Offshore sourcing decisions

OFFSHORE SOURCING DECISIONS SHIRISH CHANDRA SRIVASTAVA NATIONAL UNIVERSITY OF SINGAPORE 2008 OFFSHORE SOURCING DECISIONS SHIRISH CHANDRA SRIVASTAVA [MBA (PGDM) (MDI, Gurgaon)] A THESIS SUBMITTED FOR THE DEGREE OF DOCTOR OF PHILOSOPHY DEPARTMENT OF DECISION SCIENCES NATIONAL UNIVERSITY OF SINGAPORE 2008 ACKNOWLEDGEMENTS As I am writing the acknowledgement section of my PhD dissertation, I reflect upon the arduous five year journey, which is finally culminating, to mark the beginning of yet another journey for me as an academician. After being in the industry for about ten years, even contemplating of doing a PhD was indeed farfetched dream for me. But I was very fortunate to have received exceptional support from several people which made my five years of PhD studies a very joyful experience. First and foremost, I sincerely thank my supervisor Dr. Thompson Teo for his constant support, motivation, guidance, and training. Dr. Thompson has been a wonderful advisor and mentor who has always amazed me with his enthusiasm, energy, accessibility, promptness, and above all his compassion and patience. At any time of the day, I could write to him and expect a response within a very short time. To me, he is not only a great academic and a model of excellence in scholarship, but also a wonderful person. I feel greatly enriched for every moment that I spent with him in the past five years. I would also like to thank my thesis committee members Dr. Soh Pek Hooi and Dr. Mark Goh for the invaluable guidance and support that I received from them during the course of my PhD studies. Their comments and remarks have been extremely helpful in refining and enriching my dissertation. Several other professors helped me in many ways. I am very grateful to Dr. Partha Mohapatra and Dr. Melvyn Sim for always being a source of inspiration and guidance. I would like to record my appreciation for the guidance that I received from them, not only about matters pertaining to my research, but also about the intricate details related to the job search process. I would also like to acknowledge the whole-hearted support that I received from the senior executives in the industry without whose assistance my research could not have taken the shape that it is in today. I am especially thankful to Jayant Krishna, Pradeep Benni, Manoj Shrivastava, Shailesh Krishna, Sandeep Malhotra and Jaswinder Ghumman for helping me in my research in multiple ways. ii I also gratefully acknowledge the support that I received from the Decision Sciences department’s staff – Siew Geok, Dorothy, and Wendy who made it so easy for me to handle the administrative issues. My PhD journey would not have been a wonderful experience but for the amazing set of friends which I have. I would especially like to thank Poornima and Tanmay for always being there. They have been a constant source of support and motivation for me. Special mention must also go to Ajai, whose academic experience I could really tap on to, as and when I needed any guidance. My friends at the business school were not only my sounding boards, but also patient listeners to my academic frustrations (and accomplishments). The time that we spent together (especially in the biz canteen) would perhaps be most cherished moments of my PhD studies. I would also like to thank Vanita, Priya, and Qingxia who kept me going during my PhD studies through their motivational words. I am thankful to each one of them for being wonderful friends and colleagues for my lifetime. I was very fortunate to have continuous unflinching support from my sister Shalini and brother-in-law Vibhu during the course of my PhD studies. They helped me in innumerable ways throughout my stay at Singapore and I take this opportunity to acknowledge their contribution towards the successful completion of my research work. With their support, the whole experience of PhD studies was transformed into a delightful experience for me. Each weekend that I spent with them, helped me rejuvenate and focus on my research. I would also like to record my thanks to my loving parents, Prof. S.C. Srivastava and Mrs. Padma Srivastava, for being a constant source of strength. Being academicians themselves, they could empathize with me and guide me through tough times. No words can express the constant inspirational support that I received from my dear friend Anuragini, who always helped me in her own little ways. Her enthusiasm and energy kept me going and helped me sail smoothly through the final tiresome phase of my PhD dissertation. Finally, I would like to thank my life teacher and guide Pujyashri P. Rajagopalachari for being a constant source of help, support and guidance. To him this thesis belongs. 27 June 2008 (Shirish Chandra Srivastava) Singapore iii TABLE OF CONTENTS Topic 1. Page No Introduction _____________________________________________________1 Structure of the Dissertation _____________________________________________ 23 2. Essay 1: Strategy-theoretic Conceptualization of Offshore Sourcing Decision: Strategic Orientation versus Strategic Response ___________________________31 Abstract ______________________________________________________________ 31 Introduction ___________________________________________________________ 31 Literature Review and Research Propositions _______________________________ 36 Offshoring and Strategic Orientation _____________________________________________ 36 Offshoring as a Strategic Response ______________________________________________ 38 Research Model and Hypotheses __________________________________________ 40 Offshoring from Strategic Orientation Perspective: Hypotheses ________________________ 42 Offshoring as a Strategic Response: Hypotheses ____________________________________ 48 Method and Variables ___________________________________________________ 50 Dependent Variable(s) ________________________________________________________ 51 Independent Variables ________________________________________________________ 52 Control Variables ____________________________________________________________ 56 Results________________________________________________________________ 57 Characteristics of Offshoring Firms ______________________________________________ 57 Strategic Orientation Perspective ________________________________________________ 58 Strategic Response Perspective__________________________________________________ 62 Discussion _____________________________________________________________ 66 Strategic Orientation Perspective ________________________________________________ 66 Strategic Response Perspective__________________________________________________ 68 Limitations ____________________________________________________________ 71 Implications ___________________________________________________________ 72 Implications for Research ______________________________________________________ 73 Implications for Practice_______________________________________________________ 75 Conclusion ____________________________________________________________ 77 3. Essay 2: Country-Level Determinants of Offshoring Destination Decision and Location Attractiveness _______________________________________________78 Abstract ______________________________________________________________ 78 Introduction ___________________________________________________________ 79 Literature Review and Hypotheses ________________________________________ 82 Offshoring__________________________________________________________________ 82 Offshoring Destination Decision and Location Attractiveness__________________________ 83 Method and Variables ___________________________________________________ 93 Dependent Variables__________________________________________________________ 94 Independent Variables ________________________________________________________ 95 Control Variables ____________________________________________________________ 97 Results and Discussion __________________________________________________ 98 iv Analysis From The Perspective of Offshore Destination Nations: Revealed Comparative Advantage ________________________________________________ 109 Limitations ___________________________________________________________ 114 Implications __________________________________________________________ 114 Implications for Research _____________________________________________________ 114 Implications for Practice______________________________________________________ 117 Conclusion ___________________________________________________________ 119 4. Essay 3: The Role of Knowledge Management in Offshore Vendor Performance: Integrating Social Capital and Absorptive Capacity Perspectives _121 Abstract _____________________________________________________________ 121 Introduction __________________________________________________________ 122 Literature Review and Hypotheses _______________________________________ 127 Knowledge Management: Knowledge Transfer and Knowledge Combination ____________ Social Capital, Knowledge Transfer and Knowledge Combination _____________________ Absorptive Capacity, Knowledge Transfer and Knowledge Combination ________________ Knowledge Based View and Project Performance __________________________________ 127 129 137 145 Research Methodology and Analysis ______________________________________ 147 Instrument and Data Collection ________________________________________________ Data Analysis ______________________________________________________________ Measurement Model _________________________________________________________ Structural Model ____________________________________________________________ 148 155 156 159 Post hoc Analysis ______________________________________________________ 163 Relationship between AC-SC and KT-KC ________________________________________ 164 Relationship between KT-KC and PES-PEO ______________________________________ 168 Discussion ____________________________________________________________ 171 Implications __________________________________________________________ 175 Implications for Research _____________________________________________________ 176 Implications for Practice______________________________________________________ 179 Conclusion ___________________________________________________________ 183 5. Conclusion ____________________________________________________184 6. Bibliography ___________________________________________________188 7. Appendices ____________________________________________________209 v LIST OF TABLES Details Page No Table 1-1: Key offshoring research in various disciplines ___________________________ Table 1-2: Three essays at a glance: Research hypotheses__________________________ 26 Table 1-3: Three essays at a glance: Research questions, methods, variables and main findings__________________________________________________________________ 28 Table 2-1: Independent variables and their description ____________________________ 55 Table 2-2: Profile of 306 firms: Industry-wise distribution__________________________ 57 Table 2-3: Profile of functions offshored by 306 firms _____________________________ 58 Table 2-4: Descriptives and correlations: Strategic orientation perspective ____________ 59 Table 2-5: Results of negative binomial regression (strategic orientation perspective) ____ 60 Table 2-6: Descriptives and correlations: Strategic response perspective ______________ 63 Table 2-7: Results of negative binomial regression on the number of jobs offshored (strategic response perspective)_______________________________________________________ 64 Table 3-1: Offshoring destinations for US firms __________________________________ 99 Table 3-2: Activities being offshored by US firms ________________________________ 100 Table 3-3: Profile of US firms which are offshoring ______________________________ 101 Table 3-4: Descriptives and correlations for all nations___________________________ 102 Table 3-5: Results of logistic regression on all nations____________________________ 104 Table 3-6: Descriptives and correlations for offshore destination nations _____________ 106 Table 3-7: Results of standardized multiple regression on offshore destination numbers _ 107 Table 3-8: RCA analysis: Top offshore destinations ____________________________ 112 Table 3-9: Top Offshore destinations (without India) ___________________________ 113 Table 4-1: Key IS research using social capital _________________________________ 132 Table 4-2: Key IS research using absorptive capacity ____________________________ 139 Table 4-3: Survey items and sources __________________________________________ 148 Table 4-4: Constructs: Average variance extracted & composite reliability ___________ 157 Table 4-5: Correlation table ________________________________________________ 157 Table 4-6: Measurement model results ________________________________________ 159 Table 4-7: Structural model results ___________________________________________ 161 Table 4-8: Summary of hypotheses tests for offshore relationships __________________ 163 Table 4-9: Competing models comparison: Post hoc analysis ______________________ 168 vi LIST OF FIGURES Details Page No Figure 1-1: The boundaries of offshoring ________________________________________ Figure 2-1: Research model: Strategic factors and degree of offshoring _______________ 41 Figure 3-1: Dimensions of offshoring destination decision and location attractiveness ___ 85 Figure 4-1: Conceptual model: Knowledge management and offshore performance_____ 125 Figure 4-2: Research model ________________________________________________ 137 Figure 4-3: Results _______________________________________________________ 160 Figure 4-4: Post hoc analysis 1: SC-AC-KT&KC mediated model___________________ 165 Figure 4-5: Post hoc analysis 2: Only AC______________________________________ 166 Figure 4-6: Post hoc analysis 3: Only SC ______________________________________ 167 Figure 4-7: Post hoc analysis 4: Path from operational to strategic performance_______ 169 vii Offshore Sourcing Decisions SUMMARY Despite the growing importance of information technology (IT) enabled offshore sourcing (or offshoring), there is limited academic research devoted to the subject. Motivated by the importance of understanding the modalities and outcomes of offshore sourcing coupled with a perceptible paucity of current literature that deals with the subject, in my dissertation, I investigate three important management concerns related to offshore sourcing decisions. Using Simon’s decision making model (1960) as the point of departure, I examine three offshore sourcing decisions associated with each of the phases of the Simon’s decision making model: intelligence phase (why firms offshore), design and choice phase (what guides firms’ choice of offshore locations), and implementation phase (how does knowledge management in offshore relationships affect performance). Specifically, my dissertation has three essays, which address each of the following questions: 1. What are the firm specific strategy-theoretic factors associated with offshoring? 2. What determines the attractiveness of an offshore destination? 3. How does knowledge management in an offshore relationship impact vendor performance? Adopting a multi-theoretic and a multi-disciplinary approach, contribution of this dissertation lies in bringing out fresh insights and opening up new avenues for future research in the upcoming field of offshoring. Taking a strategy-theoretic stance, viii the first essay, investigates the firm’s motivations for using offshoring as a sourcing strategy. Grounding the discussion in path dependency and contingency theories, I elaborate two broad approaches which firms generally adopt for making a strategic decision viz. strategic orientation and strategic response. Empirical results exhibit that offshoring strategy is generally guided by the broad strategic orientation of the firm rather than being a strategic response to performance downturn. The second essay contributes to the international business and information systems literature on location decision and examines the country level factors that contribute to a firm’s location decision when sourcing services from offshore destinations. In the third essay, I link social capital and absorptive capacity perspectives to predict the extent of knowledge exchange taking place between an offshore client and a vendor and the performance consequences of such an exchange. Taking a client perspective, the first two essays are based on secondary data from US based firms that offshore services to other nations. In contrast, the analysis in the third essay is based on data collected from a primary survey of Indian offshore vendors, and takes a vendor perspective. 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APPENDICES Appendix 1: List of countries analyzed (Essay 2) Albania, Algeria, Argentina, Armenia, Australia, Austria, Azerbaijan, Bahrain, Bangladesh, Belgium, Benin, Bolivia, Bosnia and Herzegovina, Botswana, Brazil, Bulgaria, Cambodia, Cameroon, Canada, Chad, Chile, China, Colombia, Costa Rica, Croatia, Cyprus, Czech Republic, Denmark, Dominican Republic, Ecuador, Egypt, El Salvador, Estonia, Ethiopia, Finland, France, Gambia, Georgia, Germany, Ghana, Greece, Guatemala, Guyana, Honduras, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Jordan, Kazakhstan, Kenya, Korea Republic, Kuwait, Kyrgyzstan, Latvia, Lithuania, Macedonia FYR, Madagascar, Malawi, Malaysia, Mali, Malta, Mauritius, Mexico, Republic of Moldova, Mongolia, Morocco, Mozambique, Namibia, Netherlands, New Zealand, Nicaragua, Nigeria, Norway, Pakistan, Panama, Paraguay, Peru, Philippines, Poland, Portugal, Qatar, Romania, Russian Federation, Serbia and Montenegro, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Tajikistan, Tanzania, Thailand, Trinidad and Tobago, Tunisia, Turkey, Uganda, Ukraine, United Arab Emirates, United Kingdom, United States of America, Uruguay, Venezuela, Vietnam, Zimbabwe Total number of countries analyzed = 113 209 Appendix 2: List of offshore nations (Essay 2) Argentina, Bangladesh, Brazil, Bulgaria, Canada, China, Colombia, Costa Rica, Czech Republic, Denmark, Dominican Republic, Egypt, El Salvador, Estonia, France, Germany, Ghana, Hungary, India, Ireland, Italy, Japan, Korea Republic, Latvia, Lithuania, Malaysia, Mexico, New Zealand, Nicaragua, Norway, Pakistan, Panama, Peru, Philippines, Poland, Romania, Russian Federation, Singapore, South Africa, Spain, Sri Lanka, Thailand, Ukraine, United Kingdom, Vietnam Total number of offshore destinations analyzed = 45 210 Appendix 3: Note on reliability and validity of data from TechsUnite database (Essay 2) To check the validity and reliability of data collected from the TechsUnite Website (TechsUnite, 2006), we followed a series of steps which are enumerated as follows. First, we compared the list of 645 firms with the list of offshoring firms available at CNN website of “Exporting America”18. All the 645 firms were present in the other publicly available list also. Second, we explored the various newspaper reports referenced as the source of offshoring information on the TechsUnite website for 40 firms (6.2% of all firms) and found the information to be generally correct and updated. Hence, we concluded that data from this secondary source is valid. For exploring the reliability of the TechsUnite data (number of firms offshoring to each country), we regressed this data on the total score of corresponding country attractiveness collected by two separate agencies, AT Kearney19 and Economic Intelligence Unit20 (EIU). For both agencies, the relationship was strongly significant: (AT Kearney, β=0.545, p[...]... II describe the two kinds of onshore activities, viz insourcing and outsourcing Inside Firm Boundary Outside Figure 1-1: The boundaries of offshoring I Onshore Outsourcing II Offshore Outsourcing IV Onshore Insourcing III Offshore Insourcing Inside Outside Country Boundary An increasing number of business processes and other activities are being offshored from developed countries like US and UK to relatively... importance of understanding the modalities and outcomes of offshore sourcing decisions and a perceptible paucity of current literature which deals with the subject, in my dissertation, I investigate some important management concerns related to offshore sourcing I view these managerial challenges in offshore sourcing as opportunities for managerial decisions Table 1-1 summarizes some of the key published... Rottman and Lacity Interviews of 27 people— (2004) U.S customers, offshore suppliers and consultants, and offshore legal experts Identifies twenty best practices for onshore outsourcing, offshore outsourcing and practices applicable to both The best practices unique to offshoring include giving customers adequate options for choosing sourcing locations, elevating the customer’s process maturity in terms... model (1960) as the point of departure, I examine three specific offshore sourcing decisions associated with each of the phases of the Simon’s decision making model: intelligence phase (why do firms offshore) , design and choice phase (what guides firms’ choice of offshore locations), and implementation phase (how does knowledge management in offshore relationships affect performance) The approach has been... responsible for global IT sourcing decisions in 13 largest and most influential U.S based firms The sample had both technology as well as nontechnology firms • Explores the link between extent of offshoring and company performance Bock (2008) Describes the four stages for offshoring in US firms viz Offshore Bystanders companies - that currently do not outsource offshore at all, Offshore Experimenters... number of jobs offshored H2: The lower the average expenses, the higher will be the number of functions offshored H3: The higher the average growth rate, the higher will be the number of jobs offshored H4: The higher the average growth rate the higher will be the number of functions offshored H5: The higher the average R&D expenditure (innovativeness), the higher will be the number of jobs offshored H6:... do not outsource offshore at all, Offshore Experimenters companies - that are pilot testing offshore sourcing of non-core IT processes, Proactive Cost Focus companies - that seek broad, corporate-wide leveraging of cost efficiencies through offshoring and Proactive Strategic Focus companies– that view offshore sourcing as a strategic imperative Implementation Results Design & Choice Theory/Methodology... extent of information technology (IT) related and IT enabled services being offshored Although some researchers and practitioners view the present day ICT enabled sourcing of white collar services as a natural progression of the traditional blue collar sourcing (Friedman, 2005), many feel that management requirements for services sourcing, especially from distant countries in real time, may be quite different... survey of 213 Dutch Main motives of offshoring are: seeking market access, seeking strategic assets, and and Livshits (2007) firms that have offshored cost advantages Different motives may lead to choice between offshore outsourcing or captive offshoring, and choice of offshore locations Alignment of initial motives and goals in different phases of offshoring may lead to improved success in • • 19 Decision... has enabled firms to route their everyday business processes to distant offshore locations (Lewin, 2005) Offshore vendors and captive units can now supply the required administrative, technical, and business services to geographically distant firms in real time at a comparatively cheaper cost In the contemporary context, offshore sourcing (or offshoring) refers to the migration of all or part of the . activities, viz. insourcing and outsourcing. Figure 1-1: The boundaries of offshoring II Offshore Outsourcing IV Onshore Insourcing III Offshore Insourcing I Onshore Outsourcing Firm. OFFSHORE SOURCING DECISIONS SHIRISH CHANDRA SRIVASTAVA NATIONAL UNIVERSITY OF SINGAPORE 2008 OFFSHORE SOURCING DECISIONS. management concerns related to offshore sourcing decisions. Using Simon’s decision making model (1960) as the point of departure, I examine three offshore sourcing decisions associated with each of