The Offshoring Challenge

There is an agreement in the literature that an effective business model is a competitive weapon for multinationals. We extend this strategic framework to the offshoring arena by analyzing a change in the business model as a means for coping with the inefficiency trap and reducing complexity management. Most companies start by offshoring simpler tasks and achieve great savings. But, as they become more involved in offshoring, complexity increases and savings decrease. We analyze this by studying two Spanish banks, BBVA and Banco Santander. Findings suggest that the reason and the limit to complexity can be found in the need to change the business model. Results may stimulate future research in other industries and companies from other countries.

Emerging economies as destinations for offshoring value activities is now a widely recognized fact. Much of the academic writing on this phenomenon focuses on showing how access to low-cost inputs provides an opportunity for firms to compete more profitably. In this paper, we argue that, with the opportunity set for distributing the value activities across the world expanding, internationally oriented firms also enjoy the opportunity to be more entrepreneurial in their strategies. Such entrepreneurial globalization, however, calls for simultaneous changes in multiple aspects of the firm. Drawing on case studies of European firms of different sizes, we show how firms have sought to rethink their businesses from ground up, reconfigure their value chain activities globally, leverage the resources of other firms, create strategic options for their firms, and have improved their competitive position in the market. Such firms may well be in the vanguard of an industrial renaissance in Europe, a continent that has hitherto been less receptive to the use of offshore opportunities offered by emerging economies. We conclude by identifying some implications for managers, policy makers, and academic researchers.

The dynamics in industrial business networks, caused by the disaggregation of firms’ value and supply chains, cause product life cycle phases and tasks to be transferred from advanced market economies to emerging market economies. In this chapter, I track the linkages between changes in a lead firm’s business environment and changes in the lead firm’s strategic offshoring and outsourcing actions; I also track how these changes in the lead firm’s behaviour are then translated into a supplier firm’s strategy and offshoring decisions. Additionally, I discuss offshoring and outsourcing strategies in global value chains. The increasing level of highly skilled labour in emerging market economies enables industrial business networks to rearrange themselves along with shorter life cycles. Furthermore, I find that different firms typically react to their customers’ strategies with the same approach but implement and schedule their implementation in different ways. These differences in the execution and implementation patterns of offshoring and outsourcing also differ among industries.

The growing offshoring phenomenon has radically transformed the configuration of many industries: fewer rivals, more powerful retailers, transformation of previous manufacturers into marketing companies and emergence of new players. The main driver of offshoring in commodity markets is still today the possibility to benefit from low labour cost. However, cost savings are not enough: the performance of offshoring strategies is determined by outstanding capabilities in product selection, control of suppliers and logistics. This chapter highlights why and how offshoring intermediaries emerged as new players. Using evidence from a case study in small household appliances industry, we describe how intermediating offshoring roles fit with into the global reconfiguration of the value chain.

Business processes that involve information processing and human interaction raise unique issues of geography and governance. To explain outsourcing and offshoring decisions by firms, we develop a model of international transaction value that integrates resource-based theory, location economics, and transaction costs theory. This firm-level model provides a strong theoretical foundation for understanding and testing the conditions for effective outsourcing and offshoring of customer-oriented business processes (COBP). In addition to establishing static conditions that should favor greater or lesser degrees of outsourcing and offshoring, the model also provides pathways to suggest how preferences will change under alternative circumstances.

The purpose of this chapter is twofold: to explain why white-collar service work in manufacturing firms is increasingly subject to offshoring and to understand the effects of this process on work integration mechanisms. The empirical part of the study is based on two case studies of Danish manufacturers. First, the chapter finds that drivers of white-collar work offshoring in many respects are parallel to those of the earlier wave of blue-collar work offshoring, that is, cost minimisation and resource seeking. Second, due to the interdependence of white-collar tasks with the rest of the organisation, our results suggest that white-collar offshoring in manufacturing firms poses higher requirements to the organisational configuration and capabilities compared with blue-collar work. We conceptualise the effects of white-collar work offshoring in a framework relating white-collar work to integration mechanisms companies instigate to manage it on a global scale.

A growing number of Danish manufacturing companies feel compelled to offshore greater or smaller parts of their organisation. Drawing on organisational theory and, the concept of knowledge governance, this chapter examines two SMEs in the textile and the furniture sector, highlighting the knowledge-management intersection. The two case studies show one SME reorganising its processes and integrating knowledge through a mainly captive knowledge governance set-up; the other deorganises, disintegrates and, to a certain extent, “compensates” with virtual organisational elements: exercising knowledge governance through IT systems as well as through the establishment of an offshored physical intermediary control element. Furthermore, both case companies work with so-called soft knowledge governance approaches, in one case through the introduction of corporate social responsibility in the new captive set-up and in the other case through the specific selection of new suppliers and their capability/competence building over time. Organisation design approaches would focus on the initial diagnosis, choice and implementation of a “new” organisation. However, the organisations studied experience emergent organisational design elements over time. Furthermore, they are involved in dynamically tackling the learning of the organisational players as well as the dynamics of their relationships with cooperating partners regarding maintaining and developing their innovation capability. To manage these challenges, both case companies choose to revisit the organisational design elements and reconfigure their organisational design set-up, indicating a need to reinstate the classic design components along with a more dynamic perspective.

Purpose The purpose of this chapter is to explore the effect of subsidiary autonomy on intra-MNC knowledge transfers during captive R&D offshoring to emerging markets. Design/methodology/approach: A framework to this end is outlined and illustrated in relation to four cases of captive R&D offshoring to emerging markets. Findings Subsidiary autonomy has a mainly negative effect on primary knowledge transfer and a mainly positive effect on reverse knowledge transfer. Newly established R&D subsidiaries in emerging markets need primary knowledge transfer in order to build up their competence before they can add to the knowledge level of the MNC. Gradual increase in R&D subsidiary autonomy is thereby beneficial for subsidiary innovation performance.

R&D offshoring has been gaining in importance in recent years. Nevertheless, there is as yet a very limited understanding of its implications for firms. This chapter analyzes the potential benefits the offshoring of R&D may have on productivity. We distinguish between two governance modes—captive offshoring and offshore outsourcing, and we analyze their direct and indirect effects through innovation. The empirical analysis is based on an extensive sample of Spanish firms in the manufacturing and services sectors covering the 2004–2007 period. Our results enable us to conclude that offshore outsourcing has a positive impact—both directly and indirectly—on productivity. In turn, captive offshoring has a positive impact on productivity, which is observed insofar as the firm innovates. This research reveals the importance not only of R&D offshoring strategies but also of the choice of one or other governance mode according to a firm’s specific goals.

Due to their strong economic growth as well as increasing local know-how, emerging markets (EMs) have turned into attractive locations for research and development (R&D) activities of Western multinational companies (MNCs) in the last two decades. Especially, full-fledged R&D laboratories focusing on core products of MNCs are mushrooming regardless of industry. On the basis of a recent research study of German and US MNCs, we identify the main motivations and barriers related to establishing R&D sites in EMs as well as demonstrate how these barriers can be overcome in order to reach the aims encapsulated in the internationalization motives. We find that of particular importance for a successful R&D center in EMs are presence of a global R&D strategy, top management support, personality of the R&D site managing director, “ownership” of development tasks, global innovation culture, accurate R&D HR policy, and external as well as internal networking. Finally, we demonstrate that local R&D laboratories increasingly develop products for worldwide markets.

Although R&D is at the core of knowledge-intensive industries like Pharma, outsourcing parts of its activities hold considerable efficiency and effectiveness potentials. That means managers must understand, which R&D activities can be outsourced and which need to stay in-house in order to ensure competitiveness. Nevertheless, systematic approaches for understanding the finer details of the decision-making process on R&D outsourcing are lacking. To address this gap, we present a framework developed in the context of a multinational company, Bayer. The combination of literature studies and the study of the decision process in the pharmaceutical division at Bayer HealthCare allows us to unfold an outsourcing process model—the filter approach—that includes appropriate decision phases and proper tools. The underlying logic of the model is that outsourcing decisions are rather a learning process with different stages than a rational one-off decision.

Due to unique task characteristics, different location requirements exist, which ultimately lead to unique location considerations. Based on our research, five decision factors are identified for service offshoring: wages, education, infrastructure, cultural distance, and corruption. Considering these decision factors, efficiencies for the offshoring locations are computed with a data envelopment analysis from a German point of view. The research concludes that the most efficient service offshoring countries, with an average efficiency of 97 %, are the Netherlands, Switzerland, the United Kingdom, and the United States.

The problem of climate change is becoming increasingly prevalent in the business context. Risks such as increased risk of extreme weather events and the attendant loss of production site facilities, and changes in population density and migration patterns, may seem remote from the business offshoring decision. However, it is in fact highly relevant, as the recent case of flooding in Thailand and its effects on the global hard drive industry shows. The discussion in this chapter focuses on the risk of climate change for the offshoring decision at the firm level. That is, how does the potential for climate change effects occurring in a given locale influence the offshoring decision? This chapter argues for a risk management approach to climate change at the firm level, in which specific locational risks are assessed as a key component in the offshoring decision. The specific problems of climate change, including the potential for coastal flooding, extreme weather events, and hot or cold waves, do not influence all regions in the same way. Similarly, they also do not influence all firms in the same way. Instead, each firm must determine how climate change could affect its offshoring decisions and to what degree this risk should be controlled. In addition to arguing for the use of risk management for climate change at the firm level, this chapter also provides some tools for assessment and evaluation of climate change risk. These tools include a summary of the risk categories required and a risk exposure/vulnerability matrix that can help assess how significant the risk of climate change is for a given location. The tools within this chapter provide a basic guideline for firms to determine the overall climate change risk levels faced by their outsourcing partners and to make a careful decision based on these perceived risks.

The risk associated with offshoring is a recurrent theme in research. However, previous research has mainly given a static picture of offshoring risks even though the strategies of offshoring firms, including their views on risks, may change as they gain experience in the field. In this chapter we investigate the influence of organizational learning on firms’ perceptions of the risks in offshoring. We use survey data from firms in Scandinavia and compare the risk assessments of firms without offshoring experience with firms that engage in offshoring. The findings show that firms without offshoring experience particularly stress exogenous risks while firms with offshoring experience see the endogenous risks as important. We offer two different interpretations of these results.

This chapter is an investigation into the internationalization of innovation in the Danish food-related biotech industry. The process of the internationalization of innovation in food and ingredients into new markets has followed a similar path: first, the companies enter new markets with their products developed in the home economy; secondly, they increasingly adjust their products to the new markets; and thirdly, some of the more high-tech companies have developed international techno-scientific networks. These companies explain the development as a strategy for ‘tapping into new knowledge’ by collaborating with local research facilities and suppliers. The companies engage in various constructs of global innovation networks more or less simultaneously according to the type of technology. The type of engagement and entry mode relates to the host location. Similar companies develop different network constructs. Furthermore, companies face many difficulties in organizing innovation internationally. These challenges are dealt with through either virtual or physical centres of excellence. Communication and communication tools provide a key for companies to manage these centres, and new forms of qualifications are needed to facilitate this.

Companies are actively seeking competitive advantage through their choice of location and ownership of operations. The purpose of this chapter is to uncover hidden effects of this development and propose how companies can respond to them. The chapter draws on a case study of a Danish industrial equipment firm and describes how its operations configuration has been changing over time. The chapter identifies the key determinants of this change and uncovers some of its hidden effects. The chapter closes with propositions for how to respond to these effects through the development of a distinct systemic approach to control and coordination, which emphasizes not only short-term operational efficiency, but also increasingly long-term strategic effectiveness. The findings advance coevolutionary perspectives on the integration of globally dispersed business systems spanning multiple levels of analysis and involving temporal adaptations. In terms of managerial implications, the study provides managers with lessons for designing a robust system of globally dispersed operations.

Offshoring is an important economic and social phenomenon that is not confined to the firm-to-firm relationships emphasized in the management and international business literatures. Global sourcing strategic relationships also exist between firms, governments, and non-governmental organizations, and merit a re-examination of the phenomenological and conceptual scope of offshoring. We identify some contrasting assumptions about the roles and responsibilities of different actors in the global business environment, and offer some “provocations” designed to stimulate the rethinking of offshoring within the emerging global social and economic environment.

To improve our understanding of offshoring and how it is evolving, salient ideas from both institutional and prospect theories are utilized to build a more descriptive model of how decisions are made to (re)direct foreign investment into offshored activities. Careful examinations of the offshoring programs in India and Mexico reveal that they took different investment trajectories during the past decade that can be aptly explained by this integrative model. The primary information used to measure the population trends of offshoring firms in India and Mexico comes from proprietary data sources for each country that issue annual reports on the number of operators in their respective offshoring sectors, that is, services and manufacturing.