Offshoring of German high-tech IT jobs to low-wage countries

ANGLIA POLYTECHNIC UNIVERSITY
Ashcroft International Business School

OFFSHORING OF GERMAN HIGH TECH
IT JOBS TO LOW-WAGE COUNTRIES

A Dissertation in partial fulfilment of the
requirements of Anglia Polytechnic University
for the degree of Master of Business Administration
Submitted: August 2004

von

Andreas Birkholz

Table of contents
List of Figures ... iii
List of Abbreviations ... iv
Abstract  ... v

1 Introduction  ... 1
1.1 Background and Context  ... 1
1.2 Research Objectives  ... 2

2 Literature Review  ... 3
2.1 Definition of Key Terms  ... 3
2.2 Prerequisites for Offshoring  ... 4
2.2.1 Globalisation  ... 4
2.2.2 Decline of Transaction Costs  ... 5
2.2.3 Global Sourcing ... 6
2.2.4 Process Orientation ... 7
2.3 Why Offshoring?  ... 8
2.4 Opportunities and Threats  ... 12
2.5 Where to Locate?  ... 14
2.6 Choosing the Vendor ... 17
2.7 Employment Challenges ... 18
2.8 Offshoring – The Next Bubble?  ... 19

3 Methodology  ... 21
3.1 Design ... 21
3.2 Primary Data Collection ... 22
3.2.1 Interviews vs. Questionnaire  ... 22
3.2.2 Structure of the Questionnaire ... 22
3.2.3 Sample and Processing ... 23
3.3 Secondary Data Evaluation  ... 24
3.4 Case Study: Alcatel  ... 25

4 Data  ... 27
4.1 Results of the Questionnaire ... 27
4.2 Case Study: Alcatel  ... 33

5 Analysis  ... 46
5.1 Impact on the German IT Industry  ... 46
5.1.1 How Large Companies Practise Offshoring ... 46
5.1.2 How SMEs Meet the Offshoring Challenge ... 47
5.1.3 Implications for the German IT Employment  ... 48
5.2 Impact on Quality ... 50
5.3 Impact on Project Management ... 51
5.4 Impact on Human Resources Management ... 52

6 Conclusions  ... 53

7 Recommendations  ... 55

References  ... 57

Appendix A – Questionnaire ... 61
Appendix B – Collected Data ... 65

List of Figures
Figure 1 - Outsourcing vs. Offshoring  ... 3
Figure 2 - Transport and Communications Costs Indexes 1920-1990 ... 6
Figure 3 - Economics of Offshore Outsourcing  ... 9
Figure 4 - Attractiveness of Offshore Locations 2003  ... 14
Figure 5 - 2004 Offshore Location Attractiveness Index ... 16
Figure 6 - Dimensions of Rightshoring ... 17
Figure 7 - Methodology of Vendor Selection  ... 18
Figure 8 - Indian Software Industry  ... 20
Figure 9 - Assumptions on Positivistic and Phenomenological Research  ... 21
Figure 10 - Classification of Surveyed Companies ... 28
Figure 11 - Current Offshoring Destinations of German IT Companies  ... 29
Figure 12 - Planned Offshoring Destinations of German IT Companies ... 29
Figure 13 - Number of Jobs Affected ... 30
Figure 14 - Reasons for Offshoring ... 31
Figure 15 - Problems with Offshoring  ... 31
Figure 16 - The Matrix Structure of Alcatel ... 35
Figure 17 - Alcatel′s Sales, Profits and Employees 1991-2003  ... 41
Figure 18 - Headcount per Region 2000-2003 ... 42
Figure 19 - Headcount per European Country 2001-2003  ... 42
Figure 20 - Headcount in Germany 2001-2004 ... 43

List of Abbreviations
BPO Business Process Outsourcing
BTO Business Transformation Outsourcing
CMM Capability Maturity Model
CS Computer Science
DSL Digital Subscriber Line
EU European Union
GNP Gross National Product
HR Human Resources
HRM Human Resources Management
IT Information Technology
SME Small and Medium-sized Enterprises
TCO Total Cost of Offshoring
UK United Kingdom
UNDP United Nations Development Programme
U.S. United States of America

Abstract

The relocation of jobs to low-wage countries (offshoring) has been a widely used approach of European companies in search of competitive advantage during the recent decades. Whereas in the past production and manufacturing were affected, now the services industry starts to use this option. IT and telecommunications are among the most important services branches of the Western European economies today. Offshoring is becoming a macro-economic problem in these countries because a lot of jobs will be lost.

This dissertation researches the impact of offshoring on the German IT industry. Furthermore it points out the consequences for project management, quality assurance and human resources management. It highlights the pros and cons for the offshoring companies as well as the concerned employees.

This research starts with a detailed literature review that clarifies important key terms and outlines the key findings of other authors. After that the methodology chapter describes the theoretical framework of this dissertation. Within the scope of this research a survey was conducted among 335 German IT companies. As the surveyed companies are primarily small and medium-sized enterprises (SME) it ascertains the attitudes of this type of firms towards offshoring. The subsequent case study of the telecom supplier Alcatel shows the point of view of a global player on offshoring. At the end, the analysis of the results of the survey and the conclusions from the case study lead to the recommendations for large companies, SMEs and the affected IT employees.

The key finding of this dissertation is, that offshoring is a growing trend that no German IT company can deny regardless of its size. Currently the willingness for offshoring is strongly increasing, which means that many firms are in force to deal with this topic and the German IT employees must cope with changing demands in kind of IT jobs.

1 Introduction

1.1 Background and Context

“… Siemens moves headquarters from Munich to Shanghai … Deutsche Telekom to offshore most of IT jobs … SAP relocates European research centre to Bangalore … German government is helpless …”

Notional statements like these seem unbelievable, but when taking some popular German newspapers serious nowadays these statements could become headlines within the next 10 to 20 years. Is this a possible scenario or just cheap propaganda? Is it a threat or an opportunity for European societies? Is it the predetermined way of free market economy or is it worth resisting?

However, the well-developed European countries have been experiencing a major change in the structure of their economies during the last decades. As contribution of the industrial production to the gross national product (GNP) continuously declined the services sector gained importance. This process was accompanied with the relocation of industrial jobs to countries or regions with lower costs. Some examples may underpin this: The textile industry moves to Asia since the 1970s, the automotive industry manufactures in Spain since the 1980s and the computer industry produces in Asia since the 1990s.

It has been the public opinion in the developed countries for a long time that the jobs in the services sector are secured and not subject to relocation. This opinion was driven by an average level of education and knowledge that was much higher than in the developing countries. Meanwhile these countries caught up with the developed countries according to educational level, but keeping the cost low.

The developed countries suffered an economic downturn in the last years that fostered the interest in further cutting operational costs. The companies that are operating globally recognised these circumstances as an opportunity to think about relocation of jobs of the services sector as well. For this type of job relocations the term “offshoring” was formed.

Many economic trends these days emerge in the U.S. Offshoring is not an exception to this. The discussions about offshoring in the U.S. even influence the presidential election of 2004. In Europe, UK is leading the way. In Germany, offshoring was not recognised until end of 2003. At this time Siemens announced plans to offshore some thousand jobs, which caused a big response from the public.
When studying the development of offshoring within the last two years it tells a story of impressive growth rates. So, is offshoring a new phenomenon? Yes and no. The relocation of jobs to regions with lower labour costs has always been a quite normal activity of companies in search of competitive advantage. There are examples from nearly every industry that show such activities in the past. The new thing about offshoring is the type of jobs currently affected and the economic dimensions. That’s why it is valid to take offshoring as a trend.

1.2 Research Objectives

This dissertation’s research question is:

“What is the impact of offshoring for the German IT industry and what are the consequences for project management, quality management and human resources management?”

The dissertation will focus on the German IT industry. This is helpful because labour issues are handled in Germany in a peculiar way that makes it hardly comparable with other countries. Traditionally, the small and medium-sized enterprises (SME) have a great market share in Germany, so for the IT industry. The SMEs have other attitudes towards offshoring than global players. This research points out these differences.

In addition, this research will look at the pros and cons of offshoring for the companies and the advantages and disadvantages for their employees. 
Finally, this research analyses the impact on the German IT industry as a whole.

2 Literature Review

2.1 Definition of Key Terms

In the literature that deals with the relocation of jobs the most frequently used terms are “outsourcing” and “offshoring”. They are sometimes used as synonyms. But as these terms have different meaning it is important to distinguish between them. Robinson and Kalakota (2004:4-5) define three combinations of the two terms:

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