Chapter 1: Understanding Outsourcing

Entrepreneurs aiming to establish manufacturing units or start new ventures naturally seek to maximize their returns on investment. The expenses related to plant equipment and raw materials are often dictated by market conditions, leaving little room for control. However, these business leaders strive to minimize their fixed or administrative costs, particularly regarding salaries and employee benefits.

To achieve this, they explore various strategies to lower expenses without sacrificing product quality or business objectives. This involves determining which roles require highly educated professionals and which can be filled through support services. For specialized positions, entrepreneurs often aim to attract the best talent by offering competitive salaries and benefits, while support roles may be outsourced at more favorable rates. This trend of outsourcing is widely adopted across the globe.

In Pakistan, the trend of utilizing third-party contractors has been prevalent since the industrial sector's early days. The primary goal has been to reduce costs and enhance efficiency. Initially, there was a significant cost disparity between work performed by a company's own employees and that done by contractors. Wages for lower-tier employees were on the rise due to collective bargaining agreements with labor unions, while contractors often circumvented legal obligations to provide labor at reduced rates. Over time, however, this cost gap has narrowed as progressive employers have begun to insist that contractors adhere to all relevant laws, especially those concerning worker welfare.

In addition to outsourcing services to external providers, businesses also engage in two other forms of outsourcing: toll manufacturing and offshoring.

Toll manufacturing, often referred to as tolling, involves outsourcing all or part of the production process to a third party. In this arrangement, the principal company supplies the raw materials or semi-finished goods, and the third-party manufacturer processes these materials to meet specified standards.

Offshoring, on the other hand, entails relocating business functions or processes to other countries, primarily to reduce costs and improve efficiency. Companies may opt to outsource specific tasks or entire operations to countries where labor is either more affordable or possesses greater skill sets.

To bolster its burgeoning industry in the international arena, India enacted the Contract Labour (Regulation) Act in 1970. This legislation mandates that contractors register with the government and comply with labor laws to ensure the welfare and health of their workers, thereby preventing legal complications.

In contrast, Pakistan made only half-hearted attempts in the 1990s to introduce similar regulations. However, in the early 2000s, the federal government, along with the provinces of Punjab and Sindh, implemented ordinances governing the outsourcing of security services by security firms. These ordinances require security companies to register with the government; unfortunately, they lack provisions guaranteeing minimum wage payments or compliance with regulations regarding daily working hours and weekly rest periods. Consequently, many firms employing their services violate these laws, adversely affecting security personnel.

The Punjab Private Security Companies (Regulation and Control) Ordinance of 2002 stands out as the only law that mandates group life insurance for guards, albeit for a meager sum of Rs200,000, alongside compulsory registration with the social security authority. Ensuring compliance with labor laws is a shared responsibility between service providers and the companies that utilize their services.

Moreover, core job functions performed by workers hired through contractors, who operate under the direct supervision of the primary employer alongside the employer's own staff, cannot be outsourced. This principle was reinforced by two landmark Supreme Court decisions in 2013 and 2017. In 2013, the management of the Fauji Fertilizer plant in Mirpur Mathelo was ordered by then Chief Justice Iftikhar Chaudhry to regularize the employment of 112 workers. Similarly, in 2017, Chief Justice Saqib Nisar directed the management of Pakistan State Oil to regularize 210 workers at its Karachi head office.

The first video titled "10 Benefits of Outsourcing" discusses the various advantages that businesses can gain from outsourcing tasks, including cost savings, increased efficiency, and access to specialized skills.

The second video, "Outsourcing For Success," explores strategies for effectively implementing outsourcing in a business context to achieve sustainable success and competitive advantage.