Institutional factors affecting offshore business process and information technology outsourcing

Abstract

Micro and macro level impacts of offshore outsourcing are far from clear. Thus there are some well-founded rationales for and against offshore outsourcing as well as a number of misinformed and ill guided viewpoints. Using institutional theory as a lens, this paper analyzes the drivers of offshore business process and information technology outsourcing. We examine the mechanisms by which regulative rules, social rules, culturally supported habits and subconsciously accepted rules and customs influence assessment, selection as well as continuation of outsourcing projects. Managerial and policy implications are discussed and directions for future research have been suggested.

Introduction

The global offshore outsourcing market is rising exponentially. One estimate suggested that the annual global market for business process (BP) and information technology (IT) outsourcing will cross $100 billion by 2008 (Babcock, 2004)¹. Micro and macro level impacts of offshore outsourcing are, however, far from clear (Kotabe and Murray, 2004). Because of a lack of a systematic framework, there has been substantial debate about the long-term consequences of offshore outsourcing (Lacity and Willcocks, 1998). There have been some well-founded rationales for and against offshore outsourcing as well as a number of misinformed and ill guided viewpoints.

At the micro level, the existing literature provides very little guidance in selecting outsourcing service suppliers (Kotabe, 2001). Thus offshore outsourcing decisions related to the optimum level, activities and destinations are accomplished through the use of common sense, accumulated experience and rough judgment (Kshetri and Williamson, 2004). Notwithstanding a substantial potential savings, a number of firms are reluctant to outsource offshore. Some firms engaged in offshore outsourcing, on the other hand, have been unable to reap the benefits. A Gartner analyst predicted that during 2005–2008, 60% of organizations outsourcing customer services will face customer defections and incur hidden costs that will cancel or even exceed savings (Alster, 2005). Another study indicated that half the firms that shift processes offshore fail to generate expected financial benefits (Aron and Singh, 2005).

Next, let's consider macro-level effects. Some studies have indicated that if properly implemented, offshore outsourcing creates more jobs than those sent overseas. Nonetheless, offshore outsourcing has been a controversial issue in business and political circles (Human Resource Management International Digest, 2005). Fears related to offshore outsourcing have generated confrontational reactions and raised a public outcry in outsourcing origin countries. Domestic lobbies such as labor unions, members of affected industries and professionals losing jobs are pushing for protectionism (Pfannenstein and Tsai, 2004). Negative media coverage has further intensified the debate about the justifiability of offshore outsourcing (Rottman and Lacity, 2004). Job losses associated with outsourcing became a major issue during recent EU constitution referendums and in the 2004 U.S. presidential campaign (Kaka and Sinha, 2005).

Advancement of the art and science of offshore outsourcing will facilitate to speed up the learning curve (Rottman and Lacity, 2004) for firms engaged in outsourcing relations. It will also help policy makers in outsourcing destinations devise strategy to attract outsourcing jobs. Such an understanding will also assist policy makers in an outsourcing origin country (e.g., U.S.) assess broader impacts of outsourcing. To fill these research gaps, this paper draws upon institutional theory to develop an understanding of factors affecting the pattern of the global flow of offshore IT and BP outsourcing.

Before proceeding, we offer some clarifying definitions. IT outsourcing is defined as subcontracting a company's IT functions to an external vendors (Cheon et al., 1995, Lacity and Willcocks, 2001, Loh and Venkataraman, 1992, Sengupta and Zviran, 1997). Similarly, BPO is defined as long-term contracting of a firm’s (hereafter: the client firm) non-core business processes to an external service provider (hereafter: the outsourcing firm) (Romberg, 1998). These are non-IT business processes but in most cases are IT-intensive or are facilitated by IT. Some examples include customer service call centers, tax preparation, medical transcription, finance and accounting, human resources, design and engineering, etc. (The Economist, 2005a). In offshore IT or offshore BP outsourcing, the outsourcing firm and the client firm are located in different nations. The remainder of the paper is structured as follows: The next section provides an overview of institutional theory. Then, we develop some propositions that relate institutions in the origin and the destination countries with the global flow of offshore BP and IT outsourcing patterns. Finally, we provide discussions and implications.