Contracting is not a bad business model

In the late 1970s when I first started working, the practice in many a company was to employ almost everyone working in it, including the security guards, janitors, messengers, electricians, and drivers of delivery trucks. The company also owned the delivery trucks, which were maintained by mechanics that it employed. Everyone identified themselves as employees of one and the same company.

Over the years, however, I’ve seen companies outsource various activities one by one. Many employees who were released in the process continued to work in the company, but were employed by a different employer—the one contracted to provide the specific service.

So what drove this wave of work contracting?  I realized that there was nothing sinister in this wave. The typical company came to the conclusion that it was very difficult to be highly professional in each of the activities within the company, and that scale brings costs to competitive levels. In addition, it was demonstrated that career opportunities for each small group of workers in different fields expanded when they were moved to companies focusing on a particular activity.

For example, a company will outsource the delivery of products as well as the ownership, maintenance and operation of the trucks because it makes sense to have it done by a professional logistics company that can do the job better and cheaper.

Imagine a small bakeshop delivering products through three trucks that it owns, operates and maintains, with three or four drivers and one mechanic that it employs, working from one small garage that it maintains. Compare this with a company that has outsourced the delivery of products to a logistics company with 100 trucks, 120 drivers, 10 mechanics and a large, well-equipped garage. The logistics company will definitely offer more professional service, as this is its core competence, and provided at a lower cost because of economies of scale.

Additionally, the logistics company can offer a career to the drivers and mechanics, as they are part of a larger organization focused on its core competence. This scenario is replicated in security agencies, companies offering cleaning services, and so on.

We should not think of contracting as a bad business model. When you think about it, the Philippines is one of the biggest contractors in the world through our thriving BPO (business process outsourcing) offices.  Companies and institutions in other countries have been contracting various types of work to Filipinos, and we are successful because we deliver lower costs (due to our lower cost of living and large scale of operations) and high quality of service (due to the high professionalism of our people).

There is a mistaken notion that the Philippines should pass more laws to ensure job security. But our existing laws aimed at job security are actually resulting in the unintended consequence of lower job generation, as investors find these laws to be very restrictive.

The truth is, in today’s world of fast-paced changes in technology, a job for life is no longer possible. The best guarantee of job security is consistent high performance and continuous upgrading of skills to adapt to the changing environment. What we should focus on instead is ensuring that when persons are gainfully employed in a company, they receive what is legally due them in terms of fair salaries and benefits, and that the company provides continuous training to make them “future-proof.”

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Edgar Chua chairs the Makati Business Club.