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Does outsourcing threaten ethical standards?

June 27, 2014

The answer to this question is, of course, yes. Any step that reduces control always has the potential for undesirable results. But this is not unique to outsourcing. There are plenty of recent examples of ethical lapse in business that have nothing to do with external service providers.

The question was raised recently by an independent watchdog appointed by the UK Government. While their observations related specifically to public sector outsourcing, the principle is universal. In a report, they draw particular attention to the importance of contract management. According to the Financial Times: “The report comes amid wider concerns over the ability of civil servants to manage contracts as Whitehall moves from being a provider to a commissioner of services. In an inside account of the way that officials supervise providers, it said “there appeared to be limited on-going monitoring of contracts”. The committee said data collection could be poor, there was “a lack of visibility of complex supply chains” and “contract managers were nervous of challenging the service delivery of big providers and lacked the confidence and training to do so”.

A lack of oversight and governance within any organization is likely to lead to problems. Clearly these are exacerbated when the resources providing services are part of another organization, operating with a different culture, value system and potentially conflicting performance measurements. It seems to me the problem is often far deeper, because supplier selection frequently fails to take sufficient account of these issues of cultural fit and motivation. In the public sector especially, procurement rules are seen as preventing deep questioning and research into a supplier’s ethical standards, yet these are fundamental to good service delivery. But the problem is not unique to the public sector; many private sector outsourcing arrangements have failed to live up to expected standards. Again, those undertaking the procurement may not be motivated or trained to explore the right issues. If the driver for outsourcing is low cost, then quality and integrity are often ignored or discounted as ‘unaffordable luxuries’.

It is now 20 years since outsourcing emerged on a large scale, yet still the doubts and questions remain. It is remarkable how long it takes to learn the lessons of past failure and to start acting differently. I think much of the reason is our continued inability to distinguish between price and cost. It is easy to compare prices, much harder to predict and evaluate ‘cost of ownership’ or ‘cost of performance’. And the situation is not helped by the fact that so many organizations continue to operate in silos where each division has its own drivers and motivations, with key data often hidden from them.

It is not outsourcing that in itself threatens ethical standards; it is lack of competence in selecting the right partners and then in working together to achieve mutual benefits.

2 Comments
  1. Eugene permalink

    The question asked was, “Does outsourcing threaten ethical standards?” The suggested answer was, “…of course, yes.” I believe that, in most cases, the response is not only overstated, but wrong. Typically, organizations outsource for a few reasons: (1) decrease cost; (2) achieve greater expertise provided by the outsource vendor and/or (3) enable the organization to focus on their core business. Organizations tend to outsource when the function becomes too burdensome in-house and they are spending too much time and expense on a function with less than optimal results.

    Outsourcing, done right, may actually increase ethical standards. A failure to outsource in the face of known deficiencies may present significant ethical concerns. Many people think of outsourcing as a complete solution. It is not. When done right, outsourcing becomes a partnership and literally the outsourcer becomes an extension of the organization. To achieve that result takes a lot of work and constant vigilance. In previous employment, I had significant responsibility for vendor selection and ongoing management. Vendor selection should focus on core competencies of the vendor. The vendor should be brought into the day-to-day operations of the organization and feel comfortable in challenging the purchaser of the service. The vendor should have sufficient expertise so as to lay out a service platform that is highly integrated with the purchaser organization. They should not feel that they will be terminated for calling issues to your attention. The purchaser (probably with the assistance of the outsourcer) should establish performance metrics and then meet regularly with the vendor both in the purchaser’s offices and at the vendor’s location. Done correctly, outsourcing should increase the expertise at which the service is performed. With sufficient volume, cost should be reduced. Due to the increase expertise of the outsourcer and their intimate knowledge of the subject matter, I would anticipate an uptick in the ethical standards underlying your operations.

    Disclaimer: I currently work for an outsourcer of accounting services for investment vehicles, but have had significant responsibility as the purchaser organization.

    • Eugene, thanks for your comment – but I think perhaps you missed the point! My opening comment is only that the threat is potentially increased because of moving from a direct to indirect relationship. Whether or not that threat is realised depends very much on whether the buyer has put in place the right mechanisms to select and manage their supplier effectively. Hence my concluding sentence explains: “It is not outsourcing that in itself threatens ethical standards; it is lack of competence in selecting the right partners and then in working together to achieve mutual benefits”.

      Tim

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