The Impact of Culture on Offshoring Initiatives: It's Not What You Think

All else being equal, if you could choose between sourcing services in a country that has a culture similar to your own or one with a different culture – which one would you choose? Our observation is that, when confronted with that choice, most managers opt for the "cultural proximity" option. But data show that you may want to think twice before you embark on the "easier" road. Together with Prof. Dehon and Prof. Garcia Prieto, we studied the influence of cultural differences on the success of service offshoring initiatives. We looked at two measures of success, namely, how fast companies achieve the expected service levels and whether they reach cost (savings) targets. Note that we focus on the realization, or not, of cost (savings) targets; not the actual amount of cost savings achieved. That means we are interested in the ability of managers to correctly evaluate the true cost of offshoring, and to achieve the potential for cost savings, if any. If no cost savings are expected (i.e. same level of costs pre and post offshoring), we assess whether firms run into cost increases (i.e. post-offshoring costs greater than pre-offshoring level) or are able to control implementation costs. [inlinead] We used survey data from the Offshoring Research Network on 985 offshoring initiatives originating from firms in the US and Western Europe, across industry sectors, functional categories, and size. Offshore locations present in the sample include India, China, other Asian countries such as the Philippines, but also several countries in Eastern Europe, Latin America, and Africa. Following standard practices in this domain, we defined cultural differences as ‘differences in norms and values between domestic and offshore countries’, and we measured them using an index based on the indicators developed by the famous Sociology scholar Geert Hofstede. We also introduced a long list of control variables. But let me pass the details of the statistical analyses and jump to the results. We found that the greater the cultural differences between home and offshore countries, the longer it takes to achieve expected service levels. Specifically, we found that the likelihood that firms succeed the transition to expected service levels in less than six months significantly decreases as cultural differences increases. That is the well-known complexity story due to misunderstandings, coordination problems, and communication issues. No surprise here. But we also found that greater cultural differences are associated with greater likelihood of reaching cost (savings) targets. It means that, on average, firms that opt for culturally more different countries, instead of going for the supposedly easier options, have better chances of achieving whatever cost targets they have in mind. This is more counter-intuitive. After checking the robustness of our unexpected finding, we came to the conclusion that yes, maybe the latest social psychology research on emotions in cross-cultural contexts is right. Social psychology scholars have indeed provided growing evidence that the mere presence of cultural differences in work relations generates "negative" emotions such as fear due to the anticipation of challenges. But these "negative" emotions would have the positive consequence of improving the information gathering and processing efforts of decision makers, and hence lead to better decisions. Applied to the context of global sourcing, this suggests that when anticipating challenges due to working with an offshore country that is culturally different, decision makers are much more thorough and careful in collecting and interpreting data on the benefits but also costs and complexity of offshoring. That leads to more accurate cost estimation targets and reduces the risk of hidden costs. As a result, firms have better chances to remain within their cost estimates. In other words, the misleading perception that offshoring to culturally similar countries is easier than offshoring to culturally different countries leads managers to overlook the critical preparation phase of any offshoring initiative, and hence run into unanticipated costs. This result should somewhat nuance public beliefs about offshoring and the negative consequences of cultural differences. In light of our findings, we propose that cultural differences would be best interpreted in terms of opportunity cost of time. For a fast transition to expected service levels (when opportunity cost of time is high), a culturally close offshore country may be preferred, provided sufficient effort is put in developing accurate cost estimates and controlling implementation costs. But if you fail to dedicate enough effort to collect and process the necessary information to anticipate the true cost of offshoring, you may achieve service levels on time, but run into unexpected costs that jeopardize your business case. If a longer transition time is acceptable (i.e. opportunity cost of time is low), you may want to opt for a culturally more distant country that gives access to advantages not available otherwise – such as large pools of qualified engineers in India for instance. Moreover, we find that the delay in transition time due to cultural differences is greater for firms that launch their own captive subsidiary in the offshore country, than for firms that work with an outsourcing service provider. The same is true for the positive effect of cultural differences on the realization of cost (savings) targets, which holds in the case of outsourcing deals but is significantly reduced in the case of captive subsidiaries. This means that when opting for a culturally distant offshore country, unless other considerations suggest otherwise, firms may be better off working with an outsourcing provider instead of launching their own captive subsidiary. This is probably due service providers who usually have a better knowledge of the host country cultural environment and have developed capabilities to help clients deal with the challenges of cultural differences. Unfortunately, despite the fact that the outsourcing model on average leads to better results when there are important cultural differences, some other research I conducted in the past shows that, when facing the perceived greater risks of cultural difference, the most likely reaction of managers is to favour the captive model, which does not necessarily lead to best results in terms of: Transition time to expected service level Realization of cost targets

The Impact of Culture on Offshoring Initiatives: It's Not What You Think

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The Impact of Culture on Offshoring Initiatives: It's Not What You Think

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