Corporate Social and Environmental Responsibility in Global Outsourcing

Ron Babin

Ryerson University

350 Victoria Street

Toronto, Canada

M5B 2K3

and Manchester Business School, UK

Dr. Brian Nicholson

Manchester Business School

Booth Street West

Manchester,UK

M15 6PB

Corporate Social and Environmental Responsibility in Global Outsourcing

Abstract

The focus of this paper is on the intersection of Corporate Social and Environmental Responsibility (CSER) and global IT outsourcing. Offshore outsourcing of IT and IT enabled services is well established as a business practice towards reducing costs and improving performance. CSER is equally well recognized as a business strategy to define and defend an organization’s position in the marketplace. CSER is becoming increasingly important in global outsourcing in relation to environmental issues for example. The cost of energy has already increased dramatically and further increases appear likely. Sustainability issues related to carbon footprint and greenhouse gases are also becoming increasingly important. Thus responsible and economic energy management has become a critical business capability and an important social responsibility. Offshoring IT operations to a less energy efficient, less environmentally responsible organization may provide increased returns to shareholders, but may also become a CSER liability. The key question this paper seeks to answer is how do social and environmental responsibilities affect decisions to globally outsource IT? Drawing on preliminary fieldwork and an extensive literature search, we conclude that CSER issues will become important capabilities for outsourcers to demonstrate, as buyers are increasingly sensitive to their stakeholders’ social and environmental concerns.

Key words: Outsourcing, Offshoring, Corporate Social Environmental Responsibility

1. INTRODUCTION

This paper presentspreliminary findings from research that seeks to improve our understanding of the impact of Corporate Social and Environmental Responsibility(CSER) in global IT outsourcing (GITO) decisions.

Lacity and Willcocks [1, p. 1] define outsourcing as “the handing over of assets, resources, activities and /or people to third party management to achieve agreed performance outcomes”. Sahay, Nicholson and Krishna [2, p. 1]describe global software and related IT services as “work undertaken at geographically separated locations across national boundaries in a coordinated fashion involving real time or asynchronous interaction”. For the purpose if this paper, global IT outsourcing refers to a third party management of IT assets and services, including people and knowledge content, which are delivered on a coordinated fashion across multiple national locations.

In contrast to GITO, corporate social and environmental responsibility is less clearly defined. As suggested by Crane, Matten and Spence [3, p.5], “definitions of CSR abound, and there are as many definitions of CSR as there are disagreements over the appropriate role of the corporation in society.” Matten and Moon [3, p. 5] have provided the most current and comprehensive definition of CSR, including environmental issues: “CSR is a cluster concept which overlaps with such concepts as business ethics, corporate philosophy, corporate citizenship, sustainability and environmental responsibility.”

GITO is an accepted practice in many business organizations and even regarded by some, such as Thomas Friedman [4], as a fundamental business capability. A significant academic and practitioner literature has emerged over the last few years which has improved our understanding of the management of GITO outsourcing relationships. (Lacity and Willcocks [1,5], Sahay et al. [2], Lacity and Hirschheim [6], Feeney et al. [27]).

However, a gap in the current literature is related to how CSER affects ITO decisions. CSER is well recognized as a business strategy to define and defend an organization’s position in the marketplace. [3, 4] As many organizations and their stakeholders increase their expectations regarding social and environmental issues we posit thatCSER expectations will be applied to outsourcing provider. For example, Walmart’s Green Goods [7] environmental campaign has had a significant impact on its supply partners. Similarly, IT outsourcer providersshould expect to be held to the same level of CSER performance to which their customers aspire.

A CESR lens on global outsourcing reveals how outsourcing affects a broader set of stakeholders than just shareholders. The costs of outsourcing to both local and global society, and to the environment are weighed against the benefits to the corporations and their shareholders. A rising wave of CSER concerns has encouraged corporations to examine all implications of their outsourcing business decisions. The Economist [8] reports that the priority that executives give to CSER issues has approximately doubled in the last three years. The percentage of executives who give CSER high or very high priority has risen from 30% three years ago to 55% today and is expected to rise to 65% in three years. The Economist reports that CSER initiatives are expected to provide improved brand reputation, attract potential and existing employees, help meet ethical standards required by customers and create better relations with regulators and law makers. The rising importance of CESR, and consumer expectations, suggests that GITO service providers will position themselves associallyand environmentallyresponsible.

The research questionguiding this inquiry is this:how do social and environmental responsibilities affect decisions to globally outsource IT?

The paper is organized as follows: the next section reviews current literature on social responsibility issues, environmental issues and emerging social responsibility standards. We then describe a qualitative and quantitative assessment of current CSER practices and directions in outsourcing. We conclude the paper with a discussion of the implications of CSER for outsourcing providers, buyers and advisors.

2. LITERATURE REVIEW

The relevant literature can be divided into social responsibility, environmental issues and standards. In the sections to follow we consider each of these areas in relation to global IT outsourcing.

2.1 Social responsibility issues

The topic of corporate social responsibility and global IT outsourcing has attracted considerable academic interest [15, 16, 17, 18, 19, 20, 21, 32]. The range of research and opinion is wide, from pessimists who suggest that outsourcing is yet further evidence of unfettered, irresponsible corporate profit maximization to optimists who suggest that outsourcing is an attractive economic mechanism for sharing wealth globally.

Carroll provides a “definition that is arguably the most commonly cited” [3, p.5], in his description of the Pyramid of Corporate Social Responsibility [14]. Carroll suggests that CSR should embrace the entire range of business responsibilities, and should include four kinds of social responsibility: economic, legal, ethical and philanthropic. The Pyramid, depicted in Figure 1 below, rests on the foundation of economic responsibility, which requires the organization to “be profitable”. Legal responsibility is next, where organizations must “obey the law” and “play by the rules of the game”. The third Pyramid leveladdresses Ethical responsibilities, where organizations have an “obligation to do what is right, just and fair.” The top level of the Pyramid concerns Philanthropic responsibilities, where organizations should “contribute resources to the community [and] improve the quality of life.” Carroll suggests that organizations must address the lower levels of the Pyramid first before they can consider the upper levels. Carroll’s framework sets the foundation for a review of CSR discussions related to outsourcing.

Insert Figure 1.

Payaril [15] supports the perspective of global outsourcing representing profit maximization for the rich andoffering limited benefits for other groups. Parayilemphasizes the growing gap between rich and poor in developing countries. This gap appears to be exacerbated by what he calls “informational capitalism”. In his researchParavil focuses on the uneven and sharply skewed distribution of wealth as corporations export electronic information and processes to countries around the world. Parayil reviews economic data such as GDP growth, Purchasing Power Parity (PPP) and Gini index changes to conclude that rising per capita income from global IT outsourcing has not reduced wealth disparities. For Payaril, the rich simply get richer as a result of global IT outsourcing. He explores “deepening income inequalities in the developing world and deepening income inequalities in the developed world after the onset of the so-called information economy” [15, p. 41] Citing the global information revolution, he suggests that “Unskilled labor members get trapped in the traditional (‘ghettoized’) economy, suffering both a digital divide and diminishing marginal returns on their ‘outdated’ skills”[15, p. 49] . He concludes that we need a global strategy to employ ICT in a meaningful way for economic developmental purposes. In terms of Carroll’s Pyramid, Payaril sees organizations maximizing their economic responsibility, while diminishing the quality of life (philanthropic responsibility) for those in the less developed economies throughout the world.

Other pessimistic authors posit that ongoing and increasing global outsourcing will have extremely disruptive effects. Blinder [16]presents the thesis of a third Industrial Revolution, which he tags as the information outsourcing age. He suggests that this revolution will be vast and unsettling, with significant changes in the way that we work, live and educate our children. Blinder suggests that North America and Europe will see significant displacement of a broad range of workers, many from upper educational reaches, who will be neither passive nor politically quiet. For Blinder, the most significant threat will come from India, where 300 million more skilled workers will be produced in a few decades, which is about twice the size of the entire US workforce. Clearly this will be disruptive to North American society and asocial responsibility model will be needed to manage this displacement. Jones[17] concurs with Payaril [15] in the belief that transnational corporations (TNCs) are “designed, constructed and maintained to make money for the interests that own them”.Similar to Blinder, Jones wonders if “the seeds of a future social and political crisis may be being sown” as millions of white collar, post-industrial, knowledge workers face structural unemployment. He concludes that IT outsourcing in the context of stateless, placeless and heartless TNCs is dangerous for society, and requires an expanded vision to “generate socially positive outcomes”. [17, p. 97] Similarly Levy[18, p. 692] states that “reducing wages through offshoring leads to wealth creation for shareholders but not necessarily for countries or employers, and that many displaced workers have difficulty ‘trading up’ to higher skilled jobs.” Levy suggests that TNCs create global labour pools, where they take advantage of those with fewer employment opportunities, little regulatory protection and weak social safety nets, which reduces the bargaining power of all employees. He suggests that the interests of the TNCs are “increasingly dislocated from the welfare of countries or workers” [18, p. 692] which echoes the national economic issues identified by Parayil.

Knights and Jones [19] argue that offshore outsourcing of business processes (BPO) is both a blessing and a curse for workers and society. The authors point out that call centres in “far away cultures” such as India, will struggle to simulate the thing that it displaces, i.e. the UK or US call centre. The authors contrast the dystopian view of outsourcing, with long night hours in crowded call centres mimicking US and UK dialogue with the utopian view that poverty stricken Indian workers finally may realize the economic benefits of a global economy. They conclude that although the social benefits of BPO may be small, “any country suffering as many problems as India can hardly kick a gift horse in the mouth.” [19, p.444]

Sahay, Nicholson and Krishna [2]identify similar concerns, where software houses with “precarious employment contracts, Taylorized work processes in software factories without support of union organization and poor attention to health and safety” do not offset the improved income and economic status of global software work (GSW) performed primarily in India”. [2, p. 254] The authors suggest a potential “ ‘race to the bottom’ in which companies try to cut each others’ throat on prices in order to gain international contracts [creating] declining labour standards, poor wages and social conditions”. [2, p.255] The authors suggest a potential GSW code of ethics that would be coordinated by private, public and societal groups.

Several authors provide a more balanced assessment, suggesting that outsourcing is inevitable but can be conducted fairly and perhaps with benefits to many global stakeholders. Stainer and Grey [32] argue that organizations should expect to manage outsourcing risk issues by embracing CSER. Outsourcing, when used properly, can provide long term operational and business improvements. However, Stainer and Grey point out that outsourcing also creates both economic and reputational risks. Further, they point out that human resources are fundamentally important to the success of any organization, and by externalizing these resources through outsourcing, an organization takes on a higher risk, with an expectation of improved capability. A key outsourcing, and offshoring, ethical issue for Stainer and Grey is: “exploitation, because expected low prices often reflect firstly low wages and poor working conditions and secondly fierce competition between providers from national and developing countries.” [32, p. 463] Similar to Sahay, Nicholson and Krishna [2] the authors conclude with a suggestion that ethical outsourcing requires an agreement between corporations, their shareholders, employees, governments, and civil society, “to achieve betterment for all stakeholders”. In terms of Carroll’s Pyramid of Social Responsibility, Stainer and Grey encourage outsource providers to consider the top end of the Pyramid, ie. Philanthropic and Ethical responsibilities.

Optimistic authors such as Knorringa and Pegler [20] see outsourcing as a potential mechanism for sharing wealth on a global basis. The authors examine whether expanding global value chains (GVCs) can improve labour conditions in developing countries. They conclude that “while economic globalization pushes firms to upgrade, such firm upgrading does not, as a rule seem to also lead to improvements in labour conditions in developing country suppliers in GVCs”. [20, p. 476] They propose that CSER and ethical trading, especially for global consumer branded products and services, as well as collective action towards an International Labour Organizationfair-work agenda, can improve labour conditions in developing country GVC participants.

De George[21] also presents a positive view of global outsourcing. He sees transnational outsourcing as beneficial and “clearly ethically justified”. He suggests that “Outsourcing promotes efficiency; helps developing countries by providing jobs where unemployment is very high, involves transfer of information technology and knowledge and encourages the educational process in less developed countries so that people are trained for new types of work provided by information technology and helps cut the costs of goods and services”. [21, p. 40] However, he brings very little evidence, either quantitative economic data as advanced by Parayil [15], or examples such as Binder[16]and Jones[17]. De Georgelargely stands alone as one of the few with broad support for global outsourcing, where societal impacts are all beneficial.

2.2 Environmental issues

Two issues have driven environmental concerns related to IT outsourcing and both are related to increasing power consumption by IT. First, the increasing cost of energy is having an economic impact on IT operations. Second, the production of electrical power often involves the bi-production of green house gases (GHGs) which have been strongly linked to global warming. GHGs and global warming belong to a discussion which is beyond the scope of this paper. However, the role of outsource providers in electrical power consumption is anenvironmental responsibility issue within scope. Both of these environmental concerns affect IT Outsourcing.

The cost of power to run data centres will grow considerably. Although the recent global economic turmoil has resulted in short-term reductions in oil prices (e.g. the price of oil has dropped by 40% from September to November 2008), several researchers have identified a long-term trend of rising energy costs. With the price of oil dramatically increasing (a “quadruple” increase forecast by The Economist May 31, 2008), the cost of energy is now a major concern for all organizations. Thomas Homer-Dixon [22, p. 94] describes the significant changes that will come from “increasingly serious energy constraints, and the era of cheapoil [having] come to an end.” And as Jeremy Rifkin [12] pointed out at a recent Global Sourcing Conference, the declining access to low cost energy will require a new energy model. Rifkin argues for a global re-structuring of energy collection and distribution, which will have a significant impact on global outsource providers.

With rising energy costs, Simon Forge [23] describes the increasing appetite for energy in data centres. Forge suggests that from 1996 to 2006 the number of computer servers in operation globally has increased by 400% and at the same time the power consumption per server has also increased by 400%, resulting in a situation where “(t)oday, from 15 percent to 35 percent of the operating budget of data centers goes on power supplies, including cooling energy.” [23, p. 10] The rise in computer processing capability, outlined by Moore’s Law, suggests that in a ten year period the processing power of a chip will increase by about 32 times, approximately doubling every18 months. So in a decade we should see four times as many computers, each being about 32 times more powerful, each consuming four times as much power. The dramatic increase in global computer capacity has contributed substantially to demand for electrical energy, resulting in increased GHG production. With a 16 fold increase (four times as many computers, with four times the power demands) in the computer power demand in one decade, and increasing energy costs, many organizations are very concerned about this rising and somewhat uncontrollable cost. Forge suggests that the power costs of running one server can equal half of its hardware costs over four years. To put this in context, Forge suggests that UK data centres consume five percent of the country’s maximum generation capacity and by 2010 the data centre growth is forecast to be 45 percent. It is conceivable that when office and home computers are added to data centre computing the demand for power will equal about 10 percent of overall energy production capacity.

The European Commission Institute for Energy has recognized the problem of growing data centre energy consumption. The “Code of Conduct on Data Centres Energy Efficiency” [11] recognizes that “(t)he projected energy consumption rise poses a problem for EU energy and environmental policies. It is important that the energy efficiency of data centres is maximized to ensure the carbon emissions and other impacts such as strain on infrastructure associated with increases in energy consumption are mitigated.” The Code, which was released in October 2008, is voluntary and sets out a plan to define best practices and commitments for industry and governments. This document suggests an important and rising concern for environmental issues related to IT. Rutrell Yasin [24] identifies that the United States Department of Energy (DOE) is “leading the charge towards reducing power consumption and moving toward energy efficient computing.” The DOE established an industry goal of reducing data centre energy use by 10 percent by 2011. As Yasin points out, outsourcing does not solve the energy consumption problem, as it simply moves the problem from an in-house data centre to an outsourced facility. Recognizing this, Yasin quotesan unnamed Accenture representative who suggests that the data centre outsourcing will shift from a square footage pricing to power consumption pricing, which would be a significant change in the data centre outsourcing economic model.