The Ethics of Offshoring

Outsourcing and offshoring are two means by which a business can reduce its costs, and these tactics can also have strategic advantages as well. However, they also typically come at a cost, in particular to workers in industrialized nations. Offshoring in particular has become a political issue as well, cited as a reason for the decline of the middle class. This paper will look at these related issues through a number of different ethical lenses.

Outsourcing is the process of hiring a third party firm to perform tasks that were once performed in-house. Offshoring is the moving of a business function to another country. The processes that are driving globalization -- the regionalization of production, trade agreements, dramatically improved global communication networks -- have also led to increase in offshoring in particular. Outsourcing's growth is similarly related.

Many business functions are so routine that there is no need for in-house specialization; outsourcing routine functions can allow for resources to be focused more on core business competencies where a firm can generate competitive advantage. Most businesses treat outsourcing and offshoring as strictly strategic decisions, guided by either operating considerations or by financial ones. However, any change to a business has its costs, and there is a specific human cost when a firm sheds jobs, or moves jobs overseas.

There are macro-level ethical considerations to offshoring in particular, because a company that built its business in its home country is ultimately harming that country by offshoring jobs elsewhere. That represents an outflow of capital, and that outflow has consequences, driving down worker wages, lowering living standards and lowering quality of life in the company's home country. The globalization of business has only exacerbated the tensions that arise between the ethical obligations of managers to shareholders, workers and communities.

This paper will explore the issues of outsourcing and offshoring from a variety of ethical perspectives, analyzing the different arguments for and against outsourcing and offshoring, to seek to determine what ethical obligations, if any, exist for corporate entities and the people who run them. Ethical Dilemma Any given business has multiple stakeholders, people who rely on that business for something. Shareholders are the most-discussed stakeholder, largely on the basis of Milton Friedman's argument that the only duty a manager has is to the company's shareholders (Friedman, 1970).

Friedman's argument rests on the idea of agency theory. The shareholders invest their money into a corporation seeking a financial return, based on the principle of perfect economic rationality of shareholders. The shareholders hire the board of directors to hire managers who can deploy organizational resources (initially, share capital) to the pursuit of returns. The manager, therefore, must focus all energy and effort to seeking superior economic returns.

Friedman's argument has been both lauded and criticized, on a number of its tenets, including the viability of agency theory under law (Denning, 2013). Critics point out that shareholders are not the only people who add to the business -- others have a stake, too. Workers are among the major stakeholder groups. On the surface, it can be argued that workers provide their labor, and that they are compensated for that labor. But the relationship between workers and their employers is more complex.

Workers are asked to provide a certain amount of loyalty -- few work for a new company every week. They also build lives around their employment. Mortgages, leases, schools and other aspects of life are not as easy to change as one's employment, thus there is disparity in the stake an employee has to his/her employer compared with the stake an employer has to any one employee.

Related to this is the idea that companies are also members of their communities, and that a community often has a stake in the company. A clear illustration of this can be found with the recent offshoring of work by Carrier illustrates this. Carrier had received tax credits to manufacture in Indiana, but after taking this money offshored thousands of jobs to Mexico (Tonelson, 2016). The investment in the company in this case was direct and financial, but the point of the tax credit was to keep jobs.

There is a multiplier effect, especially with high-wage jobs, so communities make a specific point to entice and attract businesses. There are more people who will be affected by this particular offshoring that just the 2100 workers and their families --entire communities and the taxpayers of the United States all have stakes in companies and thus all suffer from the loss of that stake when a company moves offshore.

There are more than three main stakeholder groups, but even with just three it is clear that there are going to be instances where there is a conflict between the interests of the different stakeholder groups, and offshoring usually involves one or more conflict points. These conflicts therefore reflect an ethical dilemma, as company management must determine the degree to which the company will pursue the interests of one group over another.

This fits with the definition of ethical dilemma because the agent in the case of offshoring -- and to a lesser extent outsourcing -- will offend their obligation to at least one party by virtue of either acting or not acting. There is no decision that fulfills the needs of all stakeholders, hence the ethical dilemma (McConnell, 2014). Leadership Implications The ethical dilemma exists in offshoring situations because of confusion about agency for corporate leadership. Some doubtless find it easy to argue away non-financial obligations, falling back on the Friedman argument.

That argument, however, is not accepted by the mainstream. Indeed, many in our society feel that there is some degree of obligation to workers, because most people can see their own dependency on employment and understand the reality of losing one's job. Globalization makes it easy for jobs to move around the world, but it is not particularly easy for people to do so. It is possible, though not without difficulty, to relocate within a country.

But most people do not have the ability to move themselves to follow the work. People cannot re-train themselves for new professions easily, either. And few have the ability, upon losing their jobs, to simply retire and not worry about finding more work. Most within our society can recognize the disparity between the ease with which a company can offshore a job and the ease with which a worker can make that same transition. For the leader, the decision to offshore cannot simply be one of math.

As many moral standards as exist in this world, the pure pursuit of economic gain above all other obligations is not a commonly-held moral belief system. Milton Friedman's view has its fans, but they are not the majority of any society. People typically hold a much broader set of values. Even when the pursuit of wealth is desirable, the pursuit of wealth is not the only moral virtue. The leader, therefore, has to bear that in mind.

Agency theory is tenuous enough -- anything predicated on the assumption that humans have perfectly pure economic rationality is mythological in nature -- but in the real world there are few people who genuinely believe in economic rationality as a virtue. Where there are other values, there are going to be people for whom the costs of an offshoring decision are not acceptable.

Complicating matters for the leader as well is the reality that a lot of the costs associated with offshoring are impossible to quantify, and of course that the company does not have to pay those costs. Workers who lose their jobs suffer in many ways -- their families suffer. Even if that suffering could be quantified, the leader who signs off on an offshoring plan is creating that suffering.

That suffering is not going to be felt by the leader, and it is not necessary offset by gains made by other people. In a world with national boundaries, gains made in one country are not viewed as offsets to losses in another country. The leader can see one giant world, because the leader has the ability to move resources around that world. For people who lack such mobility, the world is not just one big place, and they are therefore not able to find remedy for their suffering.

They have done nothing to deserve the suffering, either, as offshoring decisions are seldom about any given individual's performance, but are rather about forces much bigger than the people who lose their jobs. What this means is that, inherently, there will always be some sort of ethical dilemma in an offshoring system. The leader cannot alleviate all suffering -- not offshoring has its own consequences, and can also lead to profit and job loss.

The leader therefore needs to find the right balance, in particular regarding the ethics of the situation. Whether the leader takes a Kantian or utilitarian perspective, however, the conflict will still be impossible to resolve, and the leader will still need to create some sort of suffering; the only thing left is to determine the degree to which anybody must suffer the consequences of making an offshoring decision or not making one.

Global Context Offshoring is generally the result of globalization, so there is very much a global context to this. Managers in different countries have different attitudes towards their ethical responsibilities. Geert Hofstede's work on national culture highlights some key differences. For example, in many Latin American countries, an organization's management takes an almost paternalistic attitude towards employees, who expect to be taken care of as part of the arrangement.

This differs from the more individualistic, hierarchy-rejecting views in Western nations, and differs against from the cradle-to-grave employment once offered by Japanese or Korean firms. In Europe, social responsibility is a much more accepted concept, because business leaders are also human beings, and members of the community in which they live and work -- and they are members of the community first and foremost, before they are agents of the shareholders. These cultural differences around the world mean that there are different viewpoints on the ethics of offshoring.

The practice has largely been accepted in North America, but is less accepted in Europe. Countries like China have benefitted from it, but when the time comes that they lose jobs to offshoring, it will be interesting to see how such a communal culture responds to leaders deliberately doing harm to the community for the benefit of a small class of shareholders. The other interesting element of the global context is that offshoring is a means by which wealth is transferred.

Thus are winners just as there are losers -- if America's middle class has stagnated, China's has exploded. The ethics of offshoring are typically framed in a one-sided manner, but taking a global view might reframe offshoring in terms of utilitarianism, distributive justice. A global view might ask whether offshoring is a zero sum game, for example, or if it improves net global outcomes, regardless of how those outcomes are distributed. Analysis through a Western Framework One framework for analysis is the consequentialist framework.

The typical dilemma faced by managers owes itself to the juxtaposition of the consequentialist and the deontological dilemma. The Friedman view, with its roots in agency theory, falls back on deontological roots: The manager's duty is to pursue profit for the shareholders. The means and other outcomes are not particularly important. That view is inconsistent with the prevailing ethics of Western society. We as a society generally leave this dilemma unresolved.

There is a fair amount of sympathy for deontological decision-making, in particular within the context of business, but ultimately our society judges a person's actions on the basis of consequences. The reason why people have a problem with offshoring is specifically because of the harm that it brings to their own local communities. If there was no such harm, then there would not be nearly the same controversy over the practice.

At the heart of consequentialism is the idea that the "normative properties (of an action) depend only on consequences" (Sinnott-Armstrong, 2015). This differs from the ethics of investors. The tensions between different stakeholder groups are thus evident, and relate to the level of detachment from the action. To illustrate, take the example of the worker who has shares of his company, purchased through a company program.

As a shareholder, the worker benefits from any action that increases the profits of the company, even if that action costs the worker his own job. The worker, however, feels a much stronger and immediate impact from the job loss. Leadership of the company may have better job prospects, more shares, or otherwise have a different perspective than a lower-level worker. An investor -- and with most companies the majority of investment capital is held institutionally -- is completely detached from the non-financial consequences of managerial decision-making.

As a result of this, investors have almost no reason to pay attention to consequences, whereas those who are directly affected by offshoring and outsourcing decisions have little reason to pay attention to anything but the non-financial consequences This is why the ethical dilemma exists -- managers need to weigh mutually exclusive interests, and face pressure from both sides (Robertson, Lamin & Livanis, 2010). One of the interesting dynamics is that the Friedman view is relatively new.

In social psychology, the nativist approach holds that values about things like fairness and harm have been built into the human mind through evolution, so that they pre-exist; most people find the Friedman-esque view to violate their fundamental conception of right and wrong (Haidt, & Joseph 2004). It is not possible to simply make decisions that inflict human suffering based on computations on a spreadsheet, or to simply enrich those who are already rich.

We, as a society, sometimes accept this when it is others who are suffering, but when we can see the suffering as it occurs in our own neighborhoods, the violation of our ethical norms becomes repugnant. For their part, if the leaders making these decisions have bought into the Friedman view -- and there is reason to believe that many executives have -- then they are living in a world, surrounded by other like-minded individuals, that has radically different cultural norms than others.

They may be unprepared to understand how their actions will be perceived by the majority of people, and the majority of people may be unprepared to deal with their lives being affected by people in power who lack the same moral compass that they have. Attempts to blend the two perspectives and resolve the issue typically take the economic benefits, apply utilitarianism to the estimated global financial benefits, and make an argument that on the whole offshoring's pursuit of optimal economic efficiency is desirable (Gordon & Zimmerman, 2010).

Of course, the utilitarian view is a convenient choice because it allows one to choose minor benefits to many as being better than a strongly negative consequence to a few, and also allows for the global trade-off approach that takes into account the benefits of those overseas. Even our highly-individualistic society has trouble, however, accepting such costs. Many question the desirability of pure economic efficiency, as we are ultimately not robots but complex creatures whose belief systems are far more complex and nuanced than pure economic rationality allows for.

Studies on the political economy of war provide a blunter insight into the challenges that economic rationality has in justifying certain actions -- how many lives is the oil in Iraq worth, anyway? Studies have been challenged to effectively model the juxtaposition between the cost of human life and suffering versus strict economic benefits, and critics have found economic rationality explanations justifying suffering as "reductionist, speculative, and misleading" (Cramer, 2002). Analysis through Non-Western Framework Offshoring and outsourcing are seldom studied through non-Western frameworks.

This is not surprising, in the sense that few non-Western countries are offshoring jobs. If non-Western economies are the beneficiaries of offshoring, there is no particular ethical dilemma that exists for their leaders and managers. Further, the forces driving globalization, right down to the core of its neoliberal underpinnings, are rooted in Western philosophical tradition. As a practical matter, analyzing a purely Western phenomenon through a non-Western ethical lens is disorienting, and for those who are not experts in foreign traditions is unlikely to yield useful analysis.

It is never easy to analyze other cultures accurately; thinking in another culture obfuscates moral clarity, and this is especially true of issues that are not clear to begin with (Donaldson, 1996). For the sake of the exercise, however, we can look to Japan for guidance. Japan has faced many of the same offshoring dilemmas that Western nations have. This has shaken the traditional Japanese corporate culture, in a similar way that it has shaken the corporate culture in the West.

Japanese business culture in the 20th century strongly reflects Japanese cultural traditions. It was strongly paternalistic, where a company would provide lifetime employment to workers in exchange for very high levels of dedication. The workers moved up the hierarchy based on time-served for the most part, reflecting the value of one's dedication to the company above all else. Furthermore, the Japanese economy was developed along paternalistic principles. The government worked with major corporations, creating the keiretsu, which are groupings of corporations working for their mutual interest.

Every keiretsu had a major bank, and industrial concerns. Many Japanese companies evolved into conglomerates as the result of this system, because power was concentrated, and the leaders within this system were responsible not just for the betterment of their own companies and employees, but others within the keiretsu as well. Underlying this logic was the idea that Japanese companies should support each other -- the mutual support meant jobs and economic prosperity, a goal that was ultimately achieved faster than any other non-Western country, save perhaps Singapore.

Globalization has challenged the traditional Japanese view, and that society has undergone some of the same tensions as Western societies have. The idea of the job for life is waning in Japan just as it is in the West, for one. People are being forced to take much more responsibility for their individual lives, and this had led to social changes.

The social contract may have looked different in Japan, and had its rooted in an entirely different philosophy, but the impact of offshoring and outsourcing has been the same, creating similar tensions within Japanese society. They are expressed differently, but ultimately the idea is that the tensions are between the role that corporations play with respect to shareholders versus non-shareholder stakeholders. Points of Comparison The similarities in the way that the tensions arise wherever offshoring and outsourcing have impacted the fabric of work life, and society, validate nativist approaches.

In every society, whatever the arrangement is, there is a social contract that exists between those with power and those without. The leaders of a society have power and society wants them to use that power for the benefit of all, not just some. One stakeholder group cannot always be given precedence over all the others. If such a thing was accepted, there would be no ethical dilemma associated with offshoring. The dilemma has not lessened over the years, it has merely been accepted that the average worker will lose.

In a way, this is mere pragmatism rather than a change in our moral outlook on the matter. The first point of comparison therefore is the nature of the social contract. Western philosophy and Japanese appear to have different ways in which the social contract has manifested. Corporations have taken on a specific role within that social contract in the 20th.