Case Study-OPTUS -EMPLOYEES IN OUTSOURCED SALES CHANNELS USE OF DE FACTO

. Ayhan TON

Introduction:
Optus was established in 1991 as the second telecommunications company following the deregulation in the Australian market. Optus aimed at competing with Telstra on customer service and price. From the beginning, their aim was to develop an efficient, customer focused and dynamic firm. Their policy was to establish an enterprise culture by hiring committed people with the right attitude and by actively keeping the unions out. Unlike their competitor Telstra, they introduced a performance based pay system for all levels of employees (Simmons et al 1996, 174 & 150). This seems to be in line with the changing attitude of management in recent decades. Cappelli (1999) lists some new trends in the management thinking: Pay and jobs are less secure and performance based Employability is the only real source for the worker security Seniority plays a less important role in determining pay Companies worry less about developing skills and tend to contract out entire functions and departments. (Cited in Mangan, 2000, 63) Wiens-Tuers (2001, 55-56) claims that management seems to reinforce powerful and volatile market forces within the firm. Large firms in competitive, international product markets, which are under pressure to maximize shareholder returns are less likely to have a commitment to their workforce. These companies value flexibility of employment over job security. In this context, nonstandard employment serves their purposes. The staff, on the other hand, replaces loyalty with an interest in individual careers. They gain economic rent from non-standard employment. (Cappelli, 1999 cited in Mangan, 2000, 57) The telecommunications market in Australia went through a period of fast deregulation and a resulting increase in international competition. Optus, as the company with the biggest investment among the new entrants, has sought ways of swiftly penetrating into the market. Unlike Telstra, they are a private owned firm and they face pressure to become a profitable company while keeping their prices lower than Telstra. As part of a marketing strategy, they have decided to outsource their call center and door-to-door sales channels to 2 companies, namely AC & T and Commisell. The other sales channel (Optus

World Shops) have been kept within the firm. This paper will focus on the door to door sales channel only. The sales function was a perfect candidate for outsourcing, because the skills to carry out sales were neither specialized, nor hard to come by. (Reilly, 2001, 49) Yet it was hard to standardize and control the practices of door to door sales people (or sales reps, as they are commonly called within the firm) while at the same time keeping their motivation levels high with traditional management practices. Outsourcing would allow the company to engage itself in more innovative ways of promoting their services in the Australian market. Another aim was to increase financial and numerical flexibility of the firm. Thereby management would be allowed to alter the pay bill and number of those who are in employment to suit the market conditions. (Reillly, 2001, 59) They would be able to hedge against change, save costs, encourage labor turnover to become more sensitive to external labor market conditions, match labor input and work requirement. (Reillly, 2001, 50). It was also expected to increase the competition among contracting companies (Commisell and AC & T) and among different sales channels. (Domberger, 1998, 51). Yet, on the bottom line of all these aims lies the overriding goal of reducing costs while improving sales performance (Domberger, 1998, 51). The door to door sales channel of AC & T is carried out by subcontractors. (For detai led information on the nature of employment relationship between AC & T and subcontractors, please refer to appendix) This type of employment is often referred to as a non -standard work arrangement type. Australia has witnessed a rapid increase in non traditional work arrangements in the last decades. (Murtough & Waite, 2000) In NSW, 7.9% of workforce is estimated to be self employed, % 39.1 of which is dependent SEC. (VandenHeuval and Wooden, 1995, 276 cited in Mangan, 2000, 43) There are a number of reasons why companies prefer non-standard work arrangements. In Australia, the Industrial Relations Commission made a series of rulings, which helped the employers to introduce non-standard working arrangements. (Mangan, 2000, 73) The pressures of employers to have greater discretion in adjusting their labor demand to suit with market circumstances has brought about a deregulation in the arbitration system to shift the locus of bargaining to the enterprise level in the last two decades. (Allan et al, 1998, 238) Non-standard employment also reduces the costs of dismissing a person. It is a way for managers to protect themselves from lawsuits and compensation payments related with dismissing an employee. (Mangan, 2000, 66). In general, there is a trend towards replacing expensive forms of employment with cheaper ones. (Allan et al, 1998, 237) This trend is especially higher among service sector companies, which face fast growth and increasing competition. The fastest rates of growth in self employment have been in the areas with lowest unemployment rates, and this suggests that self employment opportunities tend to increase in areas of fastest growth. (Rubery & Humphries, 1991, 29, cited in Meulders et al, 1994, 126) Fallick (1999, 24 cited in Mangan, 2000) makes a similar observation related with the correlation between market growth and part time employment in 4 similar countries (US, UK, Australia, Canada).

On the supply side are the increasing participation of two person households without children, students and women in the workforce. An inclination to seek balance between work and leisure is another reason. (Allen et al, 1998, 237). Mangan (2000, 42) defines 2 types of self-employed contractors: Independent and dependent. The question here is whether the contractor serves one client only. If it is one client, it is hard for him to be fully independent. He cannot have full control over the service he provides. These people can be called de facto employees, or fake self-employed. Meulders (1994, 125) points to a similar trend by saying that the trend towards subcontracting and outworking is tantamount to converting self employment into subordinate direct employment.. Yet why do some people still prefer to work as de facto employees? It could be because de facto employment is perceived to be promising some of the financial and psychological advantages of working as an independent self employed person: 1. Tax benefits: de facto employees do not pay PAYE tax schemes. They can deduct work related expenses from their tax. 2. Potential to increase earnings. (Mangan, 2000, 39 & 43). 3. Absence of direct supervision and work discipline. 4. Feeling of having control over ones work. 5. Satisfaction of working for oneself. 6. Making money and achieving success through ones own efforts. (Rainbird, 1991, 212) The espoused reasons frequently stated by subcontractors for working with AC & T are (in order of frequency) maximizing earnings (A$ 1.000+ gross per week), gaining experience and being promoted as a manager. Benefits like working for oneself, having control over ones work or absence of direct supervision and work discipline seem to come of secondary importance. This may be because maximizing earnings is a learned response, since this motive is constantly reminded to the subcontractors on every occasion. Most of the company lore is related with how particular people have achieved record sales within a day. Yet as can be expected there are pay offs that have to be born by the self employed contractors. These are mainly related with security and earnings. Mangan (2000, 43) points that de facto employees have to keep in mind that they do not benefit from leave provisions, employer funded superannuation and job security. Referring to a series of case studies in UK on subcontractors who provide both labor and capital, Rainbird (1991, 211) concludes that in majority of the cases a higher income level relative to paid employment was achieved only through longer working hours. She also stresses the point that fewer than half of them subscribed to pension schemes and only a quarter had some form of sickness insurance. The same applies to AC & T de facto employees. If they can not fulfill their dreams of earning A$ 1.000 + gross per week, they end up working long hours for a near-minimum hourly earning. (Please refer to remuneration in appendix) When provisions for superannuation and health cover are taken into consideration, the picture gets even grimmer. It seems the importance of job security as a motivator is changing, or the price that the employees are willing to pay for security may be changing. This may mean that different managerial tools may be needed to motivate the new workforce.

Laughlin & Barling (2001, 545) draw attention to the changing attitudes of young workers. They observe that young workers between the ages of 15 and 24 seem to demand immediate payoffs from the workplace (e.g. independence, flexible work hours, casual dress, having fun at work) They seem to prefer working to live rather than living to work. In general, the y are more skeptical, unimpressed by authority and self reliant in their orientation towards work. They are brutally honest in the workplace, telling it like it is. They expect frankness and honesty from managers related with the quality of the work they are doing. (Laughlin & Barling, 2001, 549) In this context, AC & T provides its subcontractors with a series of benefits. They are frequently encouraged to be who they are and to have fun at work. They are encouraged to feel at home and make noise in the office. Sharing is encouraged at work; this includes sharing knowledge as well as food, personal cars etc. with team mates. The authority distance between subcontractors and managers is minimal. There are no dress codes in the office. There are no memos, desks, personal computers or any other office related symbols. Working at AC & T is deliberately presented as an experience rather than a job. Subcontractors enjoy a range of flexibilities (or opportunities, as the management prefers to call them.) An example is being able to work during holidays in Australia. It is an opportunity to be a working holiday maker in any populated place in Australia.

Intended outcomes:
The main objective was to establish an enterprise culture among the sales force. Keenoy and Noon (1992, 560) suggest that the new social values in an enterprise culture are self-reliance, initiative, freedom of choice and personal responsibility. (cited in Williams, 1993, 105) In AC & T, the sales rep is personally responsible for his actions. He decides how much he wants to earn, and works accordingly. He bears the risks of not being able to perform well and ending up with earnings that are below his expectations. People are presumed to be striving for maximum earnings. If the only way to maximize earnings is to perform better, it is assumed that the sales reps will adjust their attitudes accordingly. They will perform better and more consistently. They will be more hungry for success. The second aim was to decrease the cost of the sales function. When using subcontracting,firms are enabled to either maintain output while diminishing production costs or increase output at a lower cost. recruitment and dismissal costs are slashed when this type of worker is involved. (Meulders et al, 1994, 128) Non-standard work allows employers to benefit from a number of cost savings. Pay bills are aligned with performance. Also fewer fringe benefits, salary increments, superannuation contributions contribute to the cost savings. (Allan, 2000, 189) Another source of saving is the ability to establish offices with minimum spending. (Please refer to appendix). There are some hidden costs that were expected by the management. An average sales person quits within 8 weeks. The major reasons of this high labor turnover are insufficient earnings or inability to handle the stress of constantly being rejected. The managers in AC& T do not see high turnover as a big threat to the company. They rather see it as a natural outcome of this type of employment. Since the nature of the job is rather easy to learn and implement, knowledge and experience is of secondary importance. Although they value people with experience, they make their plans as if every person will quit the next day. Therefore,

they rely on a constant flow of highly motivated and eager recruits. (Please see selection in appendix) They see sales as a function of having the people with the right attitude and motivation to get results. High turnover has some advantages. The commissions that are paid per sale of a low performing sales rep are lower than that of a high performing one. This means that the company actually earns more from sales made by inexperienced or low performing reps. It is not for the benefit of the company to have a workforce composed solely of experienced and high performing reps. Instead, they would prefer to have a mixture of few very effective sales reps and many inexperienced but highly motivated reps.

Unintended outcomes:
Turnover has also unintended hidden costs. It increases the administrative costs due to inefficiencies in record maintenance, payroll calculation, supervision, training and recruitment. (Allan, 2000, 190) Yet the biggest effect of turnover is on the potential sales that are lost due to the ineffective performance of the sales reps. Under-utilization of the sales turf shrinks the potential customer base of the company in the long run. In general, this and other unintended outcomes are a product of the looseness of the relationship between the employer and the employee. Allan (2000, 191) warns that work arrangements like casual and agency labor, home-working, and temporary and contract work are most prone to problems. Since the psychological contract between AC & T and the sales rep is not based on loyalty, the sales reps gain a unique power. They occasionally do not come to work, or suffer from low morale, lack of right attitude and bring poor results. Inconsistent performance and lack of reliability limits the power of managers to plan and control the operations. This lack of time commitment and psychological commitment causes inefficiencies in planning and controlling the work. (Allan, 2000, 190) It seems that not all sales reps are motivated by maximizing their incomes. Although the A$ 1.000 bait works well for a new recruit, it does not seem to work after the first few weeks. They start the job with an aim of earning A$ 1.000 per week, yet soon they reduce it to a minimum comfort level of A$ 450. This works against the reasonable turnover policy of the company, which was mentioned above. Laughlin & Barling (2001) observe that young workers are less satisfied with their jobs when compared with older workers. Kelley et al (1998, cited in Mangan, 2000) point that in general, a downward trend in job satisfaction is common in all western countries. Although there are also other factors, perceived job insecurity is an important and consistent factor in the increasing unhappiness. Although there is no job insecurity in AC & T, financial insecurity seems to play a major demotivating role. The quality of the performance is another problem. Allan (2000, 190) claims that poor quality standards arise in non-standard work arrangements due to lack of training, over motivation and

less experience. He concludes that insufficient skill retention, training and development are among the costs of non-standard employment. The cancellation rates in long distance telephony sales in AC & T range between 10%-20%. This is above the acceptable limits. Most of the cancellations are done within the cooling off period, which signals the insufficiency of the sales rep rather than the product as the main reason. (A new customer gains access to Optus services after 3 weeks, therefore the cooling off period elapses before the customer can actually try the service) This is a big concern because every cancellation means a loss in terms of time and money spent and represents a lost potential customer. The reason for the poor quality of the sales services is generally the over-motivation of the sales rep. Sales reps who are highly motivated but lack the experience and skills to make higher sales, sometimes prefer to be too insisting to the customers. Some of them even take the risk of being dismissed from the company by engaging in conduct that causes customer complaints. This is actually the result of a facit circle created by the high turnover, high number of sales people and maximum sales policy that was mentioned above. It is hard for both Optus and AC & T to monitor and control these types of actions. Optus has assigned an account executive in every major office. These account executives are responsible for the smooth operation of the relationship between Optus and AC & T. Although part of their responsibility is to monitor the activities of AC & T, this is more of a symbolic role. They frequently prepare one-hour workshops in offices to refresh the basic principles and techniques that are necessary to succeed. AC & T also has a demerit system to penalize sales reps who receive customer complaints. Yet, the biggest penalty is perceived to be the sales (and earnings) that are lost by the sales rep due to cancellations.

How is organizational performance evaluated?

Since AC & T is a sales and marketing company, net sales after cancellations is the single most important performance indicator for any function or activity within the organization. Cancellation rates and territory utilization (sales per doors knocked) are used to measure the quality of the performance. Cost of a new account (customer) is used as an indicator of how different sales channels and contracting companies compare within the firm. Although these are all sales related measures, they are applied to human resource practices also. Every year, sales channels are compared in terms of their efficiency. There is no evidence to say that the success of AC & T relies mostly on its human resource policies. Human resource policies are not questioned unless there is a problem in the sales performance of the company. The performance of AC & T has been very good, and it is presumed that the human resource policies are contributing to this success.

Appendix:

Who is AC & T
AC&T is Australias largest direct sales and marketing company specializing in direct door -to-door sales in the residential and business-to-business markets. It has 11 offices and 700 employees and contractors Australia wide. The core business of AC&T Sales & Marketing is the provision of services for Optus through nationally marketing all their products. AC & T has acquired more than 60% of Optus local telephony customers. The sales complaint ratio is less than 1% and the cancellation ratio is in line with Optus requirements. AC & T sells Optus products via door to door and call centre, as well as a combination of the two. AC & T sells the following Optus services Australia wide: local /long distance telephony, telephony value added services, hardware, mobile phones, mobile rate plans, internet services & high speed data, pay T.V. In metropolitan and rural areas other than Melbourne, Sydney and Adelaide, only local and long distance telephony is sold via door to door. The scope of this paper will be on long distance and local telephony services that are sold from door to door only.

Use of subcontractors:
The door to door sales channel of AC & T is carried out by subcontractors. These are people who have applied the tax office to virtually set up their own businesses and acquired ABNs. Subcontractors earn commissions for the Optus products they sell on behalf of AC&T. They are responsible for the tax payments related with their earnings. Since it is not a standard employment relationship, subcontractors are not entitled to receive any leave provisions, paid annual leaves, parental leaves, employer-sponsored-superannuation or similar benefits. Subcontractors do not have to come to work, nor do they have to finish work on time. Since their only source of earning is the commission they earn from the sales they make, all decisions related with the temporal standards of their work is left to them. Subcontractors are given training on product knowledge and the legal framework constraining door-to-door sales in Australia. They are strictly discouraged from engaging in any misleading conduct when selling. They are also subject to a demerit points system, which imposes heavy penalties on any misleading or misrepresentative conduct.

Selection:
The basic idea that lures potential sales reps to AC& T is the potential to earn A$ 1.000 + every week. Part of the office managers task is to find enough new recruits every week to fill the training room. There are scheduled induction trainings every week. Everyone who attends a basic screening interview is invited to attend the induction training. The basic philosophy is that the best way to understand whether a person can do the job is to let them work for a couple of weeks. Another reason is the high erosion rate of the new recruits. Half of them are expected to quit during the induction training. A quarter of them usually quit within the first two weeks. Therefore a formal selection process is deemed unnecessary and inefficient.

AC& T has to provide a constant inflow of new recruits to maintain an acceptable level of sales. Actually it has to recruit more people than the ones who quit in order increasing the number of reps. Since the monthly sales targets are determined according to the number of reps in the office at the beginning of the month, every increase in the number of reps that work decreases the sales target per rep during that month. Another leverage point could be improving the performance of the existing reps, but this is difficult due to the reliability and turnover problems mentioned earlier.

Performance appraisal and promotion:

The sales rep is expected to appraise his own performance based on the money he earns and the effort he puts in. There are no extra monetary benefits for being a seasoned sales rep. Eligibility to be promoted as a team manager mainly depends on consistent good performance for an average of 8-16 weeks. Unless they expose antisocial behavior, such people are given a go in management positions. A manager is expected to develop, support and motivate his or her team. They also have to be well organized and reliable. Sales reps are not dismissed. The commission per sales is adjusted in such a way that a poor performing sales rep will soon find out that when compared on an earnings-per-hour basis, it is not worth doing this job.

Remuneration:
A tear bracket system ensures that a sales rep can increase his per-sales-earnings by increasing the number of sales he makes within one week. Full time sales reps spend 10 hours a day either in the office or in the field. On a 6 days week they work a total of 57 hours. A sales rep who earns A$ 1000 (gross) can be presumed to have A$ 800 disposable income after tax. This makes approximately $ 14/hour. Yet only a few people are able to achieve such high-income levels (in fact, it is so rare that their pictures are posted on the $ 1000 Club in each office). An average earning of A$600 (gross) per week is stil l accepted as above average. A similar calculation will reveal that the net disposable hourly earnings are approximately $ 8.5 in this case. Given the financial insecurity, long working hours and lack of fringe benefits, it turns out that they may be better of doing other jobs in the market. Many sales reps make this calculation within the first 8 weeks and decide to leave the company.

Cost of an employee:
All the sales representatives share the same office facilities: a few shared desks, seats, and one shared telephone. Team managers are encouraged to use their own cars as company cars. If needed, an extra car is hired from rent-a-car companies. Most of the interoffice communication is carried out orally; written memos are distributed very seldomly. The cost of a sales rep to the company is mainly the seat they occupy in the car, the amount of managerial time that is spent on him and administrative overhead.

Training and Development:

Mangan (2000, 181) claims that when there is no continuity, training is inefficient. AC & T tries to diminish this negative effect by making training and development a function that is shared by everyone in the office. Every new recruit attends an induction training which contains product information and basic selling skills trainings. This is followed by a one-day onthe-job training where more experienced sales reps teach them the ropes and give immediate feedback on ways to improve performance. Every week there are one-hour workshops where sales reps suggest solutions to each others problems. Besides all these activities, every sales rep is expected to give newcomers a warm welcome and help them develop in every aspect.

Resources:
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Reilly, P. (2001) Flexibility at work: Balancing the interest of employer and employee, Burlington, Gower Rubery, J & Humphries, J. (1991) La position des femmes sur le marche du travail au Royaume Uni, 1983-1990, DGV, CEE Simmons, D. E., et al (1996) Optus: New recruitment and selection in an enterprise culture in ed. Storey, J. (1996) Blackwell cases in human resource and change management Oxford, Blackwell VandenHeuval, A. & Wooden, M. (1995) Self-employed contractors, Journal of Industrial Relations, 32, 23-45 Wiens-Tuers, B. A. (2001) Employee attachment and temporary workers, Journal of Economic Issues, 25, 1, 45-60 Williams, A. (1993) Human resource management and labor market flexibility, Aldershot, Avebury www.acat.com.au www.optus.com.au Interviews with Peter Timon, NSW sales manager, AC & T and Steven Wier, Wollongong Sales Manager, AC & T on February 20, 2002