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Offshore Outsourcing of Services
A Stakeholder Perspective
Wendy L. Tate
University of Tennessee
Lisa M. Ellram
Miami University
Stephen W. Brown
Arizona State University
Offshore outsourcing of business processes is a rapidly increasing global phenomenon that requires a greater reliance on the effective development of strategic alliances and inter-firm relationships. The stakeholders involved in these service purchases influence the success or failure of the buyer-supplier relationship. This article examines the key stakeholders involved in the offshore outsourcing of services, determines what expectations these stakeholders hold, and assesses how a buying firm and the offshore supplying firm work together to meet these expectations. The case research method is used to address this phenomenon by studying six U.S.-based, Fortune 500 firms involved in offshore outsourcing of services. These buying organizations initially experienced more complexity than anticipated in engaging with offshore suppliers in out- sourcing relationships. To achieve success with these relationships, the buying organizations needed to embrace cultural differences, including the needs of their suppliers’ employees.
Keywords: offshore outsourcing; services purchasing; stakeholder theory; services globalization; case studies
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eliance on strategic alliances and inter-firm rela- tionships has grown considerably in recent years (Lorenzoni and Lipparini 1999). This is due in part to the increased global outsourcing of products and ser- vices (Taylor 2007). The most recent trend in outsourcing is moving business processes offshore to locations out- side of the buying firm’s country of origin (Drezner 2004), also known as offshore outsourcing. These inter- organizational business-to-business relationships and alliances help firms create value by combining resources, sharing knowledge, increasing speed to market, and gain- ing access to foreign markets (Barringer and Harrison 2000; Doig et al. 2001). The research to date on business-to-business alliances has typically been framed with the buyer and supplier as the key stakeholders (Barringer and Harrison 2000; Cullen, Seddon, and Willcocks 2005). A stakeholder is one who affects or is affected by an organization’s actions. A key stakeholder is one whose continuing par- ticipation is critical to the survival of the corporation (Clarkson 1995). In the evolving offshore outsourcing environment, business-to-business purchases involve many additional stakeholders. In offshore outsourcing of
customer-facing services, for example, two additional key stakeholder groups include the ultimate customers and the internal business unit that specifies the service. The stakeholders’ level of involvement ranges from direct to tangential. Regardless of the degree of involve- ment, the needs and expectations of these stakeholders should be addressed. The fact that each stakeholder may perceive the success or failure of the offshore outsourc- ing experience differently complicates the task of suc- cessfully meeting everyone’s needs. Research has shown that by effectively managing stakeholder concerns, expectations, and interests, corporations can improve their bottom line success (Clement 2005). The purpose of this article is to use stakeholder theory to examine the key stakeholders in the offshore outsourc- ing of services, the expectations held by these stakehold- ers, and how the buyer and supplier effectively meet
Journal of Service Research Volume 12 Number 1 August 2009 56- © 2009 The Author(s) 10.1177/ http://jsr.sagepub.com
Authors’ Note: This research was supported by a doctoral disserta- tion grant from the Institute for Supply Management. The authors would also like to acknowledge the contributions of two anonymous reviewers and the editor. Their insightful comments have helped to significantly improve this article.
Tate et al. / Offshore Outsourcing of Services 57
those expectations. As firms become more dependent on offshore service suppliers, the actions and performance of suppliers have a greater influence on a number of impor- tant stakeholders. This fact, coupled with the high rate of failure of business-to-business alliances (Barringer and Harrison 2000), creates the need to assess the effective- ness of managing these stakeholder relationships more broadly and better understand how effective stakeholder management impacts the firm. To date, there has been limited attention in the stakeholder literature on supply chain relationships (Phillips and Caldwell 2005) and lim- ited attention in the supply chain literature on stakeholder issues. Further, the broad topics of the globalization of services and the phenomenon of offshore outsourcing have received scant attention in the service literature. To address the opportunities for effective stakeholder management in the business–to-business offshore out- sourcing environment for services, this research first pres- ents the relevant literature on offshore outsourcing. This literature review encompasses the stakeholders involved in inter-organizational relationships, business-to-business relationship management, and stakeholder theory. Stakeholder theory provides the theoretical framing for the research. Following the literature review is an over- view of the study’s research methods and findings, including an introduction of testable propositions sup- ported through the field research. This research then concludes with study implications, limitations, and directions for future research.
Conceptual Foundation
In the emerging world of networked, global opera- tions, resources critical to the success of the firm increas- ingly lie outside the firm’s direct control (Hamel 1991). Many essential services are now outsourced to suppliers in offshore locations. With this shift, reliance on strategic alliances and inter-firm relationships has grown consid- erably (Lorenzoni and Lipparini 1999). Because there are multiple stakeholders involved in the purchase of any service, organizations must ensure that the expectations of these stakeholders are met and value is provided for each of them (Zinkhan 2002).
Offshore Outsourcing
and Stakeholder Involvement
Historically, offshore outsourcing decisions were motivated by a desire to maximize profit though lower labor costs (Doh 2005; Garner 2004; Lewin and Peeters 2006). During the last decade, the increase in offshoring
of services has received considerable media attention in the United States. This attention is predominantly due to a perceived loss of domestic jobs (Ramamurti 2004). Information technology (IT) applications were among the early business functions that were offshore out- sourced (Lewin and Peeters 2006), while offshoring of administrative and technical work is in a relatively early stage of development and rapidly growing. Much of the offshore movement of business processes focuses on realizing cost savings by offshoring non-core activities to countries with significantly lower labor costs and highly educated, English-fluent labor pools (Ramamurti 2004; Zaheer and Manrakhan 2001). Offshore outsourcing of services increases risk. Data and intellectual property are more accessible to outsiders; employee turnover is more likely at an offshore site. With higher risks, the total costs of doing business can signifi- cantly increase (Lewin and Peeters 2006). Further, the greater diversity of stakeholders in the offshore environ- ment may create conflict between the buying and supply- ing firms’ interests. This is especially true when offshore outsourcing directly affects the customers’ interactions with the company, as in call centers or technical support service (Tate and Ellram 2009). The reputation of the buying firm may be damaged because the customer will view the offshore supplier as the face of the company. Contracts are one method that organizations employ to define their relationships with stakeholders and reduce risk. These contracts delimit the exchanges, transactions, and delegation of decision-making authority (Jones
- needed to purchase services offshore. The con- tracts outline the expectations for both instrumental and normative obligations (Beach 2005). The instrumental needs are often based on logic or specific, measurable performance expectations whereas the normative needs are based on the interests and identities of the partici- pants (Beach, 2005). For example, payment terms and delivery dates address the instrumental obligations, and job titles and communication flow speak to the more normative obligations. To manage both the instrumental and normative aspects of the contract requires involvement from diverse func- tional areas. For example, supply management at the buying firm has certain instrumental contractual needs that are usually addressed through detailed supplier per- formance metrics. To manage the instrumental aspects of the contract requires that appropriate and timely informa- tion is communicated between supply managers and the supplier. The contacts between the different representa- tives of the buying firm and the offshore stakeholders vary in terms of frequency and regularity of the exchange
Tate et al. / Offshore Outsourcing of Services 59
transaction (Agle, Mitchell, and Sonnenfeld 1999; Barringer and Harrison 2000; Clement 2005). The off- shore environment studied in this research is dynamic, and the business requirements for the offshore suppliers are evolving. Such uncertainty puts the key stakeholder rela- tionships at risk. In order to reduce such risk, the decision makers in the buying organization should identify the influential stakeholders, understand their expectations, and attempt to thoroughly address these expectations. This population varies with the situation. Buyer-supplier rela- tionships tend to focus on the requirements of participants who directly influence the contract. Because of the variety of services purchased, and the cultural idiosyncrasies of the outsourced country and the outsourcing country, com- panies have a difficult time identifying the salient needs and a much more difficult time addressing the expecta- tions of the influential stakeholders.
Defining Instrumental and Normative Stakeholder Expectations
As presented above, stakeholder expectations may be defined in terms of instrumental (concrete, measurable) and normative (subjective, values-based) expectations (Donaldson and Preston 1995; Holland, Pyman, and Nash 2005). In stakeholder theory, stakeholders are viewed through a lens based on their power, legitimacy, and urgency (Freeman 1984; Mitchell, Agle, and Wood 1997). This perspective helps identify and define the roles of the central stakeholders in the offshore out- sourcing environment and provides focus for satisfying their needs. Viewing stakeholders through this type of lens can, however, generate uncertainty and conflict among both the direct participants and those who are more tangentially involved in the service purchase. One problem is that individual stakeholders may assign dis- similar levels of power, legitimacy, and urgency to other
stakeholders based on their own goals and prior experi- ence. Marketing prioritizes the customers’ needs (Panda 2003), whereas supply management focuses on the sup- pliers’ needs. Unless competing needs are considered, major conflicts and dissatisfaction could emerge among stakeholders. It follows that each stakeholder group has its own instrumental and normative concerns regarding the off- shore services purchase. Stakeholder theory explains and predicts how an organization functions with respect to the relationships and influences that exist in its envi- ronment (Rowley 1997), such as the offshore outsourc- ing environment for services. Table 1 shows the instrumental and normative concerns of the major rel- evant stakeholder groups involved in the purchase of offshore outsourced services at the operating level. The buying firm must be aware that there are additional salient instrumental and normative concerns of specific individuals within each of these groups (employees, management).
Research Methods
Because the topic involved a particular phenomenon with high complexity, uncertainty, and risk, case-study- based research is the most effective methodology (Eisenhardt 1989; Ellram 1996; Yin 2003). The meth- odology allows the researchers to address “what” and “how” questions such as, “What are the expectations of key stakeholders involved in the purchase of offshore outsourced services?” and “How can the buying firm and the supplying firm work together to address these expectations?” Table 2 describes the six companies included in this case research. It includes their general economic sector, major industry, and reasons for offshoring. The predominant
Table 1 Instrumental and Normative Concerns of Major Relevant Stakeholder Groups
Stakeholder
Supplier
Business unit
Supply management
End customer
Instrumental Concern profit seeking
best price, meets requirements to support customer growth and retention, increased sales best price/value, meets requirements, leverage volume, strict adherence to metrics new source meets its needs as well as internal source did
Normative Concern cultural integration with buying firm, customization to meet demands transparent to end customer, brand identity, integrity, creativity, reliability meets company’s ethical requirements, supplier is responsive, performs well supplier really understands its needs; Can the supplier really be as responsive when it is so geographically distant?; transparency of offshore supplier
Note: Adapted from the work of Shankman (1999), Clement (2005), and Donaldson and Preston (1995).
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motivations for offshore outsourcing are opportunities for increased volume, cost savings, flexible capacity, and process improvement. The focus of the case research is the experiences of companies outsourcing call center operations to India. A detailed methodological appendix is included at the end of this article. It provides more information about the case studies, the case selection process, data gathered, coding methods, and a description of how validity and reliability concerns were addressed. Several tables pro- vide more detailed research process and methodology.
Results
This research is both explanatory and exploratory with results derived from analysis of the case study data. The outcome is the development of five testable propositions. These propositions extend the extant literature, highlight some of the differences in service purchasing in the off- shore outsourcing environment, and detail how these dif- ferences impact the organization’s relationship with its stakeholders. The unit of analysis is the purchase of off- shore outsourced services and therefore specifically explores the stakeholders involved in this relationship. Since this environment adds complexity to the relation- ship between the buying organization and the supplying organization as well as increases the number of stakehold- ers involved in the service purchase, the case participants were asked to describe the offshore outsourcing environ- ment in India in terms of opportunities and barriers to entry. This discussion allows for a better understanding of the stakeholders’ environment and expectations.
Environment
Offshore outsourcing of services to India was seen by the participants as an opportunity to draw from a large, well-educated labor pool at a considerably lower cost than the comparable domestic workforce, providing capacity for growth and variability of demand. However, case firms experienced much complexity and turbulence in the offshore outsourcing environment. This was not initially anticipated because the purchases were per- ceived much like any other purchase that involved stan- dard contracting procedures and supplier management. However, this case firms’ focus on low cost and quality created a gap in awareness of the more normative con- cerns of the stakeholders. This focus also drove many unexpected issues in supplier selection, service execu- tion, and supplier management. The case companies quickly realized that these purchases were more involved and had much more associated risk than domestic out- sourcing. Table 3 describes some of the problems that the buying firms had to face and indicates a number of meth- ods that each firm used to overcome the problems. Trent and Monczka (1998) determined that the high- est rated success factor in global sourcing is having qualified personnel to support the sourcing program; the greatest problem was a lack of qualified personnel. The case companies found that the needed skills and exper- tise differed when purchased services moved from domestic to offshore suppliers. Notably, these skill sets were rarely available internally. Both the buyer and sup- plier site employees lacked cross-cultural skills to do their jobs effectively. Lower-than-expected supplier per- formance alerted the buyers to the problem. Investigation revealed that cultural differences between the stakehold- ers at both the supplying and buying organizations were to blame. Organizations have to specifically address all stakeholders’ needs with a legitimate interest or claim (Freeman 1984). In response, the case firms trained their own and supplier employees to develop the required skills and expertise for this environment. FIN1, FIN2, SOFT, TRANS, and TECH2 recruited and hired personnel with greater cultural awareness to participate in the selection, evaluation, and management of offshore third-party suppliers. For example, FIN2 hired an Indian employee to oversee its call center activities. FIN1 and TECH recruited an employee with much experience in off- shore outsourcing services to India. SOFT and FIN placed their own employees at supplier sites in an effort to integrate their company values into the workforce of the suppliers. SOFT routinely located employees at the supplier site in India to answer questions and address
Table 2 Overview of Participating Case Research Companies
Name
SOFT
FIN
TECH1a TECH
TRANS
FIN
of
Interviews 8 6 5 7 4 7
Total Interview Time (hours) 8 6 8 6 5 9
Sector technology
financial
technology technology
transportation
financial
Predominant Offshoring Driver flexible capacity process improvement cost savings increase volume cost savings
increase volume
a. TECH1 did not want industry information disclosed.
Industry software
services
— computers
passenger services services
62 Journal of Service Research
Barriers to Meeting
Stakeholder Expectations
Organizations were not prepared for the new problems they would encounter in offshoring call centers because they had formerly worked primarily with domestic suppli- ers for outsourced call centers. They were prepared to train
the suppliers’ employees in their systems and processes to meet the needs of the buying firms’ customers and employ- ees. They were not sufficiently prepared for barriers asso- ciated with differences in culture, competition with other buying firms for resources, issues related to physical dis- tance, infrastructure and network issues, and differences in regulation and common practices in India (see Table 4).
Table 4 Barriers in Offshore Outsourcing
Barrier
Culture
Competition for resources
Distance
Infrastructure
Standards and regulations
language—external language—internal
culture
employee bias
customer bias
resource shortage
fluctuation in demand implementation costs & quality communication & management of supplier performance measurement technology
infrastructure
lack of standards
regulation
information & data security
Description English dialects are spoken differently. Communication between the buyer and the supplier is hindered by differences in language and dialect. The business culture of the home country for the buying firm may differ from the business culture in the country of the supplying firm. For example, compared to the United States, India is more hierarchical with internal bureaucracy. Internal employees are biased against certain geographical locations. It is difficult to change the mindset from managing internally to managing an offshore supplier. U.S. citizens are biased against offshoring to India, usually because of a perception of American job loss. Many companies are offshoring to India, creating a competitive environment for talented agents and managerial talent; turnover is high within the centers. Seasonality of work load creates a problem with staffing. Implementing an offshore service provider requires significant start-up funding. Distance creates difficulties in communicating with and managing the supplier.
Technology has not advanced enough to track relevant performance issues. Networks have performance problems, such as signal delays. Technology and usage differ between the firms. Travel, roads, security, technology, and other basic structural elements are required for daily operation. International standards or consistent standards are not established for certain issues. For example, laws regarding data security vary significantly across the different geographies. Company must be cognizant of the many regulations regarding technology, hiring practices, and security. Firm doesn’t want trade secrets, confidential information, or intellectual property passed along.
FIN X X X X X X X X X
SOFT X X X X X X X X X X X X X X
FIN X X X X X X X X X X
TECH X X X X X X X X X
TECH X X X X X X X X X X
TRANS X X X X X X X
Tate et al. / Offshore Outsourcing of Services 63
It was a goal of all of the case firms that their internal and external customers be unable to discern any differ- ence in service performance as a result of the move to India. The issue was how to most effectively encourage the new Indian suppliers’ management teams and employ- ees to perform in such a way as to satisfy the stakehold- ers whom they were to serve: the buying firm’s customers and employees. All of the case firms incurred significant expense and resource commitment to overcome these barriers and meet the stakeholders’ needs. This included efforts to minimize the effects of suppliers’ linguistic and cultural differences on both customers and employees. As shown in Table 4, all of the firms noted difficulty in managing physically distant suppliers. Case firms SOFT, FIN1, TECH1, and TRANS faced both higher-than-expected costs and initial declines in customer satisfaction when migrating functions offshore because they didn’t address the cultural divide between the supplier and the firm. Service decreased in part because initial supplier training did not overcome communication barriers related to lan- guage and culture. The need for training, higher staffing when suppliers were in the learning mode, as well as greater company travel to the supplier site increased firm costs. FIN2, SOFT, and TECH1 also had problems with technology and infrastructure that created both service and cost issues. These barriers to offshore outsourcing must be surmounted to enjoy the benefits from offshore outsourcing.
Investments to Overcome Barriers: Meeting Stakeholder Expectations
Before the case firms invested in the appropriate train- ing, assets, and employee retention efforts, the suppliers spent time trying to address many performance issues related to culture and language. The suppliers had lim- ited understanding, resources, and expertise to resolve these issues, and this diverted their attention from simply performing their assigned tasks. Currently, a high level of competition exists among Indian suppliers for quality personnel. This contributes to frequent workforce turnover. Wages are also rising because of strong economic growth in India, an increas- ing standard of living, exchange rate fluctuations, and competition for the most qualified labor. Management of employee attrition is a key performance indicator con- sidered by buying firms when selecting an offshore sup- plier. Each time an employee is hired or terminated, the buying firm incurs additional administrative time and expenses. Costs can be minimized through better reten- tion policies and focusing on the needs of these highly
relevant stakeholders. The costs associated with employee attrition are ultimately passed on to the buying firm. TRANS is well aware that agents become more effi- cient as they develop tenure in their positions. Prior research shows that the more effectively the organization meets the normative and instrumental needs of the employees (Clement 2005; Shankman 1999), the longer they stay in their positions and the more efficiently they accomplish the tasks. As the case companies learned the nuances of offshore outsourcing, they realized that it was imperative to hire educated and qualified agents. These agents were needed to manage the attrition in order to maintain the expected levels of customer satisfaction. Experts in Indian employment practices were consulted so that the companies could better understand what was important to the employees and what tactics would help keep them satisfied. Some solutions included higher wages, additional benefits, and a better work environ- ment. Increasing buying firm visibility at the suppliers’ sites connected the suppliers to the buying firms. Including the buying company in the suppliers’ hiring processes also helped to reduce attrition. All six case firms worked with the suppliers’ management teams to improve perfor- mance, to hire skilled workers, and to provide assistance to agents struggling to meet job performance require- ments. This ultimately better satisfies both the normative and the instrumental needs of the employees, supplier, and buyer. As a result, they all experienced both opera- tional and service quality improvements. Examples of investments that the case firms made in their suppliers and their suppliers’ employees are shown in Table 5. According to SOFT, additional education and upward progression are important in the Indian culture. To distin- guish themselves and meet the agent’s normative needs, SOFT is improving wages, providing meals and transpor- tation, as well as offering education and personal devel- opment classes. TECH2 and FIN2 offer agents positions at their proprietary or domestic sites as a strategy of dif- ferentiation. One approach is to cross-train employees in both front and back office operations to maximize utiliza- tion of the call center and give employees the opportunity to move from a night shift to a much preferred day shift. By differentiating themselves not just to the management of the supplier but also to the labor pool, SOFT, TECH2, and FIN2 have increased employee loyalty and decreased turnover and attrition. Thus,
Proposition 2: Buying companies that make specific investments to meet the normative and instrumen- tal needs of offshore outsourced suppliers’ employ- ees and management will reduce costs and increase retention of the suppliers’ workforce.
Tate et al. / Offshore Outsourcing of Services 65
According to the six firms, significant managerial effort and greater integration between the organization and its stakeholders are required to meet enhanced qual- ity and service demands. The necessary level and types of investment in supplier employees surprised all of the case firms. Despite the shock, they all concluded that the investment was cost-beneficial.
Aligning Buyers and Suppliers
to Improve Service Delivery
Businesses use learning, investment, adaptations in processes and products, and minimizing the organiza- tions’ cultural distance to reduce some of the uncertainty surrounding offshore outsourcing (Ford 2003). One of the presumed outcomes of the offshore outsourcing process is meeting stakeholder needs and expectations. However, the buying firm and its employees’ needs differ from those of the supplying firm and its employees. For exam- ple, the supplier often tries to maximize its profits while the buyer works to minimize its costs. These two instru- mental concerns can conflict and lead to poor perfor- mance and opportunistic behavior (i.e., Donaldson and Preston 1995; Jones 1995). The needs of each party must be understood and balanced to achieve mutual benefits
from the business-to-business relationships. The case study firms found that a high level of integration and interaction between the buying and the supplying firms created a mutual understanding of objectives and ulti- mately developed shared goals. This improved the overall outcome of the purchasing process in terms of supplier performance and stakeholder satisfaction. The increasing labor rates and competition for educated and trained employees in India are inducing the case firms to find alternative methods to reduce costs and increase offshore supplier productivity. One method noted by SOFT and FIN2 is to focus on continuous process improvement and directly involving their own employees in the operations of the offshore call center provider. FIN believes that maintaining high levels of customer satisfac- tion when using suppliers from India requires additional hands-on involvement at the supplier site. The hands-on involvement includes day-to-day on-site monitoring, con- flict resolution, and solving service problems as they arise. FIN2, TECH2, and SOFT co-locate operational experts at the supplier sites to participate in management, facilitate problem resolution, and expedite decision making. These experts represent the buying firm and they help to make process changes that address both the buying and supply- ing companies’ stakeholder instrumental and normative
Table 6 Benefits of Outsourcing Offshore
Benefit
Cost
Quality
Flexibility
Delivery
Innovation
Customer service
Company Example cost reduction reduction in managerial costs and effort leveraging volumes and internal resources highly educated workforce stability of agents recruiting of skilled, knowledgeable, and talented people capacity flexibility variable staffing increased (24/7) availability scalability focus on core competency: more efficient and effective delivery of products and services decreased time to market integration of global perspectives into the outsourcing process: better able to meet the needs of global customer base innovation through supplier ideas and techniques process improvement and re-engineering of processes learning new skills and methods of performing service leveraging supplier skills and capabilities improved requirements, documents, and contracts technology customer satisfaction diversification in service offerings and geographical location regionalized services to address Indian customers’ needs
FIN X X X X X X X X X X X X
SOFT X X X X X X X X X
FIN X X X X X X X X X
TECH X X X X X X X X X X
TECH X X X X X X X X X X X
TRANS X X X X X X X X
66 Journal of Service Research
needs. These experts are also knowledgeable in both local and corporate culture; they help address the normative aspects of the relationship such as the cultural differences in management structure and style. Participants from SOFT said that the hierarchical management structure of the Indian supplier made it dif- ficult for supply management and other functions to communicate across organizations and organizational levels. The supplier was unwilling to deal with a person who had the title of “buyer” and expected participation from a “vice president.” To overcome this status prob- lem, the case companies held face-to-face meetings with the supplier, clearly specifying the communication chan- nels and lines of authority. In addition, FIN2 and SOFT found that co-locating their employees to share informa- tion with the supplier further reduced misunderstand- ings. Organizations such as TECH2 and FIN2 also had employees conduct routine visits to all of their Indian suppliers’ sites, in order to encourage communication and establish a strong identity with the suppliers’ employees. An understanding of the culture helped to reduce the cultural divide between the organizations and also mitigate the conflict. Bringing an offshore supplier site on-line also requires information sharing and integration of systems, technol- ogy, and processes. There is risk associated with the sharing of proprietary technology and customer informa- tion. However, as discussed previously, investment and integration such as employees’ co-location at the sup- plier site create a stronger bond between the two firms. The observed activities seem to increase the level of mutual stakeholder communication and understanding to ultimately improve success. Therefore,
Proposition 4: The buying firm’s direct participation in the offshore suppliers’ operations improves the buying firm’s instrumental and normative out- comes. It also increases the satisfaction of the stakeholders affected by the offshore outsource purchasing process.
A final challenge faced by these organizations is find- ing the right balance between providing so many speci- fications that they limit supplier creativity and providing so few that the supplier does not have clear guidelines of expected performance. According to SOFT, over-specify- ing contractual penalties and bonuses can cause dysfunc- tional behavior. Achieving a bonus or avoiding a penalty becomes an end in itself. Reporting is confused and important measures are marginalized. Similarly, FIN2, FIN1, and TECH2 have discerned that excessive terms and conditions restrict the suppliers’ levels of innovation
and motivation to initiate potential process improve- ments. SOFT believes that a direct relationship exists between offering a supplier a contract that contains excessive clauses concerning liquidated damages and risk and having the supplier request a higher price for the service. According to SOFT, FIN1, and FIN2, suppliers are more productive and effective when they are offered incentives. SOFT and FIN2 have determined that they get the best results if they provide clear communication regarding expected outcomes (what) but allow the sup- plier some flexibility in processes used to achieve the outcomes (how). All of the case companies selected their suppliers because of the suppliers’ competencies. They acknowl- edge that the supplier should be given a certain amount of latitude to innovatively manage the business. However, many of the individual participants at all six case firms mentioned that more detailed performance requirements, tighter performance metrics, and monitoring will improve the governance process. One participant at FIN1 indi- cated that there is always subjectivity in judging supplier performance. As the service level agreements become more clearly articulated, and objectives and guidelines become more measurable but not excessive, the opportu- nity for an effective and successful relationship increases. Clear specifications, objectives, and guidelines help to meet the instrumental goals of the buying firm, the sup- plier, and internal and external customers. Thus,
Proposition 5: Clear specifications, objectives, and incentive provisions help to meet the instrumental goals of the various stakeholders at the buying firm, supplying firm, and internal and external cus- tomers. Providing guidelines and flexibility in how the suppliers perform the activities meets the nor- mative needs of the supplier.
Discussion
Many companies are receiving mixed results in ser- vice performance and financial benefits from offshore outsourcing (Aron and Singh 2005). Stakeholder theory suggests that by incorporating the instrumental and nor- mative needs of key stakeholders into business-to-business relationships, outcomes can be improved. However, our research shows that there are different requirements for companies that offshore outsource. As was the case with outsourcing of materials and finished products, there is the opportunity to gain a capable workforce at a consider- ably lower price. Yet, companies that offshore outsource must closely integrate their priorities and actions with
68 Journal of Service Research
relationship on which most of the literature is based. The findings provide legitimacy for the importance of con- sidering both the instrumental and the normative needs of many concerned stakeholders, not just the immediate buyer and supplier. Initially, the buying organizations in our research assumed that the supplier relationships should be strictly arms-length. The case firms’ initial behavior paralleled other theories such as transaction cost economics (Williamson 2008), which argue that making specific investments to benefit the other party in a buyer-seller relationship can increase risk and raise the potential for opportunism. After disappointing early results in services offshore outsourcing, the case firms determined that it was in their own best interests to expand their view of key play- ers in the relationship. These organizations expanded their thinking and actions to embrace multi-level, multi- dimensional relationships. They also shifted from focus- ing primarily on working with the suppliers’ management level and the only instrumental needs to better under- standing both the normative and instrumental needs of the suppliers’ employees who were providing the ser- vice. In making this significant adjustment, the case firms expanded their view of what was important to the supplier. The net result was that cost savings increased through employee retention when the case firms invested in the supplier. This included investment in normative areas such as providing suppliers’ employees with train- ing and a career path and investment in instrumental areas such as competitive remuneration and bonuses. As the supplier’s front-line employees have their needs sat- isfied, the service they provide improves, which in turn creates greater benefits for other stakeholders in the rela- tionship. From a practical standpoint, there is a certain irony in the fact that most firms’ main initial objective is to reduce costs by offshore outsourcing. Yet, in order to achieve this objective, they must invest in training and enculturating the supplier and their own employees. This finding also reinforces the contribution of applying stake- holder theory to complex, multi-level relationships. The findings here do not contradict other research that focuses on buyer-supplier relationships. Rather, this research expands upon prior research by broadening the definition of who needs to be involved beyond the dyad and perhaps even behind the scenes. As indicated in Proposition 4, an appropriate level of engagement and presence at the supplier location can provide benefits beyond those initially expected. Such direct participation addresses the fears of opportunism that often arise in both theory and practice as one firm invests in, and increases its dependency upon, another. Finally, in support of earlier stakeholder research (Jones and Wicks 1999; Jones
1995), this study provides clarification that addressing the instrumental and normative needs of the expanded set of key stakeholders can actually enhance stakeholder satisfaction (Proposition 5). Contracts often tend to focus too much on the instrumental concerns at the managerial level to the exclusion of normative needs at multiple organizational levels. Lastly, while not a central theme in this research, these findings also support the theoretical position that goods and services differ in general (Fitzsimmons and Fitzsimmons 2004). Stakeholder theory tells us that we need to consider the impact and needs of all key stake- holders in the process. In the case of manufacturing outsourcing, companies have tended to focus on meet- ing the needs of management of the supplier and relying upon the supplier’s management team to meet the needs of its employees. In a customer-facing service operation, where culture, image, and transparency are important, this does not appear to be enough. The buying organiza- tion can benefit from involvement with supplier employ- ees through training and on-site participation.
Limitations
This research has a number of limitations. The case studies were all conducted from the perspective of the buying firm and from a Western-centric perspective. This influences the findings. Initial concepts for this research were developed from prior theory and several streams of research. Factors outside the scope of this study could also impact the purchasing process and outcomes in the offshore outsourcing environment (Miles and Huberman 1994). To avoid this, semi-structured interview protocols were used. They provided flexibility and opportunity for new insights to develop. Finally, the major limitation is that only six large, U.S.-based companies were studied. This limits the generalizability of the results to a broader population. Available internal resources partially deter- mines these firms’ ultimate success.
Future Research
Since all the firms studied in this research are large, Fortune 500 firms, it would be useful to conduct similar research with smaller companies to understand their experiences and what size-related differences may exist in the offshore outsourcing of services. It would also be useful to study the influence of intermediaries on the firms that offshore outsource compared to firms that do not use an intermediary. Are the results and relationships any different with the addition of another influential stakeholder in the process? In addition, does the culture of the buying firm affect whether it decides to train its
Tate et al. / Offshore Outsourcing of Services 69
own employees, hire new employees to fill specific skills, or rely on consultants? Future research could empirically test hypotheses derived from the propositions with a large sample of organizations that are outsourcing services. The hypoth- eses could also be tested among firms using offshore and domestic suppliers. Current trends indicate that the prac- tice of offshore outsourcing will continue to grow. Interest levels for both practitioners and academics will remain high as offshore outsourcing spreads to other parts of the world. Finally, we hope that our work will serve as a catalyst for scholars interested in service research to pur- sue much needed work in the under-researched but criti- cally important domain of service globalization.
Table 7 List of Interviewees and Functions Functional Area SOFT FIN1 TECH1 TECH2 TRANS FIN Purchasing Executive 1 1 2 1 1 1 Director 2 2 1 2 1 Manager 1 1 2 1 1 Business Executive 1 1 1 1 Director 2 Manager 1 Functional Technology 1 1 Finance 2 Project analyst 1 Security 1 1 Reengineering 1 Operations 1 Total Participants 8 6 5 7 4 7
Appendix
Description of Research Method
A multi-case research design, with multiple informants for each case, was used to address the research questions. Similar to research performed by Wilson and Vlosky (1997) and Neu and Brown (2005), this study is concerned with the analysis of a particular phenomenon across a population of cases versus each individual case. The cases each represent multiple obser- vations about purchasing outsourced, offshore services from independent suppliers located in India. A minimum of four people was interviewed in each of the organizations regarding their participation in offshore call center service purchases (see Table 7). Initial contact was made with a high level purchasing executive in the organiza- tion. Then, a snowballing technique was used to identify addi- tional participants involved in the purchase of offshore outsourced services, including the key contact person. The key contact person was the supply manager responsible for the purchase of the offshore services. Depending upon the prox- imity of the location to the researcher and availability of the participants, interviews were conducted by phone or in-person. Informants from multiple functional and organizational levels were included in the interview process. All of the participants were asked for and most provided documentation that offered additional insights into the selection, evaluation, and manage- ment of offshore suppliers. The additional documentation provided included work orders, service level agreements, per- formance measures, organizational charts, and process check- lists. The key contact person helped coordinate the gathering of these documents to use as additional sources of evidence. Three semi-structured interview protocols, a guided survey regarding the characteristics of the purchase, and a process flow document were used to guide the data collection efforts (see Table 8) and provide consistency in the data collected. The protocols consisted of a set of open-ended questions that allowed each participant the opportunity to share his or her
experiences related to purchasing services from offshore sup- pliers. The protocols also consisted of structured questions designed to address specific issues outside of the unstructured part of the interview (Eisenhardt 1989; Perry 1998).
Table 8 Data Collection Instruments Data Collection Document Demographics
Characteristics of the purchase Process flow document
Chief purchasing officer (CPO) protocol
Buyer protocol
Functional protocol
Purpose Gather general information about the company in terms of size and organization. Develop a description of how the outsourced offshore services are perceived by the organization. Determine the steps involved in the purchasing process from identification of need to monitor and measure. Also, identify the other participants in the purchasing process and their level and frequency of involvement. Increase understanding of the performance implication of offshore outsourcing. Understand the general perceptions of a senior purchasing executive of the importance of purchasing call center services from offshore suppliers. Focus on how the purchasing organization is structured, the environment, performance implications, drivers, and barriers. Determine the level of involvement of other functional areas of the firm and their perceptions of the purchasing area as it relates to outsourced offshore purchases. (continued)
Tate et al. / Offshore Outsourcing of Services 71
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Table 10 (continued)
Test
Credibility Construct validity
Transferability External validity
Dependability Reliability
Objectivity of data
Definition extent to which the research instruments measure what they are supposed to measure; establishes the correct operational measures for the constructs being studied
extent to which the research results can be applied to the populations and the settings of interest; establishes a domain in which the findings of the study can be generalized extent to which the findings demonstrate repeatability extent to which the collection of the data limits interviewer bias
Tactic
- establish a chain of evidence
- use multiple sources of evidence
- key informants review draft of report
- use replication logic in multiple case studies
- use case study protocol
- multiple sources of evidence
- multiple interviewers
- multiple interviewees
Implementation in Cases
- gathered multiple documents
- use of multiple informants with differing internal perspectives
- research team members gave input during data collection and analysis
- key informants and other members of the organization reviewed the write up
- conducted business-to- business multiple studies in different industries
- refined and implemented study protocol with all firms
- key informants review the write up
- multiple interviewers
- multiple interviewees Source: Tate, W. L., L. M. Ellram, E. Hartmann, L. Bals, W. van der Valk (2009), Ellram (1996), Flint, Woodruff, and Gardial (2002), Voss, Tsikriktsis, and Frohlich (2002), and Yin (2003).
Appendix (continued)
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Wendy L. Tate is an assistant professor of logistics at the University of Tennessee. She received her PhD from the W. P. Carey School of Business, Arizona State University, in August of 2006. Her primary research interests include services supply management, offshoring, and environmental supply chain management. She has published in the Journal of Operations Management , California Management Review , Journal of Business and Industrial Marketing , Journal of Supply Chain Management , Journal of Business Logistics , and other managerial and academic outlets.
Lisa M. Ellram , PhD, CPM, CMA, is the Rees Distinguished Professor of Distribution in the Department of Marketing at Miami University in Oxford, Ohio. Her primary areas of research interest include services supply management, supply chain cost management, and environmental supply management. She has published in the Journal of Supply Chain Management , Journal of Operations Management , California Management Review , Industrial Marketing Management , Journal of Business Logistics , and other managerial and academic outlets.
Stephen W. Brown , PhD, holds the Edward M. Carson Chair in Services Marketing and is executive director of the Center for Services Leadership, W. P. Carey School of Business, Arizona State University, in Tempe, Arizona. His primary research interests are service strategy, service failure and recovery, transforming product dominant firms into service firms, and service theory. In addition to co-authoring and co-editing numerous books, he has published in the Journal of Marketing , Journal of Marketing Research , Journal of Service Research , Journal of Applied Psychology , Journal of Service Management , Journal of the Academy of Marketing Science , MIT Sloan Management Review , California Management Review , and many other journals.
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