Employee ownership meets outsourcing

(Cross-posted on Open Democracy.)

John Lewis’s outsourced cleaners are striking for a living wage. Recent developments are covered by Liberal Conspiracy and London Progressive Journal. The dispute has been going on for a while: here’s Polly Toynbee in the Guardian last September.

You might be inclined to file this under obvious – where in the world are cleaners not outsourced and underpaid? With John Lewis, though, it points to an important general problem with the viability of employee ownership of businesses (for readers not in Britain, the John Lewis Partnership is owned by its 81,000 employees; it is a successful operator of department stores and supermarkets.)

John Lewis employees at the annual bonus announcement

Since the 1950s, economists have speculated that a profitable employee-owned business would not grow as much as the same business would if it were owned by capitalists, because the incumbent workers would not want to dilute their individual shares of profits by adding new worker-owners. This critique is known as the Illyrian Model, for reasons to do with the name of a province of the Roman Empire and the practice of worker-self management in Communist Yugoslavia, but that’s a story for another time (see the papers by Ward, Vanek, Meade, and Domar, listed below). Within a capitalist economy, workers who happen to own their business can try to have the best of both worlds, by hiring non-owner employees whenever an opportunity for growth presents itself; that produces a two-tier system, with owners and non-owners, and has been widely seen as leading to the degeneration of the worker-owned company, its gradual descent into capitalist ownership. Notice that the Illyrian model is both a prediction about the fate that will befall worker-owned enterprises (they will either stay small, or stop being worker-owned), and an explanation for why worker ownership is not more widespread.

John Lewis cleaners protest.

John Lewis has long been seen as an important counter-example, a case which casts doubt on the economists’ gloomy prediction: it operates under a constitution which ensures that all employees are “partners”, each entitled both to a share in the annual bonus pool and to a voice in the company’s democratic process; and it has pursued growth successfully for many decades. Thus, it seems to have hit on a solution which solves the Illyrian problem. Yet, if large groups of employees (cleaners, for instance) can be outsourced into non-partnership, the guarantee that all employees will be partners becomes more a legal technicality than a principle of governance.

This is not a problem peculiar to John Lewis. Consider another leading worker-owned company, the Mondragon Corporation. This group of companies, based in the Basque Country of Spain, has about 84,000 employees. It is best known for manufacturing – it makes household appliances, auto parts, materials handling equipment, sleeping bags… many products. It was set up with a constitution which promised the opportunity of membership for all employees, and a structure which promoted entrepreneurship and growth; even more than John Lewis (perhaps because the Mondragon Corporation grew from scratch, rather than being bequeathed to the workers by their former employer), it has been seen a as case which demonstrates the viability of employee ownership, and a model for how to do it.

For Mondragon’s first few decades it was a local group of manufacturers selling largely within a protected Spanish market. Today it is a multinational corporation, and has many operations staffed by non-members. It also owns both retail stores and factories in Spain but outside the Basque country, many of whose employees are not members. In fact, for the group overall, non-member employees outnumber members.

Mondragon abroad

You could argue that becoming multinational was a mistake for Mondragon, but I am inclined to believe that it was a business necessity given both the increased pace of technological change and the requirements the company faces as a supplier to other multinational manufactures. For reasons of language, national identity, distance, finance, and differing legal systems, it is not be easy to extend shared ownership to those working in these far-flung subsidiaries. According to the Illyrian model, it’s also not in the incumbent worker-members’ financial interest to solve this problem – they could just continue treating the employees in their distant subsidiaries and joint ventures like John Lewis’s outsourced cleaners, and keep sharing the profits among the smaller group of members. This has been a matter of concern within the Mondragon corporation for years – not something they’re indifferent to, but not quickly solved either (check out the FAQs on the company website; see also the paper by Molina, listed below).

A basic strategic planning step in businesses anywhere today is to identify a core competence – an area in which your company has what Michael Porter calls sustainable competitive advantage or, in the old fashioned terms of industrial economics, market power; the next step is to outsource as many non-core functions as feasible. We could have an argument about whether the outside suppliers are cheaper because, as specialists, they are more efficient, or because they are paid less – though I’m pretty sure I know what the John Lewis cleaners would say about that. The Illyrian model was articulated in a different time, when businesses kept more functions in-house, because the costs of outsourcing were higher. The Illyrian model predicted that worker-owned business would either stay small, or take on non-owner employees. Today, the same logic suggests that successful worker-owned businesses can also keep the number of owners small – and the bonus checks large – by outsourcing low-wage functions. This presents a challenge for those who want to see employee ownership as a more widespread ownership model, or who see it as an ownership model that promotes greater social solidarity and economic equality.

Some academic sources for the above:
Domar, Evsey D. 1966. “The Soviet Collective Farm as a Producer Cooperative.” American Economic Review 56:734-757.

Jossa, Bruno. 2009. “ALCHIAN AND DEMSETZ’S CRITIQUE OF THE COOPERATIVE FIRM THIRTY-SEVEN YEARS AFTER.” Metroeconomica 60:686-714.

Guy, Frederick (as Frederick Leete-Guy) 1991. “Federal Structure and the Viability of Labor-Managed Firms in Mixed Economies.” in International handbook of participation in organizations: for the study of organizational democracy, cooperation, and self-management, edited by R. Russell and V. Rus. Oxford: Oxford University Press.

Meade, James E. 1972. “The Theory of Labor Managed Firms and Profit-Sharing.” Economic Journal 82:402-428.

Molina, Fernando. 2012. “Fagor Electrodomésticos: The multinationalisation of a Basque co-operative, 1955–2010.” Business History 54:945-963.

Sturgeon, Timothy J. 2002. “Modular production networks: a new American model of industrial organization.” Industrial and Corporate Change 11:451-496.

Vanek, Jaroslav. 1970. The General Theory of Labor-Managed Market Economies. Ithaca: Cornell University Press.

Ward, Benjamin. 1958. “The Firm in Illyria: Market Syndicalism.” The American Economic Review 48:566-589.

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6 thoughts on “Employee ownership meets outsourcing

  1. There is no doubt that employee owned companies are under the same pressures as any capitalist company that can make outsourcing appealing to the owners, whoever they are. But because employee ownership is not perfect, that does not mean it is a model we should trash–after all, John Lewis does employ 81,000 people, all of whom do become owners, and Mondragon has tens of thousands of employee owners.

    Studies of employee ownership in the U.S., where this idea is a major part of the economy, show that employee owners are one-third as likely to be laid off as employees in conventional firms and the employee ownership companies add about 2.5% more jobs per year than would have been expected absent employee ownership while providing 2.5 times the total retirement assets.

    For many on the left, employee ownership is just an annoying diversion from the real goal of a more socially owned economy. I understand that, but I also understand that it is an idea that mostly provides intellectuals with enjoyable parlour talk rather than something that actually can and does win wide political acceptance and that has had a major positive impact of tens of millions of employees.

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    • Dear Cory,

      Thanks for your comment. I certainly do not mean to trash employee ownership, that’s not where I’m coming from at all. If I were going to trash John Lewis, I would have mentioned its association with the Prince of Wales and his Duchy Originals brand, which to me exudes aristocratic bad taste, with a lingering aftertaste of tax avoidance (not on John Lewis’s part). I am, nonetheless, a regular and card-carrying shopper at their establishments. I am also very glad to hear that employee-owners in the US are so much less likely to be laid off, though it doesn’t surprise me.

      The advance of outsourcing has contributed more than a little to the growth of economic inequality, because it allows the sorting of workers into high-earning and low-earning firms. This doesn’t seem to bother most capitalists very much. I think it does pose an issue for employee ownership as a model, because for me a large part of employee ownership’s value is the promise of greater equality of wealth, equality of opportunity and social mobility. Of course there are other reasons one might support employee ownership, but that’s an important one for me, and the spread of outsourcing does threaten it.

      John Lewis might have ignored this issue if certain people – some of whom I’m sure were leftists who find employee ownership an annoying diversion, and others of whom were supporters of employee ownership who expected better from John Lewis – hadn’t raised their voices in support of the cleaners. On the whole I think that’s a constructive process, not trashing.

      Regards,
      Fred

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  2. Good Post, however.
    RE: As you say “… In fact, for the group overall, non-member employees outnumber members.”
    But according to the Mondragon site :

    “The results speak for themselves: we have gone from 25% of international sales achieved in the industrial area at the start of the 1990s to 58.2% in 2008, and we have 73 production plants in 16 different countries (see MONDRAGON worldwide), which brought in 23% of our total industrial production and 13,759 jobs (34% of the industrial area staff) in 2008. If we add to this figure the staff of our corporate and sales offices and the employees of Eroski’s shopping centres in the south of France, our international staff reached a total of 14,938 employees in 2008, which is 16.1% of the Corporation’s staff as a whole.”

    Please clarify.

    Also, in the US, Mondragon has become an Icon of Worker Ownership to the point were obvious failings are dismissed, like their questionable overseas operations. And on the domestic side, the boast is made that M. doesn’t layoff its “workers” but trains them to work in other areas of the Corporation. BUT this only applies to the accredited members and does not apply to the temporary workers (up to 15% of the workforce) who were all laid off during this last downturn. And I believe the membership as a whole has reduced hours. This last is a superb way of distributing the work, not unlike the practices in some European countries of traditional firms.

    For me – a longtime participant in an industrial (printing) collective – the basis for worker control is not the quest for “ownership,” nor even for a vision of equality and democracy, but for a society where use value is recognized as a means to regain time, stolen by the industrial processes that we are now saddled with, that produce profit (for the 1%) and misery (for the 99%).

    In other words, productivity gains must free us from the useless toil that harnesses us to labor not unlike oxen.

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    • Thanks, Bernard.
      The material you quote from the Mondragon website deals with international employees, who are clearly a small minority of total employees.
      However, many Mondargon employees in Spain are not members, either. The principle in Mondragon has always been the *opportunity* for membership, not universal membership. Membership costs money (though the group provides financing if a new employee wants to purchase a stake). As the group expanded out of the Basque Country and diversified out of industry (Eroski is a retail chain, which they bought, so that meant a big influx of non-members), the proportion of members fell. On their web site they quote the proportion of *industrial* workers who are members, which avoids the Eroski question. I believe they’ve made an effort in the past few years to get the proportion of members back up, especially in Eroski.

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