Diploma Thesis, 2007
114 Pages, Grade: 1,7
LIST OF ABBREVIATIONS
TABLE OF FIGURES
1.4 BACKGROUND - WHY CHOOSING THIS TOPIC
2.1 RESEARCH DESIGN
2.2 RESEARCH APPROACH
2.3 DATA COLLECTION
2.3.1 Secondary Data
2.3.2 Primary Data
2.4 LIMITATIONS OF THE RESEARCH
2.5 CHAPTER OUTLINE
3 OUTSOURCING AND OFFSHORING
3.1 INTRODUCTION TO OUTSOURCING AND OFFSHORING
3.1.2 Forms of Outsourcing
3.1.3 Forms of Offshoring
3.1.4 Motives, Potentials, Risks
3.2 INDIA - IT NATION AND OFFSHORE LOCATION
3.2.1 Country Profile
3.2.2 Development of the IT Industry
3.2.3 Current State of the Offshoring Industry
3.2.4 Key Factors of the Indian Success
3.2.5 Major Indian IT Players
3.2.6 Future Developments
3.3 CURRENT STATE AND FUTURE DEVELOPMENTS IN OFFSHORING
3.4 CONCLUSION - KEY FACTORS FOR SUCCESSFUL OFFSHORING PROJECTS
4.1 DEFINITIONS OF CULTURE AND ITS IMPACT ON BUSINESS
4.2 PROBLEMATICS OF MISUNDERSTANDING
4.2.3 Layers of Culture
5.1 THE COMMUNICATION PROCESS
5.1.1 Phases of an Offshoring Project
5.1.2 Process and Communication Interfaces
5.1.3 The Elements of a Message
5.2 VERBAL COMMUNICATION ACROSS CULTURES
5.2.1 The Link between Language and Culture
5.2.2 Communication Style and Tone of Voice
5.2.3 The Need for Linguistic Proficiency
5.2.4 The Notion of Feedback
5.3 NON-VERBAL COMMUNICATION ACROSS CULTURES
5.3.1 Body Language and Eye Contact
5.3.2 Feelings and Emotions
5.3.3 Proxemics - The Language of Space
5.3.4 The Relation towards Time
5.4 THE INFLUENCE OF CULTURAL VALUES ON COMMUNICATION
5.4.1 Involvement and High and Low Context Cultures
5.4.2 Group and Individual
5.4.3 Organisational Hierarchy and Decision-making
5.4.5 Gender Egalitarianism
6 MANAGEMENT SOLUTIONS FOR COMPANIES
6.1 CREATING CULTURAL AWARENESS
6.2 USING FEEDBACK SYSTEMS
6.2.1 Customer Feedback
6.2.2 Employee Feedback
6.3 DUAL SHORE MODEL
7 CONCLUSION AND OUTLOOK
7.1 CONCLUDING REMARKS
7.2 FUTURE WORK
A. QUESTION CATALOGUE
B. CBR 50 INDEX OF IT SERVICES VENDORS
C. EXAMPLE OF A CULTURAL PREPARATION SEMINAR OUTLINE
D. EXAMPLE OF A CULTURAL BUSINESS SIMULATION GAME
E. EXAMPLE OF A CUSTOMER FEEDBACK SHEET
Today, communication between different cultures becomes more and more necessary due to (1) economic changes such as globalisation, (2) political changes i.e. the formation of international communities, or problems which do not care about borders, and thus problem solving cannot either, and (3) changes in personal lifestyle.
But communication is already a complex process for members of the same culture. In interaction with different cultures, it is even more difficult to establish the true intention of the sender of a message. Misunderstandings and communication breakdowns are part of intercultural business reality. Difficulties can arise through language barriers, misinterpretation of verbal and non-verbal behaviour or different shared values and experiences. Other reasons for communication difficulties are ethnocentrism, stereotypes and prejudices.
This thesis provides an insight in the challenge of offshoring French IT projects to India. First, it gives an overview of outsourcing and offshoring, including advantages and disadvantages. Second, it presents India as an IT nation and offshore location. Afterwards, it describes the current state of global offshoring, with a special focus on developments in France.
In the following chapters, it explains culture, its phenomenon such as ethnocentrism, stereotypes and cultural layers as well as the culture’s impact on business. Moreover, this thesis analyses the communication between French and Indian nationals. It begins with describing the communication process including the phases of an offshoring project and communication interfaces. Subsequently, verbal and non-verbal elements of communication across cultures are explained. Additionally, the influence of cultural values on communication between Indian and French nationals is demonstrated.
In the end, after having discussed communication problems according to the first-hand research, the thesis tries to provide the reader with solutions to major problems such as creating cultural awareness, employee development and preparation for assignments abroad, using feedback systems and offshoring according to the dual shore model.
First and foremost, my grateful thanks go to Professor Dr. Margarete Seidenspinner of Heilbronn University, the supervisor of my diploma thesis. Her support and encouragement has accompanied me throughout the months of working on this paper. Additionally, I thank Claude Alavoine of IPAG Nice for his guidance in the early stages of my thesis work.
I would also like to offer my appreciation to my interviewees: Bernd Bücklein of BASF AG, Aurélien Debruxelles of Sogeti / Microsoft France, Anaïs Devilliers of TATA Management Training Center, François Labesse of Capgemini, Mikaël Létang of NatureSoft, Rajesh Krishnamurthy of Infosys Technologies Ltd, Niranjan Nayak of TATA Consultancy Services, Lionel Pimpin of Accenture, Pretesh Soni of Delphi Corporation and Deepti Zacharia, an Indian architect, for their time and support. The discussions I had with them were very valuable and helpful for this thesis as well as enjoyable.
Special thanks goes to my family, friends and colleagues, especially to Adeline, Anna, Gaëlle, Jemma, Julio, Leora, Malay, Markus, Micha and Ernö, Pa and Marion, Sabse, Sonja and Sven for helping to sort through my thoughts and finding this topic, for letting me use their computers while mine was broken, for support and general advice on how to write a thesis, for tips regarding the preparation and conduction of the interviews, for correctional lecture as well as for accommodation.
Last but not least, my appreciation goes to the employees and maintainers of the libraries of Universität Mannheim, Université de Nice Sophia-Antipolis and IPAG École Supérieure de Commerce de Nice because without making the books available I used for reference I would not have been able to accomplish this thesis.
illustration not visible in this excerpt
Figure 1: Key Factors for Outsourcing Decision
Figure 2: Political Map of India
Figure 3: India - High dynamics in the IT market
Figure 4: Most Recent Annual Revenues of Indian IT companies
Figure 5: Freud's Iceberg Model for Unconscious, Pre-conscious and Conscious Culture
Figure 6: Communication Interfaces in Offshoring projects
Figure 7: The Basic Pattern of Communication
Figure 8: Hall's Space Differentiation
Figure 9: Country Classification in Hall’s High vs. Low Context Dimension
Figure 10: Off-the-job and On-the-job Methods
Figure 11: The Components of International Management Competence
Figure 12: The Connection between Feedback and Change
Figure 13: The Handling of Offshoring Projects according to the Dual Shore Model
Figure 14: Summary of Cultural Differences between French and Indians
“The labels ‘international’ and ‘domestic’ no longer apply.”
(Roberto Goizneta, 1996)
The modern society develops more and more to a global society. Since the mid 1960s a steady rise of international relations between nations can be remarked (Blom/Meier, 2001:2). This development is called globalisation which is defined as a form of strategy of a cross-border business venture where competitive advantages are established by the exploitation of location advantages and economies of scale (Gabler Wirtschaftslexikon, 1992). Globalisation has been supported by several factors like technological innovation and political developments. From the technological side, one can notice constantly falling transportation costs as well as the development of cost saving communication technologies and the compatibility of technological equipment (Pyke, 1999:107). From a political side, one can see institutional changes like the liberalisation of the global market as part of the establishment of institutions like GATT and WTO1. Furthermore, the breakdown of the socialistic Eastern bloc accelerated the development of worldwide interwoven economies (Gerecke, 1998:2). The ongoing globalisation bears indispensable chances for industrialised as well as developing countries and huge advantages for consumers and manufacturers. Due to work sharing, cheap labour countries increase income and living standards for their population and at the same time producer and consumer goods can be offered in high quality to competitive prices all around the globe. Therefore, an increasing world trade is an advantage for everyone.
According to Pyke (1999:107) companies see their advantages of global trade in the access of cheaper labour, a more uniform quality, better access to new technologies, ideas and innovation as well as local markets. Furthermore, they appreciate greater economies of scale due to consolidated production and lower logistic costs and they benefit from lower taxes and duties as well as from less pressure by labour unions. Other reasons are a more consistent supply because the seasonality of the domestic market has less impact, the ability to leverage and the chance of spot deals. Besides those advantages, companies are forced to react because of an increasing pressure from competitors and the need to be close to the foreign customer. The result is a steady augmentation of international co-operations or acquisitions, foreign subsidiaries or joint ventures to use synergy effects and competitive advantages on a global basis (Schrempp, 2002:V; Aretz/Hansen, 2003:10).
In times of globalisation, offshoring is a huge challenge for companies, national economies, and governments because it bears a lot of advantages but there are some difficulties to cope with as well. Due to the growing number of international business relations, collaboration with people from different cultures becomes increasingly important.
Nowadays, companies send their employees abroad or let them interact with foreign partners on a daily basis. When dealing with international business, cultural differences need to be taken into account. People from different cultures distinguish themselves through different thinking and behaviour patterns. As mentioned above, the contact with cultural diversity can hold lots of positive effects but bears risks as well. Therefore, it is important to avoid or limit the risks and to use synergy effects and chances in order to succeed in the international business environment.
One can achieve intercultural synergies if all people involved recognise and try to exploit achievement potentials. The management challenge is to realise and link effectively the diversified culture specific strengths of international teams. Therefore, organisations, tasks and processes need to be designed in a way that as many employees as possible can bring in their individual strengths (Herbrand, 2002:42-43).
According to Stüdlein (1997:44-45), management and culture are closely connected: every culture has an influence on managerial behaviour and consequently managerial behaviour can be understood only within a certain cultural context. Because of this interrelation between culture and management, it has a huge influence on all operations within an organisation and management concepts cannot be easily transferred from one culture to another (Stüdlein, 1997:44-45). Some observers of world wide developments see an ongoing trend towards a global culture. But Palazzo (2000:1-6) highlights that this unification takes place only on the surface and does not touch deeply anchored values and beliefs. The discrepancy between the assumed unification and the actual continuity of deeply established cultural differences bears the danger of intercultural miscommunication and violation of oppositional values (Palazzo, 2000:1-6)
To conclude, different cultures cannot be ignored but need to be understood as a key element of global management practices. Culture distinctive managing demands the understanding of cultural differences and the ability to act intercultural competently gains more and more importance for the success of global activities (Spies, 2005:111; Stüdlein, 1997:44-45). As offshoring contributes to the competitiveness of a company, it will become more and more important in the next few years. In order to profit from offshoring projects, companies need not only to plan and organise well but need to take into account cultural differences as well. Experience shows that communication and knowledge transfer are key success factors but often underestimated and as a result companies profit less from offshoring advantages. The more a company considers culture and resulting differences that affect business conduct, negotiation and communication, the better the outcome of its offshoring projects will be.
The overall aim of this thesis is to give an insight in the dilemma of cultural differences in communication and its impact on today’s business because successful communication seems to be crucial for the understanding of offshoring partners and the positive outcome of offshoring projects.
In detail, the study gives an overview of recent developments and future outlook of the offshoring industry in France and India. Further, it analyses French-Indian business relations and seeks to explain intercultural difficulties that arise in business between the two nations. Moreover, the researcher’s intent is to create awareness of one’s own cultural background and appropriate behaviour in a global business context. In the end, the thesis tries to give advice on how to overcome cultural barriers in order to achieve a successful outcome of using Indian offshoring services.
Based on the researcher’s own experience of cultural differences during her various visits abroad, including longer stays in India and France for work and studies, the interest arose to dig deeper into the specific ‘features’ of these two cultures.
Moreover, a work placement with an Indian IT outsourcing supplier provided a lot of inside and firsthand experience for the setting of the intercultural communication dilemma in the current Western2 countries’ business trend of offshoring to low cost countries like India.
The timeliness of the controversial outsourcing and offshoring debate ensures an interesting background setting and topic to analyse, not only for the researcher herself but for the readers of the thesis as well.
After having explained the phenomenon of globalisation and having provided the problem definition and objective for the study, the researcher will explain the chosen research method; the process of data collection as well as the research quality will be delineated.
The research design comprises of procedures and methods specified for collecting and analysing the information needed. The following paragraph explains the different steps and stages of the chosen research design.
First of all, based on the researcher’s past experience within an Indian company, the topic of this thesis has been chosen and key problems while communicating in a completely different culture have been identified. However, the research goes further and tries to address the dilemma not only by analyzing visible differences but by going further into differences which are not obvious at first sight. Furthermore, methods to deal with cultural differences in communication are presented.
After the problem, its environmental context and its components have been defined (see chapters 1.1 and 1.2), alternative research designs, namely conclusive and exploratory research, have been evaluated. Therefore, a flexible research scheme was designed that aims at providing insights in the problem dealing in daily business and facilitates the comprehension of different methods of problem solving used in business practices.
The goal of the thesis is not to test specific hypothesis because cultural differences are given, but rather to expand the understanding of the problem by looking at ways of problem solving and handling in business practices. Thus, in order to incorporate the gathering of relevant background information to refine possible solutions, it was decided that an exploratory research design is the most appropriate way to gather the information needed. At the end of this thesis, following the conclusion of the research results, the ground is set for further conclusive research.
The chosen research design which has been explained above implies a qualitative rather than a quantitative approach to data analysis. The reason for the researcher’s decision is that the response rate for questionnaires is usually low (Kotler, 2003:137) and as a result a high number of possible participants would have been needed to be approached. This is not suitable for the chosen research design where the emphasis is on first-hand experience and best practice sharing. According to Van Maanen (1979:520), qualitative research includes “an array of interpretive techniques which seek to describe, decode, translate, and otherwise come to terms with the meaning, not the frequency, of certain more or less naturally occurring phenomena in the social world”. Consequently, the qualitative approach is seen most appropriate to achieve an in-depth understanding of the research problem at hand.
After the decision of the appropriate approach has been made, a fitting strategy for the collection has to be designed. As the researcher has a basic knowledge of the problem at hand, due to her experience in the Indian business environment, but requires more insight in order to deal with the totality of the dilemma and evaluate possible solutions, it has been chosen to derive information from primary and secondary data. Secondary data analysis preceded the primary data collection in order to define the additional information and insight needs.
Secondary data has been drawn from published materials in offline and online sources, whereas the focus has been on materials available offline. The offline sources that were reviewed and analysed include relevant academic literature and scholastic journal articles, as well as industry reports and researches. Online sources that have been consulted include full-text databases that provide full-text access for several journals in business and management as well as related governmental and industry websites.
Since the secondary data does not provide any insight into the specific handling of the dilemma in business practice, primary data was collected.
Selection of method and target group
It was decided on conducting interviews rather than having filled out questionnaires because this approach allows a flexible way of gathering the information needed. The peer group of interviewees consisted of representative managers of companies considered the main players in the industry. To have an insight on both cultures and their approach to business, the companies which were approached, represent a mixture of Western companies with subsidiaries in India and Indian companies with representative offices in France. The range of interviewees include French nationals in France who are in charge of the communication with the Indian subsidiary, French nationals based in India as well as Indian nationals based in France.
Regarding the structure of the interviews, the purely structured or standardised interview approach was rejected because the researcher wanted to develop a dialog with the interview partners. Therefore, the researcher decided on a semi-structured form which is the combination of standardised and non-standardised interview techniques to extract more and a greater variety of information during the process, a natural information flow but yet a similar structure for all interviews with the same topics addressed. According to Chrisnall (2001), a standardised interview submits identical questions to all respondents which assist in data analysis and processing because the information gathered is similar. A non-standardised interview consists of a sequence of questions which wary in wording in order to attract a maximal response. This approach is used for topics which are not customarily free for discussion. However, as the interviewer has to choose the timing for the questions he has a greater personal responsibility and also the recording and analysis of the data is more difficult (Chrisnall, 2001). As the researcher chose a semi-structured technique, she has the possibility to vary the principal questions in order and to add a question that involves further into a business practice presented by the interviewee which allows the researcher to get the most information out of every response.
A catalogue of questions (see appendix A) was designed prior to the interviews in order to underlie a principal structure for the interviews. The catalogue contains a series of unstructured, open-ended questions designed for free response of the interviewee, and structured, closed questions with an expected limited response. Closed questions were primarily used for collection of facts. Open questions were included in order to provide richer insights into business practice and expert responses and were used in a conversational style rather than simply Q&A. The questions were arranged in a logical order for conducting the interview; however, the researcher had the possibility to vary the initial chronological order in order to guarantee a natural development of the interview, to achieve greater data clarity and to allow digging deeper into certain aspects and therefore getting the interview partner to elaborate on his answers.
The question catalogue consists of 23 questions arranged in different parts and adapted to the interviewee’s nationality. In the introductory part, questions 1 and 2, the status quo of the business relation is detected through open inquiry about business nature and duration with the opposite culture. These questions are considered as the basis for gaining an overview of the company involvement and the depth of the cross cultural experience. Questions 3 to 5 are used to achieve a first insight into the intercultural relation and possible indicators for problems that occurred. Questions 6 and 9 give an insight into how important the managers consider communication. Question s 10 to 12 ask about cultural awareness of the involved parties, any incidences of feeling uneasy, and differences in communication style. Question 13 inquires about the importance of feedback, its handling and the use of a feedback monitoring system. The following two questions (14 and 15) ask about differences in company hierarchy and the equality of men and women in business context. The subsequent questions 16 and 17 query the relation towards time and its influence on conducting business as well as arising problems due to possible delays as a result of cultural differences. Question 18 is a bundle of two questions and posed to get an insight in the seriousness of quality standards and the different approaches to achieve them. The following question measures the distribution of employees: foreign versus domestic personnel in the appropriate subsidiary. Question 20 is comprised of two questions and stands in relation to the previous questions (10 to 17) and prompts the respondents to give their view on cultural preparation seminars and their usefulness abroad. Additionally, the depth of the exposure to the other culture when being abroad is inquired in question 21. Eventually, the last questions (22 and 23) ask about additional comments and personal statistical data like position in the company and length of employment.
Before using the question catalogue during the interviews with the selected companies it had to be pre-tested. The testing was done by posing the questions to an Indian national who has been living in Europe for one and a half years now and a manager from a German company. Both persons were chosen because they share similar characteristics with the peer group. Through this pre-testing, the researcher was able to find out possible comprehension problems due to question formulation and problems in the logical sequence of the questions. The final version of the questionnaire was used during the interviews which took place as face-to-face conversations in the respective companies in the Paris region or via Voice over IP (VoIP)3 and instant messaging for the interviewees working in India at the moment. The results were collected by note-taking.
Target companies and response rate
Initially, ten leading companies of the industry were approached of which the following have agreed on taking part in the research: Accenture and Capgemini as Western company representation and Infosys Technologies and TATA Consultancy Services as Indian company representation. Managers from IBM Global Services, Atos-Origin, Deloitte Consulting, BearingPoint, HCL Technologies and Wipro Technologies did not participate due to various reasons. To enlarge the group of interviewees, an Indian employee from Delphi and a French employee from Sogeti working for Microsoft France were approached. Additionally, two French nationals who are based in India at the moment of thesis writing were approached and agreed on taking part in the research. They work for NatureSoft in Chennai and TATA Management Training Center in Delhi. Therefore, the response rate can be considered as a good one.
One limitation of the research is the rather short time frame and limited cost budget which the researcher had at hand for conducting her research. Therefore, only a small group of managers was interviewed. The data gained from those interviews is used to give an insight in the communication dilemma and daily conduct of global business relations. However, the data can neither show trends nor be used to generalise differences and problems in French-Indian communication. Consequently, the statements from the interviewees are used to give examples of business practice and to support secondary data from literature.
Furthermore, the researcher would like to emphasise that interpersonal communication is a very complicated process which cannot presented entirely in this thesis because the phenomenon ‘culture’ is too complex to be treated here altogether. The focus of this paper lies primarily on general cultural standards of French-Indian communication within a business context.
This leads us to another limitation: the generalisation of cultural characteristics. The reader needs to keep in mind that the cultural characteristics and differences stated below are based on general cultural values and beliefs in France and India, as stated in literature and experienced by the researcher herself. However, every individual, no matter whether French or Indian, has his own set of mind, thinks and behaves individually. Therefore, a statement which may apply to some people, business relations and situations, may not apply to others. The researcher would like to highlight that each and every situation should be judged separately and not on the base of general statements provided by this thesis or any other report on cross cultural communication.
The thesis is subdivided in seven chapters. The first chapter gives an introduction on globalisation and defines the problem and objectives. Furthermore, it gives the reasons of the researcher for choosing this topic. In the following, the next chapter provides an insight in the methodology of the diploma thesis at hand, including the chosen research design and research approach. Moreover, the researcher explains the finding and use of primary and secondary data. In the end, the limitations of the research are highlighted. In the third chapter, the reader gets introduced to the topic of outsourcing and offshoring. Additionally, India is presented as an IT nation and offshore location as well as current state and future developments in global and French offshoring. Further, key success factors for successful offshoring projects are explained. Chapter four defines the phenomenon of culture. Moreover, it shows the impact of culture on business and highlights the problems and basics of misunderstanding. The fifth chapter deals with intercultural communication. It begins with describing the communication process including the phases of an offshoring project. Subsequently, verbal and non-verbal elements of communication across cultures are explained and in the end, the influence of cultural values on communication between Indian and French nationals is demonstrated. In chapter six, management solutions for companies are presented in order to limit the influence of cultural differences on communication. The last chapter gives a conclusion to the topic treated in this thesis as well as a future outlook on additional research that may be done. After this, references, appendices and the declaration of the researcher concerning copyrights are added.
“Outsourcing is very controversial and […] has been praised as cost-effective, efficient, productive and strategic - but also condemned as evil, money-grabbing, destructive, ruthless, exploiting the poor.”
(Dr. Patrick Dixon, Chairman of Global Change Ltd, 2005)
This chapter gives an introduction into the topic of outsourcing and offshoring, discusses advantages and disadvantages, presents India as an IT nation, and provides an overview of current developments worldwide and in particular in France.
Outsourcing is a topic which is highly discussed all over the world. However, outsourcing is a buzzword that is used differently in numerous articles and speeches. Indeed, outsourcing means only the transfer of company tasks or structures to a third party. Offshoring, on the other hand, means transferring tasks and structures abroad. Thus, what is actually discussed everywhere is not outsourcing but offshoring.
The term outsourcing is an artificial word which has been created out of the English words “outside”, “resource” and “using” and means the usage of external resources (Schwarze/Müller, 2005:6). It is defined as the delegation of usually non-core operations, which were traditionally done internal, to an external company that is specialised in this particular operation. Another term for outsourcing is “contracting out” because the operation or part of business is done by a subcontractor (Ebert, 2006:12).
Outsourcing does not define to where the operation is contracted out. Furthermore, it does not specify whether the operation is a whole process called “Business Process Outsourcing” or only a simply activity called “Body shopping” (Ebert, 2006:12).
The term offshoring is defined as the relocation of business operations outside a company’s home country. Depending on the distance of the relocation site to the company’s facilities, one speaks of “onshoring” or “onsite”, “nearshoring”, and “offshoring” (Meissonier, 2006:22). Offshoring does not indicate what kinds of operations are relocated.
Both terms may be used in combination with each other but outsourcing does not necessarily mean offshoring, and vice versa.
Following a model of Schwarz and Müller (2005:12-13), outsourcing can be divided into several forms and grouped into different dimensions of content. The forms can be combined with each other and show the wide range of outsourcing possibilities.
The degree of financial dependence is defined by the percentage of the outsourced part as an amount of share of the whole unit. One can distinguish Internal Outsourcing, Joint Venture, and External Outsourcing. Internal Outsourcing is the case if operations are shifted within the borders of a concern or holding. External Outsourcing is meant by subcontracting an external entity. The Joint Venture is seen as in-between, because the company outsources to a legally independent entity which belongs partly to the company and partly to an outsourcing partner (Schwarz/Müller, 2005:12-13).
Type and range of activities
According to the percentage of external proceedings, one can classify the activities in Total Outsourcing, Selective Outsourcing and Total Insourcing. Total Outsourcing means that 80 and more percent of a business activity is done by a subcontractor; Total Insourcing means that about 80 and more percent of the operation is done by the company itself. The rest is called Selective Outsourcing (Schwarz/Müller, 2005:12-13).
Regarding the actual outsourcing projects, the following categorisation can be applied: IT Infrastructure Outsourcing, Application Management Outsourcing and Business Process Outsourcing (Schwarz/Müller, 2005:12-13). Examples for BPO are software development, data base management, salary statements and accounting (Müller, 2005).
Number of subcontractors
If a company has only one outsourcing partner, one speaks of Single-Sourcing. If the company outsources to two or more external entities, it is called Multi-Sourcing. Important for Multi-Sourcing is the strict separation of activities (Schwarz/Müller, 2005:12-13).
The classification within a time frame can be distinguished in Insourcing, Outsourcing, and Backsourcing. Insourcing is the development of activities which have been done before neither internal nor external. Outsourcing is the externalisation of internal activities to an outsourcing partner. Backsourcing is the reintegration of outsourced operations into the internal business activities of a company (Schwarz/Müller, 2005:12-13).
Outsourcing near the company’s premises is called Onshoring or Onsite-Outsourcing. Outsourcing to neighbouring countries is called Nearshoring, and to a greater geographical distance Offshoring (Schwarz/Müller, 2005:12-13). As this thesis focuses on offshoring, these forms will be discussed in more detail in the following part - Forms of Offshoring.
Offshoring can be divided into internal and external offshoring. Internal offshoring describes the situation when a company founds an affiliated company or subsidiary, i.e. in an Asian country to relocate business operations in order to benefit from i.e. low cost labour (Ebert, 2006:13). This form is called Captive-Offshoring (Schaaf, 2005:3).
External offshoring may also be called outsourcing and describes the situation when a company relocates operations to a specialised subcontractor. If a company outsources to an entity which is situated in the same country, the process is called Onshore-Outsourcing or onsiteoutsourcing. If a company contracts out to a company in a neighbouring country, one speaks of Nearshore-Outsourcing. Both forms have the advantage of short travelling distances, the same time zone as well as cultural similarities. For French companies near-shoring locations are usually in Eastern Europe, i.e. Poland or the Czech Republic, or the Maghreb states (Ebert 2006:13; Meissonier, 2006:22; Schwarze/Müller, 2005:13).
If a company subcontracts another company where the geographical distance is greater, the term Offshore-Outsourcing is used. Favourite offshoring locations are Asian countries such as India, China, Thailand or the Philippines because Western companies want to profit from more favourable conditions i.e. low labour costs (Ebert 2006:13; Meissonier, 2006:22; Schwarze/Müller, 2005:13).
The most favourite business sectors for offshoring are banks, insurances and financial services with 35 percent, followed by telecommunication and technology with 25 percent and production with 15 percent. Other offshored sectors are retail business, logistics, tourism and dotcoms and start-ups (Pohl, 2005:201).
The principal economic, business and technology forces of offshoring
According to Carmel and Tija (2005:3-5), offshoring represents an important milestone in global economics. Several forces set the course for the worldwide offshoring phenomenon. The probably most important of these factors is the globalisation of trade in services which was enforced by the opening of the borders in the 1980s and the acceptance of market based solutions. The collapse of the Soviet bloc in the 1990s boosted the trend even further. The increasing world competition forced countries to create business friendly investment climates like tax incentives and other subventions in order to attract foreign investors. Another force was the decrease of communication costs due to the fast development of technologies. With new technologies like VoIP international calling costs dropped to almost nothing, broadband internet access is becoming more and more standard allowing faster internet connections.
The outcome is that nowadays it is almost as easy to work with someone across the ocean as it is with someone from across the town. Standardisation or ‘commoditisation’ of software plays a major role as well because as soon as a task is routinised and automated, it can be produced by the one who offers the lowest costs. Furthermore, the growth of the offshore labour pool supported the trend of offshoring. Universities technical colleges in India, China and other emerging countries graduate millions of students every year with a technical diploma that is equal to Western education levels and quality. Last but not least, the different global wage levels were a dominant key force in the development of offshoring. Rising costs and the pressure to stay competitive have made offshoring a strategic necessity for some companies (Carmel/Tija, 2005:3-5).
Small and large companies have different motives why they outsource parts of their business. Small companies seek suppliers to which they can outsource parts of their business activities because they would like to develop a certain field of operation. Therefore, they look for a partner relationship with their suppliers. On the opposite, for large companies, outsourcing is often seen as an opportunity to rationalise the company’s fields of activity. Outsourcing allows those enterprises to concentrate on their core business and externalise operations non-core activities. As a result, large companies engage in order-execution relationships rather than partner relationships (Meissonier, 2006:24).
In general, the problem of which activities a company should outsource is very complex and should be well considered before arrangements are made. Following the argumentation of Cordon, Vollmann & Heikkilä (1999:117), the topic is often addressed with too simplistic arguments like “we outsource our non-core activities and what we keep in house are our core competencies.”
Regarding the offshoring decision, large companies use either internal or external offshoring. Especially multinational or transnational corporations4, which have the necessary financial resources, prefer to develop their own subsidiary abroad instead of hiring subcontractors. Small companies usually use external outsourcing only because they do not have the resources to build up their own facilities abroad (Meissonier, 2006:24).
Potentials of Outsourcing
Outsourcing offers several potentials to companies. According to a research survey of Getronics who questioned IT executives in the US and six European countries in 2003, the main reasons for outsourcing is cost reduction and cost structure changes (see Figure 1). Outsourcing allows companies to reduce their costs because subcontractors produce or offer services to a lower price due to economies of scale or low cost environments. Besides, fixed costs, i.e. personnel, can be transformed into variable costs and adapted dynamically to the company’s changing needs. Furthermore, as it is necessary to calculate costs before the decision making whether and what to outsource or not, companies gain the chance to get an overview and transparency over their costs because hidden costs will be shown as well. Especially internal IT costs are a challenge to determine and calculate because of compilation and defining problems (Schwarz/Müller, 2005:8). This can also result in a higher cost consciousness among employees for the future. Schwarz and Müller’s experience show that outsourcing can reduce costs up to 38 percent, and in the field of IT applications up to 17 percent. However, these percentages are dependent on the particular situation of each company and should not be generalised.
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Figure 1: Key Factors for Outsourcing Decision
Source: Getronics, 2003:2
In the study of Getronics in 2003, managers mention the concentration on core business as the second most important point after cost reduction when it comes to the potentials of outsourcing. The idea behind the concentration on core competencies is that resources which become free by outsourcing non-core activities can be used in the core business to increase a company’s competitiveness (Schwarz/Müller, 2005:9). As in many companies IT is not counted as a core competency, it explains the trend to outsource IT to subcontractors.
Another potential, especially for smaller companies, is the access to special know-how and expertise as well as to new resources (Meissonier, 2006:28). This access is necessary to improve quality and services, to optimise the company’s performance, and to stay up to date in the fast changing world of technologies. Know-how needs to be built up and developed continuously. An IT service provider specialises in a certain IT area and offers services to several companies. As this specific field of IT activity is his core business, it allows the external partner to stay easier up to date, to react more flexible to changes and, therefore, to be more efficient - and from this better efficiency the company will profit in the end as well (Schwarz/Müller, 2005:9).
In line with the motives mentioned above, the splitting of risks is another potential for companies who decides to outsource its research and development activities to an external entity. This form of outsourcing holds the same logic of risk spreading than it is usual in other partnerships, meaning that taking the risk is rewarded by the company by granting the external a percentage of the future profit the new product may bring (Meissonier, 2006:30).
Risks of Outsourcing
However, outsourcing does not only offer potentials to companies, but includes several risks as well. Dependence is one of the main risks companies fear when it comes to the debate on whether to outsource or not. If a company outsources its IT services to a subcontractor, it does not only transfer processes but often personnel as well. As a result, the company will become dependent to the external service because it loses certain know-how and usage of IT systems within the company (Meissonier, 2006:27). This creates an even bigger problem if the company decides after a certain period to reintegrate its IT services again. Another aspect that is feared as risky is the transfer of confidential and business critical information to the external partner. The risk is seen in the unconscious or willingly conscious information transfer to competitors. A company can ensure this secrecy by having the service provider sworn to secrecy in the contract (Schwarz/Müller, 2005:10).
Even if the outsourced IT services are not part of a company’s core business, they can severely influence the business activities if it comes to performance perturbation or in the worst case to complete failure (Schwarz/Müller: 2005:9). This risk can be limited by including entitlement to damages into the outsourcing contract.
Furthermore, performance and quality deficits are part of the risks a company has when outsourcing. In order to profit from cost reductions and performance improvement, outsourcing provider must often standardise its IT service offerings. Those standardisations have a negative influence on the performance quality a company used to have (Schwarz/Müller, 2005:10). Again, this can be defined in the outsourcing contract.
The risk of cost increase can be limited by a detailed calculation of involved costs before the outsourcing agreement is signed. The risk occurs because of false estimation of transferring costs as well as direct costs involved (Schwarz/Müller: 2005:11).
There is a risk of personnel as well. Employees usually face important changes if a company decides to outsource. Those changes include job assignments, new employer, or changes of responsibility. The personnel will be against outsourcing if they fear that their job is on stake (Schwarz/Müller: 2005:11). To limit the risk, it is important to include the employees early in the development of the outsourcing plans and communicate openly with them. Only if they understand, that it is not a threat for them but holds opportunities for the company, and therefore for themselves as well, they will accept and support the project.
When it comes to singling out the most popular destination for IT offshore-outsourcing, one country stands out of the crowd: India! In the past few years India has become the world’s most popular destination for IT offshoring. About 230 Fortune 1000 companies5 use Indian outsourcing services or offshore to the subcontinent (Schaaf 2005:1). So what is the “secret” that gives India its popularity? In the following, a country portrait will be given and the major factors of the Indian success story will be investigated.
Located in Southern Asia, India is a country of records and of striking differences. To name only some, the Republic of India is the world’s largest democracy and with 1.1 billion inhabitants (CIA Factbook, 2006) the second most populous country in the world. The country hosts the world’s greatest mountain ranges, longest beaches and wettest city (Kolanad, 2005:9) which gives a small impression of how diversified the geographical surface is. With an area of 3.3 billion square kilometres, India covers an area of about a third the size of Europe, or six times the size of France (CIA Factbook, 2006). Therefore, it is not surprising that the Indian population varies a lot in culture and language from north to south, and from east to west. The constitution lists 15 official languages including Hindi, Urdu, Punjabi, Tamil and Telugu (Kolanad, 2005:11). English is also an official language and the only language which is spoken throughout the whole country, and is consequently very important for business and communication between the various Indian regions, cultures and ethnical groups as well as with the rest of the world.
India has a long history including changing occupations of the country, it gained its independence on 15 August 1947 from the British. New Delhi became the capital of the republic. After a period of foreign rule and several decades during which the Indian economy was virtually closed, the republic has emerged as a major economic power and the current government under Prime Minister Manmohan Singh continues to lower economic deregulation like controls on foreign trade, high tariffs or the privatisation of government-owned industries in order to attract foreign investors. India’s economy ranges from traditional village farming, handicrafts, modern agriculture, modern industries and a multitude of services, with the latter being the major force of economic growth. The service sector accounts to half of India’s output but employs only one quarter of the work force. In 2005, the gross domestic product growth amounted to 7.6 percent and continues its steady rise since the mid 1990s (CIA Factbook, 2006). Major cities are Delhi, Mumbai (Bombay), Bangalore, Kolkata (Calcutta), Hyderabad and Chennai (Madras).
Despite the success in the service industry, India faces huge social, economic and environmental problems due to the fast growing population, poverty, illiteracy, pollution and ongoing political conflicts with neighbouring countries. However, with a well-educated English speaking work force, India became a major exporter of software services and software workers. For example, an estimated 30 percent of software engineers in the US Silicon Valley were of Indian origin during the IT boom of the late 1990s (Kolanad, 2005:12). In the following subchapter, the development of the Indian IT industry is presented in more detail.
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Figure 2: Political Map of India
Source: Maps of India, 2006
India emerged as a software service exporter in the late 1980s and early 1990s with the country's transition from centralised planning to a market-oriented economy. This development was facilitated as a result of several important political changes.
In 1984, the Indian Prime Minister, Rajiv Gandhi, started to lead its country away from technology autarchy, import subventions and export pessimism. The IT industry got recognised as its own industry sector and import custom duties for computer and software were decreased by 40 percent (Schaaf, 2005:7).
The implementation of those changes took several years; besides the former Indian “seal-off” politic was one of the reasons for the success of the IT industry. The politic isolated the Indian hardware industry and as a result shifted the focus on the software sector. When IBM left India in 1987 because the company was no longer willing to bear the imposed and almost unbearable regulations, Indian companies started to use mini computers which worked with the operating system UNIX. A few years later, UNIX gained worldwide importance and the Indians used successfully their knowledge head start (Murthy, 2000).
Another important fact for the economical success was the stipulation of the software industry which started in the late 1980s. An autonomous organisation started to build software technology parks which offer a high quality infrastructure like constant energy supply, telecommunications, and satellite connection. As the rest of the country suffered from power cuts and other lacking infrastructure, these parks became high technology oases. Additionally, the settlement of companies in the technology parks is encouraged and promoted by no tax requirements and no limitations for foreign companies (Schaaf, 2005:7). As a result, in 2004, 40 software technology parks existed throughout the country with 4,644 companies settled there of whom three quarter export software products. 20 more parks are planned within the next eight years (Schaaf, 2005:7).
Moreover, general economic reforms in 1991 enforced the rise of the software industry because the path for foreign direct investment was laid open and a lot of transnational companies took the chance and opened subsidiaries in India. However, the rise of the Indian IT industry is not only due to changes in the Indian business environment.
The global IT industry was increasingly gaining more and more importance in the 1990s resulting in a high demand of skilled IT experts like programmers and software architects. In order to overcome their shortage of IT specialists, the United States, which was the biggest IT market at that time, decided on the one hand to give special visas to Indian IT qualified employees. On the other hand, American companies started to offshore IT projects to Indian companies or to open their own subsidiary in the country (Schaaf, 2005:8). Another milestone in the global development was the technological problem of the millennium year 2000. In search for the millennium bug, Indian companies became known worldwide as cost saving, competent and reliable business partners (Schaaf, 2005:8).
Today, Indian companies have the lion's share in the global offshoring/outsourcing market and compete with leading multinational suppliers across the IT solutions industry.
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Figure 3: India - High dynamics in the IT market
Source: Deutsche Bank Research - Schaaf, 2005:1
India's offshoring industry covers currently two-thirds of the world’s IT service offshoring market and about half of the worldwide market for business process offshoring and is therefore the leading offshore destination (Kaka/Kekre/Saragan, 2006; Chakrabarty/Gandhi/Kaka, 2006). In figures, India represents 44 percent of the world’s market for IT and BPO offshoring which amounted to USD 28 billion of the total market volume of USD 44 billion in 2004-2005 according to Deutsche Bank Research (Schaaf 2005:1). In 2004, NASSCOM reported a 30.5 percent growth rate for export of software and services India (Deblock, 2004). In the literature, the country is therefore often called the largest back office in the world.
The main services that are offered by Indian companies are system integration, software application packets like MS Office, product design of company software like Enterprise Resource Planning and Customer Relationship Management, and development and maintenance of applications as well as hosting services. Furthermore, a very important sector of the Indian IT industry are IT services like e-business and Business Process Outsourcing. BPO is a special kind of outsourcing which means that a company transfers a whole business unit to an external service provider. Examples for BPO are customer services like call centres and e-mail support, telephone marketing, personnel administration, salary statements and accounting (Pohl, 2005:207-209, Schaaf, 2005:3).
North America is the dominant region when it comes to Indian software exports. According to NASSCOM, American imports amounted to 63 percents in 2002, followed by Europe with 26 percent and Japan with 7 percent (Schaaf, 2005:3).
Over the last years India could stand its ground on top of the offshoring service providing countries, ahead of China and the Philippines - its main competitors. What are the key factors that are the “secret” behind the Indian success?
One of the most important key success factors is India’s high amount of well educated and English speaking workers. India has a huge population and a high population growth of about 1.5 percent annually. In 2005, around 31 percent of the Indian population was younger than 14 years old and only around five percent was above the pension age of 65 (CIA, 2006). Universities like the seven Indian Institutes of Technology (IIT) and the six Indian Institutes of Management (IIM) along with other institutions like the Indian Institutes of Information Technology (IIIT) and hundreds of colleges ensure a good to top level education and a constant supply of new skilled workers every year ((Farell/Kaka/Stürze, 2005; Schaaf, 2005:6). This highly mobile, hard working and technologically strong as well as computer literate population plays a major role in making India the most sought after outsourcing and offshoring destination.
High cost efficiency of IT outsourcing
India offers a competitive low cost work force along with extremely low set up costs and services to avail, owing to the wide difference between the personal costs in India and that of developed countries. Indian IT employees with one to two years of work experience earn around USD 8,000 annually, compared to American and European IT professionals who earn between USD 50,000 and 70,000 a year (Schaaf, 2005:5). Even if one adds the additional costs due to offshoring into the calculation, India stays ahead in the cost comparison.
1 During the Bretton Woods Conference in 1944, it was proposed to establish an International Trade Organisation (ITO) and rules and regulations for international trade, called General Agreement on Tariffs and Trade (GATT), which is the only ITO element that survived and was adopted by the World Trade Organisation (WTO) in 1995 (Wikipedia, 2006).
2 In this thesis, Western countries are understood according to the general usage of the term as the various countries of Western Europe and North America.
3 Voice over IP is a web based technology to transfer voice conversations over the internet or through any other IP- based network. Due to the development of high speed internet connection, this technology offers the end-user to call long distances for a very low price compared to telephones.
4 A multinational or transnational corporation is an enterprise that manages production establishments or delivers services in at least two countries. Very large multinationals have budgets that exceed those of many countries and can therefore have a powerful influence in international relations because of their large economic and, hence, political influence as well as their extensive financial resources (Wikipedia, 2006).
5 The Fortune 1000 companies is a list of companies maintained by the American business magazine Fortune. It is a reference of the 1000 largest public American companies classified by gross revenues alone (Wikipedia, 2006). The list is used for business analysis and trend forecasts.
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