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Whose conscience matters?

Cath EverettOutsourcing Magazine March 2010

It matters whether an outsource supplier runs as good a ship as the customer but making sure that happens can be a challenge, as Cath Everett found

As outsourcing services continue to become increasingly commoditised over the next few years, customers will progressively use soft measures, such as the ethical stance of providers, as a yardstick by which to gauge whether they want to do business with them or not. Initial concerns about corporate ethics started coming to the fore in the early to mid 1990s as part of a widespread discussion over the rights and wrongs of offshoring services to developing countries such as India if it meant that jobs would be lost at home. This situation was followed up by a series of child labour and electronic waste-related scandals and has since been buoyed by the climate change debate, which has brought issues of global sustainability to the front of people’s minds.

But technology has also played its part in promoting the ethics case. While many enterprises are currently trying to harness social networking sites such as Facebook and Twitter to push their corporate social responsibility messages out to the public, such media can prove a double edged sword. Should bad practice be unearthed these days either by investigative journalists or even simply members of the public, the news can be transmitted around the world in seconds and frequently has been, causing huge damage to company brands, particularly those selling to the diverse consumer market.

A survey undertaken by pollsters YouGov last year, for example, indicated that, despite the recession, nearly a third of UK shoppers always made the effort to purchase goods and services from businesses that behaved responsibly – a statement that implies, of course, that they would take their business elsewhere if they discovered that they had been mislead. Consumers were also wary of the ethical claims that enterprises make about their own brand, however, preferring to rely on advice from independent agencies such as watchdogs. And it appears that such scepticism may be justified.

Alex Blues, head of IT sourcing at PA Consulting, says: “It’s difficult to define ethics as there is a difference between behaviour that’s downright illegal and that which is just shabby. But the overall view is that this is not a mature area. Some organisations have brought in best practice for their sourcing strategies, but it does tend to be an under developed field.”

Shining examples here include UK telco BT and the Co-op retail chain, which have both taken their in house ethical sourcing policies and applied them to their outsourcing activities. But elsewhere the picture tends to be very mixed, with too many organisations simply paying lip service to the concept in their corporate social responsibility and marketing statements and subsequently failing to take any further action.

Nonetheless, some government bodies and high street names are starting to take the issue more seriously. As Blues explains: “Organisations are worrying more about their brand because it’s being forced on them. They’re not doing it because they want to be ethical per se. It’s about share value.” As a result, over the last 18 months or so, there have been some moves in large, high profile organisations to introduce sustainability clauses into procurement contracts and service level agreements.

Vodafone, for instance, has revised its vendor selection procedures to include an ethical purchasing code. This code means that the mobile ‘phone operator now undertakes supplier risk assessment exercises and ranks potential candidates in a league table based on their social risk profile in order to help make procurement decisions.

The UK government, on the other hand, is promoting the Environment Agency’s recent seven year IT outsourcing contract as a template for other public authorities – and the private sector - to adopt. The £336 million deal, which was signed with CapGemini last November, included a range of environmental and other sustainability based criteria, which will be applied both to the primary contractor and to all of its subcontractors.

But one of the problems with such initiatives is that ethical behaviour means different things to different people and is not currently defined overtly in either domestic or international law. While many of the larger outsourcing companies, including CapGemini, have devised their own sustainable procedures based on the United Nation’s (UN) Global Compact, these are essentially internal voluntary policy documents.

The Global Compact consists of 10 principles in the areas of human rights, labour, environmental and anti-corruption activities and is aimed at businesses wanting to run their operations in an ethical fashion. No legally binding code of practice exists for the industry as a whole, however, and none are currently being developed by trade bodies such as the National Outsourcing Association (NOA), even though it has its own internal guidelines for behaviour based on UN Ethical Practices.

Martyn Hart, the trade body’s chairman, explains the rationale: “If our members and the market feel strongly about the NOA providing more detailed guidelines based on ethical practices, this is something we would endeavour to provide. However, it does pose difficulties when conducting business in a global market as different countries have different cultural norms as well as their own ethical codes of conduct.”

Legal frameworks are equally meagre, with legislation currently fragmented across different areas. For example, UK employment contracts in an outsourcing context are protected by TUPE or Transfer of Undertakings (Protection of Employment) regulations, while data privacy is safeguarded under the Data Protection Act. There are also various anti-corruption and anti-bribery laws, which are in the process of being revised. According to legal firm Pinset Masons, a new UK Bribery Bill, which is expected to be enacted in about March this year, will include the new offence of ‘Failing to Prevent Corruption’. This means that organisations may be liable if corruption has been committed by one or more of their employees, although no detailed legal guidance has been published to date.

But Iain Monaghan, a partner at Pinset Masons, is doubtful whether an ethics law per se is ever likely to come into existence, not least because of difficulties over “the extent to which ethics could ever be reduced to a legal code”. And this challenge is amplified severalfold if applied in a globalised offshoring context. As Matt Bradley, UK environment manager at CapGemini, says: “It’s difficult to see how an ethics law would work across nations. The UN struggles in getting people to agree on basic human rights, for example, because countries with different religious backgrounds have different views and it’s very a touchy subject.”

But this is not to say that organisations cannot introduce contractual demands requiring suppliers to comply with relevant existing legislation as well as build in practical steps to manage and ensure such compliance.

Before they even start down the outsourcing path, however, it is crucial that enterprises identify and prioritise the potential risks that they face in order to manage and mitigate them effectively. Such risks will vary depending on the sector in which they operate and the geographies to which they outsource. But common ones include employment related issues such as using forced or child labour and dealing with waste and packaging in an environmentally and local community friendly way. Potential social and environmental risks should then be assigned a monetary value and weighed against cost/benefit figures for activities such as job creation in order to obtain a net result on which decisions can be based.

Other valuable exercises, meanwhile, include undertaking upfront supplier verification checks. Emanuele Cacciatore, manager of consultancy Arthur D Little Italy, explains: “Companies should make a thorough enquiry about the track record of their suppliers in areas such as health and safety. They can also introduce sustainability and ethical issues into their vendor selection requirements and should make it clear that they’ll be auditing their operations to ensure compliance.”

Useful accreditations that can be employed as proxy measures for screening purposes include the ISO 14001 environmental management standard and Social Accountability International’s SA 8000 standard for managing human rights in the workplace.

Once a suitable outsourcer has been chosen, however, concrete sustainability clauses should be introduced into contracts based on the customer’s own ethical stance. “If ethics aren’t captured in hard contract obligations, they become meaningless,” says Blues. But he also warns: “You can’t embed ethics into corporate culture with outsourcing alone. Ethics can’t be pushed up from the bottom – they have to be mandated at the top of the organisation and pushed out across the whole organisation.”

As a result, conformance to ethical policies should ideally be included in the performance objectives of all managers and personnel, who should be incentivised to adhere to them using monetary targets. “Just applying ethics to an outside supplier won’t work if you don’t have any yourself. It’s about embedding ethical behaviour into the corporate culture and feeding it out so if an outsourcer has the same credentials, you should come together,” Blues says.

But once a services provider has signed on the dotted line, simply trusting in their ethical pronouncements is unlikely to be enough to absolve customers from responsibility should things go wrong. This means that regular, formal audits by trained professionals and on the ground spot checks are crucial to ensure that everything is working as it should be. If the worst comes to the worst, however, it should be possible to fall back on the contract in order to take appropriate action. It is common these days for large contracts at least to routinely include the right to terminate if a supplier acts in a way that damages a customer’s reputation or otherwise brings them into disrepute.

But in the end, behaving in an ethical way comes down to honesty, believes Blues. This means, for example, that customers have to ask themselves whether they have been honest about the scope of the work proposed and in ensuring that any deal with a third party provider is sustainable. Suppliers, on the other hand, need to question if they have been honest about whether they can undertake the deal for the price agreed or whether they intend to introduce change control by the back door once it has been signed.

“And consultants such as ourselves also have to be responsible too. If you go into an organisation that wants to outsource, but don’t think the deal will work or be right, you should walk away. It’s down to everyone,” Blues concludes.

This article is reproduced by kind permission of Outsourcing Magazine.

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