There is more to PAL’s outsourcing program

Mirror Image
Business Mirror
by Maria Victoria P. Tibon, DBA

ON top of the business news recently was Philippine Airlines’s (PAL) implementation of its outsourcing program amid protests. Since October 1, the company began outsourcing its noncore business functions of catering, ground handling and call-center reservations to external service providers.

According to PAL management, it is a part of the company’s efforts to restructure operations to ensure its long-term survival. Through outsourcing, operations will be more efficient and can give the company savings of around $10 million to $15 million annually.

At the backdrop are those who think that the practice is against human dignity, job security and union rights. Regular workers will become contractual workers; their wages and benefits will be cut by half and there will no longer be job security. Undoubtedly, the issue of PAL’s outsourcing program has become controversial. It is timely and worthwhile to take a closer look at the practice of outsourcing, in general, so as to make an educated assessment of PAL’s case.

Outsourcing is an arrangement between a company and an external service provider, where the latter performs a business function/s previously carried out by the company. The relationship is governed by a contract that specifies the exchange of services and payments. It started as a practice during the Industrial Revolution but declined in importance as 20th century business saw the rise of the large, vertically integrated corporation. It has gained back its prominence in the present age in the light of intense competition, flattening of organizations, the need for flexibility, technological advances and emphasis on core competencies. PAL, as a large, vertically integrated corporation operating in this kind of environment, is embarking on an outsourcing program in this light.

PAL’s main competitor is Cebu Pacific. Cebu Pacific’s strategy is anchored on cost leadership, while PAL competes mainly on the basis of differentiation. It seems, however, that the strategy of differentiation can only go so far. While PAL enjoyed $72.5 million in profits last year, it has already incurred $10.6 million this year. Despite its improved management techniques, PAL’s achievement of optimum efficiency is being challenged. To better cope with competition, it does not intend to leave any stone unturned in its pursuit of efficiency. Outsourcing should be tried at this point. Outsourcing is PAL’s mechanism for differentiation and cost leadership. It is a way to improve its ability to meet cost-discipline demands and respond to customer demands for higher quality.

Indeed, companies outsource primarily to achieve greater economies of scale and save on overhead costs. They divest themselves from what is not core to their business so as to focus on what is “core.” These “noncore” business processes are usually of a commodity status. These are what PAL management has been harping on to explain their position. These arguments, however, do not seem sufficient to affected workers.

There are, however, other compelling reasons that could lead us to accept that PAL has to embark on this outsourcing program. It is a way to achieve best practice. Managers can improve their cost discipline and control skills in the process. It can improve service quality and enable management to focus on the core competencies of the company. The company can also gain access to new technology and skills.

Outsourcing can also have a positive effect on the nature of jobs in the company. Work arrangements will be more flexible. While it runs against job security, it can allow more work-life balance in terms of being able to give more time for the family. After all, employment has really changed these days. No one is assured of lifetime employment with a single company anymore.

In terms of benefits, some companies handled the situation by offering a change of employer but the same contract. The very least is redeployment with new terms and conditions. PAL has offered a good retirement package. Moreover, the affected employees are skilled and can definitely find alternative employment.

Outsourcing is beneficial to PAL but it is also risky. It has been noted that many companies that have tried outsourcing are actually dissatisfied with it. Companies that are dissatisfied with outsourcing complain that competitive advantage is not achieved due to the wrong choice of partners and ill-defined relationships with them. The choice of partner is, therefore, key to the success of outsourcing. Choosing several service providers spreads out the risks. PAL has chosen several good and reputable service providers.

Certainly, there are risks involved. However, there are also numerous benefits. There is definitely much more to PAL’s outsourcing program than just cost control. These have yet to be reaped in due time.

Dr. Tibon is an assistant professor of the Decision Sciences & Innovation Department of De La Salle University’s Ramon V. del Rosario College of Business. She teaches various business-related subjects and is the graduate program coordinator of the department.

“Mirror Image” is a rotating column featuring writers from the DLSU Professional Schools Inc.