Managing Offshoring Initiatives: Shall We Go or Should They Come?

My last column for 2013 was on the topic of cultural differences in offshoring and how they can lead to unexpected positive consequences due to more thorough decision making. However, although we found that client companies were on average better able to meet their cost estimates when offshoring to culturally distant countries than to culturally close countries, we also observed that cultural differences were (as expected this time) associated with greater challenges for the day-to-day management of offshoring initiatives. So as a first column for 2014, I would like to report on a related study we conducted with Florence Duvivier, a PhD student at ULB – Solvay Brussels School, asking whether and how the transfer of personnel between domestic and offshore entities can help mitigate cultural challenges and language barriers, as well as help coordinate and control offshoring initiatives. To answer that question we collected data through an online survey and face-to-face interviews with managers of client companies covering a total of 70 individual offshoring initiatives (we define an offshoring initiative as the process of moving or creating a service in an offshore location, and ensuring its delivery through a captive entity or an outsourcing contract). For practical reasons we limited the study to local Belgian companies and multinationals with operations in Belgium – representing roughly 30% and 70% of the sample respectively. Participants to the study were active in various industries with a majority coming from banks and insurance companies, telecoms, and IT and other services. [inlinead] The survey revealed an evolution from the use of traditional expatriates (i.e. employees sent from the client to the offshore country) to combining expatriates with the transfer of personnel from the offshore operation to the client company – what we call inpatriates (i.e. the reverse direction of an expatriate). Moreover, in contrast to other forms of international operations, employees transferred in the context of offshoring initiatives tend to work on short-term assignments (as opposed to assignments of one year or more). From the interviews we conducted, we identified at least five important reasons for the evolution towards greater use of inpatriates. First, expatriates are very costly, which is not compatible with the objectives of client companies that see offshoring at least partly as a way to reduce cost. Therefore, the greater the cost savings objectives, the less likely client companies use expatriates. Second, depending on the offshore location, it may be challenging to find candidates for expatriation. And even when the company finds a candidate, her mission may be hindered by the difficulty of adjusting (or a spouse adjusting) to the new environment, possibly leading to the failure of the assignment and its early termination. Third, many expatriates tend to display, whether intentionally or not, an attitude of dominance that counters the need for mutual respect between onshore and offshore teams. In contrast, the more open attitude of many inpatriates makes them very good linking agents for building trust, bridging cultural differences, and alleviating communication issues, as well as transfering knowledge. The use of inpatriates is also very effective for training and to help absorb the client company culture and general business context. Fourth, companies that opt for a captive model often use an expatriate to set up the new center, recruit people and ensure that operations run smoothly on a day-to-day basis. But as captive centers gain maturity, and as more and more companies contract services to external services providers, the need for expatriates decreases. Finally, more and more client companies use inpatriation schemes as a way to offer international career opportunities to offshore employees, whether in response to the pressure of some emerging country governments that see this as a beneficial skill upgrading mechanism or to mitigate high employee turnover in certain offshore destinations. To conclude, we find that as experience with offshoring is accumulated, client companies learn to combine and balance the pros and cons of expatriates and inpatriates as part of their offshoring strategy. Specifically, client companies discover that welcoming inpatriates from offshore countries, instead of, or in addition to, sending expatriates from the client company, is particularly effective when: Situation in favour of using inpatriates Explanation The potential added value of expatriates does not compensate for their high cost The cost of the expatriation and repatriation process is not compatible with high cost savings objectives The offshore location is challenging for expatriate candidates Adjustment will be difficult The client company lacks good expatriate candidates "A good inpatriate is much better than a poor expatriate" The offshore operation does not require tight control on the part of the client Direct control is the only role of traditional expatriates that inpatriates cannot fulfil Cultural differences with the offshore employees hinder day-to-day coordination and the building of trust The "open" attitude of inpatriates make them excellent link agents between onshore and offshore teams The offshoring initiative requires important transfer of knowledge, including tacit knowledge such as the client company culture and business context Inpatriates immerse themselves in the client company environment and bring that knowledge back with them to the offshore team Offshore employee turnover is high Inpatriation offers an attractive international career opportunity for offshore employees by Dr. Carine Peeters, Professor of International Business and Strategy at ULB – Solvay Brussels School of Economics and Management, Belgium and Florence Duvivier, PhD researcher at ULB – Solvay Brussels School of Economics and Management, Belgium

Managing Offshoring Initiatives: Shall We Go or Should They Come?

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