Almost every year, it seems, some major corporation is enveloped in an ethics scandal that generates a new tremor of public distrust. As a consequence of these endless scandals, the ethics phenomenon has become a buzz word in boardrooms and so is global outsourcing and corporate social responsibility (CSR). Global outsourcing has seen companies lowering the production costs, as well as offer employment for many languishing in unemployment, particularly in the developing countries.
This report finds that CSR is even more relevant in companies engaged in global outsourcing than those having in-house operations. As such, it makes a number of recommendations to contemporary companies who wish to engage in global outsourcing activities. To begin with, the fact that a company is operating away from ‘home’ does not imply that it should engage in unethical behaviors.
It should indulge in those activities that bring good to itself, and the community in which is operating. By so doing, companies will be able to maintain brand value and reputation. It will also win the confidence of the community; which may come at their rescue in times of a crisis.
On December 3, 1084, the Union Carbide plant in Bhopal, India, experienced a major crisis resulting in the leak of 45 tons of methylisocyanate, a toxic chemical used in the production of insecticides. Thousands of people died from the disaster with many others suffering long-term physical damage, including blindness, respiratory problems, birth defects, and neurological problems (Vilcox & Mohan, 2007).
Union Carbide’s response was to deny social responsibility for the accident. The company did make emergency relief payments, and later settled all civil liability for the accident amounting to hundreds of millions of US dollars. Claiming it had met its legal obligations, Union Carbide began to extricate itself from India.
Responsibility for the plant site and victims was eventually turned over to the Indian government. The company funded a relief trust and built a clinic to help treat victims, but the legacy of long-term disability, contaminated water, and lingering effects has remained unresolved (Sims, 2003).
The Union Carbide Bhopal accident, as well as a number of other dramatic and mundane examples, illustrates the debate over corporate ethics and corporate social responsibility (CSR). Companies such as Wal-Mart, Exxon Mobil, Microsoft, and many others have been accused of hiding behind legal requirements and avoiding larger social responsibilities. Corporate ethics and corporate social responsibility have emerged as salient topics for debate in the contemporary business milieu (May, Cheney, & Roper, 2007).
Almost every year, it seems, some major corporation is enveloped in an ethics scandal that generates a new tremor of public distrust. As a consequence of these endless scandals, the ethics phenomenon is often a major part of the news. Ethics is a philosophical term that comes from the Greek word, ‘ethos’, meaning personality or norm (Griseri & Seppala, 2010).
This definition is relevant to efficient leadership in business organizations in that, it refers to an organization code of exhibiting moral uprightness and unswerving values in service to the public (Trevino & Nelson, 2010). Sims (2003) posits that in order to understand corporate ethics, it is useful to comment on the relationship between ethics and morality. Ideally, ethics can be perceived as a combination of moral doctrines or standards.
On the other hand, morality is a system or doctrine of moral conduct. Corporate ethics, therefore, is concerned with right and wrong behavior and practices within a business context. There are two types of corporate of business ethics: normative business ethics and descriptive business ethics (Griseri & Seppala, 2010).
Swartz (2011) states that normative business ethics seek to propose some principle or principles for distinguishing ethical and unethical in the business context. This type of ethics lays emphasis on developing norms or principles by which business might be controlled or evaluated. On the other hand, descriptive business ethics focuses on grasping what is taking place; the realm of behavior, actions, decisions and polices. This type of ethics deals with what is the prevailing set of standards in the business community (Keinert, 2008).
Benefits of corporate ethics
The benefits of corporate ethics cannot be overlooked in the contemporary business environment. For today’s business leaders and mangers, leading and administrating ethically also entails managing with honesty. Keinert (2008) holds that honesty runs throughout an organization.
It models, influences and maintains the values, tone, climate, or culture of the organization; communication among all its members; and commitment, imagination, and realism of everyone in the organization (Trevino & Nelson, 2010). Ethics initiatives hold up employee growth and significance (Swartz, 2011).
Focus on ethics in the business aids employees face reality in the organization. They help them feel confidence in dealing with whatever comes their way. Ethical climates and organizational ethics help ensure that policies are legal (May, Cheney, & Roper, 2007). Emphasis on ethics ensures exceedingly ethical policies and measures in the workplace.
In addition, corporate ethics emphases facilitate avoidance of criminal indulgences; hence, lowering fines. Ethics programs recognize ideal standards and make certain that organizational behaviors are aligned with those standards (Griseri & Seppala, 2010)
Corporate social responsibility (CSR)
The previous segment of this report laid emphasis on the organization need to be ethical. As discussed in the segment, organizations should strive to create strong ethical cultures that support employee ethics. Keinert (2008) argues that managers should lead their employees in an ethical direction.
Individual and organizational ethical decision-making and behavior requires taking into consideration harms and benefits to those outside the organization. The organization’s relationship with its external stakeholders, usually referred to as corporate social responsibility (CSR) is very important (Swartz, 2011).
Reasons for engaging in CSR
Vilcox & Mohan (2007) state that in today’s highly interconnected, global, and transparent world, corporations are finding that social responsibility is essential to fundamental business strategy. Corporations are also finding that it is difficult to separate internal organizational ethics (discussed in the previous segment), from external social responsibility. There are three major reasons as to why companies care about social responsibility. These are pragmatic, ethical, and strategic reasons (Keinert, 2008).
Under the pragmatic approach to corporate social responsibility, a firm’s management scans the environment and is on alert to act in ways that avoid economic harm, maintain legitimacy, and ensure a good corporate reputation (Griseri & Seppala, 2010). This approach is mainly reactive and acts on stakeholder’s concerns only after they are voiced.
A more proactive, ethical reason for corporate social responsibility argues that businesses, as part of society, have a responsibility to behave ethically. Social responsibility is as integral to the business as is economic performance (Urip, 2010).
A third reason to be socially responsible is a strategic one. This approach is grounded on the basis that business needs a healthy society because only a health society can produce a productive workforce, and the rules of the road that make business transactions possible (May, Cheney, & Roper, 2007).
A healthy society also needs business to innovate, crate jobs, goods, and series, and pay the taxes that support societal activities. Therefore, the best CSR initiatives will be simultaneously good for business and for the society (Swartz, 2011). The strategic approach to corporate social responsibility offers mangers a stronger basis for making decisions about which stakeholders and social responsibility issues should garner their attention and resources given the multitude of options available (Keinert, 2008).
Benefits of CSR
Just like corporate ethics, corporate social responsibility has various benefits to the stakeholders. Although it may prove costly issue in the short run, the long term benefits of CSR can be overlooked (Urip, 2010). To the government, CSR has the following benefits. To begin with, it leads to development and acceleration of microeconomic sustainable growth through the use of good governance and best practices.
To the local community and society, CSR changes the habits of society and improves quality of life (Swartz, 2011). Through capacity building, CSR creates employment and wealth. On the side of the corporations, CSR provides growth, profit, image, and competitive edge.
It leads to community acceptance and goodwill (Keinert, 2008). In addition, CSR is a source of pride and inspiration to employees, and their families, alongside providing genuine dialogue with stakeholders. To the world and the environment, CSR results to waste management because of concern to the environment, which leads to balanced ecosystems, and green and clean environment (Sims, 2003).
With the advent of globalization and improved levels of competition, many firms have started to have considerable difficulties in developing and maintaining the variety of know-how and skill needed to compete effectively (Contractor, Kumar, & Kundu, 2010).
The mergence of American, European, Japanese, and Third World multi-nations has created a new competitive environment, requiring the globalization, or at least semi-globalization of corporate strategy. This need has led many companies to engage with various kinds of sourcing strategies such as outsourcing, offshore outsourcing, near shoring, and on shoring (Barrar & Gervais, 2006).
Oshri, Kotlarsky, & Willocks (2009) posit that sourcing is the process in which work is delegated or contracted to another party which may not be necessarily located near the organization.
Outsourcing is defined as contracting with a third service provider for the management and completion of work in a given period, cost, and level of service (Vahistha & Vashistha, 2006). Offshoring refers to the relocation of organizational activities such as finance and accounting, back office and human resources, to a wholly owned subsidiary or an independent service provider in another country (Burkholder, 2009).
The growth of global outsourcing has been attributed to many factors. To begin with, technological advances in the telecommunications industry and the Internet have shrunk space and time and have enabled the coordination of organizational activities at the global level (Oshri, Kotlarsky, & Willocks, 2009).
Other reasons include the supply of skilled, yet low-cost, labor in countries such as India; the investments in infrastructure; the improved business, economic, and political climate in a number of developing countries. Other reasons why companies engage in global outsourcing include the standardization of Information Technology processes and communication protocols that contribute to the efficiency of inter-organizational activities (Oshri, Kotlarsky, & Willocks, 2009).
The nature of outsourcing is diverse. Some firms now outsource core activities so extensively that they no longer engage in production, as traditionally understood. Inbound and outbound logistics are being extremely outsourced also. Other firms are extensively outsourcing secondary value-chain activities such as information technology, accounting systems, distribution, aspects of human resources management and research and design (Burkholder, 2009).
Despite its increasing importance, many firms do not understand the payback and costs of outsourcing. At the same time, the outsourcing firm is unavoidably bestowing at least part of its fortune to firms that are seeking to maximize their profits (Contractor, Kumar, & Kundu, 2010).
Oshri, Kotlarsky, & Willocks (2009) argue that while outsourcing is often referred to as an alliance, the contracting parties inevitably have conflicted interests. The strategic objective of outsourcing decision-makers should seek to maximize the net benefits of outsourcing relative to the in-house provision of value-chain activities. In practice, this can often be simplified to minimizing the total costs of outsourced good or activity.
However, costs must be viewed comprehensively (Contractor, Kumar, & Kundu, 2010). Costs consist of expenditures for the good itself and the costs associated with governing the outsourcing transaction. This raises a number of fundamental questions relating to governance costs such as how the firm can assess the possible governance expenses that crop up form outsourcing, and under what circumstances can these governance costs be reduced (Vahistha & Vashistha, 2006).
Burkholder (2009), states that investors expect outsourcing to create value for shareholders. The purpose of outsourcing is to lower the purchase price of some input by taking advantage of external supplier’s lower costs, or improve the quality of some input by purchasing some superior capability from an external supplier. In either case, the supplier’s advantage will be one that is not easily imitable.
If the firm could easily imitate the cost or capability advantage outside suppliers, it could produce the activity in-house (Vahistha & Vashistha, 2006).
The acquisition of superior capabilities can also be thought of in cost-saving terms-superior capabilities could only be produced at the same quality within the firm at higher cost. However, it is usual in the business strategy literature to analyze each activity on the value chain in terms of the firm’s ability to lower cost or improve quality, or more broadly, to in some way differentiate their production process (Oshri, Kotlarsky, & Willocks, 2009).
Holliday, Schmidheiny, & Watts (2002) argues that the costs of outsourcing must be compared to the costs of internal production of the activity. Many inputs are inevitable outsourced; therefore, outsourcing is really only a further step on the continuum from purchasing and procurement. There are a number of production cost rationales for outsourcing. The most basic is that internal production of the activity entails production at levels that are too low to be efficient, that is, to achieve minimum efficient scale (Vahistha & Vashistha, 2006).
The most significant economies of scale may relate to secondary scale-value activities such as administrative and information systems, knowledge and learning, access to capital markets and marketing.
Similarly, economies of scope are becoming a rationale for outsourcing. With the advent of flexible manufacturing, the potential for economies of scale has increased dramatically (Contractor, Kumar, & Kundu, 2010). Firms that can utilize the same production equipment for a range of products have a significantly cost advantage compared to smaller firms.
Disadvantages of global outsourcing
However, there exist several disadvantages to adopting outsourcing strategies. Loss of critical skills or overdependence on an outside organization for carrying out important business functions may evolve into significant threats to a company’s well-being (Oshri, Kotlarsky, & Willocks, 2009). Furthermore, security and confidentiality of data can be of great concern to many companies (Contractor, Kumar, & Kundu, 2010).
On these grounds, it is critical that a company manages its sourcing strategy in a way that is not nurturing a future competitor. With regard to outsourcing arrangements, it is important to note that there some risks that are specifically linked to these (Burkholder, 2009). For instance, outsourcing is usually followed by changes in the organization structure. Redundancies and layoffs are commonplace in outsourcing structure (Oshri, Kotlarsky, & Willocks, 2009).
CSR and Global outsourcing
As mentioned earlier, corporate social responsibility (CSR) is a priority item on the agenda of every business organization. As global outsourcing continues to be a buzz word in the business milieu, the stakeholders of this new wave have begun to embrace corporate social responsibility in their undertakings (Keinert, 2008).
In addition to customer requirements, outsourcers are reacting to societal needs, governments regulations and employee expectations. What, then, is the place of corporate social; responsibility in global outsourcing? The next segment of this report handles this question.
Oshri, Kotlarsky, & Willock (2009) posit that With many large companies centralizing and downsizing, their managers do not know what their subcontractors are doing. As such, although global outsourcing may be an appropriate decision by a firm, the decision to outsource should factor in more than the company’s needs, but also those of the communities it will operate with (May, Cheney, & Roper, 2007).
It is possible for an overseas to outsource to a firm in a developing nation. It is commonplace that the rules of business operation are not as demanding as in developed nations. As such, such companies may engage in unethical behaviors that may be a risk to the society the company is operating in.
Just as, the company is eager to adhere to the rules of the game in their in-house company, the same principle should be applied even in the out-house operations. Unethical behavior will taint the reputation of the company regardless of the area of operation. As such, it is increasingly becoming imperative for companies engaged in global outsourcing to embrace corporate social responsibility (CSR) (Vilcox & Mohan, 2007).
Similar to the case of normal in-house operations, outsourcing is beneficial to the stakeholders in different ways. Although the benefits of corporate social responsibility were discussed in the segment of this report about corporate ethics and corporate social responsibility, it would not be redundancy to explore further some benefits that the concept can bring to firms, especially those engaging in global outsourcing (Griseri & Seppala, 2010).
Companies with good community relations can help raise awareness of unforeseen issues or problems, avoid unnecessary conflicts and hostility, and generate a better working atmosphere for staff from outside the area (Urip, 2010).
Benefits of CSR in global outsourcing
Companies engaged in global outsourcing can reap three benefits from CSR. These include brand value and reputation, improvements in human capital, and revenue generation, particularly in large and yet undeveloped markets (Barrar & Gervais, 2006). Companies that flaunt or ignore human rights run a real, demonstrable risk of seeing their share price drop as a direct result.
Whereas community initiatives have a weak, yet positive, impact on shareholder value, bad community management can destroy reputation and seriously endanger financial performance (Holliday, Schmidheiny, & Watts, 2002).
A commitment to social responsibility can build the competence and vitality of a company and guide it along a course of knowledge and innovation-based success. Positive links between social and financial performance are emerging, particularly in light of the growing relevance of intangible assets, such as reputation, brands and knowledge networks (Holliday, Schmidheiny, & Watts, 2002).
The case of great giants in the business milieu falling due to a mishap in their CSR or global outsourcing is a lesson for contemporary managers. As such, there are a number of recommendations that modern leaders in the business milieu can take home from the discussions presented in this report on corporate ethics, corporate social responsibility (CSR), and global outsourcing. These are:
- They should not overlook the payback of corporate ethics. For today’s business leaders and managers, leading and administrating ethically entails managing with honesty.
- Honesty runs throughout an organization. It models, influences and maintains the values, tone, climate, or culture of the organization; communication among all its members; and commitment, imagination, and realism of everyone in the organization..
- Business leaders should be vigilant to embrace CSR as it leads to development and acceleration of microeconomic sustainable growth through use of good governance and best practices. This results to a market atmosphere favorable for both local and foreign investors.
- To the local community and society, CSR changes the habits of society and improves quality of life. Through capacity building, CSR creates employment and wealth. On the side of the corporations, CSR provides growth, profit, image, and competitive edge.
- Concerning global outsourcing and CSR, companies should first be aware of the costs in the outsourcing process.
- Global outsourcing should be aimed at reducing costs, and achieving high quality product at the minimal costs.
- Companies engaging in global outsourcing should embrace even be more vigilant to embrace CSR as they involve out-house operations
- CSR is important in global outsourcing as it leads to brand value and reputation, improvements in human capital, and revenue generation.
In conclusion, as the world of business embraces for the dynamic nature of this milieu especially in the 21st century, there is a need for firms to not only consider the legal requirement in their operations, but also put the wider society into perspective.
This is true in spite of whether a company is engaged in outsourcing or not. In fact, companies engaged in global outsourcing should be more enthusiastic in CSR as they are operating in communities away from their normal station. As such, they can easily engage in unethical conducts, and yet go unpunished.
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