Outsourcing: Do We Lose or Gain?

Historically, commodity trade has been a win-win situation for the participating countries which leverage their specialization. Developed countries like US have a distinct advantage of outsourcing low-cost low-skill products like shoes, clothes and concentrate on innovation and high technology products like airplanes, computers, cell phones, cars etc… This keeps costs low and increases the purchasing power of the US consumers. One aero plane built can buy tons of shoes and agricultural goods. Also producing an aero plane requires high skill workers and technology thus boosting salaries and standard of living. After having enormous profit from free trade the developed countries (USA, Europe and Japan) are suppressing the liberalization of markets where they have comparative disadvantage like the food markets. These nations have refused open trade in agricultural goods in an effort to protect farmers from being displaced [1]. Is this ethical to adhere to open trade/market only till it is profitable?

The latest political buzz is about the software and IT outsourcing to countries like India. The software outsourcing was one of the main agenda during the last presidential elections. Previously high skill computer jobs of programming and IT services were considered outsourcing proof. How are you going to transfer and control pieces of code and services across continents and manage the process? The dilemma of software outsourcing started with the advent of internet and better electronic communication infrastructure. Software development, maintenance, and services can now be outsources to countries like India. We reduce cost, save money on healthcare (employee health insurance), possibly save some vital resources and curb inflation through outsourcing. Motivations for outsourcing are cost driven, strategy driven or politically driven [2]. Software outsourcing to various parts of the world is primarily cost driven. However with better skilled talent in mathematics and science in developing countries outsourcing can also be strategy driven. For example IBM now focuses on capturing 50% Indian domestic market by 2010 [7]. As of July 2007, IBM employed more than fifty thousand employees in India. Google outsources its IT hardware and now setup research facilities outside US and Europe. GE global research has setup operations in China (Shanghai) and India (Bangalore) while scaling down operations in the West. GE argues that the strategy is not only cost effective but the young talent in the east is better helping them on their path of innovation. According to Seattle Business [11]-

“A Seattle-based labor union says newly surfaced documents show that Microsoft Corp. has looked to outsource to Indian companies high-level jobs in software architecture and development. ..the previously confidential agreements between Microsoft and Indian outsourcing companies Infosys Technologies and Satyam Computer Services debunk the popular notion that only lower-level technology positions are vulnerable to outsourcing….”

The US unemployment rate is at record high at 9.4%. It is predicted that it will reach double digits by the end of the year before improving. Large corporations are now outsourcing high salary high skill jobs overseas. Who is gaining? Is it ethical to lay off thousands of people in US and expand overseas? IBM, GE, Google now maintains high skill R&D jobs abroad while reducing the workforce in the US. The justification is always the Free Trade philosophy. Even though it’s not illegal the question is – Is it ethical? Infosys technologies headquartered in Bangalore, reported 17% increase in revenue last quarter. The increase is attributable to the increased outsourcing projects and stronger dollar. How is this possible when the US is in recession with more than 4% reduction in GDP and almost all enterprises experiencing the spiral decay in the economy and domestic demand? Outsourcing phenomenon is certainly legal but let’s take a closer look at the ethical implications.
A corporation’s motive is to make money and increase shareholder value. Milton Friedman, a free market economy proponent stated-

“… In a free society, there is one and only one social responsibility of the business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which to say, engages in open and free competition without deception or fraud [8].”

According to free market ethics theory outsourcing is the correct option for the US high tech companies. So what if it takes laying off thousands of US workers and hire abroad. Actually it is wrong for the managers to think about the goodwill and society’s interest in taking decision. Decisions regarding the issues concerning the society should be handled within the legal framework and political arena. Analyzing the outsourcing issue by free market ethics framework leads us to the conclusion that US companies decision is completely justifiable and appropriate.

Now, let us analyze the issue from the utilitarian framework of ethical decisions. Utilitarianism is the idea that the moral worth of an action is determined solely by its contribution to overall utility: that is, its contribution to happiness or pleasure as summed among all people [13]. It is thus a form of consequentialism, meaning that the moral worth of an action is determined by its outcome [13]. We need to analyze three main issues - job loss in US, job gain in India and overall effect on the economy. Research says that only one third of the layoff people find equivalent jobs or higher paying job. On the other hand, a job for Indian worker who currently works for less than 1$ per day can be huge. Quantification of the both the effects are difficult. Some secondary impact includes effect on the local governments as tax revenue decline. Local communities get affected as the schools and higher education systems get lower tax revenues. From the economy perspective outsourcing will help corporation save money and remain competitive in the global economy. Corporations can invest the bloated profits in research and move up the ladder to offer higher value corporate packages of research, software and services which have higher profit margins [4]. For example IBM is currently working actively in the areas of utility grid optimization & energy conservation, genetics-based personalized medicine, fraud detection & prediction, and traffic management using sensors and congestion-pricing models [4]. Specialized skills are required which create higher paying jobs ultimately leading to more innovation and growth. Outsourcing has actually strengthened the US economy. According to recent reports, Indian outsourcing companies are hiring US citizens for the operations in the United States. For example, Tata Consultancy’s US headquarters is located in Cincinnati, Ohio which has generated numerous employment opportunities in the tri-state area.

Deontological ethics or deontology is an approach to ethics that holds that acts are inherently good or evil, regardless of the consequences of the acts [14]. A central theme among deontological theorists is that we have a duty to do those things that are inherently good. Our obligation or duty is to take the right action, even if the consequences of a given act may be bad [14]. Kant, a strong proponent of Deontology, states that the universal rights and duties should be “absolute”. Evaluating an ethical problem within the deontological framework can be difficult especially when the definition of universal rights and duties is not clear. What is “fair”- Maximizing the shareholder value? Offering a job to well qualified Indian worker? Or letting go an American job according to the market forces? The first two questions lean towards outsourcing as the correct way to move forward. But the third question indicates otherwise. Will you give up your job because there is low cost labor available out of the country? No. If it is your job you will oppose the outsourcing decision. This essentially contradicts the absolute universal rights and duties as proposed by Kant.

Virtue ethics is a branch of moral philosophy that emphasizes character, rather than rules or consequences, as the key element of ethical thinking [15]. Virtue ethics sets standard for moral excellence in contrast to Deontology and Utilitarianism which sets limits on moral minima [6]. When studied in business sense virtue ethics framework needs the definition of “community” in terms of business sense and moral decisions consistent with the company principles and guidelines. Some IBM principles include:

“We are sensitive to the needs of all employees and to the communities in which we operate”
“The marketplace is the driving force behind everything we do”
“We never lose sight of our strategic vision”

Evaluating the principles IBM’s decision of outsourcing is justified.

To conclude we think that the external and secondary effects of outsourcing are difficult to quantify. The political, social, legal and marketplace influences the decision. Also outsourcing decisions analysis cannot be generalized across the industry but should be considered on case by case basis. As of now outsourcing trend seems positive and gaining grounds. The effect on the economy and labor market of the “outsourced” and “outsourcing” countries remain to be seen.


References

1. Who Benefits from Outsourcing? Albino Barrera, Accessed 29-Jul-2009. http://www.religion-online.org/showarticle.asp?title=3115.
2. Outsourcing Decision Support: A Survey of Benefits, Risks, and Decision Factors, Kremic, Tibor, Tukel, Oya Icmeli, Rom, O. Walter Supply Chain Management: An International Journal, Vol. 11, No. 6. (2006), pp. 467-482.
3. Business process outsourcing in India. Wikipedia, The Free Encyclopedia. 6 Aug 2009, 11:55 UTC. 6 Aug 2009 .
4. I.B.M. Showing That Giants Can Be Nimble, Steve Lohr, New York Times, Published: 18 July 2007.
5. Does Outsourcing Cost More Than It Saves? William J. Holstein, New York Times Published: 9 August 2009.
6. Law and Ethics in the Business Environment, Terry Halbert , Elaine Ingulli, Publisher: Cengage Learning, Pub. Date: February 2008, ISBN-13: 9780324657326.
7. IBM local outsourcing pie to be 50% by 2010, Pankaj Mishra, Economic Times - ET Bureau, 10 Feb 2009.
8. The Social Responsibility of Business Is to Increase Its Profits, New York Times, 13 September 1970.
9. Google Invests in India - Outsourcing Again, Engine Search Round Table, October 13, 2004.
10. Microsoft plans to outsource more, says ex-worker, The Seattle Times, September 3, 2005
11. “Microsoft outsourcing high-end jobs”, union says, Seattlepi Business, 16 June 2004
12. “How Outsourcing Affects The U.S. Economy!” Business Journal, 8 August 2009
13. "Utilitarianism." Wikipedia, The Free Encyclopedia. 4 Aug 2009, 03:09 UTC. 4 Aug 2009 .
14. "Deontological ethics." Wikipedia, The Free Encyclopedia. 29 Jul 2009, 16:57 UTC. 29 Jul 2009 .
15. "Virtue ethics." Wikipedia, The Free Encyclopedia. 30 Jul 2009, 03:47 UTC. 30 Jul 2009 .