The introduction of the National Competition Policy (NCP) in 1995
by the Federal Government provided the impetus for outsourcing,
benchmarking and downsizing in the late 1990s. The policy was based on
an ideology that private sector pressures and competition would make the
public sector more efficient. The Policy stated that 'competition,
or the threat of it, can create powerful incentives for management to
improve internal efficiency and to become more responsive to
customers' (State Government of Victoria, 1996: 5).
The implementation of competitive neutrality principles required
that by June 1996, all public hospitals were to identify significant
business activities and develop an implementation timetable (Phillips
Fox & Casemix Consulting, 1999: 93). However, in adopting NCP there
was no compulsion to outsource functions, or indeed, to adopt any
particular organisational form. The Health Service Review Discussion
Paper (Phillips Fox et al., 1999) stated that by 1999 a considerable
proportion of the non-clinical services in public hospitals had been
evaluated against competitive neutrality principles. It reported that in
some cases outsourcing occurred with resultant savings, but even when
internal provision was retained, it provided a means for in-house staff
to identify efficiencies and restructure workplaces. Many hospitals also
implemented a second phase of competitive neutrality through
benchmarking and the possible outsourcing of clinical services, such as
pathology and radiology (Phillips Fox et al., 1999: 93).
This paper will investigate how one rural and one city hospital
attempted to make changes and improve efficiency by adopting NCP
guidelines. But first a review of the literature highlights the reasons
for outsourcing, the interconnected nature of outsourcing and
downsizing, the use of downsizing to affect the climate and acceptance
of outsourcing, and outsourcing's role in reducing employee
Reasons for Outsourcing
Ang (1994) believes that the main attraction of outsourcing has
been the relative production cost advantage of using external service
providers. The outside provision of services introduces economic
efficiencies through the outsourcing vendor's ability to utilise
specialist human resources, technologies and physical infrastructure.
Such specialisation, it is said, creates economies of scale when the
products or services are sold to multiple customers (Lacity &
Hirscheim, 1993: 31).
A reduction in wages and other working conditions has been a reason
found to account for these cost savings. For example, Domberger (1994),
and Milne & McGee (1992), reported that cost savings arising from
public sector outsourcing result from associated wage reductions rather
than increases in efficiency. Ascher (1987), in a British study,
similarly found that reductions in employees' wages and conditions
were the result of compulsory competitive tendering, even if the tender
was won in-house.
It has also been reported that savings were due to increased
flexibility of the labour force which outsourcing produced, although
often flexibility and reduction in wages were linked. A Labour Research
Department study on the impact of competitive tendering in the British
public sector during the mid 1990s reported that the reduction in wages
and conditions was linked to outsourcing, and resulted from an increased
trend towards the use of part-time labour by contractors (Industry
Commission, 1995: 160).
The extensive review of work practices that outsourcing has
initiated in government services has also been cited as a reason behind
the government privatisation policies (Industry Commission, 1995:
E27-28). It was suggested that the mere threat of contracting-out
in-house services can lead to improvements in efficiency and
productivity (see, for example: Domberger, Meadowcroft & Thompson,
1986; Donald, 1995; Industry Commission, 1995; Sharp, 1995; Hodge,
1996). In this regard, workers are spurred by the threat of outsourcing
to adopt more flexible work practices and improve productivity to ensure
Effects of Outsourcing
Other research conducted in private industry and in the public
sector has found that outsourcing has increased the expertise of core
staff and injected professionalism and skilled personnel, whilst
improving access to technology (see, for example: Hoewing, 1992; Rimmer,
1993; Aubert, Rivard & Patry, 1996; Willcocks & Currie, 1997;
Industry Commission, 1995).
Despite this, the contention that outsourcing has financial
advantages has been challenged. First, it has been argued that cost
savings are not available over the long-term (see, for example: Evatt
Research Centre, 1990; Rimmer, 1993; Willcocks, 1994; Industry
Commission, 1995, Domberger, 1994; Quiggin, 1994; Willcocks &
Currie, 1997: 45). Secondly, the inclusion of all transaction costs has
been questioned (see, for example; Cullen, 1994; DeLoof, 1995, Donald,
1995) and thirdly, it has been suggested that the costs of internal
provision have decreased solely with the threat of outsourcing the
service without it actually occurring (Donald, 1995; Sharp, 1995; Hodge,
Questions have also been raised with regard to the effect of
outsourcing on quality (Industry Commission, 1995: 102). Other
researchers contend, however, that the outsourcing process engages the
organisation in setting specifications and monitoring of performance
which were previously lacking (Domberger & Rimmer, 1994: 84). If
indeed this is the case, then whether quality was measured accurately
before outsourcing is contentious.
Another problem that has developed is in the area of workforce
management. The management of contract staff, morale of internal staff,
equity between contract and internal staff, and trust, motivation and
commitment of both internal and contract staff have been highlighted as
complex issues by numerous researchers. For instance, Pfeffer (1994:
22-4) believes that contract staff lack loyalty, dedication and
firm-specific knowledge. He suggests that they bring problems of reduced
productivity and motivation.
In contrast, Pearce (1993: 1093-4) concludes that there is no
difference between in-house and contract workers' organisational
commitment. Benson (1998: 366) supports the proposition of dual
commitment, by suggesting that 'organizations that outsource
maintenance functions do not appear to end up with a poorly committed
group of contractor employees'. Indeed, it was found that their
commitment to the host organisation was often higher than it was to
their employer. However, as Benson qualifies, this may be explained by
the nature of the relationship between the host organisation and the
employer, as these employees were often employed on a relatively stable
basis with the contract-labour firm. They were classified as permanent
full-time workers, paid award wages and conditions, and identified with
the host company as their place of work (Benson, 1998: 361).
Outsourcing's effect on organisational safety has also been
raised as an issue (see, for example; Rebitzer, 1991: 3) often explained
by the lower commitment levels on part of contract staff and the lack of
formal supervision and training offered by the host organisation (see,
for example: Kochan, Smith, Wells & Rebitzer, 1994).
Interestingly, Pearce (1993: 1090-3) found employees who worked
alongside contractors reported less trust in their organisation compared
to those where contract workers were non-existent, and suggests that
this was due to two principle reasons. First, that employees felt
dependent on their organisations to deliver future benefits, which
contractors received immediately in the form of increased benefits.
Secondly, that the very presence of contractors reminded employees that
their organisations were willing to 'take advantage' of them
by not offering equivalent benefits (Pearce, 1993: 1085-1086).
Furthermore, Ang (1994: 140) has cited research (see, for example:
Porter & Steers, 1973; Rotter, 1980; Organ, 1988; Gambetta, 1988)
showing the impact of reductions in organisational trust through
decreased performance, increased turnover, lack of cooperation, and
dysfunctional behaviour, such as lying, cheating, and stealing.
In the same vein, the downsizing literature argues that decreased
employee numbers brought on by contracting-out has caused a reduction in
trust and co-operation between management and staff. Li this regard,
downsizing has often occurred with little research into its effect on
those remaining. Sharp (1995) states that outsourcing, as part of the
downsizing process, is often traumatic for staff, time consuming, costly
and disruptive. Zeffane (1995: 45-46) supports this contention,
asserting that the inability of managers to address issues relating to
staff redeployment, performance appraisal, retraining and strategic
human resource planning frequently leaves employees shaken, uncertain
and less effective. Amabile and Conti (1999) have cited research where
downsizing has been accompanied by a deterioration in communication
(Cascio, 1993), a deterioration in trust (Buch & Aldridge, 1991), an
increase in fear (Buch et al., 1991), a resistance to change (Cameron,
Sutton & Whetton, 1988) and high levels of uncertainty and chaos
(Tombaugh & White, 1990).
More indirectly, outsourcing, and downsizing have been shown to
confer distinct advantages for certain sectors of the labour market at
the expense of others. The expansion of supervisory positions in the
field of engineering, for example, has been found to be often at the
expense of in-house blue-collar workers (Albin, 1992; Chandler &
Feuille, 1991). Contracting has also had detrimental effects on
particular ethnic and gender groups within the workforce. In US studies,
for instance, the brunt of the downsizing due to outsourcing has been
borne by women, part-time workers and African-Americans (Hodge, 1996:
55). This finding is reflected in studies conducted in other countries,
such as Britain and Northern Ireland (see, for example: Ascher: 1987:
106; Fraser, 1997: 10-2). In Australia it was reported (Fraser, 1997:
40-1) that downsizing through contracting out has had detrimental
effects on immigrant, non-English speaking female workers.
In addition, a substantial body of empirical evidence questions the
ability of downsizing to increase profits. For instance, Cascio and
Young (1997: 1189), in their research of 5,479 cases of downsizing,
concluded that 'downsizing may not necessarily generate the
benefits sought by management ... and that management must be cautious
in implementing a strategy that can impose such traumatic costs on
employees'. Amabile and Conti (1999) concluded that downsizing
produces negative implications for creativity and team stability, and
along with the lack of support for economic benefits, decision makers
should approach downsizing with extreme caution.
To investigate these issues, this paper turns to two case studies
which describe these processes in more detail. Interviews were conducted
with hospital managers, staff, union representatives and private sector
proprietors between 1999 and 2001. The hospital names are disguised and
interviewees were granted confidentiality. The interviewer first
contacted and interviewed the hospital chief executive officer, and
subsequently arranged interviews with other personnel. All interviews
were conducted face-to-face with the interviewee alone at the hospital
location. All interviews began with the interviewee asked to talk
generally about the workplace changes which occurred throughout the
implementation of NCP, with subsequent semi-structured questions
focusing on the reasons, processes and effects of such. Interviews were
taped and later transcribed. Annual reports, newspaper articles,
consultants' reports and other published and unpublished material
was used to supplement the interview material.
Case Study Hospital One
The rural city in which the hospital is located is the largest in
the region. The hospital provides medical, nursing, psychiatric, allied
health and health promotion services to inpatients, outpatients,
domiciliary care clients and general communities. In addition, support
services for purchasing, linen provision and information technology are
provided for three smaller hospitals and health-related organisations in
This hospital is one of the region's major employers of
labour, with an effective full-time staff level in 1999/2000 of 627.7.
In that year it treated 12,823 acute inpatients, 72,500 outpatients and
served 254,429 meals. Turnover amounted to $45.2m, with total assets of
$55.6m. On 1 July 1999, it amalgamated with an adjoining regional
hospital service to become a regional health care provider, increasing
the number of available beds from 179 to 2461.
The hospital currently outsources pathology, radiology, dental
technician, lawn mowing, security and some engineering and maintenance
services. In addition, as part of NCP implementation, it has benchmarked
hotel and pharmacy services.
Hospital Process of Benchmarking and Outsourcing
Generally, the process involved a benchmarking exercise which
included a cost/benefit analysis of outsourcing. In cases where
outsourcing was considered viable, information was gathered from staff,
unions, other organisations, legal firms and industry experts. On
implementation, discussions ensued between management, staff and unions
concerning the implications, with the Chief Executive Officer (CEO)
depicting this as 'consultation'.
The CEO declared that the rationale expressed to staff was that the
hospital's financial position and the Government cuts to health
were the impetus for outsourcing. He stated that
As one staff manager stated, 'staff were told as early as
possible, but they didn't want to go in and scare people about what
might not happen'. Weekly meetings were held over a six-month
period with possible outcomes discussed. Although the hospital involved
the unions, the manager stated that the consultation was also held
directly between management and staff 'to stop misinformation from
unions'. He explained that, even though the hospital
It was reported by a staff manager that initially the staff were
hurting, angry, upset and disappointed with the changes mooted. Although
the staff understood that there was no longer tenure in the public
sector, these changes further decreased job security. They argued that
if there was money to be made by the private sector in providing the
service, then the public sector should also be able to avail itself of
Throughout the negotiations, staff became resigned to the changes,
especially since downsizing had occurred throughout the 1980s and 1990s,
alongside funding constraints, organisational amalgamations, and changes
to processes and technology. A staff manager stated that 'the staff
understood that change was inevitable, people had seen positive outcomes
from change and so outsourcing became just another step'.
Similarly, the CEO stated that the staff realised that the hospital
would examine outsourcing, so it was better to work with the
organisation to provide a better and efficient service and to ensure its
long-term viability. Indeed, 'the outsourcing threat and the
Kennett Government factor allowed changes to work practices to occur at
a faster pace than would otherwise have happened, sensitising staff to
the need to change'.
Generally, the process could hardly be called
'consultation'. Information was called from staff when the
decision was made to investigate outsourcing, whereas consultation
between management and staff and their representatives was limited to
the outcomes, such as the transfer of leave entitlements.
The CEO stated that two factors led to the outsourcing of
radiology. First, the cost of replacing obsolete equipment was
prohibitive. Secondly, the relationship between the radiologists,
management and the hospital staff was confrontational, creating
conflicts of interest, poor staff morale, management and financial
problems. Problems with staff morale were also due to staff reductions
as patient examinations declined from 18,500 to 11,000 between the
mid-1980s and early 1990s.
This reduced the hospital's private revenue, also leading to
insufficient funds to replace out-dated equipment.
Management expressed disquiet about staff morale and claimed that
the employment of internal staff by the contractor was one of the
foremost factors considered in the awarding of the winning tender.
The new service subjected work practices to minimal change. Staff
were offered their existing hours as a minimum. However, if this
involved a demotion, they were compensated. Retrenchments were also paid
for staff wishing to leave. As it was a 'transmission of
business', long service leave and annual leave was either paid out
or carried for ward. The hospital took out an insurance policy to cover
sick leave for one year, and thereafter, the staff were paid for
entitlements accrued through working for the private organisation.
The union official confirmed the hospital's concern for the
staff, adding that there was a stable union membership at the hospital
of around fifty per cent. He claimed contracting out did not disrupt
employees, their relationship with the hospital was maintained, they
obtained a ten per cent pay increase and their jobs were guaranteed. The
private proprietor argued that the pay increase was in lieu of the
staffs adoption of a private practice, or more customer focused,
mentality towards patients. However, a union official characterised this
mentality in a more derogatory fashion as being 'an assembly-line
mentality, with a loss of localised departmental leadership'.
The proprietor of the privatised service also asserted that staff
recruitment was a problem and that the scarcity of radiology technical
staff actually led hospitals to sell off their existing radiology
departments as staff attraction and retention was better for larger
multi-national companies that could contract across the State.
As the location of the service is the same, the relationship with
other hospital employees has been maintained and urgent hospital work
still takes priority over private outpatients. However, it was also
reported that work has become intense with staff working over breaks to
cope with increasing numbers and to satisfy demands of general
practitioners. A staff member commented: 'doctors put pressure on
staff and take advantage of the situation. They want non-urgent patients
tested on the same day and sometimes even at weekends'. Waiting
periods have disappeared, and whilst overtime is paid, the viewpoint of
the staff is that 'it is now a private department and staff are
responsible to the private firm, so if they don't bring in the
dollars they would not be happy'.
The CEO stated that the privatisation process had turned a
'liability into a strength [when] it injected $3m of equipment into
the hospital department'. Patient numbers have increased from
thirty-five to close to one hundred per day, with consequent increases
in staff numbers and morale.
The outsourcing of the pathology service was made within the
context of a volatile industrial relations climate. The Health Services
Union of Australia (HSUA) No. 1 Branch was regarded as powerful,
simultaneously pushing up medical scientists' rates of pay whilst
resisting the introduction of flexible rostering.
The process involved lengthy discussions between the union, staff
and management at this hospital re transfer arrangements. Voluntary
departure packages were clearly set out in the awards. Sick leave was
not transferred but a certain proportion of existing credits were
underwritten by the hospital. The union official stated redundancy
packages were offered to all employees and, as such,
A director believed a benefit was a reduction in staff management
problems, particularly in the areas of selection and rostering, as his
role changed to contract supervision. Another director added that,
'although line management control is lost, control still exists by
means of the accreditation processes of the hospital and private
laboratory'. The staff did not have to apply for their jobs with
the private organisation, and, apart from a new laboratory opening in
competition, the only other employment prospects were located in the
capital cities, both situated over three hundred kilometers from this
city. Moreover, union membership did not alter.
Another effect of the privatisation process across the industry, a
director believed, was a reduction of union power, as the public sector
put off poorer performing scientists.
In this case, improved flexibility occurred through changes to
working hours and shift rosters. Furthermore, pay rises were obtained as
the private sector pays two to three percent more than the public
sector. Rationalisation of the testing procedure resulted in the
transfer and centralisation of some tests to the city laboratory, with
the outcome that, initially, staff numbers decreased by four or
twenty-two percent, however since having increased.
Engineering and Maintenance
The contacting-out of functions within the Engineering Department,
which at the time included facilities and maintenance, began ten years
ago. Downsizing occurred with this development, and between 1992 and
1997 numbers were reduced from twenty-five to 11.4 effective full time
staff which was achieved through natural attrition with no union
involvement. Staff were told downsizing was due to financial
difficulties, and a manager stated that 'the staff realised their
vulnerability as they were viewed as non-core by the hospital and knew
that in times of cutbacks the ancillary areas would be first to be
In 1997 the consultants' recommendation to outsource was
rejected. Instead, changes were made to work practices by improving
recording procedures, monitoring job times, and staff involvement in
budget preparation. Structural change also occurred with facilities and
maintenance functions transferred from the Engineering Department to the
Supply-Department. The line manager believed that the threat of
outsourcing decreased staff morale and increased insecurity. He stated
that 'once that idea was 'put to bed' and staff were
given more responsibilities and changed their work practices,
productivity increased'. By 2000, effective full-time staff numbers
increased to 15.6.
Notwithstanding this, both departments used a combination of
contractors and internal staff, with most of the specialist engineering
functions and repairs to specialist medical equipment being contracted
out to Melbourne based organisations due to a lack of local expertise.
The relationship with most of these external companies has been
long-standing. Furthermore, it was argued that, in some cases, wages
earned outside the hospital system are six times higher those earned
within, making it impossible to find staff. However, systems such as the
Steam Reticulation System used for sterilising, heating and cooling, are
maintained by internal staff, as manager stated 'the average
plumber would have no idea how to treat it, and it is too far to bring
in Melbourne maintenance staff for a four hour job'.
In areas of general maintenance, the line manager claimed that
inhouse staff perform non-specialised work cheaper than contract staff.
In addition, he argued that internal staff produced a better quality
product due to his day-to-day control. Managers wanted contractors to
perform each job perfectly, not quickly and cheaply, in the manner
commonly found in the private sector. The continual movement of patients
can be life threatening and so a philosophy of doing it once and doing
it really well is imperative. However, another manager believed that the
productivity of internal staff and contractors are similar, but
'contract work has advantages as if they don't perform the
work they are out'.
Continual downsizing has occurred in the Food Services Department
with staff numbers falling from 72 effective full-time in 1989 to 35 in
2000. The existing manager was employed in 1989 to introduce change,
aiming to increase efficiency and decrease costs. This was achieved by
reducing hours, changing work practices, altering the menu system,
tendering for dietary supplies and using new technology, all whilst
reducing effective full-time staff by around twenty. In 1993, when the
Government offered voluntary departure packages, it spurred the manager
to again look at introducing new technology. A cook-chill system of food
preparation was introduced which allowed for a further reduction in
effective full-time staff from 50 to 35. Working hours at penalty rates
were reduced, with compensation offered as a regular fixed over-award
payment plus a reduction of one hour per shift at paid rates.
In 1997, outsourcing of the food services was considered, on the
basis of cost savings and compliance with NCP. The consultant's
recommendation to outsource was rejected for a number of reasons. First,
the CEO stated that the staff were highly committed, a number having
been employed for between twenty and twenty-five years. He argued that
these staff were very loyal, not highly paid and lacked transportable
skills and had co-operated with management in the past to reduce costs
and achieve savings by working with new technology and changing work
practices. He stated that
Secondly, it was broached by the line manager, that most hospitals
did not want to contract-out because they would lose management control.
As such, their decision was not based so much on public interest, as
self-interest. 'If the service is outsourced, the manager gets the
sack so it is really about protecting their own jobs'.
Thirdly, there were questions raised about the costing of the
consultant's proposal by the line manager and director, who both
found inadequacies in the report in relation to staffing and meal costs.
They further determined that outsourcing would make no savings.
Despite the recommendation not been accepted, the effect on the
staff was still apparent. When outsourcing was initially proposed, staff
were concerned as the hospital had outsourced other services. Even
though the line manager was told that it was only an exercise in
assessing the possibility of outsourcing, he also saw it as a real
threat. He stated that: 'he felt he was "kept in the
A union official supported the proposition that the threat of
outsourcing can change work practices by stating: 'in smaller
hospitals, outsourcing was not used as often, but was used as a threat
in order to introduce private sector efficiencies by benchmarking
internal costs against private sector costs'. The Government he
believed, gave hospitals a choice to outsource or reach benchmarks, but
whichever process was used, downsizing was a consequence.
Overall, across the hospital, a director stated that as the
department heads knew their areas were being benchmarked they tightened
up their processes. 'They had a tendency to keep increasing staff,
which doesn't occur now'.
Case Study Two
The case study hospital was founded in 1871. It has forty-two
clinical units, providing all forms of medical treatment, except for
obstetrics and paediatrics. Li 2000, more than quarter of a million
inpatients were treated. Four hundred and fifty beds are funded at this
hospital. (2) The staffing level prior to outsourcing was approximately
3,100. Approximately four hundred and fifty staff were employed in the
During the early 1990s, each of the support areas were subjected to
a best practice survey with the assistance of external consultants. Li
food services this resulted in a reduction in effective full-time staff
of approximately eighty. Staff savings were made through changes in work
practices, such as reducing the number of staff on meal breaks at one
time and reducing downtime. The hospital also injected one million
dollars of capital to improve dishwashing facilities. Inefficiencies
were attributable to poor processes, rather than employee laziness. A
staff manager argued that 'this process assisted the staff in
looking at better ways of doing things. It wasn't that they
weren't busy, but they were busy doing the wrong things and with
outdated equipment and systems'.
During 1998/99 the hospital market tested support services in
accordance with the Government's Competitive Neutrality Guidelines
(Annual Report, 1998/99: 35), resulting in all the support services of
catering, cleaning, security, ward support, distribution, and gardens
and grounds being outsourced as a single contract. The contract cost
amounted to $ 11.8m in 2000/01, being the largest outsourcing health
contract in Australia at the time.
A director discussed the reasons precipitating the outsourcing
decision in terms of ideology and trends. He indicated first, that the
decision was made when the Kennett Liberal Government was in power, with
its general philosophy of involvement of the private sector in public
sector activities. Secondly, that New Zealand had led the way in
outsourcing, particularly of hotel services, and there was 'a bit
of a trend or fashion' to, at least, market test these services. A
third factor was the strong philosophy of the Network Board, which
supported the involvement of the private sector. The Board supported a
bid from the in-house team, with the belief that the contestability
Although the policy supported an internal bid, another director
This was linked to financial reasons for outsourcing, as the
viewpoint was that the private sector could perform the work cheaper,
due to different industrial agreements. However, with the eventual
'transmission of business' case through the Australian
Industrial Relations Commission, terms and conditions of employment were
However, some managers discounted the strength of the union
movement, believing that industrial activity was not regarded as a
significant threat as in the event of slopworks or bans, management and
other staff could operate the service. A director explained that
'although the HSUA can be disruptive and unpleasant the hospital
can continue to work'. Furthermore, it was contended that the HSUA
had minimal political sway with the Kennett Government at the time.
Probity auditors were appointed to ensure, as the CEO stated,
'that the process was transparent and that staff did not view the
process as an attack on them, as opposed to a means for determining
value for money'. He explained their stated rationale:
Consultants were used to assist the in-house team however their bid
was unsuccessful and the staff felt extreme disappointment. Several
directors described the price gap between their bid and the winning bid
as huge. But another questioned this, especially taking into account the
fact that the winning bid was under-priced. "The gap was more about
nonfinancial matters as the in-house team was not seen as having the
level of management skill required to deliver the service.' He
added that, as their bidjvas dependent on further re-stmcturing to
achieve its financial targets, there was degree of reluctance on the
part of the assessors to accept it.
Copious amount of discussion ensued between the HSUA and
management. At the time, the 'transmission of business' case
had not been tested outside psychiatric services, hence, uncertainty and
a lack of clarity surrounded the maintenance of working conditions. Once
internal staff realised that their bid was not accepted, industrial
activity occurred, which took the form of extensive work bans over three
weeks plus a number of strikes. The industrial negotiations resulted in
an agreement, which contained a clause covering organisational change
and outsourcing. The CEO explained that their decision making was very
reactive due to their lack of experience in structural change processes.
The new contract positions were published and staff were asked to
submit an 'expression of interest'. Direct employment was
offered, with around seventy-five per cent of four hundred and fifty
staff transferring to the contractor. Around twenty were redeployed and
eighty took departure packages. The packages offered financial payouts
of between eighteen and thirty thousand dollars. Upon accepting new
positions, long service leave could be cashed-in whilst all other
entitlements were transferred. Pay rates remained similar due to the
'transmission of business' ruling.
Notwithstanding the emphasis on risk management and evaluation of
proven performance, the hospital parted company with the contractor
after fourteen months. Although the details of this process are
confidential, a director did state that the hospital had concerns about
the contractor's ability to deliver against the contract and to
deliver at the price.
The re-tendering process was performed over six to eight weeks. On
re-awarding of the contract, similar specifications were used, but the
price the hospital was willing to pay was reviewed. A director argued,
in relation to the importance of matching the contract price with the
required service, that
Financial savings amounted to twenty per cent of the contract price
of $1 lm. Although savings also eventuated in the management of
industrial relations, a director qualified this by arguing that
'although the hospital would spend significantly less time on
managing industrial relations issues, it is not a complete risk transfer
to the private contractor as any resultant industrial activity from
disputation effects the hospital, and still requires management
Another benefit was the introduction of detailed specifications,
which often produced changes in work practices. Additionally, changes to
work practices came from the introduction of new technology by the
contract company. Food was produced off-site initially using a
cook-chill system to reduce staff, save on penalty rates, and operate
within core hours Monday to Friday. However, on-site fresh cooking was
re-instated shortly into the operation of the second contract due to
problems with quality.
In order to save costs, working conditions were also altered
especially in after hours work with the reduction in cooking shifts from
fifteen to four. In addition, six management positions were made
redundant. A manager of the contractor stated that 'the staff are
working harder because there are less of them ... they have to work
faster and harder'.
It was proposed by a number of managers that changes, such as
removing accrued days off and changing rosters could have been achieved
without outsourcing, but as the CEO stated, 'these sorts of issues
are 'sacred cows', and they become very difficult to change,
due to their emotive nature'.
In evaluating the success of outsourcing, a director regarded the
working relationship between the contract and internal staff as an
important consideration. He stated that
Co-existence between the internal and contract staff was also
regarded as important by the shop steward who works as a patient care
assistant. He explained that operationally, on a day-to-day basis, he
answers to the nurse manager on the ward, but ultimate responsibility
falls to the Project Manager of the contract organisation.
In general, the whole process has produced a detrimental effect on
staff morale. A staff manager, in describing the feelings of the staff,
stated that they were 'frightened that the private operator would
treat them differently and sack them if they didn't do the right
thing'. A director explained: 'the reality is those staff
still work here ... they still walk in the front door, they're
still part of the place and yet for a long time after the event they
felt they'd been sold out'.
Furthermore, this spread to other sections of the hospital, such as
radiology and pathology, who saw themselves as the next in line to be
subjected to the outsourcing process. Others, such as those involved
with direct patient care, had the view initially that
A director argued that the breaking up of an organisation into
parts produced a set of problems inherent in trying to establish an
espirit de corps amongst the staff when they are beholden to different
organisations. 'At the end of the day they are still part of the
hospital, and, as a patient, if the service is poor you blame the
hospital, not the private contractor'.
The union organiser claimed that the relationship between the
private and public employees within the hospital is difficult, with the
'private sector employees feeling like second-class citizens as
they no longer worked for the hospital'. A manager of the
contractor also argued that there is still resentment from some quarters
in the use of contractors and that the contract staff are not perceived
as part of the team.
But this attitude seems to have changed more recently and there is
a move to a greater involvement of contract staff, as evidenced with
their inclusion in hospital committees.
In contrast, the CEO contended that the culture clash occurred
internally within the contract organisation with assimilating the public
sector employees into their organisational culture. A director explained
that he thought the private organisation did not do enough to imbue
staff with their vision and objectives.
A manager of the contract organisation expanded and reasoned that
the upheaval in employment from the hospital to the first contractor,
and then to another, within a couple of years imbued in workers a
He claimed that as these divided loyalties are starting to break
down, trust is returning which the private organisation has assisted by
issuing each worker with $1,000 worth of shares. The shop steward
explained, that in being given the shares, 'it is a big incentive
as you have to hold them for two or three years ... you're not a
worker any more, you're a partner'. In addition, the career
structure for contract staff has improved, as they are now able to
transfer between contract sites, rather than being limited to the one
However, the contractor's line manager qualified this when he
stated that 'as the contract is up for renewal soon for one
additional year, staff are feeling insecure again'.
The union membership density is around seventy per cent, having
fallen from a high of ninety per cent two years prior. The
contractor's line manager stated that the initial transfer from
in-house to contractor status produced intense fear as 'they just
didn't know what was going to happen to them and so there was a
mass signing up with the union'.
A director argued that they should have had the opportunity to stop
the process, if the changes made by staff were of such a magnitude prior
to leading up to the decision. He added that another model of
restructuring that has produced similar savings at other hospitals has
been one of empowering management and giving them a brief to work with
staff and unions to achieve change and reach benchmarks, without the
threat of outsourcing.
He added that 'the HSUA is less volatile than it was in the
past, and enterprise bargaining agreements lock staff in ... but even
after all the changes and disruption, workers are back to where they
were in the 1980s--lowest paid in the place with little opportunity for
training and advancement'.
In conclusion though, one director 'sees outsourcing as a
change management mechanism. The process produces change, but it is not
necessarily that the private sector does things better or smarter'.
This paper has outlined the processes of benchmarking, downsizing,
outsourcing and the introduction of NCP at two public sector hospitals.
The first case study hospital benchmarked hotel services and outsourced
the two clinical areas of pathology and radiology and the non-clinical
area of engineering and maintenance. The second hospital outsourced all
support services of catering, cleaning, security, ward support,
distribution and gardens and grounds. Li both hospitals downsizing and
changes to work practices occurred alongside outsourcing, and even where
outsourcing was rejected, its threat provided the impetus for similar
Prior to outsourcing in the early 1990s there were numerous
examples of downsizing and changes to work practices as government and
private revenue decreased. At hospital one, staff numbers were reduced
in radiology as patient numbers declined, in engineering and maintenance
as specialist functions were contracted-out, and in hotel services as
new technology was introduced and changes were made to work practices.
Hospital two also reduced staff, as systems were updated and work
practices were changed. However, over time in hospital one, staff
numbers increased in the privatised radiology and pathology services as
patient numbers rose and in engineering and maintenance with improved
productivity and the subsequent transfer of some maintenance functions
back in-house. Notwithstanding this, the whole process resulted in
decreased staff numbers, increased productivity, altered work practices,
increased numerical and functional flexibility, alongside increased
staff vulnerability and decreased staff morale, thereby supporting the
contentions raised in the downsizing literature (see, for example,
Sharp, 1995; Amabile & Conti, 1999). Costs of operations also
decreased but whether it was solely due to downsizing is questionable,
as the process included changes to work practices and technology.
Researchers have found similar results. For instance, Hartley & Huby
(1986: 293) contended that cost savings were the result of a combination
of factors such as reduced employment, increased use of part-time
workers, use of modem equipment and better management practices.
Boards and executive management drove changes such as these, with
information being provided to staff about the rationale and the progress
of the exercises. Once outsourcing was considered viable, negotiation
between management, unions and employees tended to focus on the transfer
process. None of this could be regarded as consultation, rather it was
patriarchal in nature, with management telling the workers that change
was needed and outlining the method of implementation. Such a lack of
communication has been cited by researchers (see, for example, Cascio,
1993) as problematic.
In implementing NCP, outsourcing was investigated as an option at
hospital one, whilst at hospital two it was considered to be the sole
option. Indeed, at hospital two the board of management, complying with
government ideology, mandated that outsourcing be used as the change
mechanism, whilst there was a lack of evidence of any consultation with
line managers, staff or unions concerning any other methods. In
contrast, hospital one rejected outsourcing in support areas as
management questioned data that consultants used to support their
recommendations. Instead change was implemented through alterations to
organisational structure and work practices. This occurred with the
support of line managers who actively lobbied against outsourcing's
introduction. Similarly, directors and managers at hospital two believed
that rather than outsource, other change mechanisms could have been
used, which included empowering line management to work with staff and
unions to investigate other methods. Hence, at this hospital, the
approach could be classed as giving in to "bandwagon
pressure". Walston, Kimberly and Burns (2001) argued that in times
of uncertainty, the probability of hospitals adopting new structures and
practices increases substantially when others have used them. They
furthermore argued that superficial implementation, although it may lead
to external legitimacy, in effect fails to focus the effort needed for
The lack of availability of expert staff in the rural area was a
consideration in the decision to outsource radiology and pathology at
case study hospital one. Similar considerations were apparent in the
selective outsourcing of engineering and maintenance functions. Indeed,
staff and line managers claimed that an advantage of outsourcing such
services is that problems of staff selection and control were reduced.
Rural areas suffer from both a distance and expertise disadvantage. The
distance to major cities, and thus other sources of labour, makes it
difficult to gain numerical flexibility at short notice by using
contract labour. In addition, it is often problematical to attract
skilled expertise in rural areas, especially if the complexity of the
task is not consistently high.
It was also evident that in retaining non-specialist maintenance
and hotel functions in-house, the local availability of blue-collar
workers was a factor. Such low skilled workers were readily available in
the labour market, and the managers believed that the local community
would view their replacement by those from outside the region
unfavourably. Furthermore, the flexibility of staff in having made
changes to work practices, their loyalty and the close relationship
between the rural community and the hospital were regarded as primary
motivating forces in retaining the services in-house. Despite hospital
two's outsourced workforce being comprised of similar low skills,
these were not factors considered important. In both cases the workforce
had been employed over a long period, but the relationships with the
hospital management differed. At the rural hospital a number of managers
discussed the workers in terms of their loyalty, in contrast to the city
hospital where the relationships between management and workers were
never discussed. Indeed, the major human resource consideration in
relation to outsourcing support functions at the latter hospital was the
transfer of industrial relations risk to the contractor.
Increasing union power was an impetus for outsourcing of pathology
at hospital one and support services at hospital two. Escalating rates
of pay and resistance to flexible rostering, both being subject to
negotiation at the time of outsourcing, were regarded as a direct cause
of the outsourcing of pathology right across the health industry. In
contrast, low-paid workers staffed the support services at hospital two,
with conflicting opinion regarding the union's strength. But it was
clear that the union lacked government support. Li general, the right
wing ideology of the government viewed the whole union movement
unfavourably, hence, the blue collar areas were often subjected to the
first wave of outsourcing in an effort to further decrease their power,
as well as being seen as one of the easier areas to privatise.
Similarly, the government viewed the professional union of medical
scientists negatively due to the union's industrial muscle.
Notwithstanding this strength, the unions could not prevent the move
towards outsourcing. Such industrial relations imperatives have been
cited extensively in the literature as an impetus for outsourcing,
especially in blue-collar areas or where extensive industrial disputes
have occurred (see, for example: Kochan, Smith, Wells & Rebitzer,
1994; Benson & Ieronimo, 1996).
The transfer of internal staff to the contractor provided for the
retention of firm-specific knowledge, although it made cultural change
difficult to achieve. Staff simply changed their employer, but continued
to work with their peers at the same location. Hence, the ability of
staff to change their commitment from the hospital to the contract
company has been slow.
Culture clash at hospital two was evident, both between internal
and contract staff and within the contract organisation. Staff were
unsure of who bore ultimate responsibility for their work, as they
answered to both contract management and nursing staff. However,
improvements in trust between the parties began to emerge as the
contract organisation and the hospital both made an effort to improve
communication. In addition, hospital management, in realising the
importance of a team-based approach, has begun to include contract staff
in hospital meetings and staff functions. So even though organisations
use culture to control the behaviour of employees, in an outsourced
arrangement the building of relationships and alliances is also
important (Sharma, 1997).
This fact has often been overlooked when organisations have
outsourced, in the belief that the management of staff can simply be
passed to a third party. The very nature of the location, with both sets
of workers working along side each other, makes it imperative that the
working relationship between them is based on effective communication
and clear accountability.
Decreased staff morale was evident at both hospitals as staff were
subjected to the benchmarking process, did not win the tender and were
transferred to the contractor. At hospital two, the trust and motivation
of staff working alongside contract staff in other departments decreased
as well. Industrial relations unrest was also evident as part of the
transfer process although it has decreased subsequently. In addition,
the taking of all accrued sick leave has been a problem, as the staff
still feel insecure about their long-term future.
This research points to the complex interrelated nature of the use
of downsizing to change worker's acceptance of change, which
includes outsourcing, and use of outsourcing to reduce employee numbers.
The discussion has highlighted important workplace issues, such as
consultation between management, unions and employees, changes to work
practices, maintenance of conditions, staff recruitment and retention
and the relative power of management and unions, which have emerged from
such changes to processes.
Whether outsourcing was used as a process of workplace change was
dependent, in an economic sense, on the control that the hospital
required, the cost and availability of specialist labour, and the
quality of work required. In addition, non-economic considerations
highlighted outsourcing being promoted ideologically by the government
and the board of management, its use in transferring management and
industrial relations problems to a third party and in decreasing the
power of the union. The effect of the outsourcing process had been to
initially, decrease staff numbers, change work practices, and introduce
new systems and technology, resulting in decreased morale and trust. In
addition, benchmarking exercises were used to change work practices and.
decrease staff numbers through the threat of outsourcing, also resulting
in reduced morale. The culture of change has been gradually introduced
at both hospitals with employees under no misapprehension about their
lack of tenure, job insecurity and future changes. Hence, benchmarking,
downsizing and outsourcing have all been used in this sector to bring
about workplace change, and whilst the choice between processes may be
dependent on management perception of the workplace environment, the
implications for the workplace have been similar.
Further research is warranted in areas which this research has
raised but are outside its scope. These include, first, the effects of
downsizing and outsourcing on workforce flexibility. Secondly there are
workforce management issues surrounding outsourcing, such as contract
workers' occupational health and safety requirements, training
needs and career structures. Finally there is the measurement of quality
of service provision. This article has indeed highlighted the
problematical relationship between the cost of service provision and
quality, and has illustrated that the specification of service standards
solely on an output basis do not always provide enough control over
quality which a mixture of performance standards and output measures
would offer. Hence, the third area of further research is the
measurement of service quality in times of outsourcing and downsizing.
And finally, the relationship between internal and contract staff
especially in organisations using team-based structures is worthy of
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(1) This information was sourced from the Hospital's Annual
Reports. These are not cited fully in the reference list to maintain
anonymity and confidentiality.
(2) This information was sourced from the Network's Annual
Reports. These are not cited fully in the reference list to maintain
anonymity and confidentiality.
(3) The HSUA branch referred to here is the number three branch.
Suzanne Young, Bowater School of Management and Marketing, Deakin
University. This paper is a more detailed version of one presented at
the University of Newcastle Conference 'Workforce Issues in the
Health Sector' held on 31st May, 2002. The author would like to
thank Keith Abbott and Michael Quinlan for helpful comments on the
research and paper. The usual disclaimers apply.
the staff were able to raise questions and have input into the
decision, within confidentiality requirements. They were also
informed-of the final decision... The aim was to take the staff
with the hospital so that even if they did not like the decision,
they understood it.
has a good relationship with the unions, the unions have a
different perspective. Their job is to generate fear amongst
members to ensure they are not seen as unimportant... to try to get
the hospital to give more, regardless of how well the hospital is
managing the process. Consultation and argument, and even conflict,
is positive in bringing issues into the open.
staff were granted a golden handshake to change their nametags.
They were also given access to Retrenchment Benefits from their
Superannuation Fund leaving them in a better position than others
who in a year's time may resign to go and work interstate or in the
This resulted in the unions starting to play ball with work
flexibility. The climate allowed productivity gains that the public
sector couldn't achieve prior to this process occurring. And
privatising decreased the union strength.
a country hospital's decisions impact upon a lot of people and we
have to bear in mind consequences. The hospital owes a debt of
gratitude to them for making these changes, and so does not wish to
privatise after the loyalty they have shown.
would, at worst, encourage the in-house team to carefully review
work processes, practices, efficiencies and quality, and inject a
little enthusiasm into their work and, at best, you might get some
quantum gains in work process.
in adopting it with such enthusiasm, there was obviously a view
that the private sector was a panacea to the perceived problems of
quality and change management that existed with in-house provision.
There was an aim to break the stranglehold of the HSUA. (3)
we put it under the guise of the Government's Competition Policy.
So it wasn't an internal decision, but we were compelled to comply.
We felt that it was in their interests that they went through the
process, as if they were successful it would give them some
security of tenure.
there was a common belief amongst those in the public sector at the
time that if you screwed these organisations really hard at
contract negotiation, they would just have to wear losses.
the contract staff often have intimate contact with clinical
service staff, so if things weren't going right the internal staff
would get down in the dumps and angry and frustrated, which in turn
has downstream effects on what the patients and family experience.
it was not going to happen to them and anyway, this was going to
deliver better quality services, so therefore, it must be a good
thing. The savings could be put back into core services. However,
after problems arose with quality, the realisation came that this
panacea was suddenly not true and sympathy emerged.
The accepted standards of health care maintain that all services
should be involved in continuous improvement, but this ethos stops
when it comes to non-clinical support services at this hospital.
For example, no training is offered to these staff, nor are
apprentices or trainees employed. In the first two and a half years
of contracting, the contractors were not included in the
Occupational, Health and Safety Committee.
we mightn't be all here tomorrow, so we better use up our sick
leave, our annual leave. There was a whole change of management
staff, conditions and uniforms with a lot of union trouble as well.
It is now starting to sink in that we are here for the long haul
and the relationship is getting more comfortable.