Offshoring Research Network

¹ Florida International University, Indiana University, Michigan State University, Temple University, University of Connecticut, University of Hawaii at Manoa, University of Kansas, University of Maryland, College Park, University of Memphis, University of North Carolina at Chapel Hill

A key ORN finding is the increasing importance of access to qualified personnel as a driver of offshoring decisions.[17] Most scholars have argued that offshoring is primarily driven by opportunities to reduce labor costs and by labor arbitrage effects.[18] While the ORN surveys confirm the importance of costs, they also reveal that companies use offshoring as a means to access talent pools outside their home countries, in particular for higher-skilled work. This trend has been explained by an increasing supply of science and engineering talent in emerging economies, e.g., India, and the increasing difficulty of finding talent in the U.S. and Western Europe.[19] It is further reinforced by restrictive visa policies in the U.S. and incentives for foreign graduates to return to their home countries, a recent phenomenon referred to as brain circulation.[20]

Whether offshoring is primarily driven by costs, by the global search for talent or a combination of both has been widely debated. Some scholars argue that science and engineering degrees in India and other emerging economies are, on average, not yet compatible with degrees in the U.S. and Western Europe. Therefore, the supply of qualified talent in emerging economies is more limited than often argued in the business press.[21] Some Asian companies, for example, have recently hired a number of Western managers.[22][23] However, foreign client firms sometimes respond to that challenge by setting up complex collaborations with local universities to secure access to qualified personnel.[24] Also, recent studies suggest a trend towards modularization and standardization of higher-skilled work allowing for the use of less qualified personnel for lower costs. According to ORN studies, the search for talent and cost considerations therefore depend on changes in technology, education policies, firm capabilities and economic conditions.[25] In the short term, the financial crisis might result in labor cost savings becoming a more important offshoring driver.[15]

The ORN surveys reveal that more and more firms are offshoring knowledge work, including software development, engineering, product design, research and development. Previously, offshoring was mainly associated with Information Technology Outsourcing and standard business processes.[26] However, according to ORN findings, small companies in particular seek to offshore knowledge work, partly using specialized suppliers, to compensate for their limited capital and capacity for product development. Drivers of this trend include the potential to increase speed to market and better access to qualified personnel.[17]

This trend is increasingly being discussed in the academic and practitioner-oriented literature. The economist Alan Blinder argues that technical processes, such as software testing and engineering support, are becoming easy to offshore because advanced information technology helps decompose and separate technical processes which can then be undertaken and coordinated remotely.[27] Other researchers argue that knowledge-intensive tasks remain difficult to decompose because of the complex and often tacit knowledge involved in carrying out these tasks.[28] ORN findings, however, suggest that this trend is likely to continue as more and more service providers offer product development services, as firms look for external sources of new ideas (e.g., open innovation), and as new business models and technologies (e.g. Internet marketplaces such as Innocentive.com) emerge.[29]

One major factor contributing to recent offshoring and outsourcing trends is the emergence of new geographic knowledge services clusters. In general, business clusters can be defined as geographic concentrations of firms and institutions related to particular industries or fields.[30] In the offshoring space, a new type of cluster is emerging, quite different from [Silicon Valley], which often serves as a prototype of an industry cluster.[31] These new types of clusters are highly dependent on foreign investment and are characterized by the supply of specialized talent and expertise that is demanded across industries. One key example of such a cluster is Bangalore for IT-related services and software programmers who have developed specialized service capabilities, which are in demand worldwide in several different industries, including manufacturing, financial and professional services.[32] Recent studies further indicate that these clusters increasingly show similar institutional features across the world, such as collaborative agreements between foreign firms and local universities, which are a result of local embedding and sourcing strategies of multinational enterprises across locations.[24]

The ORN research team has started to conduct survey- and case study-based research to better understand the development of these clusters. A very recent project, for example, seeks to investigate the emergence of new IT and software development clusters in Latin America which attract foreign investors from Spain and the U.S. in particular.[33] A longer-term project involves the identification of knowledge service clusters around the world, using a longitudinal study of location choices and the delivery of offshore services from particular locations. Other scholars have also looked into the emergence of offshore destinations, in particular in India, and the factors contributing to the selection of locations by investors.[34]

One key proposition raised by the ORN research team is that offshoring is an intermediary step to evolving new global organizational capabilities rather than an end in itself.[9] In general, organizational capabilities denote the ability of organizations – in this case firms – to deploy and use resources in a way that help them survive in a changing, competitive environment. As companies face various challenges related to offshoring, for example the challenge of attracting and retaining talent, or of losing managerial control and process knowledge, they are forced to develop new capabilities that help them manage offshore operations and that fundamentally transform their internal processes.[25] Examples of this sort of new capability include new procedures to manage interfaces between tasks, locations, business units and teams; new employment models using external talent agencies; new procedures for training and evaluating external suppliers etc.

The development of these capabilities is a continuous learning process and involves the search for solutions of unanticipated challenges. For example, a recent ORN study indicates that many companies go through a period of declining cost savings – the so-called 'inefficiency trap' – as they increase the scale and scope of offshore operations.[15] This trap is largely caused by 'hidden costs' involved in coordinating offshore operations that only become apparent over time. To study how companies deal with these challenges, the ORN research team is conducting a number of case studies involving series of interviews and field visits at U.S. and European companies.

Research papers based on ORN data have been presented at major academic conferences in the field of management and international business research, in particular at annual meetings of the Academy of Management, the Academy of International Business, and the European Group for Organizational Studies. ORN research papers have been or will be published in a number of major journals in this field, including Long Range Planning, Academy of Management Perspectives, Journal of International Business Studies, and Harvard Business Review.[35] Through its publications, the ORN team seeks to advance knowledge about the antecedents, process and effect of offshoring, outsourcing and global sourcing, the transformation of global firm structures and the emergence of global organizational capabilities.