The ethics and morals of US outsourcing is multifaceted with political, social and economic divisions which challenge its place in the U.S. economy. Many ask if outsourcing is a way for corporations to earn bigger profits while others state it is a necessity in the global economy for survival. Some question if outsourcing eliminates or creates jobs. Economist challenge whether outsourcing will affect the infrastructure of our society and what effect it will have on the global community. From an ethical perspective, some U.S. companies are engaged in outsourcing as “Friedman Egoist” concerned only about themselves and profits, but many companies use outsourcing for utilitarian competitive survival reasons. There are many contrasting views on outsourcing rightful place in the U.S. economy and the global marketplace. Explanation is necessary to understand what outsourcing is, its advantages and disadvantages, the economic impact of outsourcing and finally whether corporations should be morally engaged in its practice. My intention is to present the facts about outsourcing and draw the conclusion that outsourcing at its current pace is ethically wrong because it will hurt future generations of the U.S. economy.
Outsourcing is contracting overseas companies to do specific functions which fit a certain criteria. Mostly, the functions being outsourced are considered non-core to the business and the criteria might be where the activity is not central to generating profits, the job is routine, or the task needed is only temporary (3). Some of the most common forms are information technology outsourcing (ITO) and business process outsourcing (BPO). Business process outsourcing involves call centers, human resources, accounting and tax preparations, and claims processing outsourcing. Many of these outsourcing agreements involve contracts worth millions of dollars (5). The process of outsourcing involves the following stages: (A) strategic thinking involving outsourcing role, (B) evaluation of which outsourcing projects, (C) contract development and (D) governance of the working relationship (3). In most cases, success depends on executive level support, good communication and management of service providers. There is strong public opinion regarding outsourcing. Many feel that outsourcing has a bad effect on job disruption and security. However, supporters claim outsourcing will bring down prices providing economic benefits to all. It is necessary to review both the advantages and disadvantages of outsourcing to better gauge its ethical practice.
Advocates of outsourcing state it can be a strategic tool for making a business more profitable, open up opportunities of growth and financial stability and will lead to more Americans holding jobs at higher levels. Over 70% of U.S. executive interviewed said their companies presently outsourced one or more business processes to external service providers (4). A Gartner Group interview showed 84% of large company CEO’s are satisfied with their outsourcing experience (4). Many believe market perception has shifted from outsourcing as a way for companies to meet short term financial objectives to a technique for strong companies to improve competitive position where outsourcing is essential for prosperity in the 21st Century.
Considering the many factors that motivate companies to outsource, one of the most significant is cost savings. Many times, the reduced costs increase profits and the lower prices are passed to the consumer. Another advantage of outsourcing is that people and infrastructure can be focused on the core business. Cost restructuring is yet another advantage where there are changes to the balance of fixed costs to variable costs making variable costs more predictable. This ratio change can improve a company’s credit rating. When a company uses the right service level agreement, many companies claim quality is improved. Some of the factors that improve quality consist of outsourcers having access to wider experience and a larger talent pool. A key advantage to outsourcing might be reduced time to market where foreign suppliers are capable of accelerated production through specialization (13). Tax advantages are yet another advantage of outsourcing where many companies offer tax breaks for moving manufacturing operations to their country. Finally, many executives claim that when outsourcing routine projects, they have more leisure time to be with their families and loved ones (2).
Outsourcing can have a negative influence on productivity where on the surface it appears productivity is improved simply because workers are paid less. This is viewed as “non-real productivity” where production is maintained with reduced costs but there is no resource development for improved technology (12). “Real Productivity” would be increases in productivity due to better tools or methods which would enable an employee to do more work (12). The result of choosing non real over real productivity is that a company can fall behind advances in technology and can become obsolete. Also tied to productivity is that staff turnover is higher with many overseas outsourcers. This high turnover translates to a lack of exponential increases in employee knowledge which could prevent consistency in quality and productivity. To alleviate some of the potential risks in outsourcing, it is advised to use the Freedman model having the outsourcing as an important stakeholder with specific management guidelines and contracts in place to consistently monitor security, quality and production.
Under the Friedman model where a company’s primary objectives are to sell products and make profit for the shareholders, outsourcing could play a vital role through cost reductions. But the benefits of outsourcing may be outweighed by not supporting the U.S. economy and can have a negative economic impact on future generations. Many Americans who are in poverty and willing to do minimally skilled jobs find it harder to find employment because of outsourcing. Poverty reduces consumer spending and tax revenues. There is data that provides evidence that many lower income jobs are lost forever (2). A study of manufacturing jobs by the University of California-Santa Cruz found that in a period of 20 years, in the labor intensive industries such as leather, textiles, footwear and clothing, about one third displaced workers could not find reemployment within a three year period, and even those people who did, about half of them experienced wage cuts by at least 15%. (8). Many computer, technology and accounting middle income jobs are now being outsourced. These areas of outsourcing are not leaving enough jobs for U.S. workers. A person without a job can’t buy a home or spend money and less buying can lead to less production of goods which ultimately leads to more unemployment (8). One other negative effect of outsourcing is the loss of income by local, state and federal governments. The reduction of jobs means less payroll taxes and less contributions to Social Security and Medicare. The costs to the government includes unemployment benefits and the unemployed lower spending power results in reduced sales and other tax revenue.
Outsourcing is losing skilled labor positions in the United States and also the monetary gains with this labor. Manufacturing jobs create national wealth where service jobs absorb wealth and outsourcing has reduced manufacturing jobs but has increased service jobs. The loss of manufacturing jobs has reduced the industrial infrastructure with the closing down of American factories and then exporting the capital to other countries. This loss of capital is then not available for expanding the U.S. economy. According to research data, more than 400,000 U.S. jobs have moved abroad and the total is estimated to hit 3.3 million by 2015 (9).
Outsourcing is rapidly eroding the U.S. status of being a superpower. Beginning in 2002, America started running trade deficits in advanced technology products with Asia, Mexico and Ireland. Since these countries are not leaders in advanced technology, the deficits obviously stem from U.S. offshore manufacturing (11). One could say that the U.S. is giving away its technology. This technology is rapidly being captured, while U.S. firms reduce themselves to a “brand name with a sales force” (11).
There are many ethical questions that face U.S. corporations that use outsourcing. For example, international competition has forced many companies to take drastic measures just to survive which includes cost cutting via outsourcing. One can argue that it is more ethical to do whatever is necessary to save U.S. jobs and profits, rather than go out of business. From a utilitarian perspective which is doing the “greatest good for the greatest number” (14), taking measures that can protect existing employees from ceased operations is ethical. But Kantian ethics would argue that the employees are merely a means to an end and are not treated as the end, meaning the employees are simply a means for the corporation to make profit. This view can be supported by a contradiction in many company hand books where they claim to value their employees, yet outsourcing contradicts these statements and can destroy company credibility.
Consumers typically get the most benefits from cost savings and a greater variety of goods that international outsourcing affords, so outsourcing is doing something positive for the masses. One can charge that this makes it ethical. From a utilitarian perspective, it does. One could also argue for the foreign outsourcing employees. Considering the abundance of wealth in the U.S., you can argue it is good to provide jobs and economic infrastructure for these low income foreign workers instead of financial aid. Some may contend it is virtuous and just to spread the abundant wealth America posses to countries in need. Others will argue that laws are needed prevent these actions. Outsourcing builds foreign skills and infrastructure while reducing the same in the U.S. and many want laws to protect the American manufacturing base for the purposes of national and economic security (6). There are several very profitable U.S. companies, with Wal Mart as an example, that use outsourcing to enhance their margins for the sole purpose of making more money. Some challenge if this is ethical. This is perfectly acceptable according to the Milton Friedman business model. Friedman believed that the responsibility of business is to: “conduct the business in accordance with their desires (employers), which generally will be to make as much money as possible while conforming to the basic rules of the society” (14). Many question if everyone from abroad prospers from outsourcing. Not all people in other countries economically benefit from outsourced jobs, and some companies aren’t dedicated to providing humane working conditions. Outsourced work may be performed by children, or inhumane working conditions. Abuses of foreign employees might not benefit U.S. trade or political relationships and some would challenge the morality of enabling foreign companies that treat their employees inhumanly (10). The argument for “humane” treatment of employees gets complicated when dealing with foreign cultures where ethical relativism may dictate that employee treatment is humane by the foreign country’s culture. Cultural differences must be understood when dealing with this issue.
Outsourcing can play a role in our educational system. The long term effects have not been responsibly studied. Some educators ask if students should continue studies in computer programming or software development with the knowledge that many of these jobs might be outsourced. Another middle income vocation experiencing changes is the field of accounting. Lou Dobbs reported recently on CNN, “tax experts estimate between 150,000 and 200,000 American tax returns were prepared in India this year” (7). Our colleges and universities may find a drop in enrollments by students in these fields based on a reduction of job opportunities because of outsourcing. Other middle income outsourced jobs include architecture, engineering design, news reporting, stock analysis and medical and legal services. Many of these middle income jobs pay a bulk of tax revenues to fund U.S. education, health, infrastructure and Social Security. The ethical dichotomy from the utilitarian perspective could be that outsourcing is efficient and reduces costs which benefits the masses, but also reduces job opportunities which could hurt the masses through unemployment, lower tax revenues and an eroded manufacturing infrastructure.
Outsourcing is a very difficult issue with advantages and disadvantages, but will probably remain and play a vital role in business and our economy. Virtually no one, on any side of the argument concedes that outsourcing can be eliminated completely (9). There are those who feel that corporations are evading taxes and depriving the government of needed money and suggest corporations should be taxed for outsourcing, and rewarded for keeping jobs in the United States. Others feel the temporary loss of jobs will be followed by greater economic growth in the U.S. and could ultimately be worth the cost of job displacement.
In conclusion, despite the fact that outsourcing benefits the masses through lower prices and helps corporations with increased profits, its use at the current level will hurt the U.S. economy and this damage will offset outsourcing advantages. The updated ethical view of utilitarianism states “the goal is to maximize the utility of all persons affected by an action or policy is to maximize the utility of the aggregate group” (14). This view’s application to outsourcing shows that U.S. job losses which increase poverty, decrease government tax receipts and erode the manufacturing infrastructure will not “maximize the utility of all persons.” Kantian ethics state that persons should be treated as ends and never purely as means to ends of others. Considering that outsourcing is causing unemployment at lower and middle income brackets, reduced prices are meaningless for the unemployed who have no spending power so the end users are disadvantaged by outsourcing. Also, the working conditions for many of these outsourced employees is inhumane with very few rights to a safe work environment, so these workers are treated as means to an end which is a lower cost of goods. This action goes against Kantian ethics.
Laws surrounding outsourcing’s current use must change. Supporters of the Friedman business model will argue that by virtue, it is morally appropriate and just to use outsourcing for maximum profits respecting management’s fiduciary relationship with stockholders. They argue that outsourcing is necessary for survival. We must change the laws which will make outsourcing appear less attractive. The U.S. should increase taxes for all goods imported through outsourcing. Also, taxes should be significantly reduced for manufacturing corporate income tax and there should be an end to the double-taxation of foreign derived revenue (taxed once in the nation where the revenue was raised, and once from the U.S.) (14). Proposed tax changes will alleviate corporate outsourcing and make the U.S. more attractive to foreign companies. The time for Laissez-Faire policies, or doctrines opposing government regulation, are a thing of the past. The U.S. will need to adopt Modified Market capitalism, which controls the human desire for riches and greed through more regulation than the “let alone” philosophy of Laissez-Fair (15). With these laws in place, in addition to restrictions for labor union wages, the U.S. will be able to manufacture products at competitive costs domestically. This cost benefit will appease Friedman model activist to choose U.S. manufactured goods, save U.S. jobs, increase government tax revenues and rebuild the manufacturing infrastructure.
The short term effects from higher taxation for outsourced products could be higher prices and inflation. However, one could induce that with employment protections in place and lower unemployment, inflationary prices could be afforded by working individuals. The ethical dichotomy of what benefits the masses between lower prices with higher unemployment verses inflationary prices with lower unemployment remains. I contend that the current use of outsourcing is creating poverty and eroding our middle class, breaching our national security and the right to work. From a utilitarian perspective and the good of the majority, with all things taken into consideration, I feel that the current use of outsourcing is not ethical if it will ultimately destroy the United States economy. Reducing outsourcing grip on U.S. commerce is the right thing to do morally and ethically to protect future generations of American society.
