In this article we're going to go over another form of outsourcing that is just as common a practice as sending jobs overseas.
It's the hiring of contract workers.
This practice actually started many years ago back in the 70's by large companies such as AT&T.
As a regular employee of a company you are entitled to and probably receive the following: health benefits, vacation time, sick time, pension plans, 401 K and a number of other perks. These perks cost the company money, lots of money. If a company is marginally profitable these perks greatly cut into their profit margin.
In order to increase profitability and reduce expenses companies hire what they call contractors or outside consultants. Why? Well, for starters, they don't have to pay them as much, though in actuality they pay them more money to make the position more attractive. So the question is, how can these companies actually pay more money and still make this profitable?
The answer is because outsourced contractors are NOT employees of the company. That means they work for the contracting company whether it be Source EDP or one of the other big contractors in the United States. These employees are employees of the contracting company. The contracting company pays their salary, benefits, etc. The company using the outsourcing simply pays this company a fee, granted a hefty one, for the employee. BUT here is what they DON'T have to pay. Health benefits, vacation time, 401 K, pension and all the other goodies that go with a company when you're an actual employee of the company. This saves the company a ton of money on each contractor. Multiply this out by 100,000 of these and you're talking about saving millions of dollars.
Here is actually a real life example that was given to me from an associate of mine from a contracting situation from years ago during the AT&T divestiture.
Back in the early 80's AT&T Information Systems had a building in Northern NJ with 10,000 employees. They needed an additional 2,000 to complete a project. Instead of hiring them outright they outsourced them.
Now, the positions paid $7 an hour to an actual employee. The outsourced pay was $18. so the additional cost for the 2,000 employees for the 1 year project was $45, 760,000. One would think this is total insanity. However, the amount of money they saved per person for health benefits, 401 K, pension and all the other things they had to pay into came to $54,912,000. A savings of almost $10,000,000 because they used outsourced employees rather than hire actual workers for the company. After the project was completed they hung onto the contractors and laid off over 2,000 of their regular employees, which was the first time in the history of AT&T that they had to do this.
As you can see, outsourcing saved the company millions of dollars. It also cost 2,000 people their jobs. 2,000 jobs weren't created because they were using contractors instead. Remember, these contractors were already working for a company, a contracting company. So 2,000 people were now out on the street. Most of them went into, you guessed it, contracting.
It's one of the biggest industries in the United States today.
Any wonder why?
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Michael Russell
Your Independent guide to Outsourcing
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