Never before have big employers tried so hard to hand over chunks of their business to contractors. From Google to Wal-Mart, the strategy prunes costs for firms and job security for millions of workers
On February 2, 2016, Lauren Weber writes in The Wall Street Journal:
No one in the airline industry comes close to Virgin America Inc. on a measurement of efficiency called revenue per employee. That’s because baggage delivery, heavy maintenance, reservations, catering and many other jobs aren’t done by employees. Virgin America uses contractors.
“We will outsource every job that we can that is not customer-facing,” David Cush, the airline’s chief executive, told investors last March. In April, he helped sell Virgin America to Alaska Air Group Inc. for $2.6 billion, more than double its value in late 2014. He left when the takeover was completed in December.
Never before have American companies tried so hard to employ so few people. The outsourcing wave that moved apparel-making jobs to China and call-center operations to India is now just as likely to happen inside companies across the U.S. and in almost every industry.
The men and women who unload shipping containers at Wal-Mart Stores Inc. warehouses are provided by trucking company Schneider National Inc.’s logistics operation, which in turn subcontracts with temporary-staffing agencies. Pfizer Inc. used contractors to perform the majority of its clinical drug trials last year.
The contractor model is so prevalent that Google parent Alphabet Inc., ranked by Fortune magazine as the best place to work for seven of the past 10 years, has roughly equal numbers of outsourced workers and full-time employees, according to people familiar with the matter.
About 70,000 TVCs—an abbreviation for temps, vendors and contractors—test drive Google’s self-driving cars, review legal documents, make products easier and better to use, manage marketing and data projects, and do many other jobs. They wear red badges at work, while regular Alphabet employees wear white ones.
The shift is radically altering what it means to be a company and a worker. More flexibility for companies to shrink the size of their employee base, pay and benefits means less job security for workers. Rising from the mailroom to a corner office is harder now that outsourced jobs are no longer part of the workforce from which star performers are promoted.
For companies, the biggest allure of replacing employees with contract workers is more control over costs. Contractors help businesses keep their full-time, in-house staffing lean and flexible enough to adapt to new ideas or changes in demand.
For workers, the changes often lead to lower pay and make it surprisingly hard to answer the simple question “Where do you work?” Some economists say the parallel workforce created by the rise of contracting is helping to fuel income inequality between people who do the same jobs.
No one knows how many Americans work as contractors, because they don’t fit neatly into the job categories tracked by government agencies. Rough estimates by economists range from 3% to 14% of the nation’s workforce, or as many as 20 million people.
One of the narrowest definitions of outsourcing, workers hired through a contracting company to provide on-site labor for a single client, rose to 2% of all U.S. workers in 2015 from 0.6% in 2005, according to an academic study last year.
Companies, which disclose few details about their outside workers, are rapidly increasing the numbers and types of jobs seen as ripe for contracting. At large firms, 20% to 50% of the total workforce often is outsourced, according to staffing executives. Bank of America Corp. ,Verizon Communications Inc., Procter & Gamble Co. and FedEx Corp. have thousands of contractors each.
In oil, gas and pharmaceuticals, outside workers sometimes outnumber employees by at least 2 to 1, says Arun Srinivasan, head of strategy and customer operations at SAP Fieldglass, a division of business software provider SAP SE that helps customers manage their workforces.
Janitorial work and cafeteria services disappeared from most company payrolls long ago. A similar shift is under way for higher-paying, white-collar jobs such as research scientist, recruiter, operations manager and loan underwriter.
According to data from the Bureau of Labor Statistics, 25% of all medical transcriptionists, who type medical reports recorded by doctors and nurses, were employed in what the agency calls the business support services industry in 2015. The percentage has jumped by more than a third since 2009, a sign that transcriptionists are being pushed out of many doctors’ offices and hospitals.
“I haven’t yet met a CEO who’s not surprised by how many people who touch their products aren’t their own employees,” says Carl Camden, president and CEO of staffing agency Kelly Services Inc. Outsourcing and consulting brought in 14% of Kelly’s revenue in 2016.
Eventually, some large companies could be pruned of all but the most essential employees. Consulting firmAccenture PLC predicted last year that one of the 2,000 largest companies in the world will have “no full-time employees outside of the C-suite” within 10 years.
Accenture is one of the world’s largest providers of outsourced labor. Along with many rivals, it is pitching chief executives on the idea that their company’s core business is smaller than they think.
“We’ve shown we can do core parts of their business better than they can do it themselves,” says Mike Salvino, who ran Accenture’s outsourcing business for seven years until he left in 2016.
Average revenue per employee at the largest U.S. companies has climbed 22% since 2003. The jump could reflect the growing use of contractors and temporary workers, who aren’t counted as employees. Outsourcing is having a major impact in manufacturing and might have inflated official measurements of labor productivity from 2009 to 2015.
Average revenue per employee, in 2016 dollars
Estimated number of outsourced temp workers in manufacturing
Outsourced temp workers as a percentage of direct-hire employees
Steven Barker, 36 years old, says companies often dangle the possibility of full-time employment but seldom follow through. He has worked contract assignments at Amazon.com Inc., where it was common during orientation sessions for someone to ask if the job could become permanent.
He says the answer usually was: “We’ll see. Anything’s possible!”
At Amazon, Mr. Barker applied to become a full-time employee on X-Ray, which lets customers access actor biographies and other information while watching movies and television shows. He was an X-Ray contractor since it was in the development stage, he says, but wasn’t offered a job interview and eventually received a generic rejection letter from the company. Amazon declines to comment.
Companies sometimes try outsourcing and then change their minds. About 70% of Target Corp. ’s information-technology jobs were outsourced when Mike McNamara became chief information officer at the retailer in 2015. About 70% of those jobs now are done by employees.
“I’m a strong believer that if you can get competitive advantage out of something, you want it in-house,” he says. “That I have better supply-chain algorithms than [my competitors] really matters.”
Few companies, workplace consultants or economists expect the outsourcing trend to reverse. Moving noncore jobs out of a company allows it to devote more time and energy to the things it does best. When an outside firm is in charge of labor, it assumes the day-to-day grind of scheduling, hiring and firing. Workers are quickly replaced if needed, and the company worries only about the final product.
Steven Berkenfeld, an investment banker who has spent his career evaluating corporate strategies, says companies of all shapes and sizes are increasingly thinking like this: “Can I automate it? If not, can I outsource it? If not, can I give it to an independent contractor or freelancer?”
Hiring an employee is a last resort, Mr. Berkenfeld adds, and “very few jobs make it through that obstacle course.”
Visitors arriving at SAP, based in Walldorf, Germany, likely don’t notice that about 30 receptionists at its U.S. facilities work for contractor Eurest Services, part of Compass Group PLC. It happened in 2014 after SAP executives concluded during a review of potential outsourcing opportunities that some managers were paying their receptionists above-market wages.
SAP handed over hiring, training and oversight of receptionists to an outside firm. They were told they could leave SAP or keep their jobs through Eurest, which pays the receptionists in line with the overall market.
SAP says the move left the company with less to manage. “Internally, when [an employee’s] skills aren’t up to par, there’s a protracted process of managing performance,” says Jewell Parkinson, the human-resources chief for SAP’s North American division. “Working through the vendor, it’s a more efficient turnaround.”
Some economists liken the strategy to Hollywood studios, which greenlight movies and then hire directors, actors, editors, special-effects teams and marketing agencies for production. All those outsiders work together to deliver the movie, but the studio has no long-term obligations after the film’s release.
When jet-engine maker Pratt & Whitney no longer wanted to handle coordinating deliveries to its factories, it hired United Parcel ServiceInc., which has thousands of logistics experts and specialized automation technology.
For years, suppliers delivered parts directly to Pratt’s two factories, where materials handlers unpacked the parts and distributed them to production teams. Earl Exum, vice president of global materials and logistics, says Pratt had “a couple hundred” logistics specialists. Some handlers were 20- or 30-year veterans who could “look at a part and know exactly what it is,” he adds.
As Pratt wrestled with plans to speed production of a new jet engine and open three new factories, executives decided in 2015 to centralize delivery and distribution of parts in one facility. That facility would receive all the parts, pack them into assembly kits and send them to the five factories.
UPS custom-built a 600,000-square-foot facility, roughly the size of 10 football fields, for Pratt in Londonderry, N.H. About 150 Pratt employees who handled parts at the two factories were offered a chance at retraining for production jobs. Many did, and the rest left the company or retired. UPS has hired about 200 hourly workers for the facility.
Most of the UPS employees had no experience in the field, and assembly kits arrived at factories with damaged or missing parts. Pratt and UPS bosses struggled to get the companies’ computers in sync, including warehouse-management software outsourced by UPS to another firm, according to Pratt.
Production was back on schedule by the following quarter, and Pratt’s Mr. Exum says the facility is running well now. The 200 UPS employees can do work for five factories that 150 Pratt employees used to do for two. Pratt’s employees were unionized, but UPS’s aren’t. The union representing Pratt workers objected to the move.
The flexibility of outsourced labor helps Southwest Airlines Co. shield its employee base from the ups and downs of the airline industry. The fourth-largest U.S. carrier by traffic has about 53,000 employees and 10,000 outside workers.
The nonemployees range from wheelchair pushers in airports to information-technology professionals. “We’ve never had a layoff in our history,” says Greg Muccio, Southwest’s head of recruiting. “When we look at contingent workers, we’re protecting that because what we don’t want to do is balloon up and then be in a situation where we need to lay people off.”
Outsourced workers at Google parent Alphabet arrive through staffing agencies such as Zenith Talent, Filter LLC and Switzerland’s Adecco Group AG , which alone bills Alphabet about $300 million a year for contractors and temps who work there, according to an Adecco executive.
Google wouldn’t comment on how it decides which jobs are done by contractors rather than employees. A former contractor in the search division says he got the impression from conversations and meetings that he was a nonemployee because his skill set wasn’t a core feature of the product on which he was working. He says managers also needed the ability to ramp down quickly if the project wasn’t successful.
The contractor eventually became a full-time employee. He says he was told the decision to put him on the regular payroll had to be approved by Google co-founder Larry Page, now Alphabet’s chief executive, at a product-review meeting.
The trade group Staffing Industry Analysts estimates businesses spend nearly $1 trillion a year world-wide on what it calls “workforce solutions,” or outside services to place and manage workers.
As more companies outsource jobs, the resulting improvement in some measurements of productivity puts pressure on other companies.
Bank of New York Mellon Corp. executives were asked in a 2015 earnings conference call to explain why its revenue per employee trailed other banks.
Todd Gibbons, BNY’s vice chairman and chief financial officer, said investors should focus on a different indicator “because it’s just too hard to tell exactly what’s going on with head count and how people compute it and whether they’ve got contractors in versus full-time employees and so forth.”
BNY Chairman and CEO Gerald Hassell vowed to “drive down the labor component of our company” with technology that can perform tasks currently done by people. Other companies view contracting as a stopgap until more jobs are automated, freeing firms to dispense with some workers altogether.
In January, BNY told analysts and investors that the bank has “more than 150 bots now in production.”
This is another recent article that looks at a future where there will be hordes of citizens of zero economic value. That is, unless the system can be reformed to empower EVERY citizen to acquire OWNERSHIP in the wealth-creating, income-producing capital assets resulting from technological invention and innovation.
Because productive capital is increasingly the source of the world’s economic growth it should become the source of added property ownership incomes for all. The reality is if both labor and capital are independent factors of production, and if capital’s proportionate contributions are increasing relative to that of labor, then equality of opportunity and economic justice demands that the right to property (and access to the means of acquiring and possessing property) must in justice be extended to all.
Rather than focus on Job Creation, Job Retraining, and a redistributed Minimum Guaranteed Income that holds back technological invention and innovation, our economic policies should focus on wealth-creating, income-producing capital Ownership Creation.
Given that there is no question that robotic technology will continue to expand the productivity and in large measure destroy jobs and devalue the value of human labor, the question that SHOULD be urgently addressed is WHO SHOULD OWN THE FUTURE TECHNOLOGY ECONOMY? Will ownership continue to concentrate among the 1 percent wealthy ownership class who now OWNS America, or will we reform the system to provide equal opportunity for EVERY child, woman, and man to acquire personal OWNERSHIP in FUTURE non-human capital assets paid for with the FUTURE earnings of the investments in our technological future?
The conclusions should surprise no one who is conscious and who has even causally observed the constant shift to non-human productive inputs in the manufacturing, distribution, and sales of products, as well as the delivery of services, that has been occurring during their lifetime. The first burst of this phenomena was the Industrial Revolution. But now we are in an age of technology sophistication that is permeating every sector of industry and our day-to-day lives.
There’s nothing new about machines replacing people, but the rate of replacement is exponential and the result is that productivity gains lead to more wealth for the OWNERS of the non-human factor of production, but for others who have always been dependent on jobs as their source of income, there has been a steady decline to poverty-level labor incomes.
What must be understood (which unfortunately is not understood by conventional economists) is that there are two independent factors of production––human or labor workers and non-human or physical productive capital––productive land, structures, machines, super-automation, robotics, digital computerized operations, etc.
Fundamentally, economic value is created through human and non-human contributions.
Also what needs to be understood is that human productivity has not advanced (our human abilities are limited by physical strength and brain power––and relatively constant), but that the productiveness of the non-human factor of production––productive capital––is the reason that private sector corporations, majority owned by the “1 percent,” are utilizing the non-human factor of production increasingly to create efficiencies and save labor costs. It is the function of technology to save labor from toil and to enable us to do things that otherwise is humanly impossible without non-human input.
The critical question becomes who should OWN productive capital? The issue of OWNERSHIP is unbelievably overlooked by those in academia and politics, as well as by the author of the MIT Technology Review article. Yet we live in country founded upon private property rights.
Today, large streams of data, coupled with statistical analysis and sophisticated algorithms, are rapidly gaining importance in almost every field of science, politics, journalism, and much more. What does this mean for the future of work?
But what about China and Asia, the place where all the manufacturing jobs are supposedly going? True, China has added manufacturing jobs over the past 15 years. But now it is beginning its shift to super-robotic automation. Foxconn, which manufactures the iPhone and many other consumer electronics and is China’s largest private employer, has plans to install over a million manufacturing robots within three years. Thus, in reality off-shoring of manufacturing will eventually be replaced by human-intelligent super-robotic automation.
The pursuit for lower and lower cost production that relies on slave wage labor will eventually run out of places to chase. Eventually, “rich” countries, whose productive capital capability is owned by its citizens, will be forced to “re-shore” manufacturing capacity, and result in ever-cheaper robotic manufacturing.
“The era we’re in is one in which the scope of tasks that can be automated is increasing rapidly, and in areas where we used to think those were our best skills, things that require thinking,” says David Autor, a labor economist at Massachusetts Institute of Technology.
Businesses are spending more on technology now because they spent so little during the recession. Yet total capital expenditures are still barely running ahead of replacement costs. “Most of the investment we’re seeing is simply replacing worn-out stuff,” says economist Paul Ashworth of Capital Economics.
Yet, while the problem is one that no one can no longer ignore, the solution also is one starring them in the face but they just can’t see the simplicity of it.
The fundamental challenge to be solved is how do we reinvent and redesign our economic institutions to keep pace with job destroying and labor devaluing technological innovation and invention so not all of the benefits of OWNING FUTURE productive capacity accrues to today’s wealthy 1 percent ownership class, and ownership is broadened so that EVERY American earns income through stock OWNERSHIP dividends so they can afford to purchase the products and services produced by the economy.
None of this is new from a macro-economic viewpoint as productive capital is increasingly the source of the world’s economic growth. The role of physical productive capital is to do ever more of the work of producing more products and services, which produces income to its owners. Full employment is not an objective of businesses. Companies strive to keep labor input and other costs at a minimum. Private sector job creation in numbers that match the pool of people willing and able to work is constantly being eroded by physical productive capital’s ever increasing role. Over the past century there has been an ever-accelerating shift to productive capital––which reflects tectonic shifts in the technologies of production. The mixture of labor worker input and capital worker input has been rapidly changing at an exponential rate of increase for over 235 years in step with the Industrial Revolution (starting in 1776) and had even been changing long before that with man’s discovery of the first tools, but at a much slower rate. Up until the close of the nineteenth century, the United States remained a working democracy, with the production of products and services dependent on labor worker input. When the American Industrial Revolution began and subsequent technological advance amplified the productive power of non-human capital, plutocratic finance channeled its ownership into fewer and fewer hands, as we continue to witness today with government by the wealthy evidenced at all levels.
People invented tools to reduce toil, enable otherwise impossible production, create new highly automated industries, and significantly change the way in which products and services are produced from labor intensive to capital intensive––the core function of technological invention. Binary economist Louis Kelso attributed most changes in the productive capacity of the world since the beginning of the Industrial Revolution to technological improvements in our capital assets, and a relatively diminishing proportion to human labor. Capital, in Kelso’s terms, does not “enhance” labor productivity (labor’s ability to produce economic goods). In fact, the opposite is true. It makes many forms of labor unnecessary. Because of this undeniable fact, Kelso asserted that, “free-market forces no longer establish the ‘value’ of labor. Instead, the price of labor is artificially elevated by government through minimum wage legislation, overtime laws, and collective bargaining legislation or by government employment and government subsidization of private employment solely to increase consumer income.”
Furthermore, according to Kelso, productive capital is increasingly the source of the world’s economic growth and, therefore, should become the source of added property ownership incomes for all. Kelso postulated that if both labor and capital are interdependent factors of production, and if capital’s proportionate contributions are increasing relative to that of labor, then equality of opportunity and economic justice demands that the right to property (and access to the means of acquiring and possessing property) must in justice be extended to all. Yet, sadly, the American people and its leaders still pretend to believe that labor is becoming more productive.
The 400 wealthiest Americans and the other 1 to 10 percent richest Americans are rich because they OWN wealth-creating, income-generating productive capital assets. The disenfranchised poor and working and middle class are propertyless in terms of OWNING productive capital assets.
Because productive capital is increasingly the source of the world’s economic growth, shouldn’t we be asking the question why is not productive capital the source of added property OWNERSHIP incomes for all? Why are we not addressing how the system facilitates greed capitalism and envy while concentrating productive capital OWNERSHIP among the 1 to 10 percent of the population?
The change that is necessary is to reform the system to provide equal opportunity for EVERY American to acquire wealth-creating, income-generating productive capital assets on the basis that the investments will pay for themselves––and on the same terms that the wealthy OWNERSHIP class now utilizes. They are able to use the investment’s earnings to pay off the capital credit loans used to finance their investments, without having to use their own money or deny themselves consumption.
A National Right To Capital Ownership Bill that restores the American dream should be advocated by the progressive movement, which addresses the reality of Americans facing job opportunity deterioration and devaluation due to tectonic shifts in the technologies of production.
There is a solution, which will result in double-digit economic growth and simultaneously broaden private, individual OWNERSHIP so that EVERY American’s income significantly grows, providing the means to support themselves and their families with an affluent lifestyle. The Just Third Way Master Plan for America’s future is published at http://foreconomicjustice.org/?p=5797.
The solution is obvious but our leaders, academia, conventional economist and the media are oblivious to the necessity to broaden OWNERSHIP in the new capital formation of the future simultaneously with the growth of the economy, which then becomes self-propelled as increasingly more Americans accumulate OWNERSHIP shares and earn a new source of dividend income derived from their capital OWNERSHIP in the “machines” that are replacing them or devaluing their labor value.
The solution will require the reform of the Federal Reserve Bank to create new OWNERS of FUTURE productive capital investment in businesses simultaneously with the growth of the economy. The solution to broadening private, individual OWNERSHIP of America’s FUTURE capital wealth requires that the Federal Reserve stop monetizing unproductive debt, including bailouts of banks “too big to fail” and Wall Street derivatives speculators, and begin creating an asset-backed currency that could enable every child, woman, and man to establish a Capital Homestead Account or “CHA” (a super-IRA or asset tax-shelter for citizens) at their local bank to acquire a growing dividend-bearing stock portfolio to supplement their incomes from work and all other sources of income. Policies need to insert American citizens into the low or no-interest investment money loop to enable non- and undercapitalized Americans, including the working class and poor, to build wealth and become “customers with money.” The proposed Capital Homestead Act would produce this result.
Through Just Third Way reforms, economic growth would be freed from the slavery of past savings (“old money”), while creating a domestic source of new asset-backed, interest-free (but not cost free) money and expanded bank credit to finance new capital repayable out of future savings (earnings). To ensure that OWNERSHIP of future private sector growth and newly created wealth is universally accessible to every citizen, such newly created money and credit would only be available through economic democratization vehicles, administered through the competitive member banks of a well-regulated Federal Reserve central banking system.
Under the first tier, future increases in the money supply (“new money”) would be linked to actual growth of the economy’s productive assets, creating new OWNERS of new capital asset wealth through widespread access to interest-free capital credit repayable with future profits. The Federal Reserve would create (i.e., “monetize”) interest-free credit, with lenders adding their normal markup as service fees above the cost of money. This would establish an unsubsidized minimal rate for financing technological growth. This would provide the public with a currency backed by increasingly more efficient instruments of production, real wealth-producing capital assets, rather than unsustainable government debt.The creation of new money and credit would be non-inflationary and would simultaneously broaden purchasing power throughout the economy. To accomplish this, a key reform is a two-tiered interest policy by the Federal Reserve that would distinguish between productive and non-productive uses of credit.
The second tier would allow substantially higher, market-determined interest rates for non-productive purposes, for which “past savings” would remain available. The Federal Reserve would be restrained from future monetization of national deficits or encouraging other forms of non-productive uses of credit, causing upper-tier credit to seek out already accumulated savings at market rates.
Capital Homesteading would also provide through capital credit insurance a rational way to deal with risk, as well as an additional check on the quality of loans being supported by the Federal Reserve. Capital credit insurance and reinsurance policies would offset the risk that the enterprises issuing new shares on credit might fail to repay the loans. Such capital credit default insurance would substitute for collateral demanded by most lenders to cover the risk of non-payment, thus enabling the poor and others with few assets to overcome the collateralization barrier that excludes poor people from access to productive credit.
Support the Capital Homestead Act (aka Economic Democracy Act) at http://www.cesj.org/learn/capital-homesteading/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/ and http://www.cesj.org/learn/capital-homesteading/ch-vehicles/.See the article “The Absent Conversation: Who Should Own America?” published by The Huffington Post at http://www.huffingtonpost.com/gary-reber/who-should-own-america_b_2040592.html and by OpEd News at http://www.opednews.com/articles/THE-Absent-Conversation–by-Gary-Reber-130429-498.html.
Support Monetary Justice at http://capitalhomestead.org/page/monetary-justice.
Also see “The Path To Eradicating Poverty In America” at http://www.huffingtonpost.com/gary-reber/the-path-to-eradicating-p_b_3017072.html and “The Path To Sustainable Economic Growth” at http://www.huffingtonpost.com/gary-reber/sustainable-economic-growth_b_3141721.html. And also “Second Income Plan” at http://www.huffingtonpost.com/gary-reber/second-income-plan_b_3625319.html
Also see the article entitled “The Solution To America’s Economic Decline” at http://www.foreconomicjustice.org/9206/financing-future…economic-decline and “Education Is Critical To Our Future Societal Development” at http://www.foreconomicjustice.org/?p=9058. And also “Achieving The Green Economy” at http://foreconomicjustice.org/?p=9082.
Also see “Financing Economic Growth With ‘FUTURE SAVINGS’: Solutions To Protect America From Economic Decline” at http://www.foreconomicjustice.org/9206/financing-future…economic-decline and “The Income Solution To Slow Private Sector Job Growth” at http://www.foreconomicjustice.org/9872/the-income-solut…ector-job-growth.