Mitigating hidden costs in service offshoring: a strategic management perspective
| Date | 10 July 2017 |
| DOI | https://doi.org/10.1108/IMDS-05-2016-0187 |
| Published date | 10 July 2017 |
| Pages | 1058-1076 |
| Author | Songyue Zheng,Qiang Wang |
| Subject Matter | Information & knowledge management,Information systems,Data management systems,Knowledge management,Knowledge sharing,Management science & operations,Supply chain management,Supply chain information systems,Logistics,Quality management/systems |
Mitigating hidden costs in service
offshoring: a strategic
management perspective
Songyue Zheng and Qiang Wang
School of Management, Xi’an Jiaotong University, Xi’an, China
Abstract
Purpose –IT-enabled service offshoring has become a vital and widespread practice for firms seeking to
realize various advantages. However, many firms suffer from “hidden costs”(the discrepancies between the
expected and actual costs of offshoring), and these firms often find a disappointing outcome from their
offshoring decisions. The purpose of this paper is to explore whether and how the adoption of an offshoring
strategy can reduce such hidden costs and how this effect can be moderated by contextual factors, including
the complexity of tasks and the accumulation of experience.
Design/methodology/approach –Based on survey data from the Offshoring Research Network, this
study uses hierarchical regression analysis to empirically test the hypothesized relationships.
Findings –A corporate-wide strategyfor guiding offshoring decisions may effectively reduce cost-estimation
errors. This effect is amplified by increasing task complexity, but decreases with growing offshoring experience.
Regardless of whether a strategy is initially in place, most firms learn to avoid cost-estimation error so nlya fter
several years. This finding suggests that firms have a limited ability to mitigate hidden costs in the short term.
Practical implications –The guidelines specified by an overarching strategy can better rationalize cost
estimation and goal setting for individual offshoring projects, provide incentives for project participants to
achieve preset aspirations, and enhance cost-efficiency in fulfilling offshoring activities and in coping with
emerging contingencies. Firms tend to benefit more from establishing a formal strategy to reduce the hidden
costs of more complex projects, especially if the firms involved have little offshoring experience.
Originality/value –This study empirically examines the hidden costs in offshoring from a strategic
management perspective. This approach extends our understanding of cost estimates in offshoring, and it
explores the influence of corporate strategy in the alignment of expected and achieved performances from
IT-enabled service offshoring. The study also examines the boundaries of strategy’s ability to affect hidden
costs, and it expands our knowledge of the relationship between strategy and experience.
Keywords Corporate strategy, Hidden costs, IT-enabled service offshoring, Offshoring experience,
Task complexity
Paper type Research paper
1. Introduction
In the past several decades, the development of informationand communication technologies
(ICT) has enabled firms to increasingly offshore numerous business tasks and functions to
various locations to support their domestic or global operations. Such IT-enabled offshoring
has become a vital, widespread practice for firms seeking to realize cost reduction,
market flexibility, talent exploitation or other advantages (Gohet al., 2007; Koong et al., 2007;
Arlbjørn and Lüthje, 2012). However, offshoring decisions also involve many risks and
uncertainties (Tafti, 2005; Gonzalez et al., 2010; Lee et al., 2012; Nassimbeni et al., 2012).
Without sufficient awareness and preparation for dealing with the potential uncertainties,
firms may commit significant errors, and may find the implementation of their offshoring
activities costlier than initially expected. Those additional,unaccounted-for expenses beyond
the initial estimations are often referred to as “hidden costs”and such costs can cause a n
offshore project to fail (Dibbern et al., 2008; Sayeed, 2008; Larsen et al., 2013). For example,
Industrial Management & Data
Systems
Vol. 117 No. 6, 2017
pp. 1058-1076
© Emerald PublishingLimited
0263-5577
DOI 10.1108/IMDS-05-2016-0187
Received 25 May 2016
Revised 25 September 2016
Accepted 16 November 2016
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0263-5577.htm
This research was supported by National Natural Science Foundation of China (Nos 71602159,
71602145). The authors would like to thank Professor Arie Y. Lewin (Fuqua School of Business,
Duke University) for providing the ORN data and for the valuable suggestions and comments.
1058
IMDS
117,6
Dell Inc. had tomove its service centers from Indiaback to the USA after it encounteredmany
unexpectedproblems, and found that the hidden costsof service offshoring were unaffordable
(Stringfellow et al., 2008).
Previous studies have endeavored to identify and categorize the extra costs involved in
offshoring decisions, such as specification/design costs, knowledge transfer costs,
communication costs or monitoring costs (e.g. Barthélemy, 2001; Overby, 2003; Kelley and
Jude, 2005; Sanders et al., 2007; Dibbern et al., 2008; Stringfellow et al., 2008). These cost factors
are usually associated with task-related or location-related complexities that require extra time,
effort and resources to achieve coordination and integration across geographical distances or
across firm boundaries (Ceci and Prencipe, 2013; Handley and Benton, 2013). In facing such
complexities, decision makers have bounded rationality, or a limited ability to take all of the
important decision factors into consideration. The managers may overlook some future costs,
which may cause “post-decision surprises”down the road (Larsen et al., 2013). Although these
observations from previous studies highlight valid concerns, the studies themselves are
commonlylimitedinthattheytypicallyassumea homogenous effect of project complexity,
irrespective of firm characteristics. These studies also often fail to explain why some companies
are subject to estimation errors, and others manage to realize and even exceed their expected
performance (e.g. in cost savings), despite facing similar levels of offshoring complexity.
In fact, aside from variations in the cognitive capacity of individual managers, previous
studies showthat the organizational contextplays a major role in influencing the capacity of a
firm to make accurate estimations (e.g. Makadok and Walker, 2000; Durand, 2003). As the
organizational structure or climate is largely shaped by firm strategy (Miles et al., 1978;
Wang et al., 2015), it makes a difference whether offshoring is undertaken as a formalized part
of the corporate strategy. The choice to establish a formal overarching strategy affects the
context and process of individual offshoring initiati ves. It remains unclear, however, whether
the adoption of a corporate-level strategy for offshoring can systematically reduce decision
errors (i.e. hidden costs). In addition, the aforementioned factor of complexity in offshoring
efforts (especially in terms of the task complexity of individual offshoring projects) has been
commonly shown to have a direct relation to hidden costs. To better explicate the relative
effectiveness of corporate strategyin different projects, a more complete examination is needed
on the contingent effects of corporate strategy under varying degrees of task complexity.
In addition, previous studies have indicated that if firms continue to engage in offshoring
over time, their accumulated experience leads to cumulative learning, which also affects the
quality of decisions and plans (e.g. Maskell et al., 2007; Massini et al., 2010). The relationship
between experience and strategy, however, is still insufficiently explored. Therefore, this study
attempts to address the following questions. How does a corporate-wide strategy affect the gap
between expected and actual performance, or the cost-savings gap? How is this effect influenced
by contextual factors, including task complexity and previous offshoring experience?
In viewing these issues from a strategic management perspective, this study suggests
that adopting a corporate-wide strategy enables firms to better rationalize their offshoring
decisions, with more realistic cost estimation and goal-setting for individual offshoring
projects. A corporate-wide strategy also provides incentives for project participants to
achieve preset aspirations, and enhance their cost efficiency in fulfilling offshoring and
coping with any emerging contingencies. Using survey data from the Offshoring Research
Network (ORN), we find that smaller expected-actual performance (cost savings) gaps for
projects are associated with the presence of corporate strategy. We also find that this
beneficial effect is more prominent in projects with higher task complexity. Finally, we show
that such strategy-related improvements in cost savings tend to decrease as firms gain more
experience with offshoring over time.
These findings may improve our understanding of the cost estimates in the IT-enabled
offshoring,and provide an additional explanation forthe heterogeneity in the expected-actual
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Mitigating
hidden costs
in service
offshoring
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