Understanding Outsourcing and Subcontracting: An Approach from the Theory of Surplus Value

Economic Studies

The literature in the sociology of work, economics, and management is mainly focused on the organization of production and the labor process: workforce management and regulation, productive and systemic linkages, and management and business administration.

One of the earliest studies of subcontracting is Benjamin Coriat’s (1992) classic analysis of the Toyota Company, Penser a I’envers (Reverse Thinking). Drawing on the empirical data of the economist Benri Asanuma, it describes the essential features of subcontracting relations in this Japanese firm. Subcontracting is defined as a long-term relationship between companies that is institutionalized and hierarchical, contractual, and innovative (101). Coriat points out that it dates to the early 1950s and was a response to the company’s need to deal with a sharp increase in sales in the context of staff reduction. ¹ The practice quickly spread and became the cornerstone of productive organization, leaving a relatively small proportion of workers in the parent company. Coriat reconstructs the distribution of the total product, stating that about 36 percent of production falls into the realm of contractors (108). ² Subcontracting relations established between companies, as described in Coriat’s research, involve both cooperation and competition in the various stages of the relationship. While it might appear that competition takes place only when the parent company is choosing among several outside vendors, Coriat describes other mechanisms of competition once subcontracting relations have been established. For example, since more than one supplier may be hired for a particular input, suppliers will constantly compete among themselves even in the context of a contractual relationship. At the same time, contracts determine not only the nature and quality of the product but also quantities that may be modified in the course of the relationship. The parent company may remain a customer in need of wooing in spite of any contractual commitment. However, subcontractors also benefit from this contractual relationship through the accumulation of practical knowledge regarding the specific process of production, which, according to Coriat, intensifies the bond with the parent company. These cooperative customer/vendor relations result in a benefit that takes the form of quasi-rent or relational rent.

There is a vast body of literature in economics on cooperation between companies, some of it addressing geographical factors (e.g., examining subcontracting within the framework of productive conglomerates that have a strong territorial component). Yoguel, Borello, and Erbes (2009) have summarized these approaches, which seek to account for the changes in the productive apparatus from the systemic perspective of relations between companies, commercial and other (e.g., transfer of knowledge, skills, etc.), and relations between public and private aspects (e.g., links between production units and national science and technology organizations). The foundations of this outlook can be traced to classical nineteenth-century economists such as Alfred Marshall and Friederich List, whose work has been used since the 1980s to develop a diversity of approaches emphasizing subcontracting networks, distribution networks, sectoral blocks, and commodity chains (Yoguel, Borello, and Erbes, 2009). From the perspective of workforce management, these approaches tend to consider these areas of production as characterized by “upward labor mobility that allows for the continuation [of a] professional career in other local places” (68). This dynamic of labor relations is what distinguishes agglomeration from mere concentration. Another systemic approach favors the productive element over the territorial one and analyzes production in terms of the relations between production units located across the planet. The global-value- chains perspective identifies a disaggregated production process across companies that have been relocated for reasons of, for example, access to raw materials or cheap labor. Kosacoff and López (2008: 22) argue that this approach “studies relationships between the companies in the chains and, in particular, analyzes how these relations influence the performance of local firms.” Subcontracting becomes a mechanism through which contractors from developing countries achieve development of production via international integration. However, in contrast to what happens with territorial approaches, this perspective emphasizes the high degree of asymmetry across the various elements of the supply chain. Gereffi, Humphrey, and Sturgeon’s (2005) focus on governance emphasizes the need to identify the productive segments that provide the greatest value or generate the greatest spillover to most economic sectors in order to establish an effective development strategy within the framework of global production relations. In any of its versions, local or global, this approach pursues a new way of conceiving relations between economic agents and social actors and, consequently, new forms of political intervention to ensure national or entrepreneurial development (Carrillo and Novick, 2006).

Finally, business and management theorists study organizational processes to identify capacity and risk and develop managerial strategies. Perunović and Pedersen (2007) have analyzed the various theoretical frameworks employed for the study of outsourcing and identified five general stages: preparation, vendor(s) selection, transition, management of the relationship, and reconsideration. According to them, the objective of outsourcing is the establishment and management of a contractual relationship between a company and an outside supplier that provides something that was previously available internally (Momme, 2001, cited in Perunović and Pedersen, 2007). ³ An interesting study based on interviews with top business executives clarifies several issues from their perspective. The search for new suppliers and new ways to ensure delivery has altered the previously opposed roles of customer and supplier (Rothery and Robertson, 2000) in the direction of cooperation. An analysis of the value chain means that a company can be broken down in terms of its strategic activities, showing which components may be outsourced. Here outsourcing involves the segmentation of activities, the identification of the relevant ones, and cost comparison (internal vs. external), as well as a contract ensuring governance of the vendor (McIvor, 2000). In terms of goals, some writers suggest that this behavior involves a search for outside specialists who can improve the company’s products or processes (Granda and Smolje, 1997); in other cases the emphasis is on the need to eliminate internal regulatory bodies or reduce the number of managers (Rothery and Robertson, 2000). ⁴ However, they also point out that this widespread outsourcing trend must be understood in the context of the development of information and communication technology, which has allowed the reduction of costs through the dismantling of complex organizational structures (Hendry, 1996). For many, outsourcing’s main advantage is that the company focuses on what it does best, which often translates into cost reduction, reduced or flexible staffing, release of capital, and improved quality (Granda and Smolje, 1997; Hendry, 1996). For Rothery and Robertson, the staffing issue is a risk given that outsourcing entails the elimination of jobs. The key is retaining the personnel that play a fundamental role in the campus’s labor capacity. Finally, some writers comment on the effectiveness of subcontracting for limiting union conflict, claiming that “outsourcing to small contractors reduces the ability of unions to stop production and reduces the overall general power of internal troublemakers” (Rothery and Robertson, 2000: 30).

Labor Relations Studies

The second group of outsourcing studies comes mainly from sociology and anthropology and tends to address the organization of production (relocation, decentralization, etc.), working conditions (types of contract, flexibility, wage differentials, etc.), and labor relations (collective action, union representative plurality, fragmentation, individualization, etc.).

The first topic is strongly linked to discussions regarding the origins of outsourcing. Its emergence is usually traced to the global capitalist crisis of the 1970s and the consequent reconversion of production, which sought to increase flexibility through vertical disintegration (Basualdo and Esponda, 2014; Dean, 2011; Neffa, 2012; Puig Farras, 2011). However, it is often argued that it is rooted in the very origins of the current mode of production. The most important historical precedent of outsourcing dates to the origins of capitalism, when the putting-out system (Battistini, 2010; Neffa, 2012) enabled the emerging bourgeoisie to make use of the production knowledge of artisans-turned-laborers by providing them tools and supplies and paying them by the piece. Recruiters (i.e., those in charge of hiring laborers) set another precedent (Rath, 2011). De la Garza (2012) states that, while it is a very old form of production, today’s outsourcing differs in its link with the environment and its response to the need to boost productivity and competitiveness.

Finally, according to the International Labor Organization, outsourcing is intimately related to the decentralization of production. ⁵ The two elements constitute a phenomenon that is novel in intensity and form but not in essence. Commercial competition and the need for adaptation called for technical efficiency and improvement of the final product. Given this global scenario, outsourcing allowed companies to focus on what they knew best and look for specialized vendors to eliminate the need for extensive infrastructure, allowing for smaller and therefore more flexible units (Ermida Uriarte and Colotuzzo, 2009). Dean (2011) locates this issue at the heart of the critical debate on post- and neo-Fordism, which focuses on workers and technological advancement. The former identifies a radical change in the structure of production in which the industrial worker ceases to be the central figure, while in the latter technological developments deepen the Taylorist-Fordist scheme. Dean asserts that outsourcing is the way flexible specialization manifests itself under post-Fordism. Flexible specialization has also been identified as the way the theory that emerged in developed countries confronted subcontracting, while concern with the effects on labor has been most marked in developing countries in response to the increasing precariousness of labor in these nations (De la Garza, 2012).

With regard to working conditions, forms of recruitment have garnered considerable attention. Iranzo and Richter (2012) have provided a catalogue of established forms, including temporary-labor agencies that provide other companies with workers while remaining the employer, contractors who provide work or services to other companies using their own employees and tools, workers’ cooperatives, in which members offer their services to another company, and subcontracting chains, in which companies outsource a phase of the productive process. Ermida Uriarte and Colotuzzo (2009) describe four levels or dimensions of outsourcing, ranging from procurement of goods or services through intermediate forms (temporary or permanent) to the use of autonomous labor. Del Bono (2014) describes outsourcing as usually confined to a single phase of the production process in an auxiliary business with its own employees. Outsourcing in any of its manifestations is for most writers an aspect of flexibility, job insecurity, and the deterioration of general working conditions (Basualdo and Esponda, 2014; Ermida Uriarte and Colotuzzo, 2009; Iranzo and Richter, 2012; Neffa, 2012). However, not everyone agrees on this correlation between outsourcing and precarization. Perelman (2014), for example, disagrees theoretically, though international experience would seem to differ, and some allege that subcontracting does not necessarily mean precarization because “employment and working conditions might be better with the subcontractor than with the parent company” (Battistini, 2010: 3).

Finally, studies of labor relations tend to treat outsourcing as a strategy for domination and discipline that impacts collective identity. Montes Cató (2003) sees outsourcing as an employer’s strategy for distinguishing workers from others (personnel excluded from collective bargaining, interns, temporary workers, and so on). It impacts wages, judicial/union matters, and legal and educational aspects. Analyzing a particular workplace, he says that “this game of differentiation and deprivation led to the weakening of the ties of solidarity and identification among workers themselves, as well as between workers and unions” (Montes Cató, 2003: 16). Del Bono (2014) addresses the challenges facing unions seeking to represent outsourced workers and points to cases (e.g., in the Argentine oil, telephone, and subway industries) in which unionized action reversed the fragmentation provoked. Other studies speak of the emergence of new actors seeking to dispute the effective representation of outsourced workers (Rodríguez Miglio, 2016a; 2016b; Ynoub, 2012).

There is far less literature on labor disputes and collective bargaining connected with outsourcing. Some studies allow us to examine the different ways in which production occurs and how this impacts unions and labor alliances. There are several studies involving Argentine cases in the automotive (D’Urso, 2012), oil (Vogelmann and Vitali, 2014), and telecommunications (Rodríguez Miglio, 2016b) sectors, as well as on collective bargaining in telecommunications (Dávolos, 2009; Del Bono, 2014).

Outsourcing and Transformations of the Production Process

As stated above, outsourcing is primarily a process by which companies cease to engage directly in part of their production process and instead acquire these goods in the market. ⁶ This means they have had to assess the various phases of their production process and decide whether continued production or acquisition was more appropriate. Outsourcing is the fragmentation of the production process: a certain phase is excised and assigned to an outside company. This fragmentation and externalization reflect two historical trends in the organization of production, one general and one specific to the current mode of production. The fragmentation of the production process is simply the technical or manufacturing division of labor specific to capitalism, while externalization refers to the social division of labor across the ages. The fragmenting and externalization of production establish a relationship between two production units: the main, contracting partner (or parent) and the outside vendor (subsidiary or contractor).

The technical division of labor is the material basis for the typical capitalist manufacturing industry and emerges when the workplace includes various trades coordinated for the production of a common good and the required labor can be distributed among workers performing different tasks simultaneously (Marx, 1977). Increased scale of production is a technical requirement; given that each specialized laborer works all day at the same task (blacksmithing, upholstery, wood turning, etc.), low levels of production would result in many idle moments, preventing the production of surplus value. At the same time, the social division of labor entails the emergence of new productive sectors devoted to new goods that were previously part of a single manufacturing process. This process is not specific to capitalist production but found across all forms of labor organization for the development of productive forces (Marx, 1977). For example, primitive hunter-gatherer societies were organized on the basis of a precarious social division of labor that became increasingly complex over time. In capitalism, the social division of labor is reinforced by a division of a fragmented process certain phases of which become autonomous. Outsourcing is an expression of this dual trend.

As stated, when production becomes fragmented and outsourced, the units of production involved may establish stable and contractual exchange relationships. Parent companies seek to maintain most of the control over the product developed by the vendor, whether through contracts or through competitive relations with other vendors (Coriat, 1992). Thus, relations between the parent company and the contractor are not symmetrical; the former tends to dominate the latter (Gereffi, Humphrey, and Sturgeon, 2005). In fact, outsourcing studies show that parent companies are larger than contractors; small businesses never outsource to larger ones.

The main challenge lies in uncovering the rationale for employing outsourcing. Why do some capitals choose to abandon a phase of the production process and instead acquire it as merchandise provided by a smaller capital? What are the requirements of capitalist accumulation that outsourcing and subcontracting fulfill? To answer these questions we must tackle the two aspects of the production process: labor and valorization.

Labor and Valorization

Part 3 of the first volume of Capital addresses the labor process as a mechanism for revolutionizing production capacity and increasing the extraction of surplus value. In it Marx speaks of the dual character of goods production, which is, on the one hand, a labor process (i.e., a process that produces use values) and, on the other, a valorization process in which the product in question becomes value. Marx analyzes the labor process as an activity whereby man takes possession of the means of production, transforms it, and is transformed himself. The elements of the labor process are purposeful activity (that is, work itself), the object on which that work is performed, ⁷ and the instruments of that work ⁸ (1977: 284). From the point of view of the outcome, the means and the object are the means of production (or objective factors), while the oriented action is productive labor (the subjective factor). Whether a given product is part of the production process as a raw material, a means of labor, or a product will depend on this process, which may take various forms.

The labor process necessitates living labor for the consumption of the means of production. This living labor consumes the means of labor and the object productively, and thus the production process is also a process of (productive) consumption (Marx, 1977: 290):

The labour process, as we have just presented it in its simple and abstract elements, is purposeful activity aimed at the production of use-values. It is an appropriation of what exists in nature for the requirements of man. It is the universal condition for the metabolic interaction [Stoffwechsel] between man and nature, the everlasting nature-imposed condition of human existence, and is therefore independent of every form of that existence, or rather it is common to all forms of society in which human beings live.

In today’s society, however, the work is performed in a particular way. In capitalist production living labor is purchased as a commodity and used productively in a work process that is under the control of the capitalist producer. On the one hand, the labor process is organized and synchronized by a capital in a position of authority (ensuring that the consumption of the means of production is appropriate) while, on the other, the product of the work is owned by that capital and not by the direct producer. Thus, the “labour process is a process between things the capitalist has purchased, things which belong to him” (Marx, 1977: 292).

This is where the second dimension of the production process, valorization, comes in, since what the capitalist producer wants is not the use value produced but its outcome—its exchange value—and this value must be greater than the cost of production. In other words, the capitalist seeks to valorize his capital, and valorization is possible only when there is a surplus achieved by extending the workday beyond what is necessary to pay for that labor. This possibility of extracting surplus value is the rationale for the capitalist producer’s behavior. All the past work contained in the object and the means of labor participates in this process, along with the living labor spent directly (a product of the acquisition of labor power).

In valorization the worker—the seller of labor power—finds in the workplace the means of production necessary for a whole workday even though producing the value of the labor power he sells would require only part of the day. Thus “the value of labour-power and the value which that labour-power valorizes [verwertet] in the labour-process are two entirely different magnitudes” (Marx, 1977: 300). If the worker labored only to produce the value of his labor power, the capitalist would barely recover his initial expenditure. The capitalist therefore consumes labor power throughout the day, producing surplus value.

Finally, for the valorization process to increase the initial capital, (1) the time spent on production must fall within normal production conditions (i.e., the socially required time); (2) the workforce must operate under normal production conditions (i.e., with the degree of skill and intensity appropriate to production conditions); and (3) there must be sufficient consumption of the objects and the means of labor. But whether the objective factors of labor are normal depends not on the worker but on the capitalist (Marx, 1977: 303).

The two processes, labor and valorization, are different but inseparable aspects of the same process of production. The labor process involves forms of extraction of surplus value that will result (or not) in the achievement of the average rate of profit. Therefore, if we want to answer questions regarding the reason for outsourcing and subcontracting, we must attend to both these factors.

The different forms of surplus extraction employed in the labor process have been amply studied in the outsourcing literature dealing with various activities (Esponda, 2012; Montes Cató, 2003; Perelman and Vargas, 2013; Soul, 2014) and in theoretical analyses (Dean, 2011; Iranzo and Richter, 2012; Neffa, 2012). However, all these studies have failed to address the need of individual capitals to engage in these transformations of production, and therefore outsourcing is treated as the choice of the individual capitalist enterprise rather than as a response to any aspect of capitalist accumulation. A closer look at the process of capital valorization will expand our understanding.