Ethics of Outsourcing and Offshoring: A Multi-Framework Analysis

Introduction: Outsourcing, Offshoring, and Ethical Stakes

Outsourcing and offshoring are two means by which a business can reduce its costs, and these tactics can also carry strategic advantages. However, they typically come at a cost — in particular to workers in industrialized nations. Offshoring has become a political issue as well, often cited as a reason for the decline of the middle class. This paper examines 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 driving globalization — the regionalization of production, trade agreements, and dramatically improved global communication networks — have also led to an 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 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 or financial considerations. 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 moving jobs elsewhere. That represents an outflow of capital, and that outflow has consequences: it drives down worker wages, lowers living standards, and reduces 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 explores the issues of outsourcing and offshoring from a variety of ethical perspectives, analyzing the different arguments for and against these practices to determine what ethical obligations, if any, exist for corporate entities and the people who run them.

The Ethical Dilemma of Competing Stakeholder Interests

Any given business has multiple stakeholders — people who rely on that business for something. Shareholders are the most-discussed stakeholder group, 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. Shareholders invest their money into a corporation seeking a financial return, on the principle of perfect economic rationality. The shareholders hire a board of directors to hire managers who can deploy organizational resources — initially share capital — in the pursuit of returns. The manager, therefore, must focus all energy and effort on 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 value to a 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 are compensated for it. But the relationship between workers and their employers is more complex. Workers are asked to provide a certain degree of loyalty — few people work for a new company every week. They also build their lives around their employment. Mortgages, leases, schools, and other aspects of life are not as easy to change as one's employment, so there is a disparity between the stake an employee has in his or her employer compared with the stake an employer has in 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 can be found in the offshoring of work by Carrier. Carrier had received tax credits to manufacture in Indiana, but after accepting this public money it offshored thousands of jobs to Mexico (Tonelson, 2016). The community's investment in the company was direct and financial, but the purpose of the tax credit was to keep jobs. There is a multiplier effect — especially with high-wage jobs — so communities make a specific effort to entice and attract businesses. More people are affected by this particular offshoring than just the 2,100 workers and their families; entire communities and the taxpayers of the United States all have a stake in companies, and 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 will be instances where the interests of different groups conflict, and offshoring usually involves one or more such conflict points. These conflicts 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 the definition of ethical dilemma because the agent in an offshoring situation — and to a lesser extent an outsourcing situation — will fail in its 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 of Offshoring Decisions

The ethical dilemma in offshoring situations arises partly from confusion about agency for corporate leadership. Some find it easy to argue away non-financial obligations by 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 job loss. 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, nor can they easily retrain for new professions. And few, upon losing their jobs, can simply retire without worrying about finding more work. Most members of our society can recognize the disparity between the ease with which a company can offshore a job and the difficulty a worker faces in making that same transition.

For the leader, the decision to offshore cannot simply be a matter of mathematics. Among the many moral standards that exist, the pure pursuit of economic gain above all other obligations is not a commonly held moral belief system. Milton Friedman's view has its supporters, but they are not the majority in any society. People typically hold a much broader set of values. Even when the pursuit of wealth is desirable, it is not the only moral virtue. The leader must bear this in mind. Agency theory is already tenuous — anything predicated on the assumption that humans have perfectly pure economic rationality is mythological in nature — and in the real world, few people genuinely believe in economic rationality as a virtue. Where other values exist, there will be people for whom the costs of an offshoring decision are simply not acceptable.

Complicating matters further is the reality that many of the costs associated with offshoring are impossible to quantify, and the company does not have to pay those costs directly. Workers who lose their jobs suffer in many ways, and their families suffer as well. Even if that suffering could be quantified, the leader who approves an offshoring plan is creating it. That suffering will not be felt by the leader, and it is not necessarily 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. The leader can view the world as one large, integrated space, because the leader has the ability to move resources across it. For people who lack such mobility, the world is not simply one big place, and they cannot find remedy for their suffering elsewhere. They have done nothing to deserve that suffering, either — offshoring decisions are seldom about any given individual's performance, but rather about forces much larger than the people who lose their jobs.

What this means is that there will always be some form of ethical dilemma in an offshoring situation. The leader cannot eliminate all suffering — not offshoring also has consequences, and can itself lead to profit loss and job cuts. The leader therefore needs to find the right balance, particularly regarding the ethics of the situation. Whether the leader takes a Kantian or a utilitarian perspective, the conflict will remain impossible to fully resolve; the only question left is to determine the degree to which anyone must suffer the consequences of making — or not making — an offshoring decision.

Conclusion

If there were easy answers, this would not be an ethical dilemma. Offshoring is such a difficult dilemma to resolve because the competing arguments are fundamentally incompatible. The idea that all people in the West share a similar ethical perspective on the matter is entirely unfounded — in truth, those arguing for economic rationality are taking a deontological perspective in which such rationality is always the right choice, while the other side is focused on consequences. Complicating matters further is the nativist view, which would regard the economic rationality argument and its proponents as ethical outliers. That those subscribing to an outlier philosophy hold positions of power is what drives the high profile of this particular dilemma.

The relative lack of offshoring from non-Western nations complicates the analysis. It would be useful to have more than one or two non-Western countries facing the same dilemma, as this would provide richer discourse on which to base our understanding of the issue from a variety of perspectives. However, there are some points of comparison that shed light on the way other cultures view offshoring and outsourcing. The most important of these is the idea of the social contract that exists between the leaders in our societies and everyone else. The way that those who control resources utilize them — and the obligation they have to use those resources for the benefit of different groups — is at issue in all offshoring situations. This provides a useful framework by which to understand the ethical dilemma and the different perspectives people use to try to resolve it.