Wednesday, September 24, 2014
Strategic Outsourcing: Is it Ethical?
Managers across all industries have the responsibility to leverage their company’s resources and skills to concentrate on “Core competencies” of the operating firm. While concentrating on the core competencies, they can achieve preeminence for their firms and provide a unique value to their customers. One of the strategies adopted by them is to strategically outsource activities, which are not traditionally integral part of the company. These are the activities in which they feel the firm does not have special skills or strategic motives. The benefits of combining these two together have maximized the profits for many companies and put them on the world stage.
Nike, Inc. is a supplier of athletic shoes in the world. Manufacturing athletic footwear us very fashion intensive and requires high flexibility in marketing and development stages. Nike has outsourced 100% of its production of footwear. Nike creates maximum value by concentrating on the pre-production stage (research and development) and the postproduction on activities such as marketing, distribution and sales. By doing this, they earned 30% ROE for its shareholders in the last decade.
A more well knows example is that of Apple Inc. which outsources activities such as making chips, boxes, cables and keyboards. This effort and time helps them focus on other key activities such as Research and improving user experience.
While it is clearly evident that outsourcing clearly shows benefits in terms of monetary value, the question that begs to be answered is: Is it ethical to do so? There is a school of thought, which believes that outsourcing is just a tactic for cheap labor. There have been a few questions raised about the quality and cultural differences that creep in when the firm makes outsourcing a part of its process. Let us take the example of the below case:
A security check on a US company revealed that one of its employees was ‘outsourcing’ his work to china. I would imagine the software developer was spending his work time watching videos on YouTube while he was getting his work done by someone else who was paid one fifth of the employee’s pay. In this case, an individual was trying to benefit out of the system while not complying with the code of conduct of the firm, which hired him. In my opinion, this is highly unethical as the employee was not obliging to the contract he had with his firm and at the same time putting his firm at jeopardy.
However, outsourcing has much larger implications when implemented as a strategy.
Corporations have a fiduciary responsibility to their shareholders – which include the mutual funds that make up the retirement accounts of many Americans. That responsibility requires them to maximize profit. The only ways to boost profits are to generate more revenue or to reduce expenses. Moving work to other businesses and markets where labor is less expensive is a perfectly acceptable way to do so. In this case, it is evident that outsourcing is an issue beyond ethical. Strategic Outsourcing forms the core of capitalism.