can you outsource reputation management?

Saku 

I’d like to thank Teppo for inviting me and the other owners of this arena for having me. I have been lurking around this blog every once in a while for some time now and am impressed with what you are doing.

When Teppo asked me to visit, my first reaction was: please, let me prepare. I am working on a million things right now and need to gather my wits to rise to the occasion. My second reaction was: wait a minute, I can use this exalted arena to vent out whatever ideas I am currently working with, maybe get some feedback or at least get the engine running each morning. Incidently, this morning is a rather solemn occasion: Columbine High School -type shooting took place yesterday in a Finnish high school (http://www.yle.fi/news/id74371.html) and everybody’s pretty shaken up, as this is extremely rare in our context. I wish I had something profound to say about this but maybe it’s best to leave this open to interpretation.

The topic I would like to discuss today reputation management, a topic which has been studied stateside for instance by such people as Charles Fombrun and Violina Rindova, and in Europe by Majken Schultz and others. I’d like to introduce a phenomenon which Pekka Aula, my co-author and I have been looking at lately, the outsourcing of reputation management by some firms.

Reputation building: doing good stuff

At the intuitive level, you create a good reputation by

1. Doing good stuff

2. Doing it to parties who are in a good network position to spread the word

3. Being communicative about the good that you do.

Charles J. Fombrun begins his book Reputation, which many consider the rallying call to managers regarding the importance of reputation:

“Do you recall the last time you hired a contractor to make improvements to your house or apartment? Or the last time you called on a travel agent for assistance in planning a trip? […] If you are like most people, you didn’t just pick their names out of a phone book. You probably went to them because they were recommended to you by a family member, friend or someone else you trust. If so, you hired them based on their reputation.” (Fombrun, 1996, p. 1)

Choosing hairdressers, dentists, carpenters, real estate agents and so on in our personal lives is a tangible example of, not just how reputation can be an asset to a business, also how it is built in a network. Herein lies one of the key messages of reputation management (I think): when building your reputation, do not try to communicate promises that you will not keep, either now or in the future. In a recent paper in Strategic Organization (5/1, 2007) Rindova, Petkova and Kotha build an inductive account of how new businesses build reputations in the media. They argue that firms build reputation on three kinds of action patterns:

• Symbolic actions
• Innovative actions
• Action level and composition

Read the Rindova et al. paper if you want to know these mean, and how the process or reputation building is mediated by stakeholder cognitions. My point is just that reputations are built fundamentally on actions, not in PR or marketing. Indeed, my coauthor Pekka Aula once noted that: “marketing increases reputation risk.”

Can you outsource the good stuff?

That’s the moral we would like to believe, isn’t it? You get rewarded for doing good things and punished for doing bad things. Indeed, reputation can be used as a motivator for corporate social responsibility and other forms of business ethics: do good stuff or pay for it. The soup thickens somewhat when we look at the arrangements companies make to “buy reputation”, or “outsource reputation.” Indeed, I would argue that there is a whole business for reputational outsourcing. I am not talking about PR or marketing agencies who make companies look good, but assurances that you can acquire that your actions are moral or benevolant.

Many big businesses have been linked to child labor in the developing world, which is certainly harmful for their reputations. This is a tricky issue, since many businesses have outsourced operations to a number of subcontractors. For reputational reasons, it is in the parent company’s interests to control its subcontractors in order to protect its reputation. IKEA has had to face reputation risks, as it employs a lot of contract factories. IKEA has published its ethical codes for subcontractor activities entitled The IKEA Way on Purchasing Home Furnishing Products, which includes a chapter entitled The IKEA Way of Preventing Child Labour (http://www.ikea-group.ikea.com, read 20 June 2005). IKEA’s rhetoric is friendlier in tone that Nike’s, yet it is still firm. In its general ethical guidelines it states the following:

“The IKEA Group believes in long-term relationships with suppliers who share our commitment to promote good practices, and who want to grow and develop with IKEA. We expect them to respect fundamental human rights, and to treat their workforces fairly and with respect.” (www.ikea-group.ikea.com/corporate/responsible/conduct.html)

IKEA has apparently succeeded rather well in fighting child labor, as UNICEF considers the company to be a successful example in its guide on preventing child labor (http://www.unicef.org.uk/publications/clrg/app6.asp). It would be hard for a company to receive better institutional support than this. Sporting goods manufacturer Reebok and clothing manufacturers Levi Strauss and Pentland Group are mentioned in the same context.

It can be argued that the arrangement between IKEA and UNICEF is a form of reputational outsourcing. While UNICEF commences in reputational outsourcing only as a “minor venture on the side”, there are organizations specializing in reputation outsourcing of specific kinds. One well-known example is Fairtrade Labelling Organizations International. It is “an association of 20 Labelling Initiatives that promote and market the Fairtrade Certification Mark in their countries” (http://www.fairtrade.net/). The certification process for a producer operating in the third world, as well as an importer in the developed world involve the implementation of a set of standards maintained by the Fairtrade organization, as well as fees paid to the certification branch. The standards involve issues such as work conditions, pricing, various contractual issues such as favoring long-term contracts, etc (www.flo-cert.net).

While there is no reason to doubt that Fairtrade is driven by an ethical mission, the certification process can also be viewed as a reputational outsourcing service. The key is that the Fairtrade accepts a reputation risk in return for compliance with its standards as well as a set of monetary fees. They too regard the producers and traders as “customers” and make assurances that they are continuously improving their “services”.

The “carbon offsetting” fares, offered for instance by many airline companies are a further example of reputational outsourcing. Airline passengers are reminded by their airline providers that, by traveling by air, they are taxing the environment. A solution is offered by adding a voluntary, extra fare, calculated on the basis of the length of the travel and number of passengers. The notion of “offsetting” the environmental damage caused by the airplane is based on the activities of the offsetting organization, which conducts a variety of projects to conduct or fund projects that plant new forests, implement sustainable energy sources and so on.

One of many such acts of outsourcing reputation is the partnership between British Airways and Climate Care, an offsetting company. Climate Care is a financier, which provides funding to a number of projects aimed at reducing CO2 emissions or their effects. Climate Care (http://www.climatecare.org/) attracts potential business partners by offering them, among other things “a cost-effective – or cost-free – way to engage consumers in products or services”. The company assures that it is “committed to leading best practice in our approach to offsetting emissions. Our Environmental Steering Committee has played a key role in guiding our work.” The Environmental Steering Committee, which is brought up as a source of legitimacy, consists of representatives of a number of legitimate environmental organizations, such as WWF, Forum for the Future and the British Foreign Secretary’s Office.

There have been critical voices around whether carbon offsetting is a good thing in practice – see, e.g., http://www.ft.com for a number of critical texts with the keyword “carbon offsetting”. Indeed, the kind of reputational outsourcing offered by organizations like Climate Care bear a striking resemblance to the age-old business by the Catholic Church of selling indulgences to sinners (a practice which Martin Luther saw as the final insult). It indeed seems lucrative to companies: let us charge your customers a bit more for the evils they are committing by buying your products/services and give them absolution for their sins. You gain reputation as a benevolent company, while your customers pay the bill.