Is Outsourcing Unethical?

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Today, I’m writing about outsourcing and the possible ramifications on human rights. If you’re like me, maybe you haven’t thought much about this more than in passing when a company gets in trouble for exploiting workers. Hope my conversations and research gives you food for thought.

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This topic, outsourcing and the possibility of exploitation, may be a bit too niche for some, quite business-like. However, it is one worth exploring as it has the possibility of affecting many people around the globe who may be vulnerable to exploitation. I’m no business guru, and don’t pretend to be. The reason I felt this topic needed exploring is because we can all play a part in refusing to support the money making giants that possibly exploit people to create a cheap product for the wealthier in our world. When I say wealthier, I mean you and I. We are among the wealthiest in the world. I didn’t say we are billionaires, but if you could afford breakfast this morning, a house to sleep in, and the internet to read this newsletter, you are wealthy.

Recently, Boohoo, the massive online retailer that sells cheap clothing, announced that it has told its suppliers to stop outsourcing to smaller factories and bring all protection in-house. Their actions were fuelled by an investigation which found that staff were being paid as little as £3.50 an hour, when the minimum wage is £8.72, in a factory in Leicester which produces garments for Boohoo. Additionally, health and safety measures were appalling – most concerning was the lack of mask wearing at the height of the pandemic.

The factory was not a Boohoo factory per se, but one of its outsourced suppliers.  It was one of 1,500 fashion and textile business in the city that employs around 10,000 people. Outsourcing is a popular business practice where a company hires someone outside of its own staff to perform services or create goods. Instead of investing in machinery, infrastructure, training, recruitment, etc, firms can pay someone that is already doing the service. It works out considerably cheaper for the firm, which brings in more profits.

So back to Boohoo. Instead of manufacturing all their products themselves, they outsourced to private factories that have the ability to pump out products fast and cheap.

The moral dilemma with outsourcing begins with these two questions. How can firms be sure that their suppliers are not exploiting their employees? When suppliers are oversees in third world countries, is it right that someone is being paid far cheaper than the salary of those employing him?

Let’s take the first question. How can firms be sure that their suppliers are not exploiting their employees? When firms choose to outsource, they have less control over health and hygiene, hiring practices, payment, working conditions, etc. When I spoke to Michael Rogerson, who researches modern slavery disclosure and tech for supply chain visibility at The University of Bath, he explained why this is a problem: “The greater the contractual distance between production and retailer, the harder it is to effectively monitor working conditions and other factors. Having a network of thousands of factories which a firm might not know are producing its clothing has clear cost advantages but at least a part of that comes down to outsourcing to areas with very low pay, poor conditions, and weak institutions.”

Another alternative to outsourcing is vertical integration. I spoke to Rajat Panwar, Associate Professor of Sustainable Business at Appalachian State University, for more on this. “Vertical integration is when a firm controls the supply chain by itself.” The firm acquires the business operations of the supplier, thereby has more control. While vertical integration is being used more, Panwar raised concerns about it from a social justice perspective. “It could lead to marginalization of local communities and hegemonizing of resources by (mostly) Western corporations and local elites in developing countries. This is already evident in natural resource sectors: many Indigenous communities in developing countries have been pushed to the fringes by forestry and mining corporations; and food sector corporations have essentially taken away lands from small farmers through what is dubbed land grabbing.”

Panwar concludes that vertical integration, while an alternative to outsourcing, may be no better for social justice causes.

If businesses continue to outsource, they must proactively ensure that their products and services are free from exploitation. Rogerson explained that there are social audits and factory checks that can be carried out but the best way to reduce exploitation is “reducing the contractual distance (and, probably, the geographical distance, too) between production and retail – even owning the factories.”

Rogerson is suggesting “insourcing”. It’s a new concept which he says “hasn’t really bedded into business vernacular as much as outsourcing. Bringing everything in-house means a firm doing more itself.” Boohoo has committed to bringing more of its production in house, as Rogerson has suggested. Frankly though, it seems like a decision that was made, not because they are truly concerned with human rights, but because they got caught ignoring them.

The next concern about the ethics of outsourcing is the low wage that workers in factories receive as compared to the wage of those employing them. I read a fascinating article that plunged deep into this issue. But I will summarise it here.

Say you hire a company in the Philippines to make all your graphics for your business. That company pays its employees £2 and hour. But because their cheap, very skilled labour, you have a great product that cost you pennies, and earns you greater profit. How is that right - that Westerners roll around in their money, while only paying their workers enough to just live on?

The article that I mentioned expresses the same question and answered with the reasoning that £2 in the Philippines pays for just as good of a meal as a £50 meal in the UK. He also justified outsourcing because it gives work to people that may not have had any work otherwise. It provides them with a way to help both themselves and the people around them. Which is true, as long as the supplier is simultaneously undergoing deep checks into their working conditions.

And yet, isn’t a rich company from a rich country taking advantage of the poverty of person or country by getting cheap labour? If this sits uneasy with you, consider this. If your company outsources to suppliers in third world countries, perhaps lay aside greed and use the profits you obtain to pour back into the country you have outsourced from. Figure out how you can support the people of that country and its communities.

Outsourcing could potentially exploit and enslave many people around the world if firms aren’t careful. If insourcing is not an option, there are ways to reduce risk of exploitation. It just takes a lot of ongoing time and research to ensure your company knows how employees are being treated at every point along the supply chain.

If you’re just part of the general public, Panwar suggested using Know the Chain, a website that scores companies on labour practices in supply chains. We can make sure we are buying from and supporting business that take supply chains seriously.

Instead of being part of the problem of exploitation in supply chains, let’s be part of the solution to protect the rights of those working to create products and services all around the world.

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