Outsourcing non-core business functions may make perfect sense for a company looking to reduce costs. But to the employees on the trading block, it’s at best a source of high anxiety, at worst a disaster. If those employees happen to be unionized, watch out: high anxiety can quickly turn to confrontation.

When Bell Canada tried to dump unionized telephone operators in 1999 and outsource their jobs to a U.S. service provider, all hell broke loose. The union didn’t win the war, but it certainly thwarted Bell with the concessions it eventually won after a bitter public relations campaign, and the affair gave Bell a serious black eye.

By the time Hydro One, the former Ontario Hydro, started thinking about spinning off 900 jobs in customer service and information technology two years ago, the outsourcing and labour relations climate had grown markedly milder.

The hydro utility never seriously considered anything other than including its two unions in the $1-billion, 10-year deal it struck. Nor did the outsourcers, Cap Gemini Ernst & Young Canada Inc. (CGEY) and its sub-contractor Vertex Customer Management (Canada) Ltd.

“”A lot of companies in this situation might decide to ignore the union, indicate they wouldn’t take the contract and go down to the Labour Board and fight it, arguing that the collective agreement should be thrown out,”” says Hydro One CFO Ken Hartwick, a prime mover in the outsourcing decision.

“”But you’d end up with a ton of lawyer’s time, a ton of money spent — and a lot of hate.””

Instead, Hydro One got the unions onside early and let the outsourcers bidding on the contract — all experienced in dealing with unions, make the case to employees. Assurances that CGEY would assume the collective agreements with the Power Workers Union (PWU) and Society of Energy Professionals, plus a guarantee of no lay-offs for two years went a long way to relieving anxiety. In the end over 90 per cent of the PWU membership voted to accept the deal unopposed.

“”We never really got into a discussion of should we do it another way,”” says Hydro One vice-president of labour relations Steve Strome. “”I couldn’t really envision a scenario where we would go down that path of ripping up the agreement and heading for the Labour Board.””

The Hydro One case is a great model for how to handle outsourcing in a unionized environment, and that may be all other companies need to take away from it. But there’s more here than meets the eye.

The deal appears to be a success. Not only did the unions go along willingly, but the contract will save the company at least five per cent a year and Cap Gemini will make a profit too.

The cost savings come partly from economies of scale — volume buying for several customers by CGEY. Vertex and CGEY also implemented best practices such as a new application maintenance procedure.

“”Some of the processes we inherited from Hydro One were very good, very efficient,”” says Steve Power, the vice- president at CGEY who administers the deal. “”But with some there was no commercial discipline at all.””

The outsourcers also installed automated technologies such as a speech recognition option that Vertex added to Hydro One’s call centre interactive voice response (IVR) system. Speech recognition resulted in a 15 per cent increase in the number of customer calls completed by IVR, which reduces the number handled by human operators.

The Hydro One contract, managed by Inergi, a CGEY subsidiary set up for the purpose, went into effect in March 2002. “”Based on the first year, we’re very pleased with the service levels and we’re also encouraged on the cost performance side,”” Hartwick says.

A success story, but when you scratch below the surface, this is not all what it first appears to be.

Perhaps Bell could afford to replace low-skill telephone operators, but Hydro One knew it could never do the same. Those 900 employees, with their intimate knowledge of company processes and technologies, represented intellectual capital Hydro One could ill-afford to squander.

Furthermore, antagonizing the union would have been foolish given most employees left behind at Hydro One were members of the same unions.

It would have been more of a surprise if Hydro One, the unions and Cap Gemini had not marched forward in lock step.

Given CGEY’s assurances, it didn’t take much for the employees and the unions to realize they would be better off working for the outsourcer. There had been lay-offs at Hydro One, with the prospects of more. And CGEY’s pitch — that it was better to be in a company where your skills are part of the core competency — was persuasive.

“”Cap Gemini offered these people the opportunity to work with experts in their field,”” Strome points out. “”If they did well, they could move ahead with Cap. At Hydro One, they would max out in their careers much earlier. It was a good thing for employees, it was good for the unions, and it was good for us.””

But not so good for non-union employees, the 100 or more temporary and contract employees. Outsourcing economics are harsh. The object is to reduce costs and the primary way to do that is by reducing labour needs. It’s true that no PWU or Society member who wanted a job with CGEY was denied, but temporary and contract employees, unprotected by any union, were dumped.

Furthermore, for an outsourcer to absorb unionized workers it doesn’t actually need to service the account, it must win other contracts where no union stands in the way of it shedding outsourced employees. Otherwise, it has nowhere to send the surplus unionized employees.

“”You’d end up on an endless labour arbitrage treadmill,”” admits Vertex vice-president of business development Anthony Horton.

Hydro One is Vertex’s first client in North America. It is a subsidiary of a UK company that specializes in outsourcing customer service functions in the utility sector. Horton expects nine of ten deals it signs in future will be non-union.

In the meantime, Vertex is managing customer service functions at Hydro One — including call centre, finance, billing and collection — using only 275 of the 400 employees who handled those functions at Hydro One. Cap Gemini, whose international parent happens to hold a minority share in Vertex, absorbed the 130 who weren’t needed. It reassigned them to another of its contracts, providing IT services to CGEY throughout North America.

One can’t help wondering if Horton’s labour arbitrage treadmill may be the fate of outsourcers like Vertex and CGEY — especially in CGEY’s case since its two other major contracts in Canada are with Ontario Power Generation and Bruce Power, both heavily unionized. Something has to give.

In the meantime, viewed from the outsourcee perspective, it’s hard to argue with success. Hydro One made the right moves vis a vis its unions, but it just as clearly had little to do with respect for workers rights or a sense of familial responsibility for long-term employees.

Make no mistake: outsourcing ultimately wipes out jobs — if not your former employees’ jobs, then somebody else’s.

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