clock menu more-arrow no yes

Filed under:


During the past 10 years, Fortune 500 companies have been job killers, not job creators.

Since 1980, those large companies have lost more than 3.5 million jobs while small- and medium-size companies have created more than 22 million jobs.However, the downsizing of America's largest business enterprises has two faces. It's part of the process of "creative destruction" that characterizes capitalism.

One face is the painful, mid-career cashiering of executives or allegations of union busting. The other is the bloated enterprise throwing off stifling layers of management, rooting out redundant staff activities and slashing overhead costs to become more flexible and competitive.

Downsizing is also laying the foundation for tremendous increases in American productivity - especially in the service sector, where productivity growth has been slowest. Why? Because downsizing is often followed by outsourcing - or corporate unbundling.

This is the practice of farming out high-salaried legal, public relations or economic forecasting staff functions or lower-wage "back office" operations to specialized enterprises who sell business and professional services back to the large corporation.

Outsourcing creates large productivity increases and the potential for higher-wage jobs, especially in the service sector, where the challenge is greatest.

Consider the case of janitorial services. If janitorial services are provided in-house, custodians are among the lowest paid workers. Turnover is high. Supervision is provided by lower middle management. The janitorial function escapes top management's radar screen.

There is an alternative. Let's call it the ABC Office Maintenance company - ABCOM, for short. ABCOM has an entrepreneurial president trying to make a business grow and prosper. Good service and productivity improvement is the only way.

After initial successes, ABCOM's president hires a sales director and then a human resources director - to provide better training and reduce turnover.

As a result, ABCOM gets more for the buck. Because employees are more productive, ABCOM pays higher wages, attracts more highly motivated people and provides cheaper services. Its business grows.

ABCOM now realizes there are better methods to clean offices. So, the firm hires a procurement director to find state-of-the-art cleaning solvents and develop new time-and-motion routines in concert with a professor of industrial engineering at a local community college.

The result is a new surge in productivity and even higher wages for everyone. Also, with two layers of management, ABCOM provides a meaningful career path for custodians. It's possible to recruit better people, keep them longer and offer upward mobility opportunities for the best.

These are the dynamics of outsourcing. Big companies get rid of the fat.

New and very efficient firms are created. New careers are opened up. And productivity growth in the service sector is greatly increased.

Outsourcing is the up side of downsizing. It's another facet of the New Economy that is working very well.