Code of Sourcing Ethics

A series of massive corporate frauds revealed in the early 2000’s has inspired a global awareness of the risks to the public when business fails to honor basic principles of ethics and legal compliance obligations. The public interest in mandating pervasive audit and control mechanisms serves to protect current and former employees, suppliers and customers from a repeat of the debacles of Enron, MCI, Parmalat and even Lernout & Houspie.

Ethics in Corporate Compliance Generally

Securities laws like the Sarbanes-Oxley Act and the corresponding amendments to the U.S. federal Sentencing Guidelines require process controls for minimum auditability, transparency and reporting of business operations. While the securities laws apply to public companies, the criminal sentencing guidelines apply to all companies. These legal mandates apply to all business processes, including insourcing, shared services organizations and outsourcing relationships.

Ethics in Governmental Contracts

In governmental transactions, ethical breaches such as bribery, fraud, theft of competitive bidding information and conflicts of interest are old news. It is customary in governmental contracts to include warranties by the supplier of compliance with codes of conduct. Particularly abusive types of conduct may be identified as off-limits. Breaches of ethical duties in governmental contracts have resulted in serious losses to suppliers, including disbarment from future contracts and fines and penalties on the enterprise and its offending officers.

Ethics in Regulated Professions

Regulated professions, such as public accounting, the law, architecture, engineering and medicine, generally impose mandatory codes of ethics and disciplinary rules on their members. Such codes help inspire public trust and confidence and may result in loss of a professional’s license for violations such as conflicts of interest, fraud, embezzlement and unfair trade practices.

Ethics in Business Process Management and Sourcing

Sourcing and procurement of business processes falls within a separate area where a distinct code of ethics can improve the relationship of trust and confidence between enterprise customers and their service providers. Sourcing advisors who are not licensed professionals are not automatically subject to a code of conduct, thus permitting them to take money from both enterprise customer and service provider.

Ethics in sourcing affects the selection of suppliers in the competitive bidding process and in contract negotiations. In early 2005, the U.S. Securities and Exchange Commission addressed the issue of conflicts of interest by pension consultants, particularly those engaged in “pay-to-play” marketing procedures that require service providers to pay marketing promotional fees to be presented to enterprise customers. At the contract development phase, a code of ethics in sourcing is needed to eliminate potential abusive strategies and tactics by either the enterprise customer or the service provider. Such abuses range from the traditional “bait and switch” sales strategy to misrepresentation and “last minute” changes by either party that can materially alter the risk allocation, the fairness of the price or method of computing the price and/or the investments made and to be made in the sourcing relationship.

Tools for an Outsourcing Ethics Program

An ethics program starts with some basic principles and a program for compliance. This includes:

a code of conduct (or code of ethics), which may include specific reference to criminal and civil laws, a case-by-case analysis of typical scenarios that might be subject to the code of conduct;
a process for obtaining consensus on the application of the code of conduct to the participants in the sourcing process;
a process for monitoring compliance, protecting whistleblowers and determining the consequences that apply to specific breaches; and
a process for assessing the continuing validity of the code of conduct to meet emerging threats to a corporate culture of ethical conduct and legal compliance.

Ethics in the Business Relationship

The federal Sentencing Guidelines suggest that sentencing for criminal misconduct by senior executives will be attenuated if the company has not only adopted its own code of conduct, but has helped extend a culture of ethical conduct and compliance to its suppliers. As a result, outsourcing parties should include in their due diligence and implementation toolkits appropriate contractual provisions and procedures in their relationship. Further, they need to reinforce the “know your customer” (or “know your vendor”) principle embodied in traditional business practices and hallowed as law under the USA PATRIOT Act of 2001.