I think I like a bit of moral relativism, even in my cosmic evil, at least for sentient evils. That's not to say that they aren't necessarily beings it's a good idea to not kill, if it comes down either to killing them or letting them continue their plans... it's just that perhaps, even capital E Evil can be redeemed. It may not be a quick redemption, or even likely, but perhaps it's possible. After all, what can change the nature of a man? Quite a bit, really. People do things for love, or due to horror, often out of fear, and occasionally because of random kindness and seeing the joy that results. They may start small, but even in our world, they have been shown to cause amazing things.
And for lesser evils, like orcs, it's not necessarily so much a matter of genetics so much as culture and upbringing. Perhaps the orcs are treated badly, even those raised by humans and therefore know the ins and outs of being a member of the local human village, and so end up hating the people who despise them. Plus, there's always at least three sides to every story, even one where there are only two people. There's the winner's story, the loser's story, and the truth which is generally a mix of both.
The thing is, I think heroic fantasy can co-exist nicely with a somewhat morally relativist world. There can be things which are almost universally regarded as being evil... like say killing for pleasure or money, kidnapping, or torture... That means PCs can be heroes without being "perfect" in any sense of the means. It also means they can be villains without being mustache-twirlers either. Perhaps they are too committed to a cause to care about the damage they're causing or have caused, or maybe they simply haven't thought about the consequences of their actions.
The trick is knowing where to place the line. And having game mechanics that depend heavily on where you are in relation to that line is a problem because the line is a bit blurry and indistinct. The fact is, it's entirely plausible that good characters will disagree on the orc baby problem. In fact, it's pretty likely that such characters will occasionally have arguments like that, because being Good generally requires in part that one be willing to engage in a self-examination of one's behavior and a willingness to check oneself and keep from going too far, and due to differences in upbringing and culture, it's likely no one will agree entirely on where that line is. It's generally only evil characters that don't care about such things, but that's because they've generally adopted a position that only their opinion matters and theirs is the only or one of a few lives worth anything, and such a position means that one will feel such issues aren't worth caring about.
So if you want your heroic fantasy to remain heroic fantasy yet have a few aspects of moral relativism, have the PCs go up against obviously morally wrong individuals most of the time. It's just that occasionally, you show how the orcs aren't totally evil, and perhaps the orc raids are as much the villagers' fault as they are the orcs'. Just enough to bring some ambiguity.
And the thing is, D&D's ripe for such ambiguity. It owes just as much debt to Conan as it does Frodo. And even the Silmarillion, the Hobbit and LotR, possibly the most famous works of modern heroic fantasy ever (I'm not sure if Harry Potter counts) and certainly two of those works upon which rests all of the genre as it is today, has elves that end up being greedy murderers solely out of their own desires, and one of the most well-known evil characters redeemed somewhat out of a desire to change, albeit imperfectly so. Likewise, Conan spends his time doing good at least as often as he does evil. So why must D&D worlds be places where good and evil are totally objective forces? Sauron, Morgoth, and Saruman are evil because they choose to value their desires over the well-being of others. The orcs of LotR are evil because they are twisted until they enjoy inflicting pain and causing sorrow, not because there was a force that said, "Here is the line between Good and Evil. Do Not Cross." The thing is, as the heroes of LotR generally only face evils which are truly evil, the tone remains rooted in heroic fantasy. There's hints of moral relativism there, but they're not used in such a way that it becomes a totally morally relativist world. There is still a clear sense of purpose and right and wrong, but the whole world does not have so much clarity of good and evil, beyond the choices various individuals make. Look at the central plot behind the Hobbit: a bunch of dwarves decide to go steal a treasure for no real reason at all other than they want it. That is not a Good act. It is, at best, Neutral. And that only because Smaug is so clearly Evil. Admittedly, there is a force of absolute Good in the setting, but the being is largely impersonal and not a central part of the saga of the elves, humans, dwarves and hobbits that comprise the LotR sagas. Likewise, Conan's world is generally morally relativist, and again we see that there's some room for heroic fantasy there. So clearly, they can co-exist. The real question, at least in D&D is thus "For best play, should you let absolute evil exist?"
