Offshoring and Social Exchange

Transcription

1 Offshoring and Social Exchange A social exchange theory perspective on offshoring relationships By Jeremy St. John, Richard Vedder, Steve Guynes Social exchange theory deals with social behavior in the exchange of activities between organizations. The theory holds that the relationships experienced should be close but flexible. 1 This study captures the social relationship factors from social exchange theory (trust, power, dependence, communication and shared values) that underlay the client-vendor relationship and presents empirical evidence for the effectiveness of a relational approach to offshoring. This is not an intuitive approach, especially when offshoring. It is an especially difficult approach to take in a time when wide spread offshoring failures are encouraging client companies engaged in offshoring to try and keep control with strict contracts that stifle flexibility and to limit their vulnerability by maintaining other boundaries that restrict relationships. 2 Keywords: Social Exchange Theory, offshoring, organizational behavior Categories: Social and professional topics - Computing / technology policy Corresponding Author: Steve Guynes guynes@unt.edu Offshoring Early offshoring activities consisted of simple outsourcing contracts involving straight-forward tasks along the lines of call centers, help desks and simple software maintenance. Gradually, outsourcing contracts required ever more sophisticated software development. As the education and sophistication level of foreign software developers increased offshoring increased in volume and involved more sophisticated development. New technologies that increased bandwidth and the ability to offshore new and more complicated processes further raised the volume and sophistication of offshoring work. At the same time, competition between client companies to obtain the services of vendor companies and increasing wages of foreign software developers switched the primary focus and benefit of offshoring from one of cost savings to one of strategic importance. 3 1 Beyond safety outcomes: An investigation of the impact of safety climate on job satisfaction, employee engagement and turnover using social exchange theory as the theoretical framework. Yueng-Hsiang Huang, Jin Lee, Anna C. McFadden, Lauren A. Murphy, Michelle M. Robertson, Janelle H. Cheung, Dov Zohar. Applied Ergonomics, 55(7), , A relationship perspective on outsourcing. R. Kishore, H.R. Rao, K. Nam, S. Rajagopalan & A. Chaudhury. Communications of the ACM, 46(12) 87-92, Offshore agile development. Stephanie Overby. CIO.com, October 1, ACM Computers & Society Volume 47 Issue 1 17

2 Most theoretical social research into both offshoring and outsourcing has examined the politically charged relations between offshoring clients and their employees, home countries, and the public, as well as the equally charged offshoring decision itself. Social exchange theory has not been used to examine the nature of the client vendor relationship with the exception of an exploratory study by 4, which combined social exchange theory with organization theory and relational contract theory. And yet, social theories would seem best fit to explore the evolution of ever more complex offshoring relationships, sometimes termed cosourcing because of the high level of involvement required of the client. 5 In cosourcing, relationship complexity increases as work is shared, the client often actually owns all or part of the vendor, and the work offshored is more complex. The Changing Nature of Offshoring As the sheer volume of information technology (IT) being offshored continues to grow, other changes are occurring. The type of IT work being offshored is expanding as more sophisticated vendors and technologies make it feasible for new, often more complicated IT work to be completed abroad. Bandwidth continues to improve while costs continue to decrease, reducing barriers to offshoring and changing the nature of what can be offshored. Vendor countries such as India and China continue to modernize and gear their infrastructure and workforce towards offshoring. There has been an increase in the complexity, sensitivity and critical nature of the work being offshored partly because of the billions of dollars in potential cost savings previously mentioned, as well as a widespread failure of offshoring to deliver as promised continues. 6 Yet, the anticipated cost savings from wage differentials continues to be elusive. Reorganizing and reengineering operations to take full advantage of wage differentials opens up a variety of other opportunities that will ultimately boost revenue growth and exceed the annual cost savings. 7 The negative outcomes being associated with the outsourcing contract suggests that the issue is more than just a cost savings problem. Strict adherence to tightly controlling contracts (and maintaining power and control) are solutions often cited to help client companies reduce their risk of failure. In summary, offshoring relationships are dynamic and evolve over time due to changes in the external environment and the client's internal requirements. These changes include increasing wages for offshore employees and more competition between vendors for clients and clients for vendors. 8 Additionally, technology improvements are allowing the offshoring of more work and 4 Exploring information technology outsourcing relationships: theory and practice. T. Kern & L. Willcocks The Journal of Strategic Information Systems, 9(4), , Evolution of offshore development: from outsourcing to cosourcing. K.M. Kaiser & S. Hawk. MISQ Executive, 3(2), Outsourcing issues and challenges facing CEOs and CIOs. P. C. Palvia. Journal of Information Technology Case and Application Research, 7(4), Why we can all stop worrying about offshoring and outsourcing. Ben W. Heineman. The Atlantic, March 26, The offshore outsourcing of American jobs. Paul C. Roberts. Global Research. November 9, ACM Computers & Society Volume 47 Issue 1 18

3 more types of work. Clients are requiring more complex, value-added work of a strategic rather than cost savings nature. These changes require closer, more complex relationships between client and vendor. 9 Purpose of the Study The general purpose of this study was to examine the various social behaviors utilized in the client vendor relationship and to determine which approaches lead to success in the offshoring environment. This study captures the social relationship factors from Social Exchange Theory (trust, power, dependence, communication and shared values) that underlay the client-vendor relationship and presents empirical evidence for the effectiveness of a relational approach to offshoring. Differences in offshoring outcomes require a study of the variables that form the offshoring relationship to determine the extent to which the client-vendor offshoring relationship affects offshoring success. This exploratory study was conducted at the organizational level from the client s perspective. Given that research in the area of relational offshoring is not prevalent in the general IT outsourcing literature and novel to the IT offshoring literature, an exploratory study was chosen with three research questions that seemed particularly pertinent. They are: What are the important relationship factors that lead to offshoring failure or success? How are these factors related to one another in terms of relationship building? What is the impact of these relationship factors on IT offshoring success? The Research Focus The survey was sent directly to the CIO of Fortune 500 companies. They were asked either to complete the survey themselves or to pass the survey to the person most familiar with their company's offshoring activities. Data for this study was collected using a questionnaire mailed via U.S. mail followed by a postcard reminder also distributed via U.S. mail soliciting recipients to take a web version of the same survey. Spurring this study are the all too often lack luster economic and strategic benefits of offshoring, contradictory how-to advice on maintaining a client-vendor relationship and the low success rates of offshoring being reported by numerous trade sources. Academic literature has traditionally focused more on costs and more recently on strategic measures of offshoring. The focus of trade literature tends to be general in nature. Offshoring survey research from trade sources is concerned with the offshoring decision, the magnitude and future trends of offshoring, 9 Offshore outsourcing: current and future effects on American IT industry. L. Pfannenstein & R. Tsai. Information Systems Management,21(4), 72-80, ACM Computers & Society Volume 47 Issue 1 19

4 the political consequences and whether offshoring was a failure or success for particular companies. 10 Survey research from trade sources also attempts to determine the proper way to do offshoring. The problem is that offshoring is generally treated as something that exists in one form, not many. Although client-vendor relationship advice is often given or surveyed, different types of offshoring based on the client-vendor relationship are not acknowledged. Relationship advice is given as if it applies to all offshoring ventures equally. These findings point to an increasing trend in offshoring despite mixed findings regarding economic benefits, political benefits and strategic benefits and the success rate of offshoring ventures. 11 Rather than examining economic and strategic measures of offshoring success, the focus of this study is on the client-vendor relationship and its association to offshoring success. Previous research on the offshoring client-vendor relationship has been primarily case studies, literature reviews, and opinion articles. There was a relative lack of research directed towards an examination of the relationship between the outsourcer and the customer, and that although several studies comment on the importance of the relationship there is a relative lack of positivist research examining and analyzing that relationship. 12 This scant research becomes even more lacking when the outsourcing relationship is restricted only to offshoring relationships. Though the offshoring trend continues at a phenomenal rate, the success rate of offshoring ventures does not. Changes in both the complexity and nature of work being offshored as well as the mixed results of offshoring ventures justify a new and closer examination of the client-vendor relationship. Results of the study 13 Hypotheses testing was conducted using Spearman correlations. The Spearman correlation was chosen over other correlation techniques such as Pearson s because of the ordinal/interval nature of the items. More importantly, this study hypothesizes numerous links between variables. Causation is not being assumed or tested for, nor could it be properly examined without increasing the response rate by expanding the population to lower level employees or smaller companies. Any of these changes would result in a completely different type of study. Spearman s rho was calculated with alpha set at.01. If no significance was found alpha was relaxed to.05 and the smaller effect was noted. When looking up correlation coefficients the critical regions were large because of the small sample size. 10 Outsourcing becomes more complex. W. King. Information Systems Management, 22 (2), 89-90, Spring Ibid 12 Kern & Willcocks, op.cit. 13 The Value of Partnership in Offshoring. J. St. John, C. Guynes & R. Vedder. Journal of Business and Economics Research. 7 (11), , July ACM Computers & Society Volume 47 Issue 1 20

5 Hypothesis Specific Hypotheses Number H 1 H 2 H 3 H 4 H 5 H 6 H 7 H 8 H 9 H 10 H 11 Communication and trust are positively correlated. Communication is positively correlated with partnership. Trust is positively correlated with partnership. Shared Values is positively correlated with partnership. Dependence and power are inversely related. Relationships displaying more dependence will be more successful than those displaying less dependence. Relationships displaying more power will be less successful than those displaying less power. Partnership will display more dependence. Partnership and offshoring success are positively correlated. Partnership will be more successful than buy-in or fee-for-service control structures. More successful partnerships, compared with less successful partnerships, exhibit higher levels of: a. communication b. trust c. interdependence d. shared values Table 1: Research Hypotheses Hypothesis 1 Communication and trust are positively correlated. Hypothesis 1 considered the relationship between communication and trust. Based on social exchange theory it was hypothesized that the two would be positively correlated. The correlation coefficient was.658 at indicating a strong positive correlation (df=29, r=.658, critical support for the hypothesis that communication and trust are positively correlated. Hypothesis 2 Communication is positively correlated with partnership. Hypothesis 2 considered the relationship between communication and partnership. Based on social exchange theory it was hypothesized that the two would be positively correlated. The correlation coefficient was.658 at indicating a strong positive correlation (df=29, r=.729, critical support for the hypothesis that communication and trust are positively correlated. Hypothesis 3 Trust is positively correlated with partnership. Hypothesis 3 considered the relationship between trust and partnership. Based on social exchange theory it was hypothesized that the two would be positively correlated. The correlation coefficient was.883 at indicating a very strong positive correlation (df=29, r=.883, critical ACM Computers & Society Volume 47 Issue 1 21

6 strong support for the hypothesis that communication and trust are positively correlated. Hypothesis 4 Shared Values is positively correlated with partnership. Hypothesis 4 considered the relationship between shared values and partnership. Based on social exchange theory it was hypothesized that the two would be positively correlated. The correlation coefficient was.741 at indicating a strong positive correlation (df=29, r=.741, critical support for the hypothesis that communication and trust are positively correlated. Hypothesis 5 Dependence and power are inversely related. Hypothesis 5 considered the relationship between dependence and power. Based on social exchange theory it was hypothesized that the two would be inversely related so a negative correlation was expected. The correlation coefficient was indeed negative, indicating direction but not significant (df=29, r= -.128, critical value=.361, 2-tailed p<.01). There is a failure to reject the null hypothesis. There is no support for the hypothesis that dependence and power are negatively correlated (inversely related). Hypothesis 6 Relationships displaying more dependence will be more successful than those displaying less dependence. Hypothesis 6 considered the relationship between dependence and offshoring success. Dependence is often considered a bad thing, leaving one vulnerable. Social exchange theory takes a different view considering higher dependence a good thing. More successful relationships would be expected to display higher levels of symmetrical interdependence. Ideally data would be available from both the client and the vendor s point of view in this study involving data only from the client the level of symmetrical interdependence was estimated by examining dependence from the client s point of view. To test this hypothesis, responses to Ganesan s six item dependence scale were compared to offshoring success. The correlation coefficient was.202 showing no significant correlation between dependence and offshoring success (df=29, r=.741, critical value=.361, 2-tailed p<.01). There is a failure to reject the null hypothesis. There is no support for the hypothesis that dependence and offshoring success are positively correlated. Hypothesis 7 Relationships displaying more power will be less successful than those displaying less power. Hypothesis 7 considered the relationship between power and offshoring success. Based on social exchange theory, a more successful relationship will have asymmetrical power or balance. If one has more power, the relationship will not be as successful therefore it was hypothesized that more power would be an indicator of a less successful relationship. When one company dominates with more power social exchange theory postulates that the dominated company would have less trust and communication and that the client company dominating the vendor would be less dependent on the vendor, all of which would lead to a less successful relationship. Unfortunately, this survey only reports the client s side of the power relationship making this ACM Computers & Society Volume 47 Issue 1 22

7 hypothesis less than ideal. Symmetry or asymmetry cannot be determined without knowing the vendor s viewpoint. Correlation analysis between power and offshoring success returned an r value of showing no significant correlation between power and success (df=29, r= -.128, critical value=.361, 2- tailed p<.01). There is a failure to reject the null hypothesis. There is no support for the hypothesis that power and offshoring success are correlated. Hypothesis 8 Partnership will display more dependence. Hypothesis 8 considered the relationship between dependence and partnership. Social exchange theory views dependence as a good thing and better relationships would be expected to display higher levels of symmetrical interdependence. Ideally data would be available from both the client and the vendor s point of view in this study involving data only from the client the level of symmetrical interdependence was estimated by examining dependence from the client s point of view. The correlation coefficient was.306 showing no significant correlation between dependence and partnership (df=29, r=.741, critical value=.361, 2-tailed p<.01). The null hypothesis cannot be rejected and it is concluded that there is no support for the hypothesis that dependence and partnership are positively correlated. Hypothesis 9 Partnership and offshoring success are positively correlated. Hypothesis 9 pertained to the relationship between partnership and offshoring success. Based on social exchange theory it was hypothesized that the two would be positively correlated. The correlation coefficient was.723 indicating a strong positive correlation (df=29, r=.723, critical support for the hypothesis that partnership and offshoring success are positively correlated. Hypothesis 10 Partnership will be more successful than buy-in or fee for service control structures. Hypothesis 10 compared the type of client-vendor relationship with the associated level of offshoring success. It was hypothesized that partnership type relationships be more successful than buy-in or fee-for-service control structures. Offshoring success was measured by nine 7- point Likert scales with 1 being strongly disagree, 4 neutral and 7 being strongly agree. Average responses were calculated to get typical values and compared based on type of offshoring relationship reported. Comparing averages supported the hypothesis by showing that typical values reported for offshoring success were higher for clients engaged in partnership-type relationships compared with fee-for-service or buy-in type relationships. Hypothesis 11 More successful partnerships, compared with less successful partnerships, exhibit higher levels of: a. communication b. trust c. interdependence d. shared values Based on social exchange theory it was hypothesized that more successful partnerships would report higher levels of all these variables, compared with less successful partnerships. This hypothesis was deemed un-testable with the data in hand because all companies identified as having a partnership type relationship also identified their offshoring success as significantly ACM Computers & Society Volume 47 Issue 1 23

8 high. No unsuccessful partnerships responded to the survey so they could not be compared with the successful partnerships that did respond. Hypothesis 12 Shared Values and trust are positively correlated. Hypothesis 12 considered the relationship between shared values and trust. Based on social exchange theory it was hypothesized that the two would be positively correlated. The correlation coefficient was.602 at indicating a strong positive correlation (df=29, r=.602, critical support for the hypothesis that shared values and trust are positively correlated. Hypothesis Specific Hypotheses /unsupported H 1 H 2 Communication and trust are positively correlated. Communication is positively correlated with partnership. H 3 Trust is positively correlated with partnership. H 4 Shared Values is positively correlated with partnership. H 5 Dependence and power are inversely related. Not H 6 H 7 H 8 Relationships displaying more dependence will be more successful than those displaying less dependence Relationships displaying more power will be less successful than those displaying less power. Partnership will display more dependence. Not Not Not H 9 H 10 H 11 Partnership and offshoring success are positively correlated. Partnership will be more successful than buy-in or fee-for-service control structures. More successful partnerships, compared with less successful partnerships, exhibit higher levels of: a. communication b. trust c. interdependence d. shared values H 12 Shared Values and trust are positively correlated. Table 2: Summary of Hypotheses Results ACM Computers & Society Volume 47 Issue 1 24

9 Conclusion This project has proposed that this situation has changed the characteristics of and requirements for a successful offshoring relationship. Specifically, client-vendor relationships need to be closer and more flexible. The social aspects of the relationships have become more important than the contractual (written or unwritten) relationship. Following this line of thinking, this project identified several variables for investigation. These social relationship variables included trust, dependency, power, shared values, communication and the type of relationship structure. The research suggests that communication and shared values are related to trust as well as partnership. It suggests that trust affects partnership. Furthermore, dependence and power are related and affect partnership. Finally, the research suggests that partnership is related to offshoring success as a mediating variable. This exploratory study only tests the existence of the hypothesized relationships. The direction of the relationships are shown and are based on theory and past studies, not actually tested in this study. Social exchange theory considers the length of a relationship to be an important indicator variable of partnership. It was not used in this study because recent research did not support it as an indicator of partnership or offshoring success. This is likely because of the newness of highly collaborative offshoring partnerships. As these partnerships age, one would expect length of a relationship to become a strong indicator of both partnership and offshoring success Ibid. ACM Computers & Society Volume 47 Issue 1 25