The Handbook of Global Outsourcing and Offshoring

With the advent of globalisation and heightened levels of competition, many organisations are having considerable difficulty developing and maintaining the range of expertise and skills they need to compete effectively. The emergence of American, European, Japanese, and other Asian multinationals has created a competitive environment requiring the globalisation, or at least semi-globalisation, of corporate strategy. Moreover, with developments in information and communication technologies (ICT), firms do not need to be large multinationals to compete globally. These developments have led many companies to turn to various sourcing strategies such as outsourcing, offshoring, offshore outsourcing, nearshoring, and onshoring. This chapter therefore focuses on:

Clients are faced with a wide variety of alternatives when making sourcing decisions, which means taking a number of considerations into account to make the right decision. This chapter focuses on sourcing models for client firms and how to make sourcing decisions. With traditional sourcing models, unlike internet-based sourcing models (which we discuss in Chap. 3), the vendor’s personnel deliver a business service for the client firm. In particular, this chapter covers the following topics:

Cloud services and crowdsourcing are increasingly popular sourcing models based on Internet delivery of products or services. In practice, each of these high-level sourcing models can be implemented in different ways in terms of specific operational and commercial aspects of service provision. Below we describe the key principles of these two Internet-based sourcing models and give examples of how they have been adopted by client firms.

This chapter discusses the maturity of various geographical locations worldwide as sourcing destinations and the factors clients and suppliers consider when deciding on their offshoring and offshore-outsourcing strategies. We focus on the following aspects:

As we have illustrated, the global sourcing market is large and the services offered range from relatively simple processes such as data entry to very complex projects such as the digital transformation of the enterprise. The supplier base is equally diverse, ranging from locally based firms specialising in particular services or industries to offshore or global suppliers offering high-quality services at a low cost. Tables 5.1, 5.2, and 5.3 identify the dominant players in the sourcing market as follows: the top ten outsourcing companies (Table 5.1), the top outsourcing advisers (Table 5.2), and the top ten BPO companies in India (Table 5.3). These rankings provide important information regarding the expertise of a number of suppliers and thus help clients identify potential partners. Of course, these rankings may change over time as existing, developing, and new players increasingly compete across global geographies. For example, cloud services have been growing dramatically during the 2020s, with the dominant Amazon Web Services (AWS) offering on-demand cloud computing platforms and APIs to individuals, companies, and governments, on a metered pay-as-you-go basis. In 2021 AWS represented around 32% of the $US40 billion plus cloud market, but there are many other players and many niches. For example, in the early 2020s the open talent cloud-based market was just starting up, while Salesforce is a major player in the cloud SaaS market.

This chapter provides an overview of suppliers, supplier configurations, and the role played by intermediaries. The supplier landscape will be discussed in terms of firm size, areas of specialisation and location, with a focus on supplier core capabilities and supplier strategies for sustainability and growth.

In this chapter, we focus on:

One key factor in achieving success in global sourcing arrangements is the quality of the client–supplier relationship. Selecting the most appropriate service provider is critical to maximising the benefits and minimising the risks associated with the venture. As throughout, we focus on perennial management challenges and the effective practices that help steer organisations through turbulent business contexts and negotiate ever-changing technologies. In this chapter, we review the major considerations for supplier selection:

What happens to knowledge when an organisation outsources or offshores? Despite the rapid growth of business and IT services, there is still a considerable lag when it comes to grasping the implications for knowledge and expertise management in these processes. Organisations often have a limited understanding of how new knowledge can be created and exploited, especially when outsourced activities are considered non-core services. Moreover, historically, outsourcing arrangements have typically been treated as transactional, with clients and suppliers keeping knowledge and expertise to themselves. In this scenario, the role of the supplier is to draw on its own skills, expertise, and knowledge in order to deliver the service as specified in the contract. But over the last ten years clients have been increasingly talking about and expecting partnering, innovation, and value-added from their outsourcing suppliers. In the 2020s market, with ever more demanding clients, suppliers are having to compete increasingly on their capacity to leverage knowledge-related value, often in partnership with their clients (Willcocks, Global business: Management. SB Publishing, 2021a; Journal of Information Technology, 36(2), 188–194, 2021b).

In this chapter, we discuss what happens to knowledge and expertise in outsourcing arrangements, and how to realise benefits from knowledge creation and exploitation to achieve better performance and innovation. We focus mainly on the following topics:

Although the multibillion dollar outsourcing industry continues to grow in the 2020s, not all outsourcing arrangements are doing well. Lioliou and Willcocks (Global outsourcing discourse: Exploring modes of IT governance. Palgrave Macmillan, 2019) noted in their case studies that managing outsourcing has remained a problem for many, and this continues to the present day, with the difficulties heightened by increasingly volatile business contexts and fast-changing technologies and services. Events in 2020–2022 have only served to increase uncertainty around global supply chains. According to the findings of a study of outsourcing arrangements by Lacity and Willcocks (Nine keys to world class business process outsourcing. Bloomsbury, 2015), up to 15% were poor, some 40% were probably ‘doing OK’ (marginal cost savings delivered, acceptable service performance, marginal client satisfaction), while 25% experienced ‘good’ performance (cost savings delivered, service level agreements (SLAs) met, good client satisfaction). Looking at more recent research by Willcocks (Global business: Management. SB Publishing, 2021a; Journal of Information Technology, 36(2), 188–194, 2021b), probably only 20% of outsourcing arrangements can be called ‘best-in-class’, providing cost savings, improved services, delivering business benefits and innovation, and high client satisfaction.

Poor management and governance of the outsourcing relationship have often been cited as primary reasons for less successful outsourcing contracts. But before we investigate the management and governance of outsourcing relationships, which will be further discussed in Chap. 9, it is important to understand the key stages of the outsourcing process, as well as the key practices that can be applied at each stage.

This chapter discusses the outsourcing life cycle. In doing so it provides a checklist of key activities a client organisation needs to fulfil to prepare and properly execute an outsourcing relationship, whether this be domestic, offshore, nearshore, or cloud sourcing. Fortunately, the outsourcing life cycle, and the requirements for managing it effectively, remains constant across settings and relatively stable in its stages. This chapter also elaborates on the key requirements for designing and executing the transition phase. We therefore focus on the following aspects:

Although the outsourcing industry has demonstrated impressive growth during the past few years, some outsourcing relationships have yielded poor results, and some have even been terminated early. Both the professional press and academic publications have identified poor governance as a primary factor in these outcomes.

For our purposes governance can be defined as specifying and enacting the decision rights and accountability framework that encourages desirable behaviour when outsourcing IT and business services (Willcocks, Global business: Management. SB Publishing, 2021a; Journal of Information Technology, 36(2), 188–194, 2021b). After looking at 881 global companies, Joshi et al. (Decision Support Systems, 153, 113668, 2022) report that firms with IT governance processing capability, specifically the ability to identify, design, implement, and leverage IT decision-making, IT planning, IT infrastructure modernisation, IT service delivery, and IT monitoring, can significantly improve IT performance, and ultimately enhance business performance. This underpins the long-standing finding of Weill and Ross (IT governance. Harvard Business Press, 2004) that firms with superior IT governance have more than 25% higher profits than firms with poor governance, given the same strategic objectives.

Recent research confirms this to be the case for modes of outsourcing governance as well (Lioliou & Willcocks, Global outsourcing discourse: Exploring modes of IT governance. Palgrave Macmillan, 2019; Oshri et al., Journal of Management of Information Systems, 36(4), 1248–1283, 2019; Krancher et al., Journal of the Association of Information Systems, 21(1), 2022). One interesting dimension is that contracting for steady state delivery of services versus innovation requires different governance arrangements and relationships (Oshri et al., Relational and contractual governance for innovation. In L. Willcocks, I. Oshri, & J. Kotlarsky (Eds.), Dynamic innovation in outsourcing. Palgrave Macmillan, 2018). Another is that governance through strong relationships may take time to build and might not be a good way to start contracting for outsourcing (Lioliou & Willcocks, Global outsourcing discourse: Exploring modes of IT governance. Palgrave Macmillan, 2019). A further dimension is whether the structure of the client organisation is centralised, federal, or decentralised. In this respect, Weill and Ross (IT governance. Harvard Business Press, 2004) found that if profit is the strategic goal, then a centralised governance structure is most effective. With an asset utilisation target, then a blended structure is better, while if looking for growth, a business should adopt a more decentralised governance structure. Outsourcing governance works best when it mirrors organisational structure (Miranda & Kavan, Moments of governance in IS outsourcing: Conceptualising effects of contracts on value capture and creation. In L. Willcocks, M. Lacity, & C. Sauer (Eds.), Outsourcing and offshoring business services. Palgrave Macmillan, 2017; Lioliou & Willcocks, Global outsourcing discourse: Exploring modes of IT governance. Palgrave Macmillan, 2019).

The inexorable trend towards cloud sourcing—according to a 2022 MarketsandMarkets report, the cloud computing market is expected to grow from US$148.8 billion in 2019 to US$246.8 billion by 2023—is bringing additional governance factors into play (see Chap. 3).

Our focus in this chapter is therefore understanding governance issues related to traditional outsourcing and the practices that support formal structures. In particular, we review the following issues:

Globally distributed work is an integral part of offshore outsourcing and offshoring. The 2020–2022 Covid-19 pandemic has accelerated the offshoring of IT and business services as the rush for the IT talent needed to promote digital transformations has led companies to increase their offshoring investments in India, China, and Eastern European countries (https://​www.​businesstoday.​in/​magazine/​industry/​story/​why-india-still-rules-it-outsourcing-and-how-to-sustain-it-313502-2021-12-03). Offshore outsourcing often requires the client and supplier teams to work together in a globally distributed fashion. In such cases, some teams will be based onshore, at either the client’s site or the supplier’s onshore site, with others based offshore. In a similar vein, when a client firm sets up offshore facilities, it divides work between onshore and offshore locations. Such distributed work generally requires close collaboration between members of globally distributed teams. Globally distributed teams consist of two or more (sub-) teams working together from different geographical locations to accomplish joint goals. These teams face major challenges on various fronts, including cultural differences (Brooks et al., Journal of Information Technology, 35(3), 232–250, 2020) relating to national traditions, values, and norms of behaviour, as well as language barriers and time-zone differences. This chapter therefore focuses on the following topics:

Offshore captive centres are one of a broad range of sourcing models available to firms. While the focus of most of the outsourcing and offshoring literature is third-party sourcing arrangements, this chapter will focus on the mainly in-house option, but from an offshore or nearshore location perspective. According to a GrandView research report, there are over 75,000 such shared service centres (SSC) globally in 2022, having grown at a compound annual growth rate (CAGR) of close to 30% from 2015 to 2022. (Note that nearly half of these SSCs involve working with some external service provision.) Heading into the 2020s, the growth prospects were bullish for large organisations due to the increased need to reduce costs and improve the quality of delivered services. Resourceful implementation of the SSC model for certain functions and in the operational stages can yield greater operational efficiency and cost reductions, while enhancing productivity. But the future is uncertain. For example, will labour costs stay low, will tax regulations stay relaxed, and will governments continue to favour this sourcing mode in key country locations like India, China, Latin America, and parts of Eastern Europe? Not surprisingly, by 2022, many companies were reviewing their shared service plans and sourcing decisions.

The key aspects examined in this chapter are as follows:

There are many reasons why companies of various sizes see the benefit of outsourcing particular aspects of innovation, here defined generally for a business context as deploying new and creative ways of achieving productivity or topline growth (Coulter & Fersht, Service providers siloed by vertical industry are stifling innovation with clients. HfS Research, 2010). Quinn’s (Sloan Management Review, 41(4), 13–28, 2000) list of reasons includes limited resources and capabilities within the organisation, a shortage of specialist talent, management of multiple risks, attracting talent in the company’s non-specialised areas, and getting to market faster. So how can companies achieve innovation through the various ways of sourcing? Often they have an ad hoc approach to innovation, or what Linder et al. (Sloan Management Review, 44(4), 43–49, 2003) call a transactional approach. This approach, however, frequently fails to leverage organisational learning and develop innovation capabilities within the client firm as they work with suppliers. Clearly, an ad hoc approach cannot create a culture in which external contributions are accepted or welcomed. Moreover, it is difficult to measure innovative processes and outcomes when companies innovate on an ad hoc basis.

In this chapter, we look at how organisations go about achieving innovation through outsourcing in a systematic manner. This sets the context for our major, more restricted focus on whether, and, if so, how, IT and business process innovations can be achieved through using external business and IT service providers. We want to stress that we are not talking about sourcing innovation through offshore R&D centres (discussed in the context of offshore captive centres in Chap. 11), but rather about outsourcing engagement where the client is seeking to achieve innovation. The chapter starts by detailing the debate around whether innovation can be outsourced and, if so, under what conditions. We then look at the case for internal control and research on how outsourcing innovation can become an organisational practice in outsourcing arrangements. As such, this chapter focuses on the following topics: