This paper examines the relationship between downsizing, outsourcing and employment relations (ER) in the Australian and New Zealand telecommunications sectors following deregulation. It uses transaction cost economics (TCE), strategic management and institutional economics theories to analyse and compare the organisational restructuring and ER strategies of the two incumbent firms - Telstra and the Telecom Corporation of New Zealand (TCNZ) - as they reacted to this changing external context. It further considers and contrasts union responses to these strategies, focusing on the decade from 1990 to 2000. Management strategies at both firms aimed to reduce costs. However firms do not operate in a vacuum. Rather, management strategies at Telstra and TCNZ were influenced by external operating environments that impacted on the relative transaction costs associated with outsourcing production and the introduction of new ER practices. External variables that influenced Telstra and TCNZ's changing strategies, included: ownership, ER legislation and relative union strength. The paper discusses the usefulness of TCE theory in explaining management strategies. This research suggests that TCE may help explain the behaviour of 'rational organisations' if they engage in strategic downsizing or outsourcing. In practice, however, it shows that firms are political organisations that do not always behave rationally. Managerial strategies are further influenced by market-driven short-term profit considerations that may lead to strategies that do not accord with a TCE analysis. However TCE predicts some of the longer-term costs that these strategies may incur. These include the loss of firm-specific skills and the associated potential loss of core knowledge to competitors and quality control. Therefore firms shifting from hierarchical to market based subcontracting arrangements need to balance short-term profit considerations against the longer-term sustainability of such strategies.
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