Rupert Murdoch: Outsourcing Moral Ambiguity

Last Updated Jul 18, 2011 3:05 PM EDT

Using the metaphor of Russian nesting dolls, Harvard Business School professor Michel Anteby looks at the meltdown in the Rupert Murdoch media empire and sees a lesson in it for all.

Murdoch's paper News of the World apparently hired nonjournalists outside the company to hack into the voice mail systems of its targets, Anteby writes. "That these hackers seem not to be News of the World employees illustrates the Russian nesting doll model, which contains the seeds of moral hazard, since it allows for the plausibility of denial."

Moral hazard occurs when an individual or institution, insulated from the consequences of its actions, acts less carefully than it would have if it had full responsibility.

Moral hazard is readily recognized as a potential problem in several industries that follow outsourcing practices, such as in the food and apparel industries, where the production chain must be secured by the contractor. But most other industries "have yet to recognize such a hazard," says Anteby.

"The Murdoch case teaches us that nesting dolls require our full attention," Anteby concludes. "Although these configurations may seem nimble, they can also be highly problematic. Because professional groups are working separately for a common cause does not mean that the production line is secure. In fact, the nesting dolls model may be the best way to go wrong while seemingly doing the right thing."

To what extent should companies police their outsourcing partners? Should companies that commit moral hazard be punished even if they can claim plausible deniability?

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(Photo by D. Sharon Pruitt, CC 2.0)
  • Sean Silverthorne

    Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001.

    Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News. While at At Ziff-Davis, Silverthorne also worked on the daily technology TV show The Site, and was a senior editor at PC Week Inside, which chronicled the business of the technology industry. He has held several reporting and editing roles on a variety of newspapers, and was Investor Business Daily's first journalist based in Silicon Valley.