs.nsf/Article/DBoerse-wins-Aussie-deal-in-exchange-arms-race-L73XK?opendocument&src=rss