The Seven Deadly Sins of Outsourcing

Ethics in outsourcing reflect the rules of statutory legislation, regulation and civil responsibility (“tort liability”).

To simplify, based on experience, enterprise customers, service providers and advisors have complained to us about the “Seven Deadly Ethical Sins of Outsourcing”. Here’s a sample list for consideration.

  1. Conflicts of Interest. A sourcing advisor should not put itself in the position of representing both parties to a transaction unless it can effectively insulate the conflicting representation. Conflicts arise when (i) the advisor provides research, coaching or other skills improvement training to a service provider and transactional advisory services to prospective customers, (ii) t Conflicts can be managed by segregation of personnel unless the separate personnel have access to the same internal proprietary data bases and project management templates.
  2. Confidentiality. A sourcing advisor that discloses confidential information of either a supplier or a customer without authorization expressly or by definition in a non-disclosure agreement.
  3. Wastefulness. A sourcing advisor should not adopt or recommend procedures that are inherently wasteful. Waste that is forced upon a supplier can be expected to damage the enterprise customer’s interests by increasing the price or the termination fee. Waste can come in many forms, such as (i) requesting information that is already in the advisor’s possession and that could be released by simple request for approval, (ii) requesting information that is not significant or not necessary for meeting the enterprise customer’s stated requirements, or (iii) not supplying information to a service provider who requests it in a timely fashion.
  4. Fraud. Fraud is the intentional disclosure of false information for the purpose of inducing reliance by a third party who is not aware of the truth. Fraud also arises from the concealment of material information that one would normally expect to be provided as part of a requested disclosure. Competitive sourcing should not be structured to favor or unnecessarily burden one service provider or group of service providers. However, sourcing advisors may properly conceal an enterprise customer’s overall intentions relating to possible future scope.
  5. Unfairness in the RFP Process. A sourcing advisor should not build inherent unfairness into the decision-making process during the sales cycle. Inherent unfairness can occur by structuring the RFP so that only one service provider meets the criteria for selection.
  6. Unfair Discrimination. Enterprises hire service providers to obtain independent judgments and advice. A sourcing advisor engaged in unfair discrimination when it promotes or denigrates a service provider without any fair basis.
  7. Unnecessary Delays. The sales cycle to develop long-term business relationships requires a lot of time. Time is money. Time kills deals. Delay can arise from waste (asking for unnecessary information, for example) or from failure to manage the procurement or governance process. Delays cost the enterprise customer in many ways. Delay increase costs by deferring the realization of any intended savings. Delays increase the time and investment needed for all parties (including their professional advisors) to complete the procurement process. Delays require additional time to bring back the focus of the individuals who were diverted from timely completion. Delays divert energy from other projects of equal importance and priority, resulting in opportunity costs from the loss of other business opportunities. Delays impose psychological costs on line-of-business managers from stress, uncertainty, distraction, inability to meet targets in the sourcing or in the line of business, fatigue and adverse impact on family relationships, and thus may lead to irrational or biased decision-making. Delays can result in loss of interest by competing service providers if they are perceived as unprofessional, and may result in the withdrawal of a service provider from the competitive bidding if other circumstances (such as contract demands) are also perceived as unreasonable. Unnecessary delays are unethical.

If you have any suggestions for improving our list of “Ethics in Outsourcing,” please contact us.