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Ethics of Outsourcing

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Outsourcing | Is It Ethical?

A case set out by an American MBA student.

 “What do you say to someone in this country who has lost his job to someone overseas who’s being paid a fraction of what that job paid here in the United States?” George W Bush

Outsourcing has become a very hot and controversial issue in the United States in recent years. As the global economy and technology has continued to grow and become more advanced, so has the outsourcing, often called offshoring, of American jobs to foreign countries around the world. As Senator Kerry pointed out in the most recent Presidential election, “the American economy has lost 1.6 million jobs under Bush’s watch.” 1 This is largely due to many American jobs moving to foreign countries. The outsourcing of jobs overseas has not been limited to one sector of the economy or one profession. Almost every profession in the United States has felt some effect of the outsourcing that is taking place. As a result, there have been some very heated debates, among politicians, economist, and business people, regarding this issue. Jim Stroup, an outsourcing consultant based in San Diego, CA, said the following: “outsourcing has become an essential, inevitable part of doing business in the modern, global commercial environment.”  Stroup continues by calling the resistance to outsource “a form of protectionism that causes long-term harm due to short-term panic over an apparent and transient loss or slippage of jobs and wages.” 2 There are many who share Stroup’s opinion: outsourcing is good for the American economy. There are those who strongly oppose the following statement. They will argue that “these actions (by greedy companies that disrupt the economic futures of many people) are purely unethical.” The phenomenon of outsourcing has reached to all sectors of the American economy and will continue to be an issue for many years to come.

The most notable form or example of outsourcing American jobs has been within the manufacturing sector of the economy. The loss of jobs in this area has been very well publicized, and the ethical issues involved are clearly evident. The ethical concerns with outsourced manufacturing range anywhere from human rights violations to standard of living questions. However, outsourcing has effected much more than just manufacturing in this society.

The Accounting Industry

The accounting profession has felt the effects of the outsourcing going on by firms within this country. The outsourcing of essential accounting functions, such as tax returns, book keeping, and auditing, have become a multi-million dollar industry around the world. “Reports of the scope and size of the outsourcing market vary greatly, but the largest outsourcing companies claim that thousands of returns were processed during the 2003 tax season. Estimates for the 2004 season indicate the total may now be well into the hundreds of thousands.” The fact of the matter is, no one really knows how large the industry has become. There is little doubt that the industry continues to grow, and is having an increasingly larger effect on the accounting profession. Accounting firms are continuing to feel more and more pressure to outsource some of their work and lower their costs. On the website for SurePrep, which is an offshore provider for tax return services, they provide the following pitch to CPAs and accounting firms:

What if you could prepare a thousand more tax returns without adding even one more staff member? And what if you could prepare those returns for up to 50 percent less than what it costs you right now? You can with SurePrep. And with virtually unlimited ability to prepare and process returns, you can increase volume, multiply profits, and grow your practice.

This is a very hard proposal for an accounting firm to ignore. Why wouldn’t you want to increase your volume and profits without adding any additional staffing? It seems like the perfect situation for accounting firms. There are additional benefits that outsourcing provides for accounting firms.

1. Many accounting firms claim that it is increasingly difficult to find qualified part time help for tax season.

2. There is a significant cost advantage to outsourcing.

3. Improved turn around time and productivity. Returns often come back in less than 48 hours.

4. Reduced tax preparation workload frees up a CPA firm’s professional staff to find ways of offering their clients new value-added services.

5. Tax outsourcing can serve as a catalyst for business transformation, enabling a firm to outsource other accounting functions, such as bookkeeping.

Due to the benefits shown, many firms and CPA’s are outsourcing work overseas. Despite the many benefits that have been shown, outsourcing still has its risks and ethical concerns. The chief concern, according the the AICPA (American Institute of Certified Public Accounts), is the Code of Professional Conduct that CPA’s are required to follow. Richard Miller and Alan Anderson state the following:

AICPA members have responsibilities related to the practice of using third parties to provide services in engagements for clients. Primary among them are security and confidentiality of information, due professional care and compliance with provisions of the Code of Professional Conduct. In addition, members must monitor security procedures that third-party providers have put into place to ensure they remain effective.

While outsourcing this work, it will become increasingly more difficult for accountants to ensure that the financial information of their clients remain confidential and secure. Also, it will be difficult for these firms to ensure that those doing the work and the returns are qualified to do so. According to the AICPA, firms need to “exercise due care” to ensure that a clients returns and information are being handled correctly and securely. Furthermore, they also state that “there is no specific ethical requirement that the member disclose to the client that they are using the services of an outside provider.” Not only is it acceptable for a firm to use a third-party provider, but they are not even required to inform you they are doing so.

There are definitely legitimate ethical concerns in regards to the outsourcing of tax returns, bookkeeping, and financial services. However, it doesn’t appear that this trend is going to change any time soon.

Engineering and Design

According to many, the jobs that are being lost to foreign countries are the low paying jobs that no one really wants anyway. That is not entirely true. The effects of outsourcing have also been felt in some industries where many would not think to look. Highly skilled workers in the engineering and design fields have begun to feel the effect of outsourcing as well. Like most of the outsourcing decisions, the outsourcing of engineering services in being largely driven by money and the desire to cut costs. For example, “an office in India provides design and engineering capabilities such as finite element analysis, 2D drafting and 3D modeling, design of sheet metal parts and complex molds, kinematics simulation, and a host of other skills.” Companies are increasingly seeing the value of using offshore sources to do design work. According to Tom Epply, president of Continental Design and Engineering, “my view is that I’m trying to save a business for my customer. It’s either this or he can have his head stuck in the sand and possibly lose the business. I’m trying to look at the bigger picture. The engineers in India can do the routine work, while the engineers here can do the research.” There are many that share the opinion of Tom Epply; outsourcing is inevitable and it must be done to survive.

It’s true, the outsourcing of engineering can save companies money. However, there are many that disagree with the position that Tom Epply is taking. The NSPE (National Society for Professional Engineers) has issued the following statement: “the outsourcing of engineering should be done only when the talent cannot be found in the US. If outsourcing of engineering work is done, it should be done using the same rules, regulations, and laws that employers and employees are subject to in the US.”  Kenneth Harrison echoes the sentiments of the statement issued by the NSPE. “While there are contradicting considerations, for me the ethical line in the sand is this: If a company outsources because of corporate greed and the selfishness of the top executives, then it is unethical. However, if outsourcing is done out of competitive necessity and the needs of the employees are a major consideration during the process, then indeed outsourcing may be the most ethical action that can be taken.”  There are some who believe that a shortage of American engineers doesn’t exist. Professional Engineer Richard Weingardt doesn’t believe at all that a shortage exists. “I think that there is a big corporate lie that there is a shortage.” Like all issues, there are those who are completely opposed to the idea of outsourcing engineering work. Professional Engineer David Fisher says, “I, on principle, wouldn’t do it. There are people here (in the US) who can do the work.”

There are many companies and design firms around the country who are wrestling with the same issues and sentiments that were discussed earlier. They will be forced to weigh the pros and cons of their decision, and act accordingly.

The Law and Lawyers

Like many professions in this country, the legal profession has been unexpectedly blindsided by the outsourcing movement. Like many industries, law firms are seeing the costs advantages that outsourcing has to offer, and they are taking advantage of them. Law firms are increasingly outsourcing much of the work that would normally be done by first year lawyers or law clerks. For Ted Sabety, the principal of a three-attorney technology and electronic-media law firm, the decision is pretty clear. “If I hired someone full-time to do the work here, it would require substantial pay, overhead, and training.” Sabety also says that he gets the quality of work that’s equal to that of a junior associate here in the United States, at a fraction of the costs. “Witness that a competitive Indian attorney makes about $12,000 a year….That’s far less than the

$65,000 average of US first-year associates in small firms.” The costs given also do not include the benefits that US attorneys receive. When taking all of that into consideration, it is easy to see why United States firms are starting to take advantage of outsourcing.

Outsourcing will save law firms a lot of money. However, there are several ethical concerns that must be considered when outsourcing legal work abroad. An opinion paper submitted to the New York City Bar Association asks the following questions:

May a New York lawyer ethically outsource legal support services overseas when the person providing those services is (a) a foreign lawyer not admitted to practice in New York or in any other US jurisdiction or (b) a layperson? If so, what ethical considerations must the New York lawyer address?

There are some who feel that this is completely unethical. According the the Code of Professional Responsibility, and lawyer “shall not aid a non-lawyer in the unauthorized practice of law.” Many feel that is exactly what these law firms are doing. They are, more or less, allowing a non-lawyer in a foreign country to practice law in the United States. They also have the responsibility to ensure that their clients are receiving services from a competent individual. It is nearly impossible for a law firm to know who exactly is doing their research for them. A lawyer also has many of the same security issues that accountants face when outsourcing work. It is also their responsibility to ensure the confidentiality of the information their clients present to them. How can a law firm ensure that a lawyer in India isn’t sharing the secrets of their clients? Again, this is nearly impossible to do. As a result, the outsourcing of the legal profession still faces some ethical questions before it will be widely accepted as a standard practice.

High Tech Jobs

The technology and IT (information technology) sectors of the economy have been hit very hard by the outsourcing that has take place. It was not too long ago, that someone with a degree or job in computer programming had nothing to worry about. Computer programmers were in demand and there would always be jobs. That idea has been drastically altered in the last six years. In the year 2000, the unemployment rate for computer programmers in this country was 2.0%. By 2004, this number had risen to 9.5%. That is an astonishingly high rate. In 2004 alone, American high-tech firms shed 234,000 jobs. These are all extremely alarming statistics for the American high-tech worker. The loss of IT and high-tech jobs looks to only get worse. A company called India Web Developers is just one example of the types of companies that US jobs are being lost to. On the company’s web site, there is an entire section devoted to convincing companies why they should outsource their web development needs from India.

As if the loss of high-tech jobs isn’t concerning enough, there may be an even greater underlying concern. To this point, the American economy has stayed strong because of our technology advances and our innovation. We are seen as the global leader in this area. Is the United States in jeopardy of losing their position as the technology leader by outsourcing all of these jobs? There are many who feel that the US, by outsourcing its high-tech jobs, will lose its place as the technological leader in the world. The real question is, can that really happen? There is really no way for us to tell. In order for the United States to keep its place at the top of the global economy, there needs to be a much greater investment in the education and teaching of math and science. Without an educated and capable workforce, not only will we lose the high-tech jobs, we will lose our place as innovators on the global level.

Conclusion

The outsourcing of American jobs will continue to be an issue here in the United States. The politicians in this country will have to continually debate this issue and determine what the best course of action is for this country. There are those that feel outsourcing will do nothing but help our country and economy. “It is a general rule in economics that in order for an economy to grow, old jobs must be destroyed so that new jobs can be created.” 10 There are also those people who believe we need to protect the current jobs we have at all costs. It will be up to you whether or not you believe this. No matter your opinion, every industry that decides to outsource or offshore their work has some serious ethical issues to do so. It is safe to say that not all of these issues and questions have been answered yet. As George W Bush once said, “free and fair trade and global economic growth means more jobs, higher wages, and greater prosperity for Americans.” You are free to make your own decision about this statement. 

Case Questions

1. Is outsourcing an ethical practice, as a whole?

2. Is outsourcing for the sole purpose of reducing costs ethical?

3. Should accountants and lawyers be required to inform clients when they are outsourcing services to a third-party provider?

4. Do jobs need to be destroyed to create new jobs?

5. What responsibility, if any, does a company have to employees that it has layed off because of outsourcing?

6. Do the legal and accounting professions require regulation with regards to outsourcing to ensure security for their clients?

7. What responsibilities do US companies have to the workers they are outsourcing to?

8. When does outsourcing become a necessity?

9. Are US corporations too greedy? Is outsourcing just a way to make the rich more rich?

10. Do you agree with outsourcing? Why?

Sources

1. Brigham, Nancy: Outsourcing High-Tech Jobs: Why benign neglect isn’t working, Available http://www.cpsr.org/pubs/workingpapers/1/IToutsourcing_Brigham1 (November 12, 2006).

2. Juliana, Martha: More Than Money, Available http://servidor.acis.org.co/pipermail/geproyinfo/2006-August/000131.html (November 10, 2006).

3. Harrison, Kenneth, Available http://forums.machinedesign.com/eve/forums/a/tpc/f/7000036462/m/6290025372 (November 8, 2006)

4. Mintz, Steven: The Ethical Dilemmas of Outsourcing, Available http://www.nysscpa.org/cpajournal/2004/304/perspectives/nv1.htm (November 13, 2006).

5. http://www.sureprep.com (November 5, 2006)

6. Anderson, Alan W and Miller, Richard I: Legal and Ethical Considerations Regarding Outsourcing, Available http://www.aicpa.org/download/ethics/outsourcing.pdf (November 10, 2006).

7. Boykin, Danielle: Offshore Outsourcing Stirs National Debate, Available http://www.nspe.org/etweb/10304feature.asp (November 12, 2006).

8. Sherman, Ann: Should Small Firms Get on Board With Outsourcing, Available http://www.law.com/jsp/law/sfb/lawArticleSFB.jsp?id=1126256712489 (November 6, 2006).

9. Ethical Responsibilities and Opinions: Available http://www.nycbar.org/Ethics/eth2006.htm (November 13, 2006).

10. McGee, Robert W: Ethical Issues in Outsourcing Accouting and Tax Services, Available http://papers.ssrn.com/sol3/papers.cfm?abstract_id=648766 (November 9, 2006).

11. Elder, Bill: High Paying Jobs from Offshore Outsourcing-An Oxymoron?, Available: http://www.apsc.gov.au/publications02/outsourcing.htm

(November 8, 2006).

12. Breslin, David A: On the Ethics of Outsourcing, Available http://www.dau.mil/pubs/pm/pmpdf99/breslind.pdf (November 5, 2006).

13. Boyles, Barry A: Ethical Issues in Consulting, Available http://www.shrm.org/hrresources/casestudies_published/CMS_016752.pdf (November 10, 2006).

14. The Entertainment of Job Outsourcing, Available http://www.dartmouth.edu/~vox/0304/0405/alladeen.html (November 1, 2006).

15. Hill, J.B. and Spires, Todd: Outsourcing and Privatization in Libraries: Ethical Concerns, Available http://exlibris.memphis.edu/ethics21/archives/05eei/papers/spireshill.pdf (November 9, 2006).

16. Atkinson, William: New buying tools present different ethical challenges, Available http://www.purchasing.com/article/CA279920.html?ref=nbra (November 3, 2006).

17. http://transcripts.cnn.com/TRANSCRIPTS/0610/17/i_ins.01.html (November 5, 2006).

18. http://www.indiawebdevelopers.com/ethics_outsourcing.asp (November 10, 2006).

19. http://www.apsc.gov.au/publications02/outsourcing.htm (November 10, 2006).

20. http://www.outsourcing-law.com/casestudies/ProcterGamble_EDS_ACS.htm (November 5, 2006).

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