How cultural differences can have a positive impact on the success of offshoring initiatives
All else being equal, if you could choose between sourcing services in a country that has a culture similar to your own or one with a different culture – which one would you choose? “Our observation is that, when confronted with that choice, most managers opt for the ‘cultural proximity’ option. But data show that you may want to think twice before you embark on the ‘easier’ road,” says Carine Peeters, professor of strategy at Vlerick Business School.
Together with Prof Dehon and Prof Garcia-Prieto, she studied the influence of cultural differences on the success of service offshoring initiatives. They looked at two measures of success, namely, how fast companies achieve the expected service levels and whether they reach cost (savings) targets*.
The research findings are based on survey data from the Offshoring Research Network on 985 offshoring initiatives originating from firms in the US and Western Europe, across industry sectors, functional categories, and size. Following standard practices in this domain, they defined cultural differences as ‘differences in norms and values between domestic and offshore countries’. These were measured using an index based on the indicators developed by the famous Sociology scholar Geert Hofstede.
The researchers found that:
1/ the greater the cultural differences between home and offshore countries, the longer it takes to achieve expected service levels. More specifically, the likelihood that firms succeed the transition to expected service levels in less than six months significantly decreases as cultural differences increases. No surprising conclusion, in view of the well-known complexity story due to misunderstandings, coordination problems, and communication issues.
2/ greater cultural differences are associated with greater likelihood of reaching cost (savings) targets. It means that, on average, firms that opt for culturally more different countries, instead of going for the supposedly easier options, have better chances of achieving whatever cost targets they have in mind.
This latter, more counter-intuitive conclusion is in line with the latest social psychology research on emotions in cross-cultural contexts. Social psychology scholars have indeed provided growing evidence that the mere presence of cultural differences in work relations generates “negative” emotions such as fear due to the anticipation of challenges. But these “negative” emotions would have the positive consequence of improving the information gathering and processing efforts of decision makers, and hence lead to better decisions.
Applied to the context of global sourcing, this suggests that when anticipating challenges due to working with an offshore country that is culturally different, decision makers are much more thorough and careful in collecting and interpreting data on the benefits but also costs and complexity of offshoring. That leads to more accurate cost estimation targets and reduces the risk of hidden costs. As a result, firms have better chances to remain within their cost estimates.
In other words, the misleading perception that offshoring to culturally similar countries is easier than offshoring to culturally different countries leads managers to overlook the critical preparation phase of any offshoring initiative, and hence run into unanticipated costs.
Cultural differences would be best interpreted in terms of opportunity cost of time.
- For a fast transition to expected service levels (when opportunity cost of time is high), a culturally close offshore country may be preferred, provided sufficient effort is put in developing accurate cost estimates and controlling implementation costs. But if you fail to dedicate enough effort to collect and process the necessary information to anticipate the true cost of offshoring, you may achieve service levels on time, but run into unexpected costs that jeopardize your business case.
- If a longer transition time is acceptable (i.e. opportunity cost of time is low), you may want to opt for a culturally more distant country that gives access to advantages not available otherwise – such as large pools of qualified engineers in India for instance.
Moreover, the researchers found that the delay in transition time due to cultural differences is greater for firms that launch their own captive subsidiary in the offshore country, than for firms that work with an outsourcing service provider. The same is true for the positive effect of cultural differences on the realization of cost (savings) targets.
This means that when opting for a culturally distant offshore country, firms may be better off working with an outsourcing provider instead of launching their own captive subsidiary. This is probably due service providers who usually have a better knowledge of the host country cultural environment and have developed capabilities to help clients deal with the challenges of cultural differences.
* The focus is on the realization, or not, of cost (savings) targets; not the actual amount of cost savings achieved. That means the ability of managers to correctly evaluate the true cost of offshoring, and to achieve the potential for cost savings, if any. If no cost savings are expected (i.e. same level of costs pre and post offshoring), the study assesses whether firms run into cost increases (i.e. post-offshoring costs greater than pre-offshoring level) or are able to control implementation costs.
Source: “The attention stimulus of cultural differences in global services sourcing” by Carine Peeters (Vlerick Business School), Catherine Dehon (Solvay Brussels School of Economics and Management) and Patricia Garcia-Prieto (Solvay Brussels School of Economics and Management). Published in the Journal of International Business Studies, 46(2): 241-251 (2015).