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  • Print publication year: 2010
  • Online publication date: June 2012

4 - Location and sourcing model choice in global services outsourcing

Summary

Introduction

The conventional view of location choice is that it involves a comparison of the relative advantages of a number of locations, with labour costs being the dominant criterion. Outsourcing can be a very attractive option, with labour cost differentials between developed economies and emerging economies as high as 60 per cent. Senior executives transfer IT and HR tasks and processes to lower-cost locations, and expect cost savings to mirror closely those of the perceived labour differentials. However, some executives have been disappointed with the savings, and seen labour costs and labour turnover rise in some locations. These experiences are primarily driven by insufficient analysis, and a lack of understanding of the dynamics of the location decision. The attractiveness of some locations in terms of labour costs can diminish as increasing demand for services drives up the cost of labour and leads to skills shortages. In addition, some companies in the USA and UK have chosen India as their preferred location for services outsourcing, following the lead of competitors, rather than understanding the underlying factors that influence its attractiveness both currently and in the future.

The emphasis on costs means that insufficient emphasis is placed on factors such as language, culture and geographical differences. These factors have proved to be significant barriers to managing global services operations effectively. Cultural and geographic distance hinders communication and the development of trust between the client and vendor.

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Kedia, B. and Mukherjee, D. (2009). Understanding Offshoring: A Research Framework Based on Disintegration, Location and Externalisation Advantages, Journal of World Business, 44, 250–61.
Jacobides, M. and Winter, S. (2005). The Co-evolution of Capabilities and Transaction Costs: Explaining the Institutional Structure of Production, Strategic Management Journal, 26, 395–413.
Afuah, A. (2001). Dynamic Boundaries of the Firm: Are Firms Better Off Being Vertically Integrated in the Face of Technological Change?Academy of Management Journal, 44, 1211–28.
Dunning, J. (1988). Explaining International Production, London: Unwin Hyman.
Williamson, O. (1991). Comparative Economic Organisation: The Analysis of Discrete Structural Alternatives, Administrative Science Quarterly, 36, 269–96.
Blau, P. (1964). Exchange and Power in Social Life, New York: Wiley
Zaheer, A., McEviley, B. and Perrone, V. (1998). Does Trust Matter? Exploring the Effects of Inter-organisational and Inter-personal Trust on Performance, Organisation Science, 9, 141–59.
Barney, J. and Hansen, M. (1994). Trustworthiness is a Source of Competitive Advantage, Strategic Management Journal, 15, 175–90.
Barney, J. (1991). Firm Resources and Sustained Competitive Advantage, Journal of Management, 17, 99–120.
Kedia, B. and Lahiri, S. (2007). International Outsourcing of Services: A Partnership Model, Journal of International Management, 13, 22–37.
Aron, R. and Singh, J. V. (2005). Getting Offshoring Right, Harvard Business Review, 83(12), 135–43
Gereffi, G., Humphrey, J. and Sturgeon, T. (2005). The Governance of Global Value Chains, Review of International Political Economy, 12(1), 78–104
Vestring, T., Rouse, T. and Reinert, U. (2005). Hedge Your Offshoring Bets, Sloan Management Review, 46(3), 27–9.
Rugman, A., Collinson, S. and Hodgetts, R. (2006). International Business, 4th edn, Harlow: FT Prentice Hall
Shenkar, O. (2001). Cultural Distance Revisited: Towards a More Rigorous Conceptualisation and Measurement of Cultural Differences, Journal of International Business Studies, 32, 519–35.
Rao, M. (2004). Key Issues for Global IT Sourcing: Country and Individual Factors, Information Systems Management, 21(3), 16–21.
Hall, E. (1976). Beyond Culture, New York: Doubleday.
Stringfellow, A., Teagarden, M. and Nie, W. (2008). Invisible Costs in Offshoring Services Work, Journal of Operations Management, 26(2), 164–79.
Carmel, E. and Tija, P. (2005). Offshoring Information Technology: Sourcing and Outsourcing to a Global Workforce, Cambridge: Cambridge University Press.
Cavusgil, S., Knight, G. and Riesenberger, J. (2008). International Business: Strategy, Management, and the New Realities, Upper Saddle River, N.J.: Pearson.
Rottman, J. and Lacity, M. (2004). Proven Practices for IT Offshore Outsourcing, Cutter Consortium, 5(12), 1–27
Lampel, J. and Bhalla, A. (2008). Embracing Realism and Recognising Choice in IT Offshoring Initiatives, Business Horizons, 51(5), 429–40
Robinson, M. and Kalakota, R. (2005). Offshore Outsourcing: Business Models, ROI and Best Practices, 2nd edn, Alpharetta, Ga.: Mivar Press.
Howie, D. (2007). Building a Successful Captive Services Centre in the Financial Services Sector, London: TPI Research Report
Metters, R. and Verma, R. (2008). History of Offshoring Knowledge Services, Journal of Operations Management, 26(2), 141–7.
Bahli, B. and Rivard, S. (2005). Validating Measures of Information Technology Outsourcing Risk Factors, Omega, 33, 175–87.
Currie, W., Michell, V. and Abanishe, O. (2008). Knowledge Process Outsourcing in Financial Services: The Vendor Perspective, European Management Journal, 26, 94–104.
Bannerjee, I., Narendran, J. and Priyadarshini, R. (2007). Knowledge Process Offshoring (KPO): A Balanced View of an Emerging Market, London: TPI Research Report
Mithas, S. and Whitaker, J. (2007). Is the World Flat or Spiky? Information Intensity, Skills, and Global Service Disaggregation, Information Systems Research, 18(3), 237–59.
Drezner, D. (2004). The Outsourcing Bogeyman, Foreign Affairs, 83(3), 22–35
Baldwin, C. and Clark, K. (1997). Managing in the Age of Modularity, Harvard Business Review, 75(5), 84–93
Schilling, M. and Steensma, K. (2001). The Use of Modular Organisational Forms: An Industry Level Analysis, Academy of Management Journal, 44(6), 1149–68
Schilling, M. (2000). Towards a General Modular Systems Theory and its Application to Inter-firm Product Modularity, Academy of Management Review, 25(2), 312–34.
Tanriverdi, H., Konana, P. and Ge, L. (2007). The Choice of Sourcing Mechanisms for Business Processes, Information Systems Research, 18(3), 280–99.
Kedia, B. and Mukherjee, D. (2009). Understanding Offshoring: A Research Framework Based on Disintegration, Location and Externalisation Advantages, Journal of World Business, 44, 250–61.
Jacobides, M. and Winter, S. (2005). The Co-evolution of Capabilities and Transaction Costs: Explaining the Institutional Structure of Production, Strategic Management Journal, 26, 395–413.
Afuah, A. (2001). Dynamic Boundaries of the Firm: Are Firms Better Off Being Vertically Integrated in the Face of Technological Change?Academy of Management Journal, 44, 1211–28.
Dunning, J. (1988). Explaining International Production, London: Unwin Hyman.
Williamson, O. (1991). Comparative Economic Organisation: The Analysis of Discrete Structural Alternatives, Administrative Science Quarterly, 36, 269–96.
Blau, P. (1964). Exchange and Power in Social Life, New York: Wiley
Zaheer, A., McEviley, B. and Perrone, V. (1998). Does Trust Matter? Exploring the Effects of Inter-organisational and Inter-personal Trust on Performance, Organisation Science, 9, 141–59.
Barney, J. and Hansen, M. (1994). Trustworthiness is a Source of Competitive Advantage, Strategic Management Journal, 15, 175–90.
Barney, J. (1991). Firm Resources and Sustained Competitive Advantage, Journal of Management, 17, 99–120.
Kedia, B. and Lahiri, S. (2007). International Outsourcing of Services: A Partnership Model, Journal of International Management, 13, 22–37.
Aron, R. and Singh, J. V. (2005). Getting Offshoring Right, Harvard Business Review, 83(12), 135–43
Gereffi, G., Humphrey, J. and Sturgeon, T. (2005). The Governance of Global Value Chains, Review of International Political Economy, 12(1), 78–104
Vestring, T., Rouse, T. and Reinert, U. (2005). Hedge Your Offshoring Bets, Sloan Management Review, 46(3), 27–9.
Rugman, A., Collinson, S. and Hodgetts, R. (2006). International Business, 4th edn, Harlow: FT Prentice Hall
Shenkar, O. (2001). Cultural Distance Revisited: Towards a More Rigorous Conceptualisation and Measurement of Cultural Differences, Journal of International Business Studies, 32, 519–35.
Rao, M. (2004). Key Issues for Global IT Sourcing: Country and Individual Factors, Information Systems Management, 21(3), 16–21.
Hall, E. (1976). Beyond Culture, New York: Doubleday.
Stringfellow, A., Teagarden, M. and Nie, W. (2008). Invisible Costs in Offshoring Services Work, Journal of Operations Management, 26(2), 164–79.
Carmel, E. and Tija, P. (2005). Offshoring Information Technology: Sourcing and Outsourcing to a Global Workforce, Cambridge: Cambridge University Press.
Cavusgil, S., Knight, G. and Riesenberger, J. (2008). International Business: Strategy, Management, and the New Realities, Upper Saddle River, N.J.: Pearson.
Rottman, J. and Lacity, M. (2004). Proven Practices for IT Offshore Outsourcing, Cutter Consortium, 5(12), 1–27
Lampel, J. and Bhalla, A. (2008). Embracing Realism and Recognising Choice in IT Offshoring Initiatives, Business Horizons, 51(5), 429–40
Robinson, M. and Kalakota, R. (2005). Offshore Outsourcing: Business Models, ROI and Best Practices, 2nd edn, Alpharetta, Ga.: Mivar Press.
Howie, D. (2007). Building a Successful Captive Services Centre in the Financial Services Sector, London: TPI Research Report
Metters, R. and Verma, R. (2008). History of Offshoring Knowledge Services, Journal of Operations Management, 26(2), 141–7.
Bahli, B. and Rivard, S. (2005). Validating Measures of Information Technology Outsourcing Risk Factors, Omega, 33, 175–87.
Currie, W., Michell, V. and Abanishe, O. (2008). Knowledge Process Outsourcing in Financial Services: The Vendor Perspective, European Management Journal, 26, 94–104.
Bannerjee, I., Narendran, J. and Priyadarshini, R. (2007). Knowledge Process Offshoring (KPO): A Balanced View of an Emerging Market, London: TPI Research Report
Mithas, S. and Whitaker, J. (2007). Is the World Flat or Spiky? Information Intensity, Skills, and Global Service Disaggregation, Information Systems Research, 18(3), 237–59.
Drezner, D. (2004). The Outsourcing Bogeyman, Foreign Affairs, 83(3), 22–35
Baldwin, C. and Clark, K. (1997). Managing in the Age of Modularity, Harvard Business Review, 75(5), 84–93
Schilling, M. and Steensma, K. (2001). The Use of Modular Organisational Forms: An Industry Level Analysis, Academy of Management Journal, 44(6), 1149–68
Schilling, M. (2000). Towards a General Modular Systems Theory and its Application to Inter-firm Product Modularity, Academy of Management Review, 25(2), 312–34.
Tanriverdi, H., Konana, P. and Ge, L. (2007). The Choice of Sourcing Mechanisms for Business Processes, Information Systems Research, 18(3), 280–99.