The Risks and Benefits of Outsourcing in Indonesia

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Table of Contents

Introduction
Benefits of outsourcing in Indonesia
The risks of outsourcing in Indonesia
Works Cited

Introduction

Maurice F Greaver II as cited by Susetio defines outsourcing as “…strategic use of outside parties to perform activities, traditionally handled by internal staff and resources” (1). There are several reasons why companies outsource some of their processes. The business world is increasing becoming competitive at the local and global level.

Start up firms are increasing offering the same product range as more established firms at a far much lower price. In a globalized economy, cheaper imports are flooding countries making the local companies less competitive. Such economic and business environment contexts, has led companies to outsource some of their processes and noncore functionalities. Such outsourcing leads to more efficient and leaner company hence increasing its overall competitiveness.

Companies in more developed and industrialized first world countries often find it much easier and cheaper to outsource some of their services to third world countries. Such countries often provide cheaper labour fuelled by their less developed economies and lower standards of living.

In this context, workers in these low income countries may at times accept far much lower pay packages than their counterparts in developed countries. On the other hand, these workers may have the same requisite skills if not more in comparison to their counterparts in developed countries. In other contexts, some of the work may be less desirable in developed countries while workers in less developed countries may not necessarily mind the nature of the job.

Formal outsourcing in Indonesia can be traced to several Ministry of Labour regulatory initiatives since the early 1980s and 1990s. Such initiatives include the “…issuance Ministerial Labour Regulation (Permenaker) No.5 in 1986 and…..publication of Permenaker No.2 of 1993 (Faisal 19). The Ministerial Labour Regulation of 1986 was significant in rejuvenating Indonesia’s labour market. It is after these reforms that saw the growth and full utilization of low cost labour across diverse industries.

Benefits of outsourcing in Indonesia

Legal recognition of outsourcing

Indonesia’s legal system is largely inherited from the European continental system. The European continental system also referred to as the civil law system and was adopted because the country was once colonized by the Netherlands (Rizkiyana & Iswanto 2).Some laws such as the civil code remain in force in their original form as introduced by the colonizers during the colonization period. Such laws are governed by the “article 1 of the transitional provision of the Indonesian constitution” (Rizkiyana & Iswanto 2).

Traditionally the Indonesia’s laws were broadly categorized into public and private laws (Rizkiyana & Iswanto 2). The public law included both the state and criminal law. On the other hand, a variety of laws such as economic law and family law constitute the private laws. It should be noted that in the recent times, the line between public and private laws is increasingly being blurred. In this context, a large number of laws have both the private and public law characteristics.

In respect to outsourcing, the Indonesia depends primarily on Manpower act number 13 of 2003 (Susetio 1). This law is used conjunctively with “…the decree of Ministry of Manpower and Transmigration of Republic of Indonesia Number KepMen. 101/Men/VI/2004 Year 2004” (Susetio 1).

In the context of Manpower act number 13 of 2003, articles 64 to 66 directly relates to outsourcing (Susetio 1).The Manpower 13/2003 explicitly allows for outsourcing. In this context, article 64 of Manpower act 13/2003 states that a “…company may hand over part its functions to another company through…provisions of labour service/workers that is made in writing” (United Nations Development Programme 45).

The benefits of Indonesia’s legal system in the context of outsourcing include provision for outsourcing functionalities. In this context, the law attempts to regulate the industry by putting minimum working conditions which serves as a means to protect the workers from exploitation.

For example article 64 of Manpower act 13/2003 explicitly states that the outsourcing contract must be put in writing. Employee’s contract is legally backed by a written contract which may be useful in times of disputes. The Indonesian law also states that that the outsourced work must not constitute the core function of the company.

Low labour cost

Indonesia’s low labour cost is one of the factors making the country highly desirable as an outsourcing destination. In this context, Indo advisors note that “…Indonesia has a large and reasonably skilled labour pool for a developing country and cost of labour is extremely low relative to most countries” (1).

Companies which deal in labour intensive production process would find it more economical and efficient to outsource some of the production processes to low cost countries such as Indonesia. This would help these companies gain competitive edge in terms of pricing over similar companies operating in their mother countries. The companies would also have a chance to make a bigger profit margin in their home countries fuelled by the low labour cost.

Indonesia also has a high literacy level of 90.4% translating into a highly skilled and multifaceted labour pool. This is critical in the provision of labour to companies in diverse industries that would wish to outsource to Indonesia. Indo advisors opine that “…although Indonesia is better known for its skilled workforce in industries like furniture manufacturing and automobile assembly, it also has a skilled labour force in value added areas like It where people can be employed at a fraction of the cost in other countries.” (1).

In the context of labour cost, rising labour cost in China has increased the competitiveness of Indonesia as an outsourcing destination. China has traditionally been regarded as the ultimate destination for outsourcing for labour intensive industries. However several policy and political developments in the recent years has seen the China lose some of its competiveness to low cost countries such as Indonesia. Such policy developments include increase in minimum wages and social benefits.

Rein argues that “…the government (China) has been actively trying to end the nation’s cheap labour force era by increasing wages and social security benefits…” (1).In 2011, Rein (1) noted that in the year 2011 more that 20 provinces out of 31 China’s provinces have increased their minimum wages. It is perhaps critical to note that such increase in minimal wages represent additional increase from a similar increase in 2010 in some of China’s provinces.

The increasing labour costs in China will ultimately benefit Indonesia among other countries. In this context, Rein (1) notes that “…high labour costs in China…can create an opportunity for countries like Indonesia, which can offer cheap and efficient labour for mass manufacturing. If Indonesia can maintain stability and train its 240 million populations, it could emerge as the next China” (Rein 1).

Political and economic stability

In the recent years, Indonesia has enjoyed relative stability in the context of its political and economic fortunes. This further increases the attractiveness of the country as an outsourcing destination. Hasoloan (2) notes the steady economic growth of the country from a negative 13.1% in 1998 to a positive 5.6% in 2004(Hasoloan 2).

On the other hand, the inflation rate has been on the decline further signalling the improvement of the economic fortunes of the country. For example, Hasoloan (2) noted that the inflation rate declined from a high of 17% in 2005 to 7% in 2006 (Hasoloan 2). The economic growth together with the declining inflation rates signifies the stability of the economic system and creates a conducive environment for business in general and outsourcing in particular.

The risks of outsourcing in Indonesia

Legal risks of outsourcing

There are certain legal provisions in Indonesia that have the net effect of negating any benefits made in the outsourcing regulatory framework. One of such provision is the provision of the manpower act number 13 is the raising of “severance rates for long tenured workers” (World Bank 5).

However, the provision has had unintended consequences. The World Bank notes that “…there has been a decrease in formal sector permanent employment as businesses have turned to contract labour and outsourcing to avoid severance payments” (World Bank 5). Concerns around provisions of the Manpower 13/2003 have led to a call for its amendments.

On the other hand, both articles 65 and 66 of the Manpower act 13/2003 have clauses that relegate outsourced work into support functions as opposed to the main production process. In this context, this has encouraged outsourced workers to perform peripheral duties in the company. This often leads to poor working conditions for these workers. Such poor conditions include monetary benefits and welfare.

This is because the workers are not as valued as their permanent counterparts (UNDP 45).As most workers in outsourcing industry are in contracts lasting over relative short period, these workers’s collective bargaining power is often compromised. It is thus imperative to note that foreign companies wishing to outsource services in Indonesia have to be weary of the labour practices in the country. This is especially so if they are to attain fair-trade conditions often imposed on foreign European companies by their customer.

Indonesia’s bureaucratic red tape

Indonesia is particularly noted for bureaucratic red tape that can have negative effect on companies wishing to outsource and invest in the country. According to Sulaiman expectation and condoning of the corruption is one factor that is aiding red tape in Indonesia (2).

Sulaiman notes that “…the entrenched culture of corruption creates expectations from both bureaucrats and society at large…it is common for an application even for a small business or a routine license to be delayed or neglected for non payment of a bribe, making the society itself lose respect for bureaucrats”(2).

It is worth noting such bureaucratic red tape has the effect of making the country less attractive for companies wishing to outsource and invest in the country. Tax avoidance has been cited as a major consequence of bureaucracy in Indonesia. For example Sulaiman notes that “…many businesses don’t…mind paying more taxes, but they cook their books in order not to attract undue attention from bureaucrats seeking higher bribes” ( 2).

Despite the negative consequences of corruption in Indonesia, Sulaiman offers rather radical insights of the use of corruption to combat bureaucracy in Indonesia (2). Sulaiman argues that in the short term that

…some corruption can be considered “good” in the sense that it helps the private sector to bypass bureaucratic red tape, especially when shortcuts are needed to satisfy conflicting regulations- this kind of grease, it is argued, can foster economic growth in the absence of governmental and regulatory reforms (2).

Indonesia’s environmental regulations laws

Sakumoto (1) opines that the “… Environment Management Act No.23 of 1997 (EMA 1997)….stands as the basic environment law and functions as an umbrella act”. This act replaced earlier versions of acts that regulated environmental issues and in particular the Act No. 4 of 1982.

These legal reforms in environmental laws have several implications in the context of outsourcing. One of the key reforms in the environmental regulation laws was the decentralization of the environmental management laws.

In context of decentralization, vertical decentralization has seen environmental powers decentralized up to the municipality levels which act as autonomous authorities in their respective regions. Such decentralization implies that it far much easier for outsourcing companies to apply and acquire their environmental licences from their local regions.

The risks involved in decentralization of environmental laws are the lack of consensus across different regions in contexts of requirements and implementations. Companies outsourcing in different regions may find themselves under different regional authorities in the context of environmental issues. Decentralization can also in certain contexts provide conducive environment for corruption. Municipal leaders can form powerful cartels that make transparency in the implementation of by laws difficult.

Works Cited

Faisal, Akbar 2011, Review outsourcing controversy in Indonesia.2011. Web.

Hasoloan, Maruli 2006. The Indonesian labour market. Web.

Indo advisors 2012, advantages. 2012. Web.

Rein, Shaun 201. Rein: Can Indonesia Benefit From Rising Labour Costs in China? Web.

Rizkiyana, Rikrik & Iswato, Vovo 2007, Indonesian Competition Law: Introduction and recent developments. 2007. Web.

Sakumoto, Naoyuki, Development of environmental law and legal reform in Indonesia. 2011. Web.

Sulaiman, Yohanes 2011, Could Corruption Derail Indonesia’s Economic Growth? 2011. Web.

Susetio, Wasis 2010, Regulating on outsourcing worker in Indonesia.2010. Web.

UNDP 2007, Legal empowerment of the poor: lessons learned from Indonesia. 2007. Web.

USAID 2011, Labour Law Measure Plus: Indonesia. 2011. Web.

World Bank 2006, The Impact of Formal and Informal Labour Regulations on Business in Serang District. 2006. Web.

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