Outsourcing & Ethics

Posted: October 4, 2010 in Shubham's Posts
Tags: , , ,

Outsourcing is the buzzword today and apart from companies, it is being discussed at the political and social levels also, particularly in the United States and the developed world.

The following article in the Bangalore edition of the Economic Times of 10th September, 2010 shows that President Obama himself is against outsourcing-

Obama raises pitch against outsourcing

US President Barack Obama on Thursday once again targeted outsourcing of jobs overseas by American companies, increasing the pressure on local firms in an attempt to secure some benefit ahead of the crucial November elections in his country.

Obama, speaking at a rally in Parma, Ohio, the state which banned outsourcing of work overseas by government departments, said he remained firm on ending tax breaks for American firms that sent jobs abroad.

“One of the keys to job creation is to encourage companies to invest more in the United States. But for years, our tax code has actually given billions of dollars in tax breaks that encourage companies to create jobs and profits in other countries,” Obama said, flanked by Ohio governor Ted Strickland, who is trailing in the polls and is fighting to retain his governorship.

Obama’s party, the Democrats, faces a hugely disillusioned and angry electorate on November 2, and is widely expected to lose control of the House of Representatives. The US president has spent the last few days trying to rally his base with promises to protect jobs and spur economic growth.

The full article can be read here.

The main pitch against outsourcing is that jobs are lost because of outsourcing. However, the following video dispels this feeling –

Outsourcing is fast becoming the order of the day and any company that is setting up an online business or optimizing an existing business will likely consider, at one point or another, whether or not to outsource any of their web design, IT maintenance, customer care or even data entry. And certainly, more and more companies are turning to outsourcing, often in an attempt to keep their costs down, and to stay competitive in an increasingly complex business environment marked by cut-throat competition.

I am limiting my blog to offshore outsourcing, which really is the topic of debate nowadays.

The question about whether to outsource or not, at least for the thousands upon thousands who have already made this choice, is redundant. The real questions have become “Is outsourcing unethical?”, “What is ethical outsourcing?”, or “How to outsource ethically?”

Let us first have a look at outsourcing, the history of outsourcing and its benefits in brief –

What is outsourcing?
Outsourcing involves hiring overseas companies, located anywhere around the world, to do tasks, a company would normally do itself. These companies, from all corners of the globe, offer their services online, at extremely competitive, if not unheard of, rates.

History of outsourcing
Outsourcing is has seen an exponential growth spurt on account of Internet and the Information Age. In 1990s, Internet reached a critical mass, and then, almost overnight, technology changes started happening at an alarmingly rate. Internet started growing rapidly and then services like Youtube, MySpace, Facebook, Twitter etc. etc became available. Now, information has become a primary commodity as the global economy has transformed into one based on the manipulation of information. In the early outsourcing days, companies turning to outsourcers often sought IT providers. Today, a growing number of companies use outsourcing services as a means to develop their business, juggle the array of online social media and handle their customer care.

The loss of jobs in the United States and the developed countries to foreign markets is nothing new. For decades, developed countries have been losing jobs in manufacturing, textiles, and almost any field that involves factory work. Offshore outsourcing is just recently becoming prevalent in the news because white-collar jobs that used to be considered secure are being lost to overseas contractors. Two explanations for the sudden outburst of outsourcing in the IT industry are the Y2K bug and the dot com boom. Both events created a great need for developers that could perform mundane repeated tasks at a low cost. Since the developed countries couldn’t provide enough workers at the time, companies looked elsewhere.

Is it necessary to outsource?
Many entrepreneurs feel that they should focus on their core competencies and the routine work should be outsourced. It is often seen that people who have attempted to set up their own company, are just keeping afloat or are seeing a small profit margin. And many others are struggling to generate the same annual income they would have, had they sought employment, working for someone else. Outsourcing represents a way for some companies to stay in business.

Benefits of Outsourcing

Here are a few of the obvious benefits of outsourcing-

The time zone advantage:
A company can outsource any aspect of its online business to providers in a different time zone in the evening, and the work is in the company Inbox the next morning.
The global employee pool:
A company which outsources tasks can tap into a network of literally thousands upon thousands of employees, the vast majority of whom are eager to do the work assigned. This is a treat for those employers who have tenured employees in the office, who grumble when any new project is given to them.
Cost savings, focusing on core competencies and rising in the value chain:
Apart from saving money, the central idea behind outsourcing is that an enterprise should focus on what it does best (make cars, cakes or sell insurance) – its core competency, and hire someone else to do what they do best (make steel, food coloring or cut checks). A business should outsource only what does not differentiate it in the marketplace. It can lead to a company rising in the value chain, by outsourcing its non- core work to other companies. This also allows the company to seek those ventures that generate more revenue and are more profitable.

Ethics of Outsourcing

The recent years have seen a whole new debate in the United States and the developed countries about the ethical dilemma in offshore outsourcing. Critics are concerned about the widespread loss of jobs in their countries as more and more processes move to low cost countries like India, Philippines and Brazil. A company has to choose between the choice of retaining its employees at a higher cost to the company and outsourcing the same task to cheaper locations.

Very recently an anti-outsourcing bill was introduced in the US Senate, but has been defeated, which is being viewed as setback for the Democrats. The following news article was reported in the news papers-

Anti-outsourcing bill blocked in US Senate

Washington (29th September, 2010),(PTI).
US Senate Republicans successfully blocked the passage of an anti-offshoring bill that would have denied tax breaks to US companies which move jobs overseas.

Republicans in a 53-45 vote prevented the bill from overcoming a filibuster. At least 60 votes were needed to overcome the Opposition’s obstruction.

As per the bill, there will be a ban on government contractors from using American taxpayers’ money to move jobs offshore.
What is seen as an electoral populist move, the Creating American Jobs and End Offshoring Act aims at small manufacturers and included a payroll tax exemption for firms that move jobs to US, but the bill also contains provisions to prevent businesses from deferring US taxes on the income they make from foreign subsidiaries.

Indian IT honchos had said the bill won’t make much of an impact on India. However, they warned that US companies operating in other countries may be beaten by the same stick.

Several business groups such as the National Association of Manufacturers (NAM) were strongly opposed to the legislation. It had sent a letter to senators arguing the measure would make US corporations less competitive and hurt job creation.

The full article can be read here.

Here is a video which explains as to why outsourcing is not harmful –

The primary consideration of corporate leadership is to keep their company competitive. Offshore outsourcing helps companies to make substantial savings on costs, improve profitability and add value to shareholders. It is worthwhile to note that most global corporations have adopted outsourcing in a big way. The few that have held out are joining the bandwagon as they find it increasingly difficult to stay competitive without outsourcing.

The offshore outsourcing ethical dilemma

Companies face a lot of outsourcing issues while trying to send out jobs to cheaper locations. Many of them have to do with employee resentment towards outsourcing while other concerns revolve around ethics of outsourcing practices at the vendor location. Some of the concerns about the ethics of outsourcing practices at the offshore location include:

Poor work environment at vendor location: Concerns about poor work environment and exploitative HR policies in developing countries’ BPOs (Business Process Outsourcing) may have been the reason why the earliest outsourcing vendors were described as ‘sweat shops’. However, these concerns are all but gone now as more and more customers visit vendor locations and see the reality of comfortable and state-of-the-art work centers.
Fall in service quality: Most companies that decide to outsource have to keep in mind the concern of employees and shareholders about quality. A moot question is whether services delivered from half-way across the globe by a set of people who are culturally removed from the parent company can meet quality expectations?
Environmental issues: With rising environmental consciousness in the United States and the developed countries, outsourcing companies are concerned that vendor companies may practice environmentally damaging processes.
Cultural differences: The cultural differences between the two countries is often cause for worry in any outsourcing venture. Companies in the United States are greatly concerned that they may have to deal with governmental issues, bribes and language barriers in the country where they wish to outsource.
Retrenchment in the parent company: A major concern is the retrenchment on account of outsourcing and the social issues involved with it.
Outsourcing is damaging to local economy: In recent years, outsourcing hit the headlines with a vengeance. There was an out lash against outsourcing, with the main arguments used including that it does not support the local economy, it reduces wages, and it costs local jobs. Other opponents raised the red alert flag that outsourcing would have negative impact on future generations.
Legal liability: The copyright issues and legal liability of the work done by the outsourcing company are ticklish issues that have to be dealt with.
Outsourcing may result in intellectual theft: Another concern may be that the outsourcing company likes the ideas of the company, copies them and starts its own operations.

Ethical outsourcing: Measures for companies considering outsourcing
Companies deciding to outsource can take the following steps to ensure that they manage the tightrope walk between ethics and outsourcing –

Proactive employee management: Companies that decide to cutback or outsource jobs need to take several proactive measures to make the transition as easy as possible for affected employees:

  1. Being open and communicative about the decision to outsource.
  2. Planning the outsourcing strategy well in advance.
  3. Giving the affected employees early notice so that they have enough time to find replacement work.
  4. Providing a “safety net” for employees who are losing jobs.
  5. Working out severance packages.
  6. Devise opportunities for retraining and transfer of employees into alternative roles
  7. Alternative recruitment and placement assistance

Detailed vendor research: Companies wanting to outsource should make a thorough inquiry into the track record of the vendor, network and infrastructure security systems in place, security awareness of employees, safety of electronic data storage etc. A detailed investigation of the vendor’s past projects, technical competencies etc. should also be made.
Audit of vendor operations: Outsourcers should impose stringent standards on the offshore vendors and conduct intermittent audits on the work conditions, HR policies and environmental practices of the vendor company.
Sub-standard wages should not be paid under any circumstances: Outsourcing should be done in a way that doesn’t involve sub-standard wages. The minimum wage in the country where the work is outsourced should be taken as a guideline. Not paying a decent wage for work completed falls under the category of unethical outsourcing.
Imagine the employee working at the same table: The working conditions at the vendor premises should be just and humane and which are as per the normal requirements of the workers.
Treating the outsource provider as a partner: Efforts should be made to create a win-win working relationship or partnership, and one that is as transparent as possible. Take for example, the outsourcer who works in the domain of website creation or design, server administration and article content. There are outsourcing companies that will bid for jobs and then outsource the work to individuals who will work at lower rates. This happens as some individuals strive to put themselves in project management or managerial roles while others seek task-driven assignments. In this particular scenario, being transparent would involve saying: “We are getting paid this much per website or article. We will pay you this percentage of our share to do the actual work”. A side benefit of creating a genuine win-win working relationship is that typically it requires less managerial control.
Being an advocate for the outsource provider: A good employer acts as an advocate for his or her employees, and helps them evolve. One way to act as an advocate for the outsource provider is to promote their services on the company website or to refer work to them. Another is to offer, where appropriate, to help the provider profile himself or herself better so that they can charge a higher hourly rate with their other clients.
Asking: “Is there anything that should bother me about my outsourcing practices?”
Ultimately it all comes down to a simple question of conscience.

My Views & Opinion

Throughout history, it has been popular for employers to lower their costs by seeking cheaper sources of labor. The desire for cheap labor is driven by profit motive. By decreasing costs, companies hope to reduce prices and increase profits. One recent trend is to export jobs to countries where salaries are lower. In the past, outsourced jobs have usually been unskilled jobs in routine IT functions like medical transcriptions, payment processing etc. and in manufacturing. However, “safe” jobs in engineering and health care are also now being shipped overseas. Nowadays, even wombs of ladies in the developing countries are being hired for giving births to children of rich couples in the developed countries.

A question that is very pertinent now is whether it is ethical to outsource jobs, and, if so, what are a company’s responsibilities when doing so? In general, companies exist to yield profits for entrepreneurs and investors. As a result, there is significant pressure on management to increase productivity and profits. Usually, this is a good thing. Capitalism is so successful because it strongly rewards the best business models and the hardest workers. However, these forces can lead a company to implement shady business practices to get ahead of the competition like employing child labor and using environmentally unsafe processes.

I feel that outsourcing is not necessarily unethical, nor is it unavoidable. After all, international business has opened huge markets for the products of developed countries and has provided customers with new and cheaper goods. With advancements in shipping and telecommunications, it is easier now than ever before to sell products and services across the globe. Simultaneously, these very factors have led to increased competition. The companies of the developed countries have to compete against businesses in regions where operating and labor costs vary greatly. Outsourcing has the benefit of providing jobs to people in regions that may be poor or lack opportunities for economic growth.

Outsourcing will undoubtedly remain to be a natural part of business today. If the developed world feels that it can refrain itself from outsourcing, it will be a big mistake as this would lead to increase in costs of most of the goods and services, ultimately leading to a deterioration in the quality of life of the people there.

Most economics textbooks reference the theory of comparative advantage, developed by David Ricardo at the turn of the 19th century. It means that nations benefit from free trade when they focus on producing the goods and services they can produce more easily and cost-effectively than other nations. Wise nations purchase the goods and services difficult for them to produce from nations who can sell them for less.

Thomas Siems of the Research Department of the Federal Reserve Bank of Dallas said in a 2003 article, “International trade generates higher overall output by redirecting jobs to those who create the most added value, that is, to those who maximize their productive abilities. Put simply, the benefits of free trade can be summarized as: ‘Do what you do best. Trade for the rest.’”

Outsourcing is here to stay and the statements of some of the leading lights of the corporate world corroborate this.

There is no job that is America’s God-given right anymore — Carly Fiorina, Ex CEO, Hewlett Packard

As CEO of Intel, my allegiance is to the shareholders of Intel and to the success of the company. We go after the most cost-effective resources around the world, no matter where they are. — Craig Barrett, Ex CEO, Intel

A moot point is regarding the employees who have been with the company for many years and who now no longer have work? How could it possibly be ethical to unexpectedly fire these people and hand out their jobs? I feel that such unexpected firing is unethical by today’s standards. It should be the attempt to pursue the best possible outcome for employees within the framework of outsourcing. An important factor would be open, honest communication and good planning.

Decisions to cutback or outsource jobs should be made long in advance so that employees have time to find replacement work. All employees should know what they can expect from their severance packages and how long they have left with the company. The firm should reasonably attempt to help its employees. For the best employees, this may translate into a promotion or extra responsibilities. Others may be given the opportunity to relocate within the company or become managers or lead engineers at the foreign site. But, this is not a feasible solution for every employee.

The companies still have an ethical responsibility to its laid-off employees. They may have anticipated a steady income from the company and perhaps a retirement package. Now, they must start over at a new company, which could push back their retirement and reduce their salary and benefits. As such, the severance package should be commensurate with the time spent at the company. Additionally, workshops on writing resumes, interviewing techniques, and job opportunities should be held to assist the employees in finding new jobs. It is the company’s obligation to minimize the impact of the outsourcing on its employees.

Outsourcing is and will remain to be common business practice.

Economist Thomas Friedman strongly encourages Americans to focus on the education and innovation necessary for success in the global marketplace. Outsourcing provides the opportunity for highly-skilled workers to focus on higher-skilled and better-paying tasks than they could have before. Skilled workers as whole have more to gain than they do to lose when it comes to outsourcing. Those in danger, however, are low-skilled workers who choose not to grow and upgrade their skill sets. “…while protectionism would be counter-productive, a policy of free trade, while necessary, is not enough by itself,” Friedman said in his highly-publicized book, “The World is Flat”. “It must be accompanied by a focused domestic strategy aimed at upgrading the education of every American, so that he or she will be able to compete for the new jobs in the flat world.

Some other concerns like data privacy, confidentiality and security at the vendor’s premises should be ensured. The issues of copyright and ownership of intellectual property should be worked out and proper agreements signed with the vendors. The issues of child labor and environmentally safe processes should also be worked out beforehand. A very important aspect is regular monitoring and inspections of the premises of vendors.

One would wonder that it is only the big multinational companies are outsourcing, but wait, and watch the following video. It shows that individuals in United States are also outsourcing their work, which shows that outsourcing is only to grow.

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