Introduction
For years, the company has relied on itself for all business operations, hiring in-house specialists. However, as it started to land various high-profile projects, the CEO has realized that the existing internal resources might not be sufficient for completion. For this reason, the company is currently considering contracting but still has some reservations regarding the cost-benefit analysis and the ethical side of things. This report discusses the ethical issues that may arise in the process of contracting as well as the potential benefits that may outweigh the hassle. The paper stresses the importance of the communication process in building rapport and clarifies risks and responsibilities in the contractor–customer relationship.
The Ethical Issues in Contracting
When it comes to hiring contractors, a dilemma may arise as to whether to operate ethically or push one’s agenda for a bigger profit. Unfortunately, too many a firm choose the latter and prefer to pursue their commercial interests with little to no regard for ethics. Adnan, Hashim, Yusuwan, and Ahmad point out the detrimental impact of unethical practices, especially concerning the construction and civil engineering industries (1). Among the consequences, the scholar’s name wasted tender expenses, inadequately high project costs, tendering uncertainty, blackmail, criminal charges, fines, blacklisting, and damage to reputation. In a greater scheme of things, Adnan et al. highlight waste of public resources missed opportunities, and a less transparent business environment on the whole (1). While between 2005 and 2013, the industrial accident rate declined by 35%, the construction industry, notorious for poor contracting ethics, saw a 5.6% increase. It is safe to conclude that malpractices not only ruin employee morale but also directly compromise the safety of working sites.
Adnan et al. stress the fact that both parties can be unethical: it is not only clients or contractors who refuse to navigate the business environment in an ethical manner (1). The scholars single out several types of unethical practices that, in their paper, characterize the construction industry but may apply to many sectors. Unfair conduct takes many forms that include but are not limited to unfair competition, unfair labor practices (e.g. promotion or dismissal), and unfair business practices (1). One party may put the other one in a position where the latter will have little to no ability to negotiate the legal terms of the contract (pro forma “take it or leave it” contracts).
There may be inadequate disclosure of relevant information from either side that may especially hurt the weaker party that will not be aware of the terms on which it is entering the transaction. It is not unusual for the dominant party to muddle the nature of a long-term relationship so that in the future, it can renegotiate the terms to favor its interests. Lastly, there may be no market-sensitive and straightforward ways to resolve conflicts, or either of the parties may be reluctant to accept any interventions. In other words, contracting problems may stem from dishonesty and abuse of power resulting in unclear terms of the contract and/ or their manipulation.
If the company is serious about contracting, it should know how a conflict of interest can manifest itself in this context. Adnan, Hashim, Yusuwan, and Ahmad define a conflict of interests as a situation in which a person in a position of trust is aware of having to compete for professional or personal interests that interferes with his or her but proceeds regardless. In other words, conflict of interest is a “secret understanding” that often serves fraudulent ends (1). When it comes to the contract, an example could be a manager hiring a contractor who is their relative. In this case, the manager may be unable to make fair judgments about the quality of work or negotiate terms and conditions. On the one hand, as a manager, they would have to prioritize the company’s interests, but as a family member, they would be more inclined to unfairly favor the contractor.
Adnan et al. argue that when unaddressed, conflicts of interests can lead to unfair competition, a negative image of a company of an industry on the whole, and decreased employee performance due to moral dissatisfaction (1). For this reason, there is a need to solve collusive agreements, though it can be quite challenging. There are external and internal factors that affect the decision-making process. The external factors mainly concern the legal issues and are identified with more ease than internal factors that rather relate to the issues of morality and conscience.
The Benefits of Contracting
Outsourcing, or contracting out, is becoming ever more normalized around the world. For example, the United States alone contracts out at least 300,000 jobs annually (2). The IT sector is leading the trend: half of the technology executives admit to outsourcing application and software maintenance, and 40% use external data centers (2). A third (33%) of small businesses outsource, while at medium and big companies, the outsourcing rate reaches 66% (2). The situation would not have been so had it not been for the multiple benefits that such a business decision may offer. First and foremost, outsourcing allows a company to focus more on its core business activities (3). Sometimes, it is better to mobilize and develop external resources to become better in a specialized field than to strive for excellence in all areas and cover all needs in-house. For example, a company developing digital products may be better off outsourcing accounting. Contracting an external specialist will allow the staff to concentrate on what they are best at doing and ignore distractions.
The second potential benefit is cost reduction due to access to a cheaper and more flexible workforce (3). There is a trend toward hiring experts from developing countries, such as India or the Philippines that are now the two top sources of foreign contractors. The customer companies are well aware that workers may settle for lower remuneration, and the costs will be further reduced because there will be no need for paying health benefits or contributing to retirement funds. Ritchie, an ISO expert, reports that companies that choose to outsource on average see a 15% reduction in business expenses (4). Building on the previous example, it is readily imaginable how the company would only need accounting services a few times a year. Indeed, many businesses need certain services from time to time, which makes hiring someone for a full-time position would be redundant. As a result, companies enjoy a variation in their cost structures as they transform some fixed costs into a variable.
Another benefit is improved access to more effective technology that cannot be developed or maintained in-house. According to Liu, in 2018, the annual global revenue of the information technology outsourcing market amounted to 62 billion U.S. dollars (5). Some segments of the industry saw faster growth and a more pronounced surge in demand. Liu reports that as a business has grown more data-driven in recent years, data analytics has become an on-demand service for many companies (5). Cloud computing services and software as a service are also increasing in popularity (5). Companies rush to take advantage of new technologies and choose to outsource to alleviate unwanted costs.
Lastly, outsourcing helps businesses to connect with experts they would otherwise not be able to find in instant proximity.. If previously, a company had to go through the pool of candidates in its area, today, it can enjoy what the global market has to offer. Cappelli reports that in the United States alone, companies spend $20 billion on human resources with the majority of these expenses going toward hiring (6). On average, filling in one position costs around $6,000 and may take up to 52 days. Moreover, even hiring itself can be outsourced to subcontractors, which is what about 40% of US companies are doing now (6). In other words, global mobility and transition into the online have made hiring easier.
The Importance of the Communication Process in the Contractor–Customer Relationship
Communication is key to building a successful business and a predictor of quality results. Four out of five employees and contractors say that communication improves their performance (8). The opposite is also true: it has been found that an average employee spends 2.5 hours every day searching for information, which on a larger scale turns into business days lost to search tasks. Such time waste is often a result of the so-called information silos when important information becomes lost and creates a hurdle in business processes. 39% of workers wish there was more collaboration between people in their organization. Communication issues become more pronounced when it comes to contracting when teams have to build rapport from scratch and may have not separated not only by physical but also time and cultural differences.
Recent literature suggests that communication enhances trust between project management and subcontractors, reduces information risks, and dissolves misunderstanding (7). The question arises as to how a company should organize the communication process to yield the best results. Kraljević, Lacković, and Šojo share the results of their survey of multiple companies and define best practices in outsourcing communication. Among asynchronous methods of communication, the respondents single out routine project meetings and the delivery of milestone reports; email is the preferred way of sharing this kind of information (7). Aside from that, respondents put a high value on arbitration of issues such as non-performance penalties and addressing cultural gaps that may be interfering with task completion. As for synchronous communication, the majority of respondents name face-to-face meetings as the preferred mode, which, of course, is not as feasible amidst the COVID-19 outbreak (7). Face-to-face meetings are followed by video and audio conferences, during which respondents are more inclined to provide top management reviews and train cadres. What is clear is that there is no one-size-fits-all strategy: all communication solutions should be tailored to a company’s unique profile.
The Risks and Responsibilities in the Contractor–Customer Relationship
For all its advantages, outsourcing has its fair share of risks that require a mitigation strategy. First and foremost, companies are wary of broken promises because they essentially enter a partnership with an unknown entity (2). The freedom of choice due to the access to the global market only means more variables and more contractors to check before taking communication to the next level. Another risk is the client’s lack of domain experience and, hence, the inability to adequately assess the quality of goods or services (2). Unforeseen expenses are another inconvenience that may occur during the contractor-customer relationship, especially if the customer navigates the outsourcing market for the first time. Lastly, miscommunication exacerbated by time zone differences, language barriers, and the absence of face-to-face meetings may become a major hurdle.
There is an opinion that the risks stem not from random aberrations and mistakes but businesses’ fundamental misunderstanding of the very nature of outsourcing. The majority of companies do not have a plan B if their current subcontractor fails to deliver or breaches the contract terms (2). They do not entertain different scenarios, which makes them less resilient against force-majeure events and unreliable suppliers. Therefore, for a company that turns to hire contractors for the first time, it is crucial to think every step through and carry out thorough research. Today, it is possible to find a contractor’s former clients as well as locate online reviews to have a more or less full picture of its reputation and reliability. Financial risks can be alleviated through the addition of multiple clauses to the contract that protect both companies.
The responsibilities of the two parties are defined by the contract. It is the client’s responsibility to understand the organization’s needs and select subcontracted vendors that would fit the business strategy. The client may want to hire an outsourcing manager who will be a medium between organizational stakeholders and subcontracted personnel. From the client’s side, there is a need for clear goals, actionable, and deliverables. It is their responsibility to oversee the process, set milestones, and provide feedback. As mentioned earlier, the contract should not give inadequate leverage to one party at the expense of the other; nor should it leave the loopholes for reinventing the nature of the partnership. The vendor needs to comply with the proposed timelines and uphold the level of quality requested by the client. The vendor has the right to fair remuneration as per the contract terms.
Conclusion
Today, outsourcing is one of the defining trends of the business environment. Depending on the industry, up to two-thirds of companies trust contractors with services. The benefits of outsourcing include reduced costs, the ability to focus on core activities, and gain access to effective technology and highly qualified cadres that would otherwise be out of touch. However, one should be aware of potential risks such as unreliability, contract breaches, hidden or unexpected costs, and miscommunication. There are also ethical issues that may arise in the process of building a client-vendor relationship. Outsourcing is not immune to unfair labor practices, abuse of power, and conflict of interests. Communication is key to resolving disputes and yielding consistently good outcomes. Regardless of the preferred form of communication, which should be tailored to a company’s profile, it enhances trust, reduces information risks, and dissolves misunderstanding.
References
- Hamimah Adnan, Norfashiha Hashim, Norazian Mohd Yusuwan, and Norizan Ahmad. 2011. Ethical Issues in the Construction Industry: Contractor’s Perspective. Web.
- Irina Salanta, Dan C. Lungescu, and Veronica M. Pampa. 2011. Outsourcing: The Benefits and the Risks. Web.
- Mary Ritchie. 2015. Outsourcing’s Booming Business. Web.
- G. Dautovic. 2020. 15 Outsourcing Statistics You Must Know in 2022. Web.
- Shanhong Liu. 2019. IT Outsourcing Industry – Statistics & Facts. Web.
- Peter Cappelli. 2019. Your Approach to Hiring Is All Wrong. Web.
- Drago Kraljević, Krešimir Lacković, and Robert Šojo. 2020. The Information – Communication Process in a Business with Outsourcing for the Maintenance of a Complex Technical System. Web.
- Smarp. 2020. 11 Reasons Why Business Communication is Critical to Your Company’s Success. Web.