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Outsourcing?
There’s been a trend that’s been going on in the US economy for a few decades, something under the radar to which no one has really given much notice: outsourcing. Outsourced solutions providers have become specialized, moving well beyond traditional payroll services. Other entire administrative functions — such as accounts payable and disbursements processing, HR, IT, and accounting — have all entered the outsourcing market. We’ve entered a time where the Corporate Office may well consist only of the executive suite where all the other functions and employees of a large public company are absent, or if they are present, are employed by another firm.
Outsourcing comes in many flavors. The first is the use of staffing companies to peel off entire classifications of employees. For example, many smaller companies, those at or near the 50 employee healthcare provision threshold, often outsource entire classes of employees, prepared as these staffing companies are to efficiently provide benefits. On a much larger scale, companies with large numbers of semi-skilled staff, especially those companies traditionally offering expensive compensation and benefits offerings, have been replacing positions lost to normal attrition with staff hired through staffing companies, slowly evolving away from direct employment.
There are several drivers causing this outsourcing; first and foremost, technology has reached a point where the needs of many disparate clients can be accommodated reasonably and efficiently through a centrally controlled, but individually customized system. This is true for a whole host of standard business processes; all can be reproduced in the cloud and managed by an ever-shrinking cadre of outsourced administrative people. Some may be needed on site while some may be virtual, providing the same generic functions (processing disbursements, for example, or reconciling accounts) for many clients.
But outsourcing does not stop with administrative functions. Factory floor workers and managers are being outsourced as well as field workers in such industries as construction and mining. Corporations large and small have been eliminating line positions and replacing them with staffing company personnel. These are often positions dedicated entirely to a single employer, positions traditionally held by employees. The reasons for this kind of outsourcing are simple; employers have the leverage to force staffing companies to meet their permanent and temporary needs and can divorce themselves from retention, promotion, compensation, and benefits issues. Since staffing companies are usually less generous with respect to wages and benefits, this mitigates the premium paid by the former employer.
From the employee’s perspective, this is not a positive trend. Mobility within an outsourced position is limited. You are hired to work in a specific company at a specific job, often reporting up to an employee of the company who has no authority or inclination to help your job trajectory. Outsourced staff are transformed into hyper-specialized clerks and workers and stuck in those positions with little leverage. There is no longer advancement or mobility as you are not an employee. It is not the traditional American “up or out” system. It has been replaced with the “do or done” system.
The old American idea of advancement from the mailroom to a window office is becoming impossible. Ambitious people now must migrate to rise as opportunities within companies have been eroded substantially by outsourcing trends. That’s probably ok as the half-life of corporations these days, where mergers, acquisitions, downsizings, reorganizations, consolidations, divestitures, and old-fashioned bankruptcies are as common as the holiday sale, is measured in dog years.
There is not much loyalty in corporate America today. There never was, but it is now scarcer than ever.
Published in Economics
This, in great part, helps explain why wages have not spiked with our low unemployment. We won’t see wages rise substantially until we see more mobility. Employees are a little gun-shy, millennials especially (who know nothing else) and are not moving into new companies and new positions. Demand is not quite strong enough to start the shift, but it will happen eventually if unemployment remains low. That is for certain.
You are correct about all of this.
The driver is the emergence of huge new companies such as Ariba and AgileOne that make it one-phone-call easy for companies to take on and then get rid of workers. These companies assume the liabilities for meeting the pages and pages of documentation now needed to prove to the IRS that they are contract workers, not employees.
This is the same phenomenon that drove the H1B visa program to its success. A little hotel on Cape Cod can make one phone call and poof! there is a busload of the staff the hotel needs for the summer.
These companies are moving people around as efficiently as Amazon delivers books.
What I have found as a subcontractor is that the government gets more and more ornery about this every year. Now I have to prove I work for three publishers each year. This is a new burden the government has put in place. (It’s as maddening as can be because it is forcing me to work for companies I don’t want to work for just to be able to prove to the IRS that I am not an employee of the company I do want to work for. Oh, well. I’ll figure it out.)
The bigger companies are inserting layer after layer of separation between their contract employees and their upper management.
In some ways this is good for individuals. It truly is. There are tax advantages on the contractor side of life. And there social advantages. Companies treat contract workers with a respect that they don’t show their regular employees. That is a good thing for everyone.
In the long term, it means that none of us should settle in to a job with a single company ever again. Leave the potted plant at home.
We will live life on a kitchen bar stool, ready to hop down and move along in a second’s notice. And we’re all in sales now.
I live next to a golf course that is owned by a large company but is maintained on a fee-for-service basis. The golf course is now looking a little shabby around the edges because the owner is getting billed for every tree taken down. The owners cannot take advantage of the subcontractors the way they used to take advantage of their employees. In the past, the golf course employees would put in long hours fixing up a space just for the pride of having it look nice. Now the same people are seeing that job as broken up into billable projects.
That said, the landscapers can compete, and the guy who says he can get the job done for less will get the contract. The owner of the golf course won’t know until he gets the bill and inspects the work whether that actually happened. At the moment, the owner is liking not having to deal with the expensive HR problems. The owner is shopping for subcontractors now based mostly on price.
There will be lots of changes and adjustments in the new world.
I’m going out on a limb here though and saying that the small contractors who have loyal employees will outperform the contractors who don’t run their small businesses that way.
Eventually the smaller companies will prevail, just as local banks have prevailed against the multinational Santander.
But for the next ten years, there will be a huge earthquake in the way Americans do business with each other.
Ah, but those contract workers of whom you speak, are not self employed. They work for the staffing company. You are your own staffing company, which is a different but smaller subset of the outsourced workforce. Most work for staffing companies. The IRS has no issue with that as someone is seeing to it that employment taxes are paid and income taxes withheld. If I had my way all employment taxes would be eliminated, but then again, I’m an idealist.
Really? That’s an odd statement…given they made a whole movie about it. Which is mildly funny…deserving of a once through, but not a twice through.
Everything I’ve seen the government do in the last forty years in the area of jobs and employment has had the effect of discouraging anyone in this country from hiring anyone else.
The government is like an addict when it comes to regulations. And even though those regulations are going to kill it, it doesn’t know how to do anything else.
I am excited to see how tax revenues actually decrease when millions of newly created subcontractors start deducting their business expenses.
The government will never know what hit it, and I will laugh and laugh.
The loyalty has always been, and will always be, to the dollar. And that’s good.
Some do. Most don’t. Our records are kept by the contractor. That’s it. There’s nothing else between us. They have what looks like a bank account in my name into which payments for me go.
That’s what I’m trying to say. They started out that way, but they have discovered a new way to grow their business.
Trust me. This is how this story will end.
Agile One and Ariba are going completely into the paying-the-contractors-as-suppliers work. Staffing will continue for a while, but even they can’t afford payroll taxes and accounting and liabilities.
The workforce will be made up of independent contractors wherever it can with only a few executives in place in each company, as you described.
It’s being done now.
The reason, the nail in the coffin of employment, was ObamaCare and its regulations pertaining to employees.
The big change has been the proof the IRS now demands each company provide that a person is not actually an employee. The regulations just became law in 2014 or 2015, I think. What HR departments were able to manage in the past in terms of getting personal information on each employee has become so ridiculous now to meet the law that the companies are saying, “To hell with this. We don’t want this liability. Let someone else assume it.”
Same phenomenon here in Tokyo where I live.
(I’m reasonably sure that the same holds true for many other major cities in Japan, but I’m refraining from saying anything definitive simply because my working life has been anchored in the capital — I hesitate to make pronouncements about other locales.)
It’s a particularly salient characteristic of foreign subsidiary-company operations here. In fact, while I was on a consulting assignment in late 2016 at the Japan subsidiary operation of a major non-Japanese financial services company, I helped with the initial phase of functional requirements definition work as part of an implementation of an enterprise software package (or more precisely, a cloud-hosted SaaS/Software as a Service package) specifically purposed for managing a corporation’s “contingent labor force” — namely, outsourcing staffers and other non-employee contractors. Just the mere exposure alone to this particular manifestation of the trends illuminated in the OP was enough to make my head spin and my heart deflate.
And speaking of deflation, the overall phenomenon of outsourcing and transitioning away from majority-FTE (Full-Time Employee) corporate payrolls — irrespective of whether the context is a foreign subsidiary or a “pure Japanese” entity — is nowadays so pervasive that there’s still so little hope for escape in macroeconomic terms from the wage-suppression trap that in turn prevents Japan’s GDP from recovering to any level remotely resembling that of robust growth. Basically, Japan’s employment situation has transitioned from one distorted paradigm to another.
Almost thirty years ago I spent six weeks developing a project for JP Morgan, literally across the street from the NYSE. (We could look down from the window in those pre-Internet days and tell how the market was doing based on how the traders were smoking)
Everyone there at Morgan was a contractor. They told me how, six months earlier, they’d all been fired on a Friday, hired by a new company that Morgan owned, and come back to their same desks (never cleared) on Monday. Making twice as much. All because Morgan wanted them off their books.
Let’s establish some context: staffing or temp employees make up about 2% of the workforce.
Second, there’s annual fluctuation in the total number, but the trend isn’t rising at a rate that should alarm anyone.
Third, I’m in this industry. To make it worse, I own a company that places both direct hire and contract employees. Call me evil, but no one is forced into contract work. We primarily focus on direct hire and pull a number of candidates from the contract side. I use contract recruiters because they want the flexibility, and this benefits us because it allows us to better respond to the demands of the market. Some months are slow, and some months we’re swamped and I can adjust recruiting resources accordingly.
Fourth, there’s a noticeable decline in H1 hiring; companies are staying away from it because of the political uncertainty. Personally, this is a good thing. I’m not a fan of H1B candidates because they typically undercut the rates of American employees. The only entity benefitting from this is our client. We don’t make more money because our clients insist on a lower bill rate for H1 candidates.
I appreciate the concern on this subject. But I encourage members to look at all the facts in their proper context.
And if it makes anyone feel better, you can hate me for contributing to the perceived problem. Sadly our industry doesn’t have a good reputation.
The bottom line is that no one wants to have an employee anymore.
It is really bad out there now in the corporate world. There are so many laws concerning everything from discrimination to pensions to bathrooms to parking, and then there are the liabilities.
The U.S. government hires subcontractors now just to avoid the myriad hassles it has created. Not even the government, the author of this employment garbage, wants to deal with it anymore.
It’s actually pretty funny in a Hogan’s Heroes kind of way. :) The communist bureaucrats have ended up 180 degrees away from where they were trying to go. :)
And this is also a testament to human ingenuity and resilience. There’s always a way around everything.
I hope it ends the employment strangulation of private business by the government.
big trend in big law. Eliminate “overhead” to maximize profits per partner.
some are outsourcing administrative tasks: conflicts, accounting, document processing to companies set up in the rust belt and with companies like Williams Lea.
My Firm got rid of the IT call center. So now to get someone from my IT department, I have call a number that picks up in Chicago so they can call one floor up in my building and have someone respond.
I don’t see this trend as so much of a problem but as a certainty that comes with issues, much like the issues associated with robotics and automation. If outsourcing is more efficient, it will happen. The question then becomes, what does this mean for the workforce and the American dream? Advancement is still possible, it just requires moving your feet. We already see that in any case as corporations churn through the throes of technology development and economic cycles. So we need to encourage people to look elsewhere if the place where they currently work does not properly value their potential. We also need to encourage people to acquire and develop new skills that make them more valuable. Specialization is good, to a point, but the workers with the most potential must be versatile. The bottom line is, no one is stuck forever in a dead end job. It’s just that the dead end job has moved up the ladder a few pegs and then some. So we need to find new ladders in new places..
Also, you are missing data specific to entire functions outsourced to companies like Ariba and the like. The workers are eliminated entirely ; there is no resident outsourced staff. This is different than temp staff or where current line staff are moved to a staffing company.
This needs to be its own post. Beautifully said.
Not to mention it’s expensive…
That was a different kind of “outsourcing” often referred to as “off-shoring” certain technical functions to countries with an abundance of cheap coding talent. Current trends go beyond coding, where entire corporate functions like accounting, purchasing, accounts payable, collections, payroll, HR, IT, etc. are moved to a contracted entity, usually domestic.
This has historically been a big problem for workers. They end up at a dead end because their job has been so specialized to fit the needs of their employer.
It’s true in the military too, by the way. Young people think that their skills will be easily transposed to the private sector, but that’s often not the case. That’s why a lot of military personnel start taking online education courses as they near their departure from their military jobs.
I read a really great book about Ritz-Carlton years ago. In an industry that has had a rate of turnover nearing 90 percent at times, the Ritz-Carlton Hotel Company keeps its employees for years and years. One reason they do so is because they are considerate of their employees. Whenever their employees master some new skill, management makes sure that those employees get some type of certificate that the employees can show to other companies.
It’s more important than money at times to be able to prove what you can do.
All workers, subcontractors and employees, should keep a file open all the time into which they put notations and evidence of their successes and projects completed. Think of it as holding on to your receipts for purchases. It should be a way of life like brushing your teeth.
I think the loss of loyalty – in both directions – is a big loss to the company and economy. I got my first job after dropping out of a Physics program and transferring to an Engineering degree. My title was “Engineering Aide” which I thought sounded pretty impressive until I found out that I was the one that Technicians told what to do. Luckily for me, the company had a tuition reimbursement program that paid for 100% of tuition if you were taking courses towards a relevant degree. I was young and single and was willing to work the midnight to 6:00 AM shift babying the mainframe computer overnight runs. Because of this, they allowed me pretty flexible hours for the rest of the day. I wound up taking 3 courses per semester and eventually getting a BS and an MS in Engineering. After I finished, they changed the rule and put in a limit on the number of credit hours per semester they would pay for.
I think they got their money’s worth, though. In the 10 years I was there, I went through 11 titles, ending up as Senior Research Scientist. Because of their generosity and loyalty to me, I stayed there probably 3 years longer than I should have. Other companies I have worked for more recently have been reluctant to set up a tuition reimbursement program for people that I had working for me. I think that is short-sighted.
At my second company, I designed an industrial control system based on a new microprocessor (same one as in the Apple II). It was important to keep the parts cost as low as possible. After I left about 10 years later (to build a product to interface to the control system that customers were asking for, but the company did not want to develop). I was in close touch with the Engineering department and showed the engineer that replaced me how to provide a needed feature with no new hardware. After a while, I found out that the solution he came up with was to add a “piggyback” board with a much more expensive processor (68000 for the old-timers). His reason was that he thought it would be good for his career to have experience with that chip.
That is where the short term/no loyalty/consulting mindset leads.
My resume was organized by project, rather than employer. Meaning there were typically multiple entries per employer, but they were short and focused to a specific topic rather than trying to capture all the details of years of work into a single entry.
In my experience, very, very, very few people appreciate cleverness, but almost all will reward using new technology, no matter the cost. That’s why in my business life I always make the client do the work, because I can always be more clever, but I don’t want to support it.
You addressed both outsourcing and staffing in your original post. Being most familiar with the latter that’s what I addressed.
You’re right these are very different. Back in my consulting days we were working with a very large company in Chicago who had outsourced a bunch of their back office IT functions to InfoSys. Working around people who were likely losing their job to India was… interesting.
Outsourcing is very similar to automation in the manufacturing industry. Lower skill repeatable tasks are being outsourced to save money and improve efficiency. Some companies will outsource functions that are not core to their business. Does it make sense for a manufacturing firm to hire and maintain expert IT employees? Maybe not, except for their manufacturing systems.
(My entire career has been in technology; I’m not sure about outsourcing of other functions so it’s possible my perspective is skewed.)
The bottom line is individuals must take ownership of their career. Employers aren’t loyal, so employees shouldn’t be either.
I’m not quite sure how my son’s Marine rifleman skills would be transposed to the private sector.
The company I work for has finally moved in this direction for both its engineering staff and maintenance staff. There was major resistance to over staffing for training purposes. Basically they take a specialist and try to train their replacement in 3 to 6 months, on top of the expectation that new employees will graduate through the leveling system. Its a gong show.
@mitchellmessom
If you are in software or IT, there are a lot of training options on the Web. On that I hear about (but haven’t tried) is ITPro.tv They are a sponsor of the Security Now podcast which I trust and have team licenses available.
I’ve read that this has had some impact on the measured decline in manufacturing employment. It used to be that manufacturing companies all had their own janitors, kitchen staff, landscapers, etc that were all considered “manufacturing” employees.
Now, that’s all contracted out as a service. Is there any private sector company left in America that has a full-time janitorial staff?
When it comes down to it all the negative aspects of this phenomenon were caused by the government — not 100% of the pressure but most of it. Isn’t that right, Doug?
Another story I like to tell is: My mother worked in a small doctor’s office as a bookkeeper. Keep in mind that this is 28 years ago – so 1990 or so. She always said that 1/3 of the patients were medicare patients and that this segment was responsible for 2/3 of her work hours. So, this doesn’t have much to do with the outsourcing (but it has some) but it shows how the government intrudes into a business. Also, the doctor refused to go above 1/3 of his patient load from medicare. It just wasn’t profitable enough.
Son #2 – as a machinegunner, has made this realization, although he’s also had lots of good leadership and planning training