Environmental Impacts of Outsourcing

North American firms often take great pride in their environmental policies and performance, and justifiably so. Corporate demonstrations of environmental and social responsibility generate long-term marketing and branding advantages, which translate into competitive advantages.

American consumers, investors, and business leaders increasingly recognize that the full environmental impacts of business operations extend throughout the global supply chain. As companies consolidate their supplier base, those companies are able to provide stronger oversight of and guidance to their supplier firms regarding minimum environmental and labor standards.

Adherence to minimal environmental standards is being taken into greater consideration by firms in selecting and retaining vendors, particularly suppliers in developing countries where environmental and labor conditions have become hot-button issues for many Western consumers. However, these issues have received scant attention in regard to outsourcing software development, customer service, and business process outsourcing (BPO) work from the U.S. to India.

Environmental Issues Ignored

Several factors contribute to the lack of attention to environmental and labor issues in information technology (IT) outsourcing.

The first is the lack of understanding of the IT outsourcing industry in developing countries, except for a narrow focus on the core IT capabilities of outsourcing service providers. The newness of IT outsourcing has not allowed the field of global IT supply management to come together around commonly accepted values and standards beyond the drive to simply obtain low-cost and high-performance services offshore.

Outsourcing brokers, client representatives, and third-party project managers in the IT and BPO outsourcing arena do not wish to risk alienating their clients, colleagues, and counterparts by raising issues of environmental responsibility and fair labor practices offshore.

Client-side or broker-side personnel lack clear messages of commitment from top managers at client firms directing them to incorporate environmental and labor protections into the outsourcing process. Top managers set the ethical tone at their firms. Their commitment is essential before a firm can act decisively on matters of environmental and labor ethics.

Unless environmental and labor ethics in IT outsourcing becomes a concern of corporate managers, investors, and American consumers, the status quo will prevail. This situation invites the sort of international investigatory journalism that prompted supply chain reforms in the athletic shoe industry.

Environmental Consequences

Industrial companies in India have opened software development and call center divisions to take advantage of the tax holidays provided to firms with export-oriented IT divisions. These tax holidays are being used to declare income from polluting industrial activities as having been derived from IT operations.

An industrial firm with an IT division can avoid high Indian tax rates on non-IT income by routing that income through a firm’s IT division. This is done by having the old industrial side of a business pay the bills for the IT side. The current tax code enables firms with undeclared or illegal income (black money) to wash that money or to bring untaxed money parked in the U.S. back into India by declaring it as income from IT clients in North America.

Sending IT outsourcing work to old industrial firms with polluting operations enables those polluting operations to avoid taxes and become more profitable. The process of outsourcing to firms with bad environmental records rewards those firms for polluting.

The extent of the pollution in India by firms profiting from the IT outsourcing boom is impossible to hide. This is a country where less than half of all sewage is treated and where regulatory agencies have generally lacked the authority, independence, or sophistication to implement basic environmental protections.

Indian IT outsourcers with long records of pollution say that their environmental records are a matter between those companies and Indian regulatory agencies. However, some outsourcing project managers are finding that there is a strong correlation between poor environmental performance and unethical business practices.

“When brick-and-mortar meets IT, chaos ensues,” is the description provided by the manager of a purely IT-oriented firm in Eastern India to characterize the performance of old industrial firms when they enter the IT outsourcing market. Two examples below illustrate why it can be a good business strategy to avoid attempting to send IT outsourcing work to firms with poor environmental records.

Brick and Mortar Meets IT

The IT division of the Hero Honda Motors group of companies is an example of an IT outsourcing services provider with an old industrial firm’s environmental record. Hero’s motorcycle and bicycle production facilities date from 1956. Their environmental controls resemble those in the U.S. in the early 1970s when it was legal for U.S. firms to dump solvents and other hazardous waste onto the ground of their own industrial properties.

Hero currently has 650 call center seats in Gurgaon, near New Delhi. They are bringing funds back to India from the U.S. under the umbrella of that call center’s operations. The manager of the competing call center referenced above found that Hero’s inflows of funds from the U.S. exceed revenues that could reasonably be expected to accrue from U.S. clients of those call center operations.

Hero appears to have been parking funds in the U.S., which it is moving back to India tax-free because of India’s tax exemptions granted to export-oriented IT and research and development operations in that country. This comes less than a month after India unveiled a program to eliminate tax exemptions on U.S.-owned outsourcing and research and development facilities in India, thereby favoring domestic Indian firms. The standard corporate income tax rate in India is in excess of 36 percent.

Chaos

In April 2002, the American IT outsourcing firm InternationalStaff.net sought to enter into a standard non-disclosure agreement (NDA) with Hero as a prelude to providing outsourcing work to Hero from that American firm’s U.S. clients. The head of Hero’s IT outsourcing division at the time, Sunil Sawhney, had his staff propose several revisions to InternationalStaff.net’s NDA. First, Hero wanted this clause removed:

Each Party has had or will have its directors, officers, employees, consultants, and agents who have access to Confidential Information of the other Party sign a non-disclosure agreement in content substantially similar to this Agreement.

To circumvent the NDA and the American firm, Hero inserted this language into the NDA:

Notwithstanding anything contained herein, the Receiving Party shall be free to solicit business from the customers of the Disclosing Party.

With that language, Hero sought to take over the business of its clients.

Hero’s example was followed by the Birla Group’s Manjushree Infotech division in Kolkata (formerly Calcutta), headed by Kalyan Sen. When offered an outsourcing contract in October 2003, Sen’s managers went straight to the client even though Birla was not being charged a brokerage commission by InternationalStaff.net. The U.S. client responded by refusing to deal with Birla. As with Hero Honda, the Birla Group’s environmental record invites attention from investigative journalists looking to break new ground.

Cutting Ties to Polluters

Following a series of disappointing experiences with old-line industrial firms, on June 10, InternationalStaff.net issued a public statement saying that it was cutting its ties to outsourcing service providers with poor ethical practices. The statement said:

Access to IT outsourcing contracts is to be tied to the adoption of the following three principles:

1. Fair treatment of employees and contractors, especially in regard to non-discrimination in hiring, promotion, and the prompt full payment of compensation;

2. Protection of confidential information and non-circumvention of U.S. clients;

3. Environmental responsibility by outsourcers, contractors, and their parent firms.

The statement called on outsourcing clients and other outsourcing project management firms to follow suit. Speaking to others in the industry, the statement read:

It is time for all of us to use the power of the market to set minimum standards and accomplish what governments have been unable to do through laws and regulations. If we stay silent, then we legitimize bad practices and cause long-term damage — not just in the areas where our outsourcing work is being performed, but for our customers too, and discredit the outsourcing process as a whole.

In a subsequent column, internationally accepted approaches for quickly assessing the environmental performance of offshore service providers will be presented. Issues regarding the fair treatment of employees at offshore IT facilities will also be addressed.

Anthony Mitchell, an E-Commerce Times columnist, has been involved with the Indian IT industry since 1987, specializing through InternationalStaff.net in offshore process migration, call center program management, turnkey software development, and help desk management.