Ethics
&
OUTSOURCING
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What is Outsourcing?
Generally, outsourcing can be defined as – “An organization entering into a contract with
another organization to operate and manage one or more of its business processes.” As
companies face increasing competitive pressure, they are searching for ways to remain focused,
flexible, cost competitive and competent, outsourcing addresses these needs in addition to giving
organizations access to low cost specialized talent.
Outsourcing is the contracting out of a company's non-core, non-efficient, non-revenue
producing activities to specialists. Outsourcing can be a strategic management tool that involves
the restructuring of an organization or just contacting out to third party to carry out certain
functions efficiently. Some of the most common types of outsourcing are manufacturing
outsourcing, information technology outsourcing and business process outsourcing (including
processes related to accounting, human resources, benefits, payroll and finance). Most
companies provide following as the reason for outsourcing.

Rising labor and health cost in US. Lack of skilled labor in US.

Market pressure to be price competitive.

Availability of cheap labor elsewhere.

Abundance of highly talented skilled labor force in India and China.

Pressure from investing community to cut cost, increase profit and show growth

Focusing on core business operations.

Expanding global presence.
Since the waves of layoffs and subsequent outsourcing in the past five years, ethical and
moral implication of outsourcing has been push to the forefront of the political and business
discussions. During the last presidential election, outsourcing came to further prominence as a
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critical campaign issue. Today outsourcing has developed into one of those “for-or-against”
social debates, with both sides refusing to move from their stance. It is also increasing linked as
being connected “evil” side effects global trade and WTO.
Discussion on potential grey areas of Outsourcing
Proponents of the outsourcing are led by many academics, business leaders and most of
the free trade leaning political leaders. Many pro-business magazines and newspapers take the
same stand as well.
"The fact that foreign competition now impinges on services as well as
manufacturing raises no new issues of principle whatever. If a car can be made more
cheaply in Mexico, it should be. If a telephone enquiry can be processed more cheaply in
India, it should be. All such transactions raise real incomes on both sides, as resources
are advantageously redeployed, with added investment and growth in the exporting
country, and lower prices in the importing country. Yes, trade is a positive-sum game."
- "The great hollowing-out myth," THE ECONOMIST, February 19, 2004
The biggest argument supporting outsourcing (from US) is that sending jobs to other
countries stimulates trade and actually creates a stronger economy in the U.S., and in the
long run, more jobs. According to this theory, once lower-skilled jobs leave the U.S., the higher
valued jobs are left for the Americans to snap up. Further, low cost labor in outsourced countries
will help o drive the cost of goods for the American consumer and thereby increasing their
purchasing power. However, this is tough to swallow for employees in the U.S. who are facing
the possible loss of jobs, real income loss and a tougher job market. When high paying white-
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collar jobs are increasingly outsourced, “when the low paying jobs leave high-paying jobs will
be left for grab” argument does not hold much value with the opposing side.
Projected Number of U.S. Jobs to Move Overseas by 2015
Field
Management
Business
Computer
Architecture
Life sciences
Legal
Art, design
Sales
Office
Number of jobs moving
288,281
348,028
472,632
184,347
36,770
76,642
29,564
226,564
1,659,310
Source: Forrester Research, Inc. November 2002
Although the global outlook supports outsourcing, citizens of many developed nations
who are directly affected by job losses are increasingly voicing their opinions against global
trade and outsourcing.
"The argument that we will create new jobs in highly paying fields simply is not true. We
have no comparative advantage or superiority in innovation. To assume that we are
inherently more creative than our foreign competitors is both arrogant and naive. We are
currently empowering our competition with the resources to innovate equally as well as
we... The costs of the decision to outsource are not borne by the decision maker. Loss of
jobs reduces the tax base, creates high unemployment benefit costs, and raises the cost of
government retraining programs."
- Rory L. Terry, "Answers on Outsourcing for The Dobbs Report," CNNFN
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Americans led by labor unions and politicians are trying to resist the push to send jobs
overseas. Pushing for curbing outsourcing is poplar political rhetoric pursued by politicians
regardless they are pro-business or pro-labor. At a local level, even pro-business politicians are
voicing against outsourcing because it is affecting their constituents adversely.
“Millions of jobs in manufacturing and technology are shipped overseas to countries
where companies can pay employees far less money. There are a number of companies
that have continued to get federal funding while at the same time outsourcing jobs
overseas... The Defending American Jobs Act of 2004, sponsored by more than 50
legislators, proposes to cut federal funding from companies that lay off workers at higher
rates in the U.S. than abroad. The legislation would also require companies that apply
for federal grants and loans to declare the salaries of employees in the U.S. and abroad."
-
Joel Barkin, spokesperson for Rep. Bernie Sanders, I-VT.
Conservative economists led by Nobel laureate Milton Friedman argue that the sole
mission of a corporation is to maximize profits for the benefit of shareholders. Friedman and
his colleges also condemn spending on social causes as violation of that prime directive. They
also contend that in a global economy, outsourcing does not mean net job loss. They argue that
more jobs will be created globally since the cost of labor lowered. The term “glocal” comes to
mind when discussing today’s Multinational Corporations. It is hard to say which locality a
company belongs to; Today, DaimlerChrysler is not a property of ‘mo-town’ or for that matter
property of German equivalent of mo-town - Stuttgart. So accusing these global companies as
operating with disregard to their “local community” does not board well with the proponents of
outsourcing. Because their claim argues that these companies are operating at a global level and
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as far as they are creating jobs globally, they cannot be accused of destroying jobs or for not
being a corporate citizen.
"Calls for new trade restrictions to preserve current jobs are misguided. There is no
significant difference between jobs lost because of trade and those lost because of
technologies or work processes. All of those job losses are a painful but necessary part of
the larger process of innovation and productivity increases that is the source of new
wealth and rising living standards."
- Brink Lindsey, "Job Losses and Trade A Reality Check," The Cato's Center for Trade Policy Studies
Discussing outsourcing and lay-offs in pure economic terms and a global context is a dry
and callus approach to a sensitive subject. The effects of mass lay-off and outsourcing can leave
local and regional economies with lasting scares and devastated economic conditions. Sudden
loss of jobs and loss of income can lead to economic depression in smaller regions. That was
defiantly the case in many former so-called “manufacturing towns”. As the biggest employer in a
those towns/cities closes down factories and start manufacturing in Asia or outsource the
manufacturing altogether to a foreign this party, the local communities were left behind and
created ghost towns. When these unemployed workers obtained better skills such as computer
training to gain higher paying jobs (if available in their community), jobs that require those skills
are leaving the shores too. Results of these manufacturing migrations can be seen all over the
country. Today, with white-collar jobs on the chopping blocks, many fear that many lush suburbs
are heading to the same fate as these manufacturing towns.
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Morality of lay-off of local employees in favor of outsourcing hiring low wage
employees elsewhere is another point of contention of this debate. The (capitalist) economy
based on the law of supply and demand. In such economy, allocation of resources, including
capital and labor is generally determined by market forces. Outside concerns such as government
or society are not suppose exert any intervention to control these forces. Therefore, it is
reasonable and expectable that companies would seek the best option available to employ their
capital and recruit in a global economy. The term local responsibility has less meaning when the
economy and company operate globally.
According to Edward Mason, in his March 11, 2005 report in Boston Business Journal,
Bank of America, which in the past has resisted making available specifics on employment
decisions, has defeated a move by the United Brotherhood of Carpenters Pension Fund to force it
to produce a public "job loss and dislocation impact statement." Company's move was to shield
employment details in light of layoffs Massachusetts and the relocation to Latin America. The
bank had previously stated that its acquisition of FleetBoston would result in 17,000 job cuts but
it maintained that employment levels would be return to pre-merger totals by 2006. Still Bank of
America has not provided a specific commitment on job growth in US. This is an example of a
company laying off employees in its traditional home (Massachusetts) to employ cheap labor
elsewhere (Latin America). The scar of this particular outsourcing will be high since Bank of
America is an organization that has roots in the community for over hundred years and still
decides to outsource to be financially competitive at the expense of its local employees.
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Which stakeholder gets priority is another point of contention in the outsourcing
debate. Does the company have duty to shareholders trump its duty to employees? Many would
agree that the acts of downsizing/outsourcing for pure financial reasons (i.e., choosing short-term
investor gain over employee welfare) are very often morally wrong. However, without clear
morally relevant distinction (either in academia or business press) between a company’s priority
to the shareholder and that to its workers, it is very hard defend that position.
Many theorists and business managers defend the moral superiority of shareholders on
grounds that corporate managers are bound by a fiduciary duty to their shareholders (Block et al,
1998) which trumps any competing duties. This is justified because shareholders have taken a
risk in placing their money in the hands of the corporation, and are thereby due compensation.
Shareholders can potentially lose something they have placed into the corporation. However,
workers too have placed something at risk when accepting a job; they lose future potential
earnings due to corporate layoff & outsourcing. At the very least, the worker has foregone other
possible job opportunities, opportunities that may have turned out to be financially more
rewarding. Even more importantly, many workers have invested in their houses, their local
communities and in their lifestyle with the expectation of a steady income. While the worker's
investment in a corporation is not of the same sort as the shareholder's, it constitutes a risk
nevertheless, and so the worker's position is not radically different to that of the shareholder. The
difference between the risks taken by the two parties is matter of perception and personal value.
Evaluating the differences of that risk will depend upon the stake of each individual’s
relationship with the company and their personal values.
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CEO pay is a completely separate issue on its own. It is a very popular subject in current
academic and business press. Even if it is different subject, it has moral implications in regards to
outsourcing. In its 11th annual survey of CEO compensation, the nonprofit liberal Institute for
Policy Studies (REFF) found executive pay at the 50 firms outsourcing the most service-sector
jobs increased 46 percent in 2003, while the average CEO got a nine percent raise and regular
workers saw a two percent boost in pay. Chief executives at U.S. companies that shipped jobs
overseas won a 46 percent pay hike last year, more than five times the average CEO raise, while
ordinary workers' paychecks barely budged. CEO pay overall was 300 times higher than the pay
earned (roughly around $27,000) by the average production worker, the study showed. That is up
from about 42 times that of the average worker in 1982. According to one popular Ernst &
Young audit report, in 1996 Nike paid Michael Jordan more for his endorsement - at least $30
million- than it did its 19,000 non-U.S. factory workers combined. This is another testament to
the disregard of the corporations and its management toward their employees.
Even though there is no concrete correlation (in terms of empirical data from this survey),
there is enough causation to conclude that outsourcing contributes to profitability /stock price
increase of a company, thus the rise in CEO compensation. The ethical issue here is that, if the
market rewards a company for improving it is bottom line or for cutting costs why is it ethically
wrong for a company to outsource at the expense of local labor force. After all, the reason for an
existence of company is to provide value to its shareholders.
Institute’s survey report further states, "The fact that leading outsourcers make more
money than average CEOs is one more reflection of a perverse system that rewards executives
for making decisions that may improve their bottom line while hurting workers and
communities". With high CEO pay already a topic of widespread anger, the morality of further
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rewarding CEO’s who knowingly undertook layoffs of his employees in favor of outsourcing
their work to a third party or move those jobs to a low wage country is very troubling. How can a
CEO justify mass layoffs in a community as a part of his duty to the shareholders, very well
knowing that many of those employees and many others in that community themselves are
shareholders of the company? One person getting a pay raise at the expense of many loosing the
jobs is a tough issue to justify. Perhaps this is more of an emotional sentiment based critique than
the facts and figured based economic arguments.
Pressure from the stock market to reduce cost and show profit growth has been one
of the perennial cause cited for outsourcing decisions. The stock market has constantly rewarded
companies that continue to cut cost by any means, and reacts positively in almost every case of
layoff announcement. Most of the public anger regarding layoff and outsourcing is directed
towards the company and the CEO. What many neglect to notice is the hidden hand (and power)
of the “market”. As mentioned above, the market rewards the CEO’s and companies for such
behavior and thus giving incentive to other CEO’s and companies to follow suite. Unless as
individual consumers and individual investors we indicate our opposition to such behavior by
‘voting’ (E.g. by refusing to do businesses with such companies, refusing to invest in such
companies) against the company, you cannot expect a change of behavior. Accusing a company
of moral undoing while consuming that company’s products and heavily investing in that
company does not constitute as rejection of such practices. (Example of this would be objecting
to Wal-Mart’s business practices while shopping there). My point here is that the corporate
world is not the only one to be blamed, the public has a share in that blame. By virtue of not
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objecting what it things as unethical or morally wrong by expressing its opinion by action, the
society has aided to this corporate behavior.
Growing concern of issues of privacy related to outsourced information creates an
ethical and legal dilemma. The concern is against outsourcing (in specific cases of Accounting,
HR, and Medical outsourcing) because of the fear of sensitive information’s safety and
confidentiality. With identity theft on the rise, when hiring staff, most US firms go through great
pains to check references and transcripts and perform background checks to minimize the risk of
hiring someone who lacks integrity. Outsourcing firms may indicate that all of their employees
are highly educated, trained professionals of the highest integrity. Still a company in US cannot
verify its outsourcer’s each and every employee. Personal data is required to be handled in a
highly sensitive manner in according to many regulatory and statutory laws. How can one be
assured that clients’ names, addresses, social security numbers, and financial information are
being handled according to these strict regulations on a day-today basis and that they not being
sold or used indiscriminately?
Privacy of personal information and possible identity theft are the ethical issues that
have received the most scrutiny. These issues came to the fore in the medical
profession when it was disclosed on October 22, 2003, that a Pakistani transcriber of
medical information threatened a medical center in San Francisco with posting
patients’ medical records online unless she received money she alleged was her due
(www.sfgate.com). Simply put, she was blackmailing the center to chase down a third
party—yet another outsourcer—who she said owed her money. While the immediate
threat has been resolved, the news article reports the center’s concern that there is no
evidence that the transcriber actually destroyed the records as promised.
- Steven Mintz, The Ethical Dilemmas of Outsourcing, CPA Journal. March 2004
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Many professional liability insurance providers for accountants, lawyers and medical
personal, are recommending incorporating a disclosure of electronic communication devices into
contract letters to have a shield for these services. Following is a sample wording recommended
to a CPA:
“…In the interest of facilitating our services to you, we may communicate by
facsimile transmission or by sending electronic mail over the Internet. Such
communications may include information that is confidential to you. Our firm
employs measures in the use of facsimile machines and computer technology
designed to maintain data security. While we will use our best efforts to keep such
communications secure in accordance with our obligations under applicable laws
and professional standards, we have no control over the unauthorized interception of
these communications once they have been sent….”
This might provide the company legal coverage, but this statement will be small part of
long list of other footnotes or fine prints. Does disclosing information dissolve the CPA of his
duty? Is the client fully aware of the details and risks of these outsourcing?
Outsourcing raises many concerns for working professional for and communities. It has
rattled long held personal and community values such as, loyalty and commitment to employees,
lifetime employment, and local responsibility of a firm. Many of the reasoning for outsourcing
might make perfect sense in business perspective, but at the same time, it can be extremely
troublesome if you look in terms ethical expectation and human cost. Every story has two sides,
outsourcing is no different in that aspect. As much as economic prosperity global trade can bring,
if does bring devastation as well. Availability of cheap goods is appreciable, but you need to
have a job and a income to consume those goods. For many, outsourcing hurts at the heart of
their livelihoods. It may be result of common global good, but it is ethical to trample the average
Joe for the good of the world?
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References
AICPA Sets Ethical Standards for outsourcing. Journal of Accountancy, Jan 2005:1, 199, p8.
Baily, Martin; Lawrence, Robert. Don't blame trade for US job losses. McKinsey Quarterly.
2005:1, p86,
Block, Dennis., Barton, Nancy., & Radin, Stephen., The Business Judgment Rule: Fiduciary
Duties of Corporate Directors. 1998. 5th Ed. Aspen Law & Business.
Engardio, Pete and Einhorn, Bruce., Outsourcing Innovation. Business Week, March 21 2005
Globalization. Global Policy Forum. http://www.globalpolicy.org/globaliz/index.htm
Kletzer, Lori., and Rosen, Howard. Easing the Adjustment Burden on US Workers. Institute for
International Economics Policy Briefs. Jan 2005
Ledford, Jerry. Kiss And Tell? Ethics and Outsourcing. Information Week. September 14, 2004
Mann, Catherine. Offshore Outsourcing and the Globalization of US Services: Why Now, How
Important, and What Policy Implications. Institute for International Economics Policy
Briefs. Jan 2005
Mason, Edwards. BofA wins ruling to stay mum on layoffs. Boston Business Journal. March 14,
2005
Mass Layoff Statistics. U.S. Department of Labor, Bureau of Labor Statistics.
http://www.bls.gov/news.release/reloc.toc.htm
McGee, Robert. Ethical Issues in Outsourcing Accounting and Tax Services
http://ssrn.com/abstract=648766
Miller, Richard., and Anderson, Alan. Legal and Ethical Considerations Regarding Outsourcing.
Journal of Accountancy. March 2005:2, 199.
New Ethics Requirements on Outsourcing. Miller GAAS Update Service, 1/15/2005, Vol. 5.
Outsourcing Law. http://www.outsourcing-law.com/Services-Legal_Research/law_departmentsoverview_2005_0108.htm
Outsourcing Survey 2004 – Results & Analysis
http://www.outsourcingcentral.com/topic_type_det.asp?type=5&cate=6&post=786
Paroush, Jacob & Prager, Jonas. Criteria for Contracting-Out Decisions When Contractors Can
Deceive. Atlantic Economic Journal. Dec 1999:4, 27, p376.
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Reich, Robert., Huizenga, Wayne., Mann, Catherine., Greenspan, Alan., & Barrett, Craig.
Viewpoints: How to create Jobs. Time, 3/1/2004, Vol. 163 Issue 9, p3
Roach, Stephen. From Jobless to Wageless. Morgan Stanley Global Economic Forum. March
2005 http://www.morganstanley.com/GEFdata/digests/20050307-mon.html#anchor0
Samuelson, Paul. Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream
Economists Supporting Globalization. Journal of Economic Perspectives. Summer
2004:3, 18, p135.
Schaaf, Jürgen. Offshoring: Globalization wave reaches services sector. Deutsche Bank
Research. September 27, 2004
Sylvestre, Jeanne & Urbancic, Frank. Auditor independence and outsourcing internal audits.
International Journal of Management, Mar1998:1, 15, p51.
The Outsourcing Debate. http://www.pbs.org/now/politics/outsourcedebate.html
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Question regarding Ethics of Outsourcing.
1) Does stockholders welfare outweighs that of a company’s employees?
2) Is profit maximization ethical?
3) Is it ethical to reward the upper management for cutting cost by eliminating jobs? Should
the compensation for upper management with held if the profit is achieved by layoffs and
outsourcing?
4) Is it ethical to reward a management that repeatedly shown disregard to it its employees?
(increase workload, constant layoff, choosing the cheapest labor over quality)
5) If shareholders to be rewarded for the risk that they take on the company shouldn’t the
employees get a “premium” addition to the payment for performing their duties because
they are taking a risk by choosing working for the company?
6) Is it okay for the public to expect a company to keep all its employment locally, (at a
higher cost) but at the same time sell products at comparable rate with foreign companies
who use cheap labor?
7) Any services obtained from a professions ( CPA or a Lawyer) comes with the expectation
that the work is done by a US qualified professional. When outsourcing most of the work
is done by foreign nationals. However qualified, if they don’t have the US qualifications,
does the service provider providing a inferior service? Aren’t they ethically responsible
for providing the best quality of service?
8) When a company completes services such as Tax filling, legal document preparation by
outsourcing, does it violate confidentiality, privacy and ethical obligation safeguard
customer’s data?
9) Does a company ethically bound to provide maximum occupation in its home country?
Does it have a duty to its local host/community?
10) Should a company required to monitor day-to-day business practices of its outsourcing
locations /partners to confirm the employees are treated well?
11) Does the society have the right to tell or expect a for-profit organization to work for the
benefit even if it might financial hurt the company?
12) Is employment a commodity?
13) Incase of layoff is the employer ethically bound to retrain the employees?
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