O

ne of the sticking points for labor unions during their recent strikes and demonstrations has been outsourcing.

Last month, thousands of workers across the country took to the streets to demand that employers stop using outsourcing companies and guarantee that all their workers receive benefits.

Opposition to outsourcing stems from obscure Labor Law regulations, which have led to both employers and employees interpreting the law according to their respective interests.

Under the 2003 Labor Law, companies are not allowed to outsource core jobs and can only outsource five types of peripheral work, namely cleaning services, security, driving, catering and mining support services. However, many firms outsource most of their workers, including core employees. Business players have complained that the law is too strict and gives no flexibility to either employees or employers to end employment contracts, the main obstacle for businesspeople and foreign investors to increase their investments.

In 1990, C.K. Prahalad and Gary Hamel introduced the term '€œoutsourcing'€, which means to send certain jobs or steps in the production process to outside companies.

Ultimately, it is a shortcut to produce a product at a more competitive price. Some companies treat outsourcing as a cost reduction concept and try to externalize their non-core activities to outside partners in order to save money. Other terms attached to outsourcing are off-shoring, make-or-buy and third-party logistics.

As an example, one Barbie doll comes from several different countries: the components and raw materials come from Taiwan and Japan, it'€™s assembled in Indonesia and Malaysia, moulds are introduced from the United States, the clothing is made in China and the accessories that adorn the doll come from the US.

Which activities in a firm can be outsourced remains a source of controversy as it'€™s often debatable what is essential and what is auxiliary in the production process or in employment.

Prahalad and Hamel developed three tests to judge a core competence: First, it provides potential access to a wide variety of markets. Second, it makes a significant contribution to the benefits of the product as perceived by the customer. Third, a core competence should be difficult for competitors to imitate.

For example, US-based athletic shoe giant Nike never produces a complete pair of shoes by itself. Its production has been outsourced to the countries with lower labor costs such as China and Indonesia.

The company itself simply concentrates on product design and marketing in order to strengthen its core competencies.

Outsourcing suppliers should comply with legally binding regulation to ensure the sustainability of their business. On the other hand, they should pay attention to manufacturing, and their focus should be on innovation and value creation.

That'€™s the most important thing for a firm to survive in a competitive market. They should know completely how to fulfill clients'€™ needs and draw profit from doing so.

According to government data, Indonesia has millions of outsourced workers, which roughly account for 40 percent of the country'€™s formal labor force of 41 million. Concerning the present situation in Indonesia'€™s outsourcing industry, the government should improve its capability in monitoring enforcement of the law to ensure outsourced workers get their benefits properly.

On the other side, the Indonesian government needs to focus on how to strengthen comparative advantages as an outsourcing supplier and push Indonesian firms to outsource. First of all, it can issue new policies or suggest local governments encourage local firms to get involved in outsourcing activities. The government can promote successful outsourcing suppliers nationwide to strengthen the firms'€™ confidence in outsourcing.

Meanwhile, the government can create industrial values through cooperation with global suppliers in order to set examples in public. Improvement in awareness of outsourcing is another key point. People and firms do not only need to know about what outsourcing is and what can be outsourced, but also why they should outsource.

The writer is group head of human capital development, Sampoerna Financial Group. The views expressed are his own.