Is Outsourcing the New Union Movement?

Andy Stern, President of the SEIU, on why unions can't turn back the clock on outsourcing.

by Jay Whitehead

ANDREW STERN, THE PRESIDENT OF AMERICAS LARGEST AND FASTEST-GROWING UNION, THE 1,800,000-MEMBER SERVICE EMPLOYEES INTERNATIONAL UNION, OR SEIU, IS THE MOST INNOVATIVE UNION LEADER OF OUR GENERATION. (DARE WE SAY EMPLOYER-FRIENDLY? GLOBALIZATION-FRIENDLY? OR EVEN OUTSOURCING-FRIENDLY?) IN THIS HRO TODAY EXCLUSIVE INTERVIEW, STERN HAS ANSWERS FOR THE TRICKIEST QUESTIONS IN MODERN WORKFORCE MANAGEMENT. AND HE STILL HAS ENOUGH ENERGY LEFT TO GIVE HR LEADERS THREE BIG IDEAS.

 

Here is an HR shocker. If SEIU President Andy Stern were heading HR in a large company rather than the heading the countrys largest union, he would outsource a lot more. His outsourcing providers would be unions.

 

Take the example of what Stern did with New York City janitors Local32BJ. Their pension administration, health plans and operation of health clinic, severance and outplacement administration, training and retraining, employee legal services, and even grief counseling are all outsourced to the SEIU. In handling these functions, one of Andys clientsthe employersend up with a far more reliable, trained workforce. And Andys other clientsthe employeesend up with a higher standard wage, respectable benefits, and a path to portable employment should their employer not need their services any more.

 

Unions could be this countrys largest HR outsourcers, says Stern in an exclusive interview with HRO Today following the rancorous AFLCIO (American Federation of Labor - Congress of Industrial Organizations) meeting in Las Vegas in early March during which Stern threatened to sever ties with the mega-syndicate. Remember, we have a huge, huge advantage. Its called collective bargaining, which in any other industry would be an antitrust violation [since collective bargaining agreements, or CBAs, involve setting wage and benefit price standards across multiple employers and industries]. But unions have anti-trust exemption.

 

A CHANGE AGENT'S RISE

 

Vision comes to prepared spirits. And if ever one person was well-prepped to have a new vision of labor, it is Andy Stern. He started as an activist in SEIU Local 668, the Pennsylvania Social Service Union. He rose quickly up the ranks. At the age of 29, he was named to the SEIU International Executive Board. By the mid 1990s, Stern had become an aggressive advocate for adapting the union to new market realities, including such vexing mega-trends as globalization and outsourcing. Sterns high-pitched advocacy, however, irked union traditionalists such as his boss, current AFL-CIO head John L. Sweeney, who unceremoniously sacked Stern. Bent but unbroken, Stern got even. In 1996, he came back and was elected President of the SEIU. At 45, he was the youngest president in union history. Since then, Stern has boosted union membership by 500,000-plus people to more than 1,800,000.

 

Today, Sterns vision of labor is crystal clear. And he is unhappy with what he sees. That is why he has envisioned splitting with the AFL-CIO, an organization he sees as out of touch with todays business reality, which includes the terrible troika of workforce dislocation: globalization, outsourcing, and Wal-Mart. There is a difference between making change and thinking change, says Stern. But the plan that [AFL-CIO leadership] passed in Las Vegas gave more money to politicians. Rather than relying on workers, we are relying on politicians to turn around unions shrinking membership. Thats not very smart. The numbers tell the tale of union decline. Since the AFL and the CIO merged in 1955, union membership has fallen from 35 percent of workers to 12.5 percent of all workers, or 13 million employees. And if you look at the private sector alone, membership is only 8 percent. The most dramatic portion of this decline has happened since 1970, a period when the number of U.S. workers has risen an astounding 42 percent to 123.6 million.

 

DUELING DUELS

 

At the March AFL-CIO dustup in Las Vegas, Andy Stern fought dual duels. The first was for the right to represent 49,000 childcare workers in Illinois who his union had worked 10 years to attract, only to be undercut at the last minute by the rival AFSCME (The American Federation of State, County, and Municipal Employees). AFSCME claims right to the Illinois contract since 150,000 of its 1.3 million members are childcare workers already. Sweeney refused to make a decision on the issue at the meeting, preferring to hold offline discussions with both unions.

 

The second and much bigger fight is for control of the AFL-CIO, of which SEIU is part. Five major unionsSEIU, Teamsters, Laborers, United Food and Commercial Workers, and Unite Hererepresenting 40 percent of AFLs membership all side with Stern against AFL-CIO head John L. Sweeney over the syndicates $120 million annual organizing budget. Stern and company wanted Sweeney to return $42 million in dues to the unions for organizing activities, while Sweeney offered only $15 million and proposed boosting political and lobbying spending from $32 million to $45 million annually. Sweeney won this round. But insiders contacted by HRO Today expect that Sweeneys victory will be short-lived, since he stands for re-election in July 2005, and faces major opposition in light of declining membership. Sterns ultimate proposal is to reorganize the AFL-CIO from a patchwork quilt of 58 units into 20, each focusing on specific industry segments. This reorganization, Stern sees, is just one step toward making unions relevant to the modern economy. The rest of his plan is more complex, and a far cry from the traditional semi-Marxist labor versus management dialectic.

 

STERN'S RADICAL CORPORATE-IZATION

 

In the 1970s, pro footballs Pittsburgh Steelers won multiple championships with its famous Iron Curtain defense, which featured a unique attack: Rather than targeting just one ball carrier, the Steelers tackled the entire backfield, on every play. Andy Sterns union-organizing technique is Steelers Revisited. Take the example of 10,000 building maintenance personnel in northern New Jersey. Five years ago, the janitors were upset because they earned $10 less per hour than their counterparts 20 miles to their east in New York City. Building owners were also upset because the workers were badly trained and unreliable.

 

In this situation, a typical union would target one employer, get a CBA in place, and then target other employers in the area. But SternSteelers Reduxtackled the entire market at once. He told all the employers that his CBA would be void unless 50 percent of them agreed. In the end, more than 70 percent did. By tackling an entire industry segment, Stern created market-wide wage, benefit, and quality standards, which added significant value for both employers and employees.

 

In another variant on this theme, Stern tackled the challenges of an Arkansas nursing chain called Beverly Health, which faced problems with cuts in state medical payments. Sterns offer to Beverly was pure Steelers. If Beverly would agree to a contract with SEIU, the union would use its political might to boost state aid. Beverly signed. Then, just as promised, Stern delivered on the payment increases. Stern attacks problems facing his clients entire industries in the same way a corporation would devise a segment-wide marketing strategy. But Sterns union corporate-ization program goes well beyond his organizational technique. He has become a fan of branding as well. In 1996, when he was elected, SEIUs locals were a hodgepodge of locally-identified units. Using a corporate consultant to design a package of financial incentives and brand elements, Stern got all the locals to agree to go by one unified brand, indivisible, with one brand colorpurple. Now, watching union workers come to work in the morning at their 1313 L Street headquarters in Washington, DC, shows an outpouring of purple prideSEIU logo-wear shirts, cups, jackets, hats, sacks, and slacks, and the ubiquitous purple water bottle.

 

Stern is now also a devotee of a hightech tactic for spreading his reform message. He is now an inveterate blogger, the term for people who use Web logs, or personal Web pages. (You can find his newest Web log submissions at both the UniteToWin.org and PurpleOcean.org blogs.) In a recent article he put up following that fractious Vegas meeting, he wrote: At the recent AFL-CIO Executive Council meeting in Las Vegas, one of the other union leaders complained to me in exasperation: You keep running around bringing up this worker sh-t. Well, sorry. I thought thats what we were meeting about. Workers.

 

While some elements of Sterns corporate- ization are mechanical, the real difference between Andy Stern and the legacy union movement is in what he sees as a need for a new strategy to deal with market forces such as globalization, outsourcing and what he calls the Wal- Martization of wages, or in other words, a mad race to the bottom.

 

Stern uses a private-sector analogy to illustrate how to introduce a new strategy to address the mega-market shifts now facing the AFL-CIO. Several years ago, he explains, IBM faced a moment when its business model no longer worked. It had to change or die. It brought in a new leader [CEO Lou Gerstner] and moved rapidly into services. It changed, rather than continue selling a losing proposition. And now it is once again a leader. Stern sees most of labors value proposition as hopelessly broken. The AFL-CIOs focus on spending more money on public relations and lobbying is horrifyingly wrong, in his mind. Just by spending more on our PR, we are not going to turn the clock back on outsourcing or globalization, Stern says intensely. And we have problems of our own making. For example, there are more people flying on airlines than ever, but we have 12 or 14 airline unions who do not cooperate, which has helped create airlines financial problems. There is no unified plan for portable pensions or healthcare or training. It is a failed strategy of not uniting and not understanding the business realities.

 

HEALTHCARE HORROR SHOW

 

While unions own value propositions need revamping, there are other market forces that Stern sees as even more ominous for American business. In Sterns view, healthcare is the 20,000 pound elephant that everyone is afraid of acknowledging. A recent Princeton University study predicts that healthcare, which now represents nearly 17 percent of U.S. gross national product (GNP), compared with 9 percent in Europe, will reach 35 percent of U.S. GNP by 2030 if healthcare costs remain unchecked. If we dont do something about healthcare, well lose Americas competitive advantage, Stern warns. Just look at Detroit, he says. Carmakers can move 15 miles north to Canada and cut their healthcare costs tremendously. (GM reports that it now costs $1,400 per car to provide worker healthcare costs.) The big increase in independent contractors is also distorted by healthcare cost hikes, because employers cannot afford the medical premiums. And the silence on the part of big companies on this topic is deafening.

 

According to Terence O'Sullivan, head of the Laborers International Union, another AFL-CIO unit, 80 percent of negotiated wage and benefit increases go just to pay for healthcare costs. O'Sullivan has written recently that healthcare and hospital costs are driven up partly by the costs of paying for uninsured employees whose non-union companies fail to offer benefits. In Sterns opinion, our failure to address healthcare cost control has forced companies to shift costs to employees. What makes the situation particularly desperate for unions is that their ability to stanch the bleeding is limited because 84 percent of union members live in 12 states, leaving labor with little organized power in the remaining 38 states. In an ironic sidebar, Andy Stern notes that the healthcare cost climb has helped create some odd winners. The competitive advantage of coffee chain Starbucks, for example, comes largely from its guarantee of health coverage for all employees. That will last for a while, as long as [Starbucks] margins are strong, Stern observes. That is, until the Wal-Mart of coffee comes along and crushes their margins.

 

MEETING GLOBALIZATION HEAD-ON

 

While the AFL-CIO will be spending more money on PR and lobbying for protectionist barriers to globalization, Andy Stern will be making lots of international flights, adapting his union to the inexorable trend.

 

Stern is quite concerned about the impact of Wal-Mart on the plight of American workers. It used to be that what was good for GM was good for America, he says. But now Wal-Mart is the countrys biggest employer, and it takes two Wal-Mart jobs to support one family.

 

While Wal-Mart provides a specific challenge, Stern claims that the bigger threat comes from global Wal-Mart-like players from France and Britain. Companies such as food-service giant Sodexho are largely unionized in France, but in the United States and Canada, where the company has more than 100,000 workers, they have fought union organizing efforts. So Stern went airborne and launched the idea of a global union alliance that would force the company to respect the same workforce standards here as in France. Sodexho, Stern reasons, would be less able to pound down wages here if it faced picket lines in Paris. The tactic has worked. Sodexho has come to the bargaining table.

 

Stern used the same tactic with U.K.- based First Group, which owns a U.S. school bus company named First Student. While staunchly non-union in the United States, eight out of 10 First Group employees in Britain are union members. Stern hooked up with the transportation union in Britain to put pressure on the company in London and in Parliament. Before and after Sterns planned Keynote speech at NY HR Week and HRO World in New York in April, he will be in London and Australia on similar missions. He recently went to Beijing, China for talks with union leaders there, and talks openly about going to India on an information gathering tour to address companies that are outsourcing work there. But unlike his AFL-CIO counterparts, Stern is not waving a flag of protectionism. His message is about standards. Im no Marxist, he says. Im a Farrellista big fan of McKinsey economist Diana Farrells globalization theories.

 

In a 2004 edition of The McKinsey Quarterly, Farrell, the head of the McKinsey Global Institute, wrote: But understandable as the protectionist reaction [to the hardships of globalization] might be, it is misguided, since it would forestall not only the problems but also the benefits of offshoring. Less understandable, perhaps, is the failure of corporations and governments to do more to ease the suffering of its victims In healthy economies, companies create new jobsoften with higher wages and higher value added to the economyfor most of the people who lose their old ones. Companies can make it easer for their workers to adjust by committing themselves to continual on-the-job learning and retraining programs. Policy makers can assist them by offering tax credits or other incentives for companies that hire and train displaced workers. Generous severance and relocation packages can help as well. So too can wage insurancethe McKinsey Global Institute estimates that for as little as 4 to 5 percent of the savings gained from offshoring, companies could insure most full-time workers for up to 70 percent of any difference between the wages they received on jobs they lost and the wages they might receive on their new jobsif indeed these jobs paid less. Companies could also offer health care subsidies for up to two years.

 

Stern wholly endorses Farrells concept of helping companies share the risk of worker dislocation. Why cant a high tech company operating in Silicon Valley or Bangalore have set-asides for worker health, training, and transition? he asks. The truth is that a union could do this. This could be a risk-sharing partnership. The union could be an intermediate force in an industry to make these increasingly rapid changes less painful. Stern thinks for a moment, then proclaims, Yes, this is a winning strategy.

 

Does that mean that Stern, the leader of the countrys biggest union, is actually a fan of outsourcing? Hey, we represent lots of outsourced workers, he smiles. Janitors, security officers, healthcare workers, they are all doing outsourced work. To us, the question is whether [the outsourcing] is all about paying less wages and rewarding campaign contributors [in the case of public-sector outsourcing], or about quality and efficiency.

 

Stern pauses, knowing he is on to a big thought. We cant reward work with a race to the bottom on wages, he says, slowing his pace and deepening his voice for emphasis. That is not the American Dream.  [HRO]

 

ANDY STERN'S 3 BIG IDEAS FOR HR LEADERS

 

As the leader of a 1,800,000 union, the nations largest, Andy Stern is as much a Human Resource leader as any reader of this or any other HR publication. And he has Three Big Ideas that just might inspire you to look at your job a bit differently.

 

IDEA 1: DEEDS ARE BETTER THAN WORDS.

Think about how to reward workers rather than stockholders. When you say We are investing in people, is that just empty words? There is a role for an intermediate organization that helps you truly invest in your people.

 

IDEA 2: ARE UNIONS AN ANTI-COMPETITIVE FORCE OR ELECTRICITY?

The sum total of the wage race to the bottom is that this generation of American workers will be the first ever to have a worse quality of life than their parents. To try to stop the wage drops, unions have been an anti-competitive force, protectionist. But what union wages should be is like electricity, which allows their users [employers] to operate more efficiently with better quality.

 

IDEA 3: PRIVATE RETIREMENT ACCOUNTS SIDE-BY-SIDE WITH SOCIAL SECURITY.

Maybe the only interesting part of President Bushs proposals on Social Security reform is to have workers put money in an account as an add-on for retirementsetting up a national annuity system in addition to Social Security that is portable from employer to employer. It would take a portion of employees retirement investment and outsource it with some [principle] guarantee. Unions could play a role in helping administer this.