The Economist Print Edition
August 18, 2005
The dangers of outsourcing
BRITISH AIRWAYS paralysed by a strike? It must be August again. In the summer of 2003, check-in staff struck over work changes. Last August came a strike over pay. This year's dispute started last week with a quarrel over the sacking of some 670 staff by Gate Gourmet, BA's inflight caterers. That triggered a one-day (illegal) sympathy strike by 1,000 BA ground staff, again causing chaos for passengers, some 70,000 of whom were stranded. BA's outgoing boss, Sir Rod Eddington, is livid at the latter “outrageous” action by the Transport & General Workers' Union (T&G), which, although officially against the illegal strike, is keen to flex its muscles as BA prepares new working practices for when it moves to Heathrow's new fifth terminal (see article). The catering dispute may be a taste of what is to come, then. It is also a reminder of the dangers of outsourcing.
Gate Gourmet used to belong to BA, so many staff feel it is still part of our family, say T&G officials. Now it is owned by Texas Pacific, a private-equity firm, which bought it from Swissair after that airline went bust in 2001. The T&G objected to the firing of Gate Gourmet workers who had protested against it hiring temporary staff even as it cut 200 permanent jobs.
Union leaders claim that Gate Gourmet had undermined a sensible rescue package that they had agreed in June to cut costs by some £14m ($25m). Texas Pacific says that Heathrow is by far the worst of Gate Gourmet's businesses in 29 countries, losing £23m last year. Archaic working practices, which it says the union refused to change sufficiently, are a big problem.
Hoping to pin the blame on its caterer, BA says that it tried to help Gate Gourmet, offering a deal in July to “improve and extend” their relationship at better rates. BA claims its offer, coupled with a deal with the T&G, would have secured the future of the firm. But, says Texas Pacific, some of the terms of the agreement were “inimical” to Gate Gourmet, such as exposing the caterer to more risk by guaranteeing its Heathrow contract only for a year.
The strikes are a financial and, worse, a reputational blow to BA. There will be immediate revenue losses, estimated at £40m-60m, plus longer-term losses from passengers who stop flying with such a strike-ridden airline. Given the critical importance to its brand of maintaining service, BA should have prepared a contingency plan to protect itself against a strike, says Yossi Sheffi, a logistics expert at MIT and author of a forthcoming book, “The Resilient Enterprise” (MIT Press). BA should either have used more than one caterer, he says, or else had such a close relationship with Gate Gourmet's managers that it knew exactly what they were up to.
BA is thus having to learn the same truth about outsourcing that has already been discovered by firms ranging from banks criticised for poor customer support from outsourced Indian call centres to Nike and Gap, attacked over the sweatshops allegedly operated by some of their suppliers. Outsourcing an activity does not mean it is no longer a firm's problem.
Meanwhile, Gate Gourmet may go into administration, where restructuring will be easier—if BA does not first kill the firm by finding a new caterer. But only the market leader, LSG Sky Chefs (part of Lufthansa), is big enough to prepare the 80,000 meals a day BA needs. So it is in the ideal position to demand a higher price.
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