NSBPI. Barriers for IT offshoring to India for Dutch companies

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1 NSBPI Barriers for IT offshoring to India for Dutch companies 1. Introduction In an increasingly global and competitive marketplace Dutch companies have to constantly optimize their business processes. As Dutch companies are increasingly making use of foreign services, larger physical, cultural and legislative differences need to be bridged. The goal of the Netherlands Foundation for Business Process Innovation (NSBPI) is to bridge this gap. As an independent party it wishes to be a platform for local and foreign firms to explore opportunities and establish successful relationships ( The foundation is constantly improving its knowledge base to be able to provide up to date information to the different parties. NSBPI decided to put into action a team of international business students from the RSM Erasmus University to research aspects of the business environment that are relevant for companies (out)sourcing internationally. The team of RSM Erasmus University students will investigate what barriers Dutch companies experience when deciding to outsource to foreign countries. NSBPI has specifically put forth the Dutch IT sector, which is increasingly outsourcing activities to foreign countries (Berenschot, 2004). India, in particular is a huge supplier of IT-services with a market size of approximately 20 billion US dollars, from which an estimated 80 % is destined for foreign companies ( yet other developing countries such as China are also growing in this market. It has been argued that offshoring could help companies to reduce costs and to improve quality and flexibility (e.g. Rappaport, 1986; Alexander and Young, 1996; Hayes et al., 2000). 1

2 Research context A broad array of parties, ranging from consultancy firms to the Ministry of Economic Affairs, has shown increased interest in the outsourcing activities of Dutch companies to foreign countries, or offshoring. Offshoring is the moving of current business processes to foreign countries either through direct foreign investments, in-house offshoring, or through offshore outsourcing (CPB, 2005: 13). A large scale research conducted for the Ministry of Economic Affairs on offshoring has shown that in the past ten years an increasing amount of Dutch companies have moved business processes to foreign countries (Berenschot, 2004: 2). The research describes that in the IT-sector the outsourcing and moving of activities to foreign companies is growing and is expected to grow especially fast, where 12 % of the IT companies already offshore and another 9 % are planning to offshore in the coming year (p 43). Non-IT companies offshore their IT activities far less, with only 4 % of the companies engaging in offshoring. The amount of offshoring activities by Dutch companies is related to size (larger companies off shore more) and international orientation of the company. Multinationals are frontrunners in offshoring their activities. Dutch IT-companies mostly offshore to Eastern Europe (49%), India (43%) and Westand South Europe (40%). According to a research by AT Kearney (2003), India is the most attractive country to outsource business processes based on cost, business environment and human resources. In the IT sector Indian companies are said to deliver higher quality, with more flexibility and at a lower cost than Dutch companies current IT activities (FD, 01/12/04). These are exactly the reasons why companies are willing to outsource their IT activities to foreign countries, with cost being mentioned the most. Language barriers and geographical distance are said to be important barriers for Dutch companies to outsource their activities (FD, 01/12/05). IT activities that require the least amount of tuning and adjustment, such as software development and control functions, are outsourced the most. Activities that require intensive customer communication, such as program-management, configuration and parameter-setting, consultancy and implementation are kept closer to 2

3 home (Berenschot, 2004: 44). A lack of decisiveness of IT-managers is also mentioned as a barrier to outsourcing (FD, 05/02/05). The Dutch government does not seem to pose large barriers for Dutch companies to offshore activities. Karien van Gennip, secretary of state of economic affairs, mentioned that offshoring is seen as a natural development in the business environment and required for Dutch companies to be competitive (NRC, 05/02/2005). Though there is a fear of losing jobs, she claims that the ministry has no intention to lay constraints on Dutch companies. Increasing the competitiveness of Dutch and European firms is of greater importance, also for new job creation. All in all offshoring seems to be an issue for many parties in the business environment and as some claim a competitive necessity (AT Kearney, 2004: 1). For exactly that reason NSBPI has the purpose to function as a platform for knowledge and information on the subject. This research in the form of finding the barriers for Dutch firms to outsource IT-activities to developing countries is one step in understanding the dynamics of offshoring. 2. Aim, objective and research question NSBPI has explicitly indicated that it would like to know more on issues related to the outsourcing of activities, in particular on the barriers for offshoring. The barriers of offshoring for Dutch companies are to be identified and classified according to different levels. Research goal The goal of this research is to gain more insight into the current state of Dutch companies concerning offshore outsourcing. As the Dutch business environment is more occupied with the question to offshore or not, more research is done on offshoring practices by governmental bodies, consultancy firms and research firms. Still it has not been made explicit what barriers Dutch firms experience, either within their own firm, or in their environment. Our research thus intends to be an explorative and descriptive research, 3

4 mapping the barriers that companies experience. Special attention will be paid to the offshoring of IT activities to India. Research objects and research question Offshoring barriers can be divers and located at many different levels. One level is the company level. Barriers may lie in company specific characteristics such as decision processes, structure, financial resources, knowledge and capabilities, technology. Barriers could also lie at the national level either at the home country (the Netherlands) or at the host country (developing countries). National barriers could for example be legal, cultural and geographical. Research objects are thus located in medium-large size Dutch companies, the Netherlands, developing countries such as India and specific business segments such as the IT segment. The research question can be formulated as follows: Research question: What are the barriers for offshoring of IT activities to India for Dutch medium-large companies? In order to solve the research question, three sub-questions can be identified. These subquestions deal with the company level, home country level, and host country level respectively. Sub-question 1: What are the barriers at the company level for offshoring of IT activities to India for Dutch medium-large companies? Sub-question 2: What are the barriers at the home country level for offshoring of IT activities to India for Dutch medium-large companies? Sub-question 3: What are the barriers at the host country level for offshoring of IT activities to India for Dutch medium-large companies? 4

5 First, a general framework for offshoring to developing countries will be developed. This will then narrow down to the more specific questions concerning Dutch companies and India. After having accumulated knowledge on offshoring based on a literature review, interviews will be organized to identify barriers that are specific to the three levels of analysis. 3. Theoretical and analytical framework This research project is made up of two phases. In the first phase, which is explorative in nature, a solid understanding of IT offshore practices will be developed. This will be achieved by analyzing relevant literature and consulting with various experts on the topic (e.g. university professors, government agencies, intermediary companies). Also, a pilot case study will be performed to get a clearer picture. The second phase consists of the actual fieldwork where hypotheses developed in phase one will be tested, and further information on barriers for offshoring will be collected. Here, a number of company representatives will be interviewed and company documents will be analyzed. There are three levels of analysis for this study: company level, home country level (the Netherlands) and host country level (India). These levels are listed in Figure 1. In the following sections, these levels of analysis are discussed in more detail. 5

6 Research objective Identify barriers for IT offshoring to India for medium-large Dutch companies Levels of analysis Barriers Barriers Barriers Analytical framework Phase 1 Phase 2 Literature review Expert interviews Pilot case study Company interviews Figure 1. Barriers exist at the company-, home country-, and host country level 4. Method In this section, the company, the home country and the host country levels are discussed. Company level It has been found that there can be barriers for offshoring inside the company (e.g. Venkatesan, 1992). On the company level, barriers to offshoring will be identified based on a thorough literature review. In addition, interviews with a number of Dutch companies that are currently (considering) offshoring will be scheduled. Where possible, content analyses of textual materials dealing with the offshoring process provided by the companies included in the sample will be performed, allowing for triangulation of sources. This is in line with Eisenhardt s (1989: 534) observation that Case studies typically combine data collection methods such as archives, interviews, questionnaires and observations. 6

7 For this study, a comparative case analysis is appropriate because the goal is to gain a profound insight into one or several objects (Verschuren and Doorewaard, 1999: 163). For this comparative case study the hierarchic method (Verschuren and Doorewaard, 1999) will be used, because it allows more for time constraints than the sequential method. All interviews will be performed independently from each other. Then, information provided during the interviews will be analyzed for barriers for offshoring. In order to construct a sample for the comparative case study, the state of offshoring of activities of companies will have to be determined. As it is very difficult to determine the current state of offshoring of activities for a given company using public sources (e.g. annual reports), a survey will be mailed to Dutch medium-large companies with 100 to 500 employees and with an annual turnover of EUR 100 million to EUR 500 million. This is the size of companies NSBPI showed interest in. According to Reach, a database with financial information on Dutch companies, 538 companies based in the Netherlands match these criteria. Of this population, 200 companies will be randomly sampled and e- mailed a questionnaire, using SurveyMonkey, a web-based survey tool. Questions will be of the type: What is your company s current state of offshoring of IT activities? and Would someone in your company that is knowledgeable of the offshoring of IT activities be willing to be interviewed for 30 to 60 minutes? Ideally, interviews will be organized with five (5) Dutch companies. However, this number will strongly depend on the willingness of the contacted companies to cooperate and should therefore not be considered fixed. As Hussey and Hussey (1997: 67) point out: Access to a suitable organization is often difficult to negotiate and the process of the research can be very time consuming. Depending on the number of positive responses, a final sample will be selected based on the following criteria, or as specified by NSBPI: - Experience with offshoring - Industry - Country to which activities are offshored 7

8 In order to determine the questions to be asked during the company interviews, a thorough review of the literature will be performed by which relevant issues will be identified. Also, RSM Erasmus University professors and other experts will be contacted that are knowledgeable of offshoring and asked to comment on possible questions. Questions asked will be dealing with issues such as the experience of the company and the supplier with offshoring contracts, task complexity and measurement problems. Home country level Within the Netherlands there may be barriers to offshore too. In order to identify these barriers on the home country level, interviews will be conducted with officials from The Dutch Chamber of Commerce and The Ministry of Economic Affairs. The Netherlands Chamber of Commerce manages the trade register and its other tasks include providing Dutch entrepreneurs with information; stimulating regional trade and industry; and providing advice to local and regional government. ( As The Netherlands Chamber of Commerce targets its services at Dutch businesses across all sectors an interview with one of their employees will be valuable for providing information on offshoring by Dutch companies. The influence the Dutch Chamber of Commerce has on the international sourcing decisions of Dutch companies will be investigated. As information is requested on a specific topic, appointments with one of the Chamber s in-house specialists will be arranged. An employee from the Dutch Ministry of Economic Affairs will be interviewed too. The ministry has three key policy areas: knowledge economy and innovation; competition and dynamic; and room to do business ( In undertaking this project for NSBPI it is essential to investigate and understand the government s opinion on offshoring, helping to further highlight any barriers Dutch companies may face when making offshoring decisions. Thus interviews should improve the knowledge base in this area and provide insights into how the external environment shapes Dutch company s decisions to offshore. 8

9 For both The Netherlands Chamber of Commerce and The Ministry of Economic affairs semi-structured interview questions will be developed to ensure that the relevant information is accessed. Questions include what each of the organization s stances on offshoring is. Furthermore, specific questions regarding the organizations view on barriers to Dutch companies offshoring will be included. Host country level On the host country level, barriers to offshoring also exist. There may be cultural differences and there could be a problem of perception: quality and service levels may not be clear. The offshoring process itself (i.e. how to contact potential suppliers) could be a significant barrier too. Relevant literature will be examined in order to find examples and evidence of barriers created by the host countries. In addition, interviews will be scheduled with embassy personnel of the target country India. NSBPI has agreed to organize appointments with appropriate individuals at the embassy. These appointments provide the opportunity to discover and question the embassy s knowledge and opinion on Dutch offshoring relationships with India. The findings will add to the knowledge base regarding offshoring relationships between Dutch companies and Indian organizations. 5. Presentation of the results The results of this research project will be presented on May 18, 2005 during a seminar organized by the NSBPI in the VNO NCW, Malietoren, Bezuidenhoutseweg 12 in The Hague. 9

10 References Alexander, M. and Young, D. (1996a). Outsourcing: where s the value? Long Range Planning 29, AT Kearney, (2003). Where to Locate: Selecting a Country for Offshore Business Processing, A.T. Kearney, Inc., AT Kearney, (2004). What to Move Offshore: Selecting IT Activities for Offshore Locations, A.T. Kearney, Inc., Berenschot, (2004). Aard, omvang en effecten van verplaatsing bedrijfsactiviteiten naar het buitenland, Ministerie van Economische Zaken, 12/11/2004. CPB, (2005). Verplaatsing vanuit Nederland, CPB, januari Eisenhardt, K.M. (1989). Building theories from case study research The Academy of Management Review, 14 (4): Hayes, D.C., Hunton, J.E. and Reck, J.L. (2000). Information systems outsourcing announcements: Investigating the impact on market value of contract-granting firms Journal of Information Systems 14 (2), Het Financieele Dagblad, (05/02/2005). Het nieuwe Silicon Valley ligt in India; IT in India, Het Financieele Dagblad B.V. Het Financieele Dagblad, (05/02/2005). Weg met die Haagse stroperigheid, Het Financieele Dagblad B.V. Hussey, J, and R. Hussey (1997). Business Research. Macmillan Press, London. NRC, (05/02/2005). De stelling van Karien van Gennip: We kunnen profiteren van de lagelonenlanden, PCM uitgevers B.V. Rappaport, A. (1986). Creating shareholder value. Free Press, New York. Venkatesan, R. (1992). Strategic sourcing: to make or not to make Harvard Business Review, 70 (6): Verschuren, P. and H. Doorewaard (1999). Designing a research project. Lemma, Utrecht. Web resources