von Dr. Christoph Freiherr von Gamm
The challenge of international outsourcing lies in the bridging of many different cultures at the same time whilst enabling a best-of-breed configuration in order to gain competitive advantage for both the outsourcer as service provider and the outsourcing company, the client. The right configuration of the global outsourcing structure, the correct cultural settings and the right contractual incentives generates a win-win situation and relationship that lasts even when the initial contracting parties are gone. There are four key cornerstones as a key requirement for a win-win relationship: First, are a good cultural fit between provider and client, a process model that is based upon standards and enables the flow of process and information flawlessly from client to provider. Third, a contract model that allows the client and the provider to excel and last but not least an incentive scheme for the provider as well as for its employees that is aligned with the desires of the client.
To examine the impact of intercultural and interdisciplinary collaboration in large organisations in order to gain economic and market success, we need to go back to the basics of why doing business makes sense at all. Due to the internationalisation of labour – especially in outsourcing – additional tension with western enterprise cultures has been generated. This creates frictions – and in the interests of financial and market success, these frictions needed to be surpassed. As well as investigating the intercultural implications, for many companies, organisational change is required in order to improve cooperation both across disciplines as well as across
different countries. Robert Murphy in The Politically Incorrect Guide to Capitalism (2007) writes: ‘trade makes all parties richer’. So it is also the case with outsourcing, despite some common beliefs. As a result, people who trade or provide services can live from arbitrage, focus and cost differences.
Why do corporations internationalise?
Outsourcing and internationalisation go hand in hand. No company wants to internationalise just for the sake of it. Firms internationalise when they have reached a certain ceiling in their local potential within their domestic countries. Thus, the first clear precursor to internationalisation is the ability to think beyond one’s own country. Therefore, managers might have anticipated the need to internationalise and to seek opportunity abroad. A second set of motives is based upon competition faced by the company, ie from
international firms. This can be seen in the IT services industry, where Indian players entered the US in the 1990s and even more from 2000 onwards, slowly but surely taking away market share from the domestic players. Some writers suggest that there is a third motive for managers: personal career and pleasure, largely because it is much nicer to visit a service delivery centre in Nice or
Buenos Aires than in say – Slough or Pratteln. International services are a large and increasing part of the international economy. Yet the ideas which are related to international enterprise have so far been built upon the experiences of manufacturing industries. So far, little research has been undertaken on the internationalisation of services – only since the inception of the ‘globally integrated enterprise by Sam Palmisano (Palmisano, ‘The Globally Integrated Enterprise’, Foreign Affairs, 2006) has this really changed. Services are special in nature as they are intangible and therefore services have initially be seen as hard to outsource. Moreover, service firms initially due to the locality of the service have been poor candidates for globalisation, initially. With the internet, this all has changed.
The outsourcing of services
Depending on the number of variables, some industries that are thought of as service industries may well contain a high degree of production of non-service goods. The distinction can be seen through the separation between ‘front-office’ and ‘back-office’ functions. For example, consulting firms produce large reports; IT service providers operate personal computers and laptops for clients and make them
available to run or complete data centre services; banks and insurance companies create financial statements or offer products such as structured vehicles or derivatives yet being in its core a service offering; and advertising agencies produce campaigns. Services also have a locational element:
The user may move, or not, and the provider may move, or not. This gives the opportunity to name three additional categories of services (Grimwade & Grimwade, International Trade Policy: A Contemporary Analysis, 1996): separated services; demander-located services; and provider-located services. The goal of many service companies is to provide all three with the best possible and cost-effective mix. For example, an outsourcing service is a highly separated service with its data centre and help desk and remote infrastructure monitoring service, however the on-site support and the service management component is demander-located.
Working with stereotypes ideally can help and promote
With the dislocation of services, different countries and continents, the culture question comes into play. Hence, the discipline ‘Intercultural Business Communication’ is the foundation for a culture adapted to the client’s business process, which has strategic importance for companies. Tangible knowledge and understanding of cultural characteristics (Schröder, Ethnozentrismus, Stereotype und Lakunen Methodologische Überlegungen zur Analyse interkultureller Kontaktsituationen, 1998), should be codified in the
form of databases by local experts who know each other across borders and add to the knowledge of intangibles. This implies, however, that an enterprise configuration (Mintzberg, The structuring of organisations, 1999) should support, in addition to the global control and global ‘strategic apex’, an ‘octopus-like’ set of local brains. The part in between, known as the ‘middle office’ or ‘support staff’, and
the so-called ‘techno structure’ should be allocated in a globally cost-optimised way. Therefore in services organisations especially, the money needs to be put where the mouth is: and this is where the clients are.
When trying to take advantage of those factors (Porter, Competitive Strategy: Techniques for Analysing Industries and Competitors, 2008),
the trade-off that needs to be made is to increase transaction costs. Many of those extra transaction costs stem from the differences in culture and, of course, distance. The more successful organisations try to overcome those factors with a set of concepts on how to bridge those gaps.
Typically, organisations have to work with stereotypes, lacunas and ethnocentrisms that need to be analysed and overcome in order to stay effective. Definitely, those stereotypes need to be acknowledged, and the ‘pre-supposed base truths’ need to be spoken as they often do not correspond to each other. As a result, it shows that communication happens in a different way besides language and discourse.
In technology and services, it is therefore important to find a lingua franca to describe similar terms across the world, especially when working with front-offices onshore andback-offices offshore. In order to overcome these stereotypes and to become effective, they essentially need to be translated into the correct meaning, often using a common process framework or a technical lingua franca, such as ITIL (ITIL Organisation, 2010), a framework for describing meanings within a technical services community. This then helps in finding a common denominator across the organisations to talk about and to communicate. Through a global delivery model, best talent then can be balanced in client engagements between onshore, nearshore and offshore locations and works as a ‘unified team’. The benefit is then a cost-balanced model whilst providing flexibilities such as a quick hiring of additional resources whilst having a local understanding of the clients’. Here, one of the biggest challenges to work as a ‘unified team’ is to have ad unum a common language and process, and ad duem a common culture and understanding.
The business case for an off-shored outsourcing
For years, businesses have increasingly sought to optimise their development and service capabilities globally. As a result, they are in a constant screening process for new facilities in order to grow and adjust their business. Outsourcing and offshoring often come together as synonyms. Aside from clear and sustained cost reduction motives, the reason for outsourcing is often a strategic one, such as improved
flexibility with the outsourcer, who has economies of scale the client does not have, thus enabling a fast scale-up or scale-down of the operations depending upon the business needs, which might improve time to market and cost dependencies.Next, access to talent is a key
driver. The outsourcer operates within its own core competencies, so the access to talent might be easier to manage in this specialised domain. Further on, risk transference plays an important role: with the operation transferred to the outsourcer, theoutsourcer then has the risk of performing and can contractually be forced to take over the financial and business risk of a service delivered. And last but not least, capital allocation – an operation outside of the core business might still bind financial capital designated elsewhere to core operations.
Additionally, several benefits might occur during this process, such as further instant savings, less risk in delivery and as part of the acquisition, an initial payment for cash-strapped organisations, and literally speaking, a hidden loan for the takeover of assets at a goodwill
price. The savings contribution and quality improvement of an outsourcing solution might be more predictable than a do-it-yourself operation – at least it can be contractually guaranteed.
However, an outsourcing company does not perform an outsourcing solution for ‘free’; as a commercial enterprise, it has associated some extra cost beyond production costs such as: margin for the provider – usually between 5 and 20 per cent of the total service delivered; transition and transformation efforts (10-15 per cent surcharge); as well as people transfer costs to comply with legalobligations such as the German BGB § 613a or Swiss Law CO Article 333, to name two of them. Also, VAT might be encompassed if not deductible.. Next, the
client has to set up some parts of the organisation to manage the outsourcer. Depending upon the quality of the contract, the client has to put together a ‘retained organisation’, managing the supplier. All these costs together therefore only make it commercially viable if, the outsourcing company can produce the service at cost levels of less than half of what the client company would need to make.
As a result, labour arbitrage is an argument that makes sense. By combining outsourcing and offshoring, additional costs and risks come to bear what need to be encompassed. The biggest risk in working internationally is the cultural risk; different countries have different cultures. A Swiss ‘yes’ is a different one to a British or even an Indian ‘yes’. There is a risk and a price associated with dealing with the different culture and this risk only can be mitigated with teams that have been trained to work across different cultures and who know
each other. A further implication is currency risk. If the outsourcer operates within a different currency environment, these currencies might fluctuate in relation to each other.
Therefore, the business case for outsourcing only works if the service including all burdens can be performed at a much lower cost than before. The following base premises therefore need to be factored in, in order to make the business case fly: (i) the infrastructure cost can be drastically lowered ie, by better purchase conditions, sharing of resources or better utilisation of capital equipment employed; (ii) the people cost can be significantly lowered either by a much better utilisation of the people and condensing and automating people’s work (eg, by sharing the same skill over several clients or using a higher degree of automation) and by lower labour costs by using labour arbitrage and putting people offshore; (iii) the apportioned risks need to be manageable and therefore can be lowered, ie by a culturally capable team and by standardisation and specialisation. The service management costs from both sides – provider and client (retained organisations) are contained and the service operations can be as frictionless as possible. Consequently, those standards like ITIL as a lingua franca do play a significant role in reducing the service management costs.
The intercultural question – is common process and language an answer?
One question to ask is how can intercultural differences not only be used as a lever but also as a beneficial advantage for success?
A good cross-cultural collaboration for a company is particularly effective if there is a common goal. For example, a common customer
base as a revenue source helps connect people while measuring collaboration through a structured measurement system such as the ‘balanced scorecard’, shown by Kaplan and Norton (Kaplan & Norton, The Strategy-focused Organisation, 2001). When measuring this, in addition to the pure financial perspective such as revenues, costs and profit, other perspectives such as that of the customer, innovation
and learning, and internal processes – all centred around a central mission and vision – should be investigated in order to measure and improve intercultural collaboration. In a client-orientated environment, the sales leaders in charge should therefore have a common set of targets and goals and the salary and bonus system should be connected with these goals. Leading indicators such as deal pipeline, certification of employees, technical and intercultural skills, succession plans in human resources, and market share tests should be combined with trailing indicators such as revenue, cost ratio, profits and customer satisfaction in a reasonable and weighted measure.
Lacity et al, in particular, realised that the outsourcing of back-office operations (Lacity, Willcocks, & Rottman, ‘Global outsourcing of back office services: lessons, trends and enduring challenges’ Strategic Outsourcing: An International Journal, 2008) correlate widely with
the use of common language. Common language has been developed in order to capitalise upon the maturing information technology outsourcing (ITO) and business process outsourcing (BPO) markets by firms. Again here, the concept of understanding different cultures is paramount and if this cannot be achieved, a common framework such as ITIL serves to provide a trans-cultural bridge. The main
lessons are that executives need this lingua franca in order to build significant and effective internal IT capabilities in-house – those capabilities are hard to develop and in consequence, service providers who have that capability have a further competitive advantage. It is the same with processes for managing global outsourcing.
In a services industry, the service process itself is increasingly becoming standardised and industrialised in order to enable scale efficiencies and to replicate personnel. This is a key feature of industrialisation in the IT industry, which is further instrumentalised using common process such as ITIL. Consequently, the key success factors for service organisations to realise an international outsourcing are: high
technical ability; low labour costs; global functioning of processes; and not to present a different corporate culture to the end customer. Enterprise configurations with customer-related functions should therefore be much more culturally adapted towards the client than client-remote areas, however even a back office needs to understand the customer in order to perform. An outsourcing business can
only be realised if the transaction costs of bridging this cultural gap doesnot outweigh the cost advantages of the outsourcing organisation itself. Not every place in the world is equally appropriate for the allocation of resources and workers. As Porter wrote in his concept on Porter’s Diamond (Porter, Competitive Strategy: Techniques for Analysing Industries and Competitors, 2008), surrounding cultures and conditions are essential. Neglecting these affects the business case negatively on either, or even both, sides.
Four cornerstones for a win-win relationship
Outsourcing contracts sometimes last for years or even decades with changing personnel on both sides over the duration of the contract. In order to generate a win-win situation between the provider and the supplier, four main cornerstones need to be built.
The first key requirement is a good cultural fit at the interface between provider and client. People matter. Therefore, it makes great sense when the provider has its service management and client-facing team located near to the client in order to bridge the culture gap between client and provider. In return, this client team then also has to bridge the second gap between itself and the rest of the organisation. Consequently, the success of a service starts and ends with attitude, skill and quality of the people engaged in it. Second, supporting
this, a process model based upon standards that enable the flow of process and information flawlessly from client to provider and vice versa, needs to be established. In information technology, ITIL has proved to be successful.
Third, the contract and contract model needs to allow both the client and provider to breathe and live. Outsourcing is like a marriage, an arm’s-length contract therefore does not work. More generalist framework agreements with individual schedules for the services provided often provide much more flexibility and freedom to manoeuvre like a partnership than itemised specification. Most contracts are designed with a high focus on the initial transition and transformation phase, yet the ongoing operations which will change and evolve over the years are often neglected. Here it is important to provide a framework of reference that allows for changes without jeopardising the initial strategic objectives of the outsourcing engagement, such as cost reduction on the client’s side as well industrialised services on the provider side.
Last but not least, business is being conducted to make money, so the incentives for the participants on both sides – the companies and their employees – have to be set the right way. Results count. Therefore, broadly speaking, an incentive andmeasurement model needs to focus on business results and not on effort.
Implementing these models is not easy and can lead to a high degree of discussion initially. And a unilateral measurement, ie a focus only on savings or profitability, will probably not meet the objectives of a well-run long-term relationship. Moreover, a measurement system using balanced scorecards should be used and tailored towards the specific needs of the provider-client relationship. However, these discussions are worthwhile having, instead of then having an effort-based incentive model that over time simply lets prices explode without producing any marginal business result.
One word of caution should be noted: with an ever changing world, outsourcing services providers increasingly become clients of the same companies they serve – be it in banking, travel, telecoms or even food. Despite all temptation to initially close a ‘value creation deal’ that fosters this network effect, the golden rule of separation of duties should never, ever be forgotten.
Dr Christoph Freiherr von Gamm
CEO and owner of the Advisory led Search company vonGammCom Global