Outsourcing logistics – what about the workers?

By Dr. Alicia Martinez de Yuso and Dr. Aldo Arranz-López

Outsourcing so called ‘non-core’ activities, including logistics functions, is a well-established strategy right across industry and commerce; one that has been increasingly adopted as firms struggled to rebuild after the Covid pandemic. (Actually, the phrase ‘non-core’ is slightly misleading – often an activity such as retail distribution is central to the business: it is just that the company lacks the expertise or resources to be as good at it as it could or should be).
The objectives of an outsourcing strategy may be to improve productivity, performance, flexibility and customer satisfaction, even achieving ‘green logistics’ goals, but inevitably the ‘bottom line’ is indeed the bottom line – reduced costs and/or increased profitability - and that brings a real risk that in the process wages, employment conditions and rights, and other corporate social responsibilities may be significantly impaired.

Recognising this, in 2022 as part of the ReSChape project (Reshaping Supply Chains for Positive Social Impact) launched under the EU’s Horizon Programme, ZLC led on a task to examine the impact of logistics outsourcing on employment. ReSChape has now completed its 3-year programme of work and the results are in.
We have trawled the available literature, from surveys and research papers to recruitment advertising and media coverage of outsourcing-related industrial disputes to establish the nature of the issues that can arise, and we have discussed these issues with a range of stakeholders and experts. From this we have devised a set of Key Performance Indicators (KPIs) that companies can adopt to monitor the effects of their outsourcing strategies on employment. (For consistency of interpretation, we confined ourselves to English-language material: on the plus side this allowed us to look at practice beyond the EU, in for example the United States and Australia).

In theory, of course, there is no reason why outsourcing logistics activities to a specialist third-party provider (3PL) shouldn’t be positive across a range of employment and other social issues. A 3PL should have a greater depth of skills and knowledge in logistics; it can make investments in technologies that improve working conditions, whether that be in less effortful materials handling, or in sophisticated scheduling and planning that better and more predictably match labour to the tasks in hand; with multiple clients it may be able to ‘smooth’ peaks and troughs of activity which may lead to more permanent, full time posts and less reliance on exploitable casual or agency labour; it may have the scale to be able to invest in employee training and career development, and so on.

But while this may often be true in many of the national and global 3PL ‘brands’, it isn’t always the case, and in fact the majority of third party logistics providers are much smaller local or regional companies, often with origins as pure hauliers, perhaps family-owned, under-capitalised, struggling to attract and retain top-flight logistics management, and of course working to eye-wateringly tight margins. In such circumstances it is not surprising that labour pay and conditions can deteriorate, legal obligations be neglected, sustainability and other social goods deprioritised. As is typical in smaller companies, worker representation such as through Trade Unions is patchy at best, if not actively discouraged.
Meanwhile, the outsourcing company may be blissfully unaware of any problems at its appointed 3PL - until something goes badly wrong and their reputation (and likely their profitability) gets trashed.

Our review confirms this view. We found evidence of a ‘two-tier’ workforce developing whereby the outsourcing company retains many knowledge-based engineering and management staff in house on permanent contracts, while outsourced roles such as warehouse and fork lift operators often end up on temporary, casual or ‘zero hours’ contracts, or may even find themselves further sub-contracted out.

Wage disparities become significant. An American study shows an immediate 2.5% drop in wages for outsourced workers, growing to a 10% gap over 5-10 years. Of course, in the EU there are laws protecting workers when undertakings are transferred such as in an outsourcing – nonetheless studies show that outsourcing (not just in logistics) is responsible for around 10% of the increasing wage inequality in recent decades – in Germany, a country with historically powerful labour representation! (It barely needs stating that the wage penalty is higher for female workers).
Weak worker representation and lack of collective bargaining also enable firms to exploit workers by skirting around what may already be weak regulatory protection, for example through ‘shadow management systems’ and subcontracting networks. In the limit this may include the illegal employment of undocumented migrants.

At a policy level we see four key (and interlinked) areas for action.

• Strengthening collective bargaining to attain fair wages and job security
• Introducing (or enforcing) minimum wage standards for outsourced workers
• Increased transparency in subcontracting
• Stronger regulatory oversight.

Those are matters for governments and for industry as a whole. Meanwhile, what can and should individual firms be doing to assess employment risks and opportunities in their outsourced logistics operations?

We have drafted a ‘Guide to Socially Responsible Outsourcing: KPIs for Impact and Performance’ which contains a set of ‘sentinel’ indicators that can reveal early signs of social risk in outsourced logistics operations and thus enable firms to take timely corrective action before risks escalate into legal, reputational or operational failure. We group these into four ‘pillars’ – around working conditions, wages and bargaining power, legal and sustainability, and operational and financial. For each pillar there is a set of KPIs. Note that these are not in the main metrics to be calculated to three places of decimals – rather, they can be assessed as of low, medium or high risk concern, and acted on accordingly.

Examples of the principal issues addressed in each of these pillars (each of which has several KPIs) include:

This may look dauntingly complex, but firms will usually have at least some of the relevant metrics already available. These can be used to establish some sort of benchmark or baseline against which future performance can be compared. Also, we suggest that firms start with one or two KPIs from each pillar, those most relevant to the contract or which address already-recognised risk areas. For new or renegotiated contracts the provision of KPI metrics by the supplier should be built into tender requirements and taken into account in contract award processes.
KPIs should be matched with the data already maintained by HR, legal and procurement teams, avoiding duplication and encouraging ownership, and there needs to be a formal and agreed cycle, perhaps quarterly, of cross-functional reviews across in-house teams and, obviously, with the supplier.

Over time, then, the outsourcing company can create a system which benchmarks supplier performance, integrates with (increasingly, mandatory) ESG and CSR reporting, detects and prioritises ‘red flag’ issues before they become damaging, and use the insights gained to inform contract award and procurement decisions which will increasingly move the emphasis from ‘lowest cost’ to shared social value – which, firms may discover, can also be the lowest cost in the long run.

As a final thought, we also believe that logistics providers themselves could benefit from adopting this framework.

For more information, contact Dr. Aldo Arranz-López or download the Policy Brief here.