What is Offshoring Management Capability and How Do Organizations Develop It? A Study of Dutch IT Service Providers.

Author:Mihalache, Mashiho
 
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1 Introduction

Offshoring refers to the relocation of business processes to foreign countries to support current business operations (Contractor et al. 2010; Levy 2005; Mihalache et al. 2012). Offshoring owes its popularity to the fact that it allows organizations to access the specific relative advantages of foreign countries (Kedia and Mukherjee 2009), such as lower factor costs (Larsen et al. 2013), large pools of qualified workers (Lewin et al. 2009), and specialized knowledge (Mihalache et al. 2012; Rosenbusch et al. 2019; Steinberg et al. 2017). In order to achieve these benefits, organizations need to overcome challenges such as coordinating operations that are culturally and geographically distant (for a review, see Mihalache and Mihalache 2016). While many organizations struggle to overcome these challenges and some, discouraged by early disappointing results, even decide to bring operations back home (Kinkel 2014), others can use their initial experiences to develop capabilities for managing offshoring (Haleem et al. 2018). So, what does an offshoring management capability comprise and how can organizations develop it?

While previous research hints at the existence of an offshoring management capability (e.g., Bhalla et al. 2008; Doh 2005; Levy 2005), it does not provide a comprehensive analysis of what this comprises. Previous studies suggest capabilities such as cultural intelligence (Ang and Inkpen 2008) or the ability to collaborate with offshore parties (King and Torkzadeh 2008; Manning et al. 2008; Mukherjee et al. 2017), but these address only particular elements of what is necessary to manage offshore activities. To capture the complexity of offshoring we need a comprehensive understanding of what an offshoring management capability comprises.

Similarly, we do not fully understand the process through which organizations leverage their experience to develop this capability. Previous research finds that offshoring experience is important for future decision-making as it reduces errors in cost estimation (Larsen et al. 2013), lowers risk perceptions in areas such as loss of intellectual property (Lewin and Peeters 2006), and supports venturing to riskier locations (Hahn et al. 2009). Also, previous findings that organizations start to offshore more complex tasks as they gain more experience of offshoring (e.g., Carmel and Agarwal 2002; Lewin and Peeters 2006) suggest that organizations can learn how to offshore. However, there are mixed results when it comes to how experience affects the success of offshoring projects; some studies find that experience is associated with achieving offshoring goals (Haleem et al. 2018), while others fail to find any link (Hutzschenreuter et al. 2011). This suggests that leveraging experience to develop offshoring management capabilities is not straightforward and the learning process still needs to be better understood. That is, previous research assumes that organizations learn how to manage offshoring activities, but it does not investigate the learning process explicitly. Recognizing this lacuna in our understanding, identified through an extensive systematic review of more than 180 offshoring studies, Mihalache and Mihalache (2016, p. 1129) ask "what are the mechanisms through which firms learn from experience?".

This study advances offshoring research by developing a capability perspective of offshoring. It complements previous studies that have alluded to the existence and importance of offshoring capability (Bhalla et al. 2008; Carmel and Agarwal 2002; Levy 2005) as it provides a more comprehensive understanding of offshoring management capability. Specifically, we find that the offshoring management capability is multidimensional, consisting of coordination competency, relationship development, relationship design, and organizational identification. Furthermore, our study uncovers the process through which organizations can leverage their offshoring experience to develop an offshoring management capability. Organizations are often engaged in a diverse range of offshoring activities (e.g., Lewin and Peeters 2006; Lin et al. 2017), so there is potential for them to learn how to manage offshoring. We find that developing offshoring management capability is a deliberate activity; it requires organizations to cultivate an offshoring growth mentality and to adopt mechanisms that enable them to adjust their monitoring of offshoring performance, engage in reflexivity, and store and share best practice in offshoring. By uncovering the underlying process through which organizations learn how to manage offshoring, we build on organizational learning theory (Levitt and March 1988), to advance previous studies that show the importance of offshoring experience for offshoring decision-making (e.g., Hahn et al. 2009; Lewin and Peeters 2006) and those that suggest the existence of organizational learning in offshoring (e.g., Asmussen et al. 2016; Carmel and Agarwal 2002). Our study also complements previous research showing that organizations learn how to offshore in an impromptu manner (Parida et al. 2013), since we find that organizations can employ structured learning processes in order to develop an offshoring management capability.

The remainder of the study is organized as follows. First, we present building blocks from the literature that enable us to take a capability perspective of offshoring and identify gaps in our knowledge. We then present our methodology and the cases (Dutch IT service providers) used to develop theory. Next, we present our offshoring management capability model and the case evidence. We conclude the study by discussing our findings' theoretical contributions to existing offshoring research and their practical implications.

2 Literature Review: Towards a Capability Perspective of Offshoring

Increased globalization over the last few decades has changed how firms organize their value chain (Liesch et al. 2012). Offshoring refers to firms' moving business processes to foreign locations with particular factor advantages (Mihalache and Mihalache 2016). The offshored activities can be undertaken either within the boundaries of the firm (i.e., captive offshoring) or by a contracted party (i.e., offshore outsourcing) (Nunn and Trefler 2013; Thakur-Wernz and Bruyaka 2017). Firms initially attempted to leverage costs differentials, particularly with regard to developing countries, by offshoring manufacturing activities (Lewin and Peeters 2006). Advances in information technology then made it possible to separate service work from the service delivery location, as technology facilitates low-cost communication and international data transfer (Metters and Verma 2008; Pisani and Ricart 2016). This stimulated a new wave of offshoring, with firms increasingly moving abroad business processes of various degrees of complexity (Boehe 2010; Doh et al. 2009; Jain et al. 2008; Jha et al. 2018; Musteen et al. 2017).

Offshoring is attractive because it can provide access to a large pool of qualified workers (Lewin et al. 2009), lower wages (Larsen et al. 2013; Lieberman 2004; Youngdahl et al. 2008), or specialized knowledge (Lehrer and Asakawa 2003; Mihalache et al. 2012; Nieto and Rodriguez 2011; Pisani and Ricart 2018). However, despite the increase in offshoring, such initiatives vary considerably in their degree of success. This is because offshoring involves various challenges that firms need to overcome if they are to enjoy the promised benefits. These challenges are associated with managing operations at geographically distant locations and include coordination and control (Ravichandran and Ahmed 1993) across cultural and institutional distance (Ashforth and Mael 1989; Beugre and Acar 2008; Uzzi 1997). These difficulties are sometimes called the "invisible" (Stringfellow, Teagarden and Nie 2008) or 'hidden' (Apte and Mason 1995) costs of offshoring, as many organizations initially underestimate or even ignore them. Interestingly, there are considerable differences in how organizations respond to these challenges; while some decide to stop offshoring and backshore (e.g., Kinkel 2014), others are able to use these early experiences to learn how to manage offshoring initiatives (e.g., Haleem et al. 2018). In other words, some organizations can develop capabilities for managing offshoring, while others cannot.

Organizational capabilities refer to how organizations manipulate resources, i.e., the factors an organization owns such as human resources, in order to achieve their desired goals (Amit and Schoemaker 1993). In this study, we focus specifically on capabilities required to manage offshoring activities and on learning "how to" offshore. This comes in contrast with a considerable body of previous offshoring research that uses the terms "capability" and "learning" to refer to the acquisition of technology, knowledge, or skills from abroad (see for e.g., Jensen 2009). That is, our focus is on the learning required for managing offshoring rather than on the learning generated through offshoring. While previous research suggests the existence of specialized management capabilities for offshoring, it lacks a comprehensive understanding of what offshoring management capability comprises and, most importantly, of the process through which it is developed. In Table 1, we present an overview of research suggesting the importance of studying offshoring management capability.

Previous research provides a foundation on which to develop a capability perspective of offshoring as several studies explicitly suggest the importance of considering offshoring capabilities. In a theoretical study, Levy (2005, p. 686) stresses why a capability perspective should be adopted by arguing that offshoring is "related to the development of firm-level organizational and managerial capabilities to coordinate geographically dispersed networks of tasks and productive...

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