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Outsourced And Out Of Luck


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OUTSOURCED-AND OUT OF LUCK

Next time you're in the Oakland airport, look closely at the ticket agents behind the American Airlines counter. They may seem like other American Airlines staffers. They direct you to American flights and wear the same dark-blue uniforms. But there's a difference: Nowhere on the uniforms will you see the small AA emblem with the trademark wings. That's because they're not American employees, who were terminated in May.

The agents in Oakland, Calif. are newly hired employees of Johnson Controls Inc., which has a contract for the ticketing jobs. As part of a cost-cutting effort, AMR Corp.'s American Airlines Inc. decided last year to allow outsiders to work in its operations at 28 second-tier airports. The reason: American pays its veteran agents up to $19 an hour, plus benefits. The 550 jobs farmed out to Johnson and other contractors pay $7 to $9 an hour and often offer inferior benefits such as costly health insurance.

LABOR SHIFTS. American is part of the ongoing movement by large companies to shift work to suppliers and contractors. While outsourcing started in manufacturing in the early 1980s, it has expanded through virtually every industry as companies rush to shed staffs in everything from human resources to computer systems. No one tracks the total amount of outsourcing. But in computer operations alone, outsourcing sales have more than doubled since 1989, to $41 billion last year, according to Dataquest Inc. Employment in business services--companies that supply services to other companies--has doubled in the past decade, to 6.2 million jobs in 1994 (chart).

While outsourcing often helps companies slash costs, the broader economic implications are less clear-cut. It can be good for the companies involved and for the economy as a whole when the contractor really is more efficient. For instance, Detroit-based MCN Corp.'s data processing unit uses economies of scale from its seven mainframes to more efficiently serve 25 companies, including Ford Motor Co. Because MCN employs fewer people to process Ford's auto-financing applications than Ford did, the resulting productivity gains should help boost overall living standards enough to one day offset jobs lost in the switch.

Johnson, on the gther hand, isn't more efficient, it just pays local market wages, which are less, says Dave Jones, head of business development at the Johnson unit. Result: The switch helps American become more competitive but doesn't help the overall economy. Rather, the shift of jobs depresses wage levels for that sector, and income is merely transferred from employees to shareholders. "Companies often find it makes sense to outsource because they can orient their pay to local markets rather than to the industry they're in," says Jeffrey A. Schmidt, a managing principal at Towers Perrin.

While lower wages aren't always the prime motive in the current outsourcing wave, they're often the result. Take United Parcel Service, which recently said it would farm out 5,000 jobs at its 65 customer-service centers. UPS built centers around the country because agents needed to look at written records to trace a package or assign a pickup. Today, the entire system is computerized, and all agents have access to the same information. So management decided to consolidate into 8 to 10 locations and let outsiders run each center.

"Everyone's in shock and doesn't know what to think. All of a sudden we're not needed anymore," says Roger Sporeleder, a 27-year employee near Chicago, who hopes UPS will offer him a similar job nearby when his center closes.

But look what happens to pay: UPS call-center employees earn $10 to $12 an hour, in line with the industry norms. Agents employed by APAC, the Cedar Rapids (Iowa) company that UPS chose to run three of its centers, get the local-market wage for telephone clerks: $6.50 to $8 an hour, depending on the city.

THIS PHONE FOR HIRE. APAC, a private telemarketing company, has cut pay elsewhere, too. Since entering the customer-service business three years ago, it has won contracts from Western Union, Compaq, Quill, and Sears specialty catalogs. APAC has hired 2,600 telephone workers in 24 locations and plans to hire an additional 1,300 this year, says Donald B. Berryman, the vice-president in charge of this division. He expects his unit to hit 10,000 workers soon. APAC's other unit, which employs 2,400 and is growing at 30% a year, sells insurance policies and credit cards outsourced by insurers and banks. "When you call our clients' 800 numbers, you get us," says Berryman.

Even when pay isn't cut, outsourcing often seems to just move chess pieces around on the board. Last year, Xerox Corp. signed a $3.2 billion deal to let Electronic Data Systems Corp. supply all its computer needs for the next decade. But most of the savings comes from replacing Xerox' outdated technology, which EDS can buy more cheaply because it buys in bulk. Small savings stem from higher labor efficiency by EDS, say officials at both companies. In fact, EDS agreed to take all 2,000 Xerox computer-systems workers at their same pay. This is typical of EDS's subcontracting deals, which account for half of its 80,000 employees, says Micki Cobb, EDS's human resources manager.

Even if EDS-style outsourcing doesn't improve national productivity, it seems good for most people involved. Xerox reduces its expenses, EDS gets more business, and most employees aren't hurt. Trouble is, many other outsourcing deals don't add up to the same kind of win-win proposition.By Aaron Bernstein in New York, with Wendy Zellner in Dallas and bureau reports


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