Ethical Outsourcing

People often ask what the “COP” after my name means. It has nothing to do with law enforcement. I’m a Certified Outsourcing Professional in Governance (COP-GOV), a designation that reflects decades of hard work, continuous education, and significant accomplishments in my field, which while prestigious can be misconstrued as a bad thing. After all, many politicians and pundits incorrectly assume that the term “outsourcing” means sending “US jobs” overseas. For those not living in America, it’s often perceived as sending [insert country here] jobs to another country. In reality it doesn’t mean that at all, but if you don’t work in a procurement-related profession you cannot be expected to know that.

So, what is outsourcing really, and why should you care? Outsourcing simply means buying products or services that we cannot or will not make ourselves from somebody else. The supplier we contract with could be located anywhere, across the street or halfway around the world. Since nobody can do everything, businesses and individuals buy stuff all the time, things like office supplies, computers, software, smartphones, building maintenance services, vehicles, tools, equipment, cafeteria services, raw materials, precious metals, and the like.

Outsourcing is nothing new. While it became a popular business model in the 1980s, it’s been going on for centuries. In fact, the first such agreement was signed way back in April of 1860, outsourcing mail service to Pony Express, a supplier who was able to leverage a succession of horse riders to carry letters from Missouri to California, covering 1,966 miles in a mere ten days. While that relay service is synonymous with the “Old West” of the United States, it only lasted 18 months until a transcontinental telegraph line was able to complete that communication link faster, cheaper, and more securely. Disruptive technology is nothing new either, obviously...

Back on topic, you can think of outsourcing this way: If you’re an awesome home cook perhaps you never go out to dinner, but most of us do from time to time. Every time you go to a restaurant, you’re outsourcing… well, sorta. Technically you’re not using the strict definition of the word, but it’s a useful analogy that everyone can relate to nonetheless.

You see, when you order your dinner, you are buying a “statement of work” that achieves a desired “service level,” such as a chateaubriand (fillet of tenderloin beef for those of you who aren’t foodies) cooked medium rare. If your steak is prepared properly, you enjoy it and likely provide a nice tip to your server, whereas if it doesn’t meet your expectations, you send it back and have the restaurant try again until they get it exactly right. In this fashion you have a high level of certainty that you’ll get exactly what you’re paying for and enjoy your night out.

If, on the other hand, you decide to prepare a meal yourself or hire a private chef to cook at your home and accidentally burn your steak, you not only have to buy another steak but also recook it or pay the chef to prepare it again. That shifts the risk of doing everything correctly to you. That risk becomes exponentially higher if you are not an accomplished chef or trying out new foods that you have never prepared before.

Analogy aside, what exactly is outsourcing? It is defined as, “A long-term, results-oriented business relationship with a specialized third-party services provider.” Clearly going out to dinner doesn’t count as “long-term” in most instances, at least one would hope not, but the restaurant is a specialized third-party provider who creates a menu and hires employees with unique expertise that you and I likely do not have such as chefs, sou-chefs, sommeliers, waiters, and such, who deliver products and services that we want to buy.

As you can see, the beauty of outsourcing done right is that it is a value-adding transaction that benefits both parties. In the restaurant example we gain access to exotic foods that we may not be able to pronounce let alone cook, expanding our palates and enjoyment of the world’s culinary delights. And, we get to enjoy a nice meal without having to do the shopping or clean the dishes. The restaurant, on the other side of the equation, makes enough money to create jobs and help their employees earn a decent living. In other words, it’s a win-win.

“The real power of outsourcing going forward is going to be that it increases an organization’s core capacity for change and growth. The business challenges over the next decade are going to be very different than anything we’ve seen so far and the companies that weave a powerful network of global partners through outsourcing will be the winners.” – Michael Corbett

When folks rail against outsourcing more often than not it’s actually “offshoring” that they are opposed to. Offshoring means acquiring work from another country, one of many delivery models that include onsite, onshore, nearshore, rural sourcing, and the like.

More important than terminology, however, we need to take a step back and ask ourselves, “What’s wrong with this picture?” Is hiring somebody in another country to provide products or services for us inherently a bad thing? Unless we’re at war with them or some other geopolitical factor such as conflict minerals overrides our decision, likely not. After all, it’s a bit arrogant to assume that we’re entitled to certain jobs simply because we were born in whatever country we happen to live in and work at whatever enterprise we are employed by irrespective of whether or not others can do the work better, faster, cheaper, or more innovatively.

Obviously, this is a complex dynamic, as the definition of “better” or “more innovatively” is often in the eye of the beholder. Cost depends on process innovation, automation, labor arbitrage, regulatory burdens, tax rates, and a host of other factors. And, speed depends on supply chain resiliency, among other things. So, the real answer is “it depends.”

Let’s examine this a little deeper… If you’re a company located somewhere in the developed world with access to cutting edge technology, a robust economy, and high quality of life that goes along with such things, establishing a supply chain in an underdeveloped foreign country can mean helping to establish and grow an infrastructure that leads to clean water, education, and opportunities for folks who could never expect a better life on their own.

Think about how information technology and business process outsourcing has helped Vietnam, the Philippines, Ireland, and India, to name a few... What’s so bad about that? In most instances there are plenty of other activities that can or must be done in house by your employees on your premises, so in growing your business you can help provide jobs for everyone who is willing to work, not just in your home country but all around the world (assuming you’re big enough, of course). As the old saying goes, high water floats all boats. But, outsourcing must be done in an ethical and appropriate manner.

Once upon a time outsourcing decisions may have been made amongst key executives on the golf course, but that’s rarely if ever the case nowadays. Business impact is simply too great to take such things lightly. In my experience strategic decisions that determine what work is performed in-house versus purchased externally are made through a robust process. A series of gates such as idea, assessment, implementation, transition, and management are put in place and factors considered include things like core/context analysis, talent pipeline and future knowledge needs, architectural roadmaps, security and interoperability requirements, export controls and protection of proprietary information, TCO (total cost of ownership) analysis, RIO (risks, issues, and opportunities) assessment, etc. Clearly deep thought and diligence goes into such decisions.

It all starts with the work. For example, if you are looking at potentially outsourcing your IT infrastructure a good way to evaluate the work is by using the ITIL framework. ITIL stands for IT Infrastructure Library, and is the industry standard service management framework that codifies best practices for delivering IT services. Leveraging an industry standard taxonomy for whatever you want to buy helps you determine what to do yourself versus what to purchase externally as few things are 100% outsourced or 100% insourced. It further improves clarity of expectations between buyer and supplier, setting you up for success in contracting once you get to that point in the process.

When it comes to IT infrastructure, service strategy and certain service design tasks are virtually always retained since that is where you set policy, architectural direction (such as the speed of public cloud adoption), business requirements, and the like, whereas tactical service operations work is almost always outsourced. Some aspects of service design and virtually all service transition tasks could go either way depending on who owns the assets, impact to your talent pipeline and employee development, and a host of other factors, but more often than not that work goes to a service provider too. They need to own a large enough scope of the work that they can make investments on your behalf, improve efficiency, and be held accountable for results.

“The need for access to talent will lead companies to think about outsourcing as a means of accelerating innovation and gaining competitive advantage. This will lead to a transformation of the outsourcing profession where innovation will be valued much higher than pure cost savings.” – Jagdish Dalal

So, how does that translate into real life? Take Nike for example. A paragon of sustainable manufacturing headquartered in Beaverton, Oregon, their footwear components were supplied by 112 factories spread across 12 countries around the world in 2019, with no single location accounting for more than 9% of their branded products. They outsourced 93% of their work from sustainably run factories that year, with a goal of achieving 100% not long afterward. In rationalizing their supply chain, which once encompassed a mindboggling 780 factories employing over a million people worldwide, they optimized the number of locations that mandated excessive overtime on their workers to less than 2.5%, simultaneously improving both working conditions and supply chain effectiveness.

To keep tabs on their suppliers Nike rated everyone in their supply chain using a Sourcing & Manufacturing Sustainability Index (SMSI) that evaluated labor conditions, health and safety, energy usage, carbon footprint, lean manufacturing capabilities, and environmental sustainability. According to their code of conduct, Nike only acquired products from factories that were able achieve a minimum bronze standard SMSI on that scale which ran from red to yellow, bronze, silver, and gold (from worst to best along the continuum). This means, among other things, that labor was voluntary, nondiscriminatory, and that subcontractor employees were all at least sixteen years of age, compensation was paid timely, facilities were safe and healthy, and the environmental impact of operations was minimized.

During the pandemic they invested in greater regional diversity, deployed a multi-node network, that included developing regional service centers near Los Angeles to serve the west, Pennsylvania to serve the east, and Texas to serve the southern regions of America and in doing so became nimbler to adapt to changing needs. The company expanded its European distribution as well, developing regional service centers in Madrid and Belgium. They also invested in people, processes, automation, and sustainability.

So, the real question we should be asking is how can we make our businesses grow while doing good things like Nike has demonstrated? No enterprise is perfect, but we know that we can make a lot of money for ourselves and our stakeholders in a morally and ethically appropriate way when we focus on doing the right things. So, the real question about outsourcing really should be how do we define “doing good” in the global context?

Outsourcing isn’t evil as long as it’s done in an ethical manner. It is vital to understand that businesses are not faceless conglomerates; they are collections of people who make personal decisions and take individual actions at all levels throughout the organization on any given day. Added together these individual choices drive the way in which the business performs its work, manages its employee base, governs its supply chain, and interacts with the larger community.

That means that this is personal. It’s not somebody at the top’s problem. It’s not our boss’s problem. It’s not our coworker’s problem. It is our problem, yours and mine… And our solution. Every day the decisions we make, however big or small, impact the operations of our business and thereby the larger community as a whole.

At minimum this means being certain to treat one’s suppliers, customers, and employees right. This is not only the ethical thing to do but also a strategy that can pay off over the long run. Studies consistently demonstrate that consumers would rather spend their hard-earned money at establishments that act in a socially responsible way as opposed to buying from ones that do not. This includes companies that won’t work with foreign suppliers who violate child labor laws (as Nike protects against with their SMSI evaluations), those that embrace “green” manufacturing, those that acquire Fair Trade certifications, and those that only source sustainable products or buy local ingredients, among other factors... In fact, putting their money where their morals are, many folks are willing to pay a premium for products or services that are produced in an ethical and responsible way.

By taking the larger view in our decision-making we not only do the right things we also grow our businesses in the process. And we can look at ourselves in the mirror every morning without flinching at what we see... That’s all goodness.

Don’t let concepts of right and wrong get muddled through ignorance, politics, or short-term thinking. Outsourcing is a tool, and like any other it can be used for good and evil. Hammers were designed to pound nails, a vital part of building construction, yet they could just as easily be used to break heads. Drills, also commonly used in fabrication processes, are designed to make holes in things. Sure, they could be used to pound nails in a pinch, but that’s pretty hard on the drill and unsustainable over the long run. As you can see, it’s not the tool but rather how we use it that matters.

“If there is a thing that we cannot do more efficiently, cheaper or better than a competition, there is no point in doing it further – we should hire the one who does it better than we do.” – Henry Ford

So, outsourcing can be good or bad. It all depends on how we do it. When decisions are made thoughtfully and ethically, outsourcing can and should be a good thing.

No one can do everything themselves. The typical manufacturing organization buys 70% to 80% of its finished product through a supply chain of specialty suppliers. We would not have access to needed services, products, and technology that make a material, positive impact in our lives if companies did not practice ethical outsourcing.

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