Academic journal article
By Hutzschenreuter, Thomas; Lewin, Arie Y.; Dresel, Stephan
Management International Review , Vol. 51, No. 1
* This paper contributes to the emerging debate about offshoring of support functions in international business research. We analyze the success of offshoring activities and focus on the time a firm takes to achieve its expected cost savings and its targeted service level.
* We hypothesize that firm-specific offshoring experience, publicly available knowledge on offshoring, path dependencies, cultural distances, and the chosen governance mode influence the success of offshoring activities.
* An analysis of detailed data about 525 offshoring implementations of US and German firms confirms the anticipated relationships and provides further crucial insights.
Keywords: Offshoring- Performance. Success * Path dependencies * Heterogeneity * Cultural distance
Offshoring of white-collar work is nowadays a widely-spread phenomenon. Firms from all industrialized countries undertake offshoring. Whereas the transfer of manufacturing work to low-cost countries has been already practiced in developed economies since the 1960s the relocation of support functions as IT, HR, finance and accounting, etc. started as recently as the 1990s (Lewin and Couto 2007). Thereby, firms' expectations in offshoring are high as well as manifold. According to Lewin and Peeters (2006a), 55% of the companies expect cost savings of 30% or even more. In fact, firms not only want to realize cost reductions but also leverage offshoring to enhance service levels, to repel competitive pressure or to access qualified personnel. Realization of these diverse targets is rather challenging. It is no surprise that the attention of researchers and management executives towards this topic grows continuously and a clear need emerges to understand the specific success factors of offshoring.
To evaluate success of internationalization activities, researchers have been primarily focused on two components. On the one hand, they analyzed the success of foreign entities based on financial indicators as return on assets, etc. that rely on published or unpublished figures (e.g., Chan 1995). On the other hand, they also used non-financial indicators as longevity or the failure rate of a foreign entity (e.g., Jiatao and Guisinger 1991). However, all these success indicators have their specific constraints. For example, Andersson et al. (2001) named different financial reporting conventions, reluctance of parent companies to provide non-consolidated data and the problem of data reconciliation from different firms. Obviously, a thoughtful approach to assess the success of offshoring activities is mandatory.
For a management team which is responsible for an offshoring activity other criteria might be particular relevant: Has the transferred entity achieved its targets and how much time did it take to achieve these (Lewin and Peeters 2006b)? An entity reaching the defined savings target of 50% after three years might be outstanding from a target-achievement perspective but alarming from an implementation-time perspective. Unfortunately, the drivers that underlie these two distinct aspects might be different or even work in opposite directions. For example, the achievement of extensive cost savings might require a transfer to a country with very low wage and salary levels as the Philippines (Khan and Islam 2006). But, local infrastructure issues and a low education level might make a fast and efficient implementation impossible. A high savings level might be associated with an overlong implementation phase that ties up extra resources (e.g., regular operations in home country have to be continued and new operations in host country have to be ramped up simultaneously), causes frictions in other business areas and might even delay other important projects. Thus, we have to differentiate between success aspects based on achieved performance levels and others based on the time to achieve these. …