Study Reveals Global Outsourcing More Beneficial than Onshore or Localized Outsourcing - Indus Net Technologies

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Study Reveals Global Outsourcing More Beneficial than Onshore or Localized Outsourcing

July 10, 2014 by Mainak Biswas under Strategy179 views
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Some of the hardest hitting criticisms against outsourcing have come in the form of anti-globalization protests and a belief that it increases unemployment in the home country. Contrary to such beliefs, research papers and academic studies have pointed at something more positive – that offshore outsourcing is a viable, beneficial & supportive B2B exchange that helps in growing businesses.

There are also those who advocate localized and onshore outsourcing, as opposed to global outsourcing. Those who support localized outsourcing believe that smaller guys within the same geographical area as the client will be better able to understand cultural quirks that might act as hurdles when it comes to global outsourcing. Similarly, proponents of onshore outsourcing highlight the importance of vendors having a physical address nearby, which helps to keep track of their work and also probably to keep projects accountable.

Academic and scholarly support for global outsourcing

We found a study that evaluated the choice of geographical location as governance strategy, when it comes to outsourcing contracts. The results were not very surprising. The study highlights the benefits of global outsourcing over onshore and localized outsourcing. It also highlights the importance of developing personal and informal relationships with outsourcing agents and offshore vendors, which minimize the cultural differences that proponents of localized outsourcing speak about.

The study’s aims, methodology and its findings

Anindita Chakravarty, Rajdeep Grewal, Suprateek Sarker and V. Sambamurthy published a paper titled “Choice of Geographical Location as Governance Strategy in Outsourcing Contracts: Localized Outsourcing, Global Outsourcing, and Onshore Outsourcing” in Customer Needs and Solutions (CNS), which is a premier journal for scholarly work related to customer needs and related critical issues.

The researchers applied Transaction Cost Economics to imply that the degree of relational governance required to manage an outsourced project might benefit from specific geographic locations. They concluded that global outsourcing is more effective for relational governance strategy for most outsourced ventures than onshore or localized outsourcing.

The study has several important findings

• Localized outsourcing is not a very popular choice. The researchers speculate that it could be due to certain cultural and political barriers that might occur, even when operating from the same country. They also note that this result challenges the assumption that it leads to higher rates of unemployment and wage compression.

• The only time that shareholders preferred localized outsourcing was when the contracts were with known suppliers or vendors. This again reinforces the importance of developing informal relationships with vendors and suppliers so that cultural barriers are minimized.

• Even though relational governance became more complex with global outsourcing, shareholders preferred to engage in global outsourcing than onshore outsourcing. They speculate that onshore outsourcing is not possible always because vendors would have to have an office everywhere the client, usually, comes from.

• The study revealed that to manage operations in multiple locations, global outsourcing was more beneficial. It is simply not possible to locate vendors in every country or location that a business might branch out to. Having a consistent global outsourcing partner leads to safer project management.

• A global outsourcing mode, which not only has offshore presence but also onshore presence seems to be a better solution. Such a solution provides clients with top talent from across the world. This is again not a new finding and is something that most proponents of offshore outsourcing have repeatedly stressed on.

Our thoughts

Most IT outsourcing companies have stressed on the importance of finding a suitable vendor who is approachable and reliable. For first time clients, it is often advisable to read through testimonials and speak to people from shortlisted outsourcing agencies & see if one can develop informal relationships. Much academic research has stressed on the importance of a non-hierarchical and informal nature of business relationship for the success of outsourced projects. It is advisable to find a reliable and reputed global IT outsourcing partner to minimize risks & enhance productivity.

The entire study can be downloaded (PDF) from here.

Reference

• Chakravarty A., Grewal R., Sarker S., Sambamurthy V. Choice of Geographical Location as Governance Strategy in Outsourcing Contracts: Localized Outsourcing, Global Outsourcing, and Onshore Outsourcing. Cust. Need. and Solut. 2014;1(1):11-22.

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