A GROWING management strategy called "outsourcing" is shaking up much of the United States economy. It is streamlining businesses and creating billion-dollar industries, but it also is undercutting wages, unions, and job security for millions of workers.
The high stakes from outsourcing for both labor and management have been dramatized by the 17-day struggle between General Motors Corp. and the United Auto Workers (UAW). At press time, there were reports of a tentative agreement. The strike, by 2,700 workers over outsourcing at two GM brake factories, had created a shortage of vital parts. This has prompted GM to furlough 166,000 workers at assembly and parts plants in North America.
Nationwide, organizations ranging from companies to government bodies to universities are contracting out more tasks to outside firms. Spending on outsourcing has ballooned fivefold this decade and will exceed $100 billion this year, notes the Outsourcing Institute in New York.
"Outsourcing is mushrooming like crazy - virtually no activity is beyond the outsourcing trend," says James Emshoff, chief executive officer of IndeCap Enterprises Inc., a consultancy in Lake Forest, Ill.
By outsourcing, many companies have lifted profitability and spawned new supporting industries. But they also have accelerated both widespread payroll cuts - or downsizing - and the erosion in incomes of less-skilled workers, say analysts. Consequently, outsourcing has helped fuel a politically volatile sense of insecurity among US labor, they say.
Outsourcing especially threatens the UAW and many unionized workers vulnerable to competition from lower-cost, non-union labor. It most roils relations at established, highly unionized manufacturers - "the heavy-metal, 'rust belt' crowd like makers of automobiles and auto parts, consumer durables, and industrial and agricultural equipment," says Robert Evans, a partner at Andersen Consulting.
In Bellwood, Ill., a blue-collar suburb of Chicago, firms under contract to larger companies churn out dies, fork lifts, industrial piping and other products for manufacturing. "I'm not against GM workers, but the fact is we produce transmissions at lower cost, so who can blame GM for buying from us?" says Tony Scaife, one of 1,000 workers at Bellwood's nonunionized Borg-Warner Automotive Inc. plant. The factory pays workers less than what their GM counterparts receive and its transmissions sell for at least 5 percent less than those made at GM, says Borg-Warner spokeswoman Leslie Cleveland Hague.
"More and more companies are finding they have no choice but to outsource and challenge the entrenched union," says Mr. Evans. "For unions, the whole outsourcing trend is very troubling because they must sell a product - in this case labor - in competition against cheaper rivals."
UAW disagrees. "The outsourcing trend is not inevitable, and it's not necessary for a company to go with the lowest-cost producer without regard for workers," says Reg McGhee, a UAW spokesman in Detroit.
AS a systematic practice, outsourcing dates back more than a decade. But it has become widespread in the 1990s as companies seek to cut costs amid stepped-up global competition. Companies also outsource to capitalize on the greater ease in moving information and the wider accessibility of low-cost foreign labor.
Outsourcing usually involves tasks at the margins of an enterprise's specialty, or "core competency." The tasks range from customer service, distribution, finance, and human resources, to information technology, marketing, and administrative chores such as training and mail handling.
The trend has spread so widely that US companies today outsource 60 percent of the cost of making an average product, says Morris Cohen, professor of manufacturing logistics at the Wharton School at the University of Pennsylvania.
Outsourcing has nurtured entirely new forms of business. For example, hospitals have farmed out the transcription of medical records to what is now a $4.6 billion service industry, Mr. Emshoff says.
Some companies outsource too much and decimate their in-house expertise. Generally, however, outsourcing enables many firms to operate with more flexibility, launching out or pulling back with greater ease. "If you have a downturn, it's a lot easier to tell a supplier not to ship than it is to lay off your workers," Mr. Cohen says.
Moreover, an outsourcing company disperses its risks and costs. Seattle-based Boeing Company contracts out the production of most aircraft parts to hundreds of companies around the world.
Companies that outsource can better focus on their core strengths. For many firms, those strengths are the design of products and manufacturing techniques and the skillful use of information.
"The highest value in manufacturing today is the knowledge of how to design and build something," says Stephen Ricketts, vice president of technology at the National Center for Manufacturing Sciences in Ann Arbor, Mich. "The fabrication phase of manufacturing is becoming a commodity that can be purchased from the lowest-cost bidder virtually anywhere in the world," according to Mr. Ricketts.
As a result, outsourcing is speeding the fall of the huge, rigid, and strictly hierarchical company, Emshoff says, and the rise of a complex network of comparatively small and nimble knowledge-based firms.