Is outsourcing immoral?

Cleaners and canteen staff are striking as they don’t enjoy the pay and conditions of fully employed colleagues. But for under-pressure HR teams, keeping things in-house isn’t always an option

Is outsourcing immoral?

If you have walked the streets of a major British city in recent months, there’s a strong chance you will have witnessed an increasing but still unusual phenomenon: workers forming picket lines to protest about pay and conditions. From University College London (UCL) and St Mary’s Hospital in the capital, to school staff in Glasgow and cleaners in Liverpool tax offices, walkouts have become commonplace, even if they haven’t made the headlines.

Such strife doesn’t represent a new Winter of Discontent. Rather, it is evidence of a more specific issue: those walking out are not employees of their institutions, but outsourced individuals who were often, but not always, previously in-house and now feel their pay or perks compare unfavourably to their permanent colleagues.

The organisations involved are often in the public sector, but banks and retailers have also been affected. And the issues are incendiary. At UCL, for example, hundreds of facilities and security staff walked out in November. Primarily employed by outsourcing giants Sodexo and Axis, they claim they receive 13 days less holiday than their UCL colleagues and must manage on statutory sick pay rather than the more generous packages allocated to fully employed staff.

For unions, outsourcing has become a lightning rod for disquiet over the allocation of capital in the modern economy, with outsourced staff painted as a ‘precariat’ left behind by the advance of technology and globalisation. “Our mission of a 
well-paid, motivated staff working alongside colleagues with the same employer – whether it’s for the NHS, universities or schools – is always better than fragmented tiers,” says Donna Rowe-Merriman, Unison’s acting national secretary of business, community and environment.

Twenty years ago, outsourcing was largely a byword for the displacement of entire roles, such as those of call centre workers to overseas destinations. But while that trend has slowed or proved less than cost-effective, what has emerged in its place is the handing of functions (even, in some cases, HR and IT) to specialist service providers such as Serco, Capita, Interserve and the Compass Group, as well as a range of smaller firms.

Not all these businesses are bad employers, nor do they always seek to introduce new contracts with lesser terms and conditions. But in many outsourced contracts – particularly those involving security, cleaning and facilities management – the only way to achieve the returns required to justify the move is to reduce the cost of the biggest overhead: the employee base. Meanwhile, employers are under ever-increasing pressure to cut costs by focusing on ‘value adding’ activities that generate direct revenue, rather than support services.

“It’s a trend that companies are focusing on developing core competencies in-house,” says Dr Washika Haak-Saheem, associate professor in HR management at Henley Business School. “Outsourcing other functions helps free up managerial capacity, cuts costs and allows access to different talent pools from a third party.”

Haak-Saheem points out that there can be many upsides to the practice. For example, it can mean work is more flexible because there is a greater resource bank to call on. And for the employees involved, it can offer greater security and development since they can theoretically be deployed across other contracts. 

Even so, for many HR professionals, the trend is unsettling. Many of the organisations that have outsourced their cleaners on unfavourable conditions win awards for employee experience in their ‘core’ business. Some pay the living wage while their outsourcers do not. 

The TUC estimates that 3.3 million people in the UK are currently outsourced workers, most of them in lower-paid roles. It wants parent companies to be made legally liable for the treatment of third-party workers, though previous legal cases in this area have failed to establish this principle. In March, workers at the University of London lost a High Court case in which they claimed the institution was their employer and they should be able to negotiate with it directly over pay. 

In the meantime, the march towards outsourcing continues. Research from PA Consulting has found the majority of UK businesses plan to maintain or increase their rate of outsourcing, with the IT sector particularly enthusiastic. The reasons cited include cost reduction (68 per cent), focus on core business (57 per cent) and access to resources (51 per cent).

The dangers of creating such a ‘two-tier workforce’ go beyond the moral implications or reputational risks, says Dr Maja Korica, associate professor of management and organisation at Warwick Business School. “In those cases where one set of individuals feel they are treated worse than others, you have a greater churn and turnover of workers,” she says. “So you arguably have wasted effort and cost in sections of your workforce continuously having to be retrained, which is not always acknowledged from a business perspective.”

Korica also points out that the loss of organisational ‘memory’, when outsourced workers turnover at an unreasonable rate, can be operationally damaging, while excessive outsourcing can also lead to the erosion of company culture and values.

Howard Sloane, chief people officer for Essar Oil UK, has seen outsourcing from various angles and says one of the major failings HR teams experience is that when they are asked to project costs for shipping out a particular department or function, they are often unable to take account of the intangible implications of doing so. After all, Sloane points out, there are “only so many lines in a budget”, which means issues such as loss of momentum, reduction in employee engagement or the need to introduce operational workarounds are often not captured. “The real costs of outsourcing are often not accurately recorded,” he says. “But that doesn’t mean the vital process of doing a cost-benefit analysis when considering outsourcing should be avoided. And culturally, the simple 
fact you are considering outsourcing can damage employee goodwill, so it is vital communication is a high priority for the HR function.”

The simplest way to guarantee outsourced workers are treated fairly, of course, is to ensure they contractually enjoy the same terms and conditions as their parent company’s employees. But that begins to erode some of the business case for outsourcing in the eyes of leaders, or may be difficult to enforce. More practically, parent companies can set guidelines for how they wish outsourced staff to be treated, which can be central to whether the arrangement is renewed.Retailer Ikea, for example, announced it would remove outsourced labour suppliers that were unwilling or unable to satisfy the requirements of a code of conduct around employment rights. 

“Organisations need to ensure their suppliers are credible and will be able to produce the supply of labour they are hoping for,” says Nick Bacon, professor of HR management at Cass Business School. “And if you procure a contract, you can insist certain employment conditions are met by specifying requirements such as pay levels, training or health and safety requirements.”

This involves ensuring HR is present and active during procurement negotiations, rather than merely dealing with the aftermath of outsourcing, adds Bacon. The alternative, he points out, is to risk increased media scrutiny over why cleaners or other lower-paid workers are treated differently from ‘core’ staff, an issue that makes easy headlines for some sections of the press and which can be hard to defend in the confines of a journalistic article. And when the outsourced workers are overwhelmingly migrants or members of ethnic minorities – which has been the case among London universities, as well as Ministry of Justice staff who walked out in 2018 – that can lead to “extremely bad” publicity.

Outsourcing is unlikely to go away as long as margins are squeezed and businesses face agile competitors that quickly establish a lower cost base. For HR, however, the question is whether you can defend your practices to your remaining employees – and, if not, whether that is a price worth paying for a bit more on the bottom line.