A Survey on the Business Relationship between Chinese Outsourcing Software Suppliers and Their Outsourcers

14th Asia-Pacific Software Engineering Conference A Survey on the Business Relationship between Chinese Outsourcing Software Suppliers and Their Outsourcers Jingyue Li 1, Jianqiang Ma 2, Reidar Conradi 1, Weibing Chen 2, Junzhong Ji 2 and Chunnian Liu 2 1 Department of Computer and Information Science, Norwegian University of Science and Technology, NO-7491 Trondheim, Norway {jingyue, conradi}@idi.ntnu.no 2 College of Computer Science and Technology, Beijing University of Technology, Beijing 100022, China {jianqiang.ma, weibingchen}@gmail.com Abstract The business relationship between a software outsourcer and its suppliers is gradually moving from contract relationship to partnership. The partnership type between the outsourcer and the supplier is considered as a key predictor of outsourcing success. Although several studies have investigated the practices and benefits of building partnership from an outsourcer s perspective, few of them have studied these issues from the supplier s viewpoint, especially in the context of offshore software outsourcing. Since more and more Chinese software companies are getting outsourcing subcontracts from abroad, it is important to investigate the effect of business relationship on their performance, and to identify possible enhancements. Our study has collected data by a questionnaire-based survey from 3 finished projects in 41 Chinese software suppliers. Twenty-six of our investigated suppliers claim to have contract relationship with their outsourcers and the remaining 27 think they have partnership with outsourcers. Results from our study show, however, that 1) processes and methods used by suppliers to solve conflicts with outsourcers do not follow their self-claimed contract relationships or partnership; 2) there is no significant correlations between the type of relationship and the success of outsourced projects; 3) more personnel with proper language and communication skills need to be educated in order to facilitate Chinese companies to build and maintain a proper partnership with their outsourcers. 1. Introduction Software outsourcing is gaining more and more attention. It can help software companies to save costs and to focus on their core businesses [1, 6]. China is becoming one of the biggest software supplying countries, together with India, Ireland, Russia, and so on. Although the volume of Chinese software exports in 200 was $390 million, compared with $720 million in 2001, it was still only 1/6 of India s and was 0.% of the total volume of Chinese export [2]. Comparing with onshore software outsourcing, several new factors may impact the effectiveness of offshore software outsourcing, such as infrequent and ineffective communications [7], time zone differences [3], and cultural differences [11, 13, 24]. Moreover, the relationship between outsourcers and suppliers may also bring benefits or challenges to software outsourcing []. In this study, we have used a questionnaire-based survey to investigate how Chinese suppliers have built and maintained partnership or contract relationship with their outsourcers, and the effect of these relationships on the success of outsourcing. Results of this study have summarized the state-of-the-practice of relationships between Chinese suppliers and their outsourcers, and have illustrated possible issues to be improved. The rest of this paper is structured as follows: Section 2 presents the related work. Section 3 introduces the research motivation and research questions. Section 4 describes the research design. Section presents results and discussions. Section 6 contains a general discussion. Conclusion and future work are presented in Section 7. 2. Current software outsourcing research There are two main participators in software outsourcing: the outsourcer and the supplier. Outsourcers are the organizations that give development subcontracts to other software organizations, namely suppliers. Lee et al. [17] have summarized the evolution of research issues on outsourcing, and pointed out that the first stage of the software outsourcing research is based on the outsourcer s view, hierarchical relationships, and a win-lose strategy, i.e. the contract relationship. The subsequent stage will be based on both outsourcers and suppliers views, equal relationships, and a win-win strategy. They predict that the changes of relationship between the outsourcers and suppliers are the most important trend in outsourcing. That is, the nature of outsourcing is evolving from merely 130-1362/07 $2.00 2007 IEEE DOI 10.1109/ASPEC.2007.22 470

contract relationship between customers and vendors to partnership to achieve shared goals of the participants [9, 16]. The partnership quality has been found to be able to significantly influence outsourcing success [9, 16]. Information System (IS) managers are suggested to manage the relationship with the service suppliers less as a fixed contract and more as a dynamic partnership [19]. Based on the possible evolution from contract relationship to partnership, potential research questions of the next phase of outsourcing studies are proposed as [17]: Partnership motivation. For example, why do outsourcers and suppliers wish to consider more collaborative relationship than the dyadic relationship? Partnership scope. For example, how do outsourcers and suppliers evaluate and select a certain outsourcing arrangement from several alternatives? Partnership performance. For example, how can both the outsourcers and the suppliers improve the performance of outsourcing partnership? Partnership or not. For example, what circumstances are suitable for outsourcing partnership? Partnership contract. For example, what factors should be considered when basing outsourcing contracts on a partnership? Although a few studies have investigated partnershiprelated issues, they have the following limitations: Most of them are still performed from the outsourcer viewpoints. Since the partnership is a mutual relationship, it is also important to study these issues from the suppliers viewpoints [17]. Most studies on partnership are limited to onshore outsourcing instead of offshore outsourcing []. Due to larger inherent risks of offshore outsourcing, it is important to investigate effects of these factors on building and maintaining partnerships. Most study units focus on the company level. Few of them have investigated on a project level []. 3. Research questions China has one of the largest software supplier industries in the world. Our motivation is to study the state-of-the-practice and possible improvements of building and maintaining a partnership with the outsourcers from the Chinese suppliers perspective. With reference to the five potential research questions proposed in [17] (see the above Section), we are primarily interested in three issues, namely partnership motivation, scope, and performance. 3.1 The current relationship There are different types of sourcing arrangements []. Based on degree of outsourcing and ownership, the outsourcing arrangement can be classified into several types, as shown in Table 1. Table 1. Type of outsourcing arrangements Degree of Ownership outsourcing Internal Partial External Total Spin-offs (wholly Joint- Venture Traditional outsourcing Selective owned subsidiary) Selective sourcing None Insourcing/ Backsourcing Facilities sharing among multiple clients N/A With respect to issues relate to partnership scope, our interest is to study existing relationships between the Chinese suppliers and their outsourcers, and how these relationships are established. Therefore, our first research question is: RQ1: How are the relationships between the Chinese suppliers and outsourcers established? 3.2 The partnership performance The terms partnership or strategic alliance relationship are heavily used today and have been shown to be abused [18]. For example, five banks being investigated in [18] stated that they had a strategic partnership with their suppliers. However, only three actually exhibited behaviour to support the partnership label. The remaining two often resorted to the contractual details to resolve problems without concern for reciprocal outcomes or for forgoing situations which are not of mutual interests. With respect to partnership performance, one important issue is to improve the efficiency of solving conflicts between the outsourcer and the supplier. Due to cultural differences, natural language differences, and geographic distances between Chinese suppliers and outsourcers worldwide, it is interesting to know whether partnerships or strategic alliance relationships are real and how the conflicts are solved. Thus, our second research question is: RQ2: How are conflicts between Chinese suppliers and outsourcers solved? Elements of partnership such as trust, cooperation, and communication are important for outsourcing success [9, 16]. We are also interested whether business relationships between Chinese suppliers and their outsourcers have an 471

effect on the performance of outsourced projects. Thus, the third research question is: RQ3: What are effects of different relationships on the performance of projects? 3.3 The expectations for the future Regarding partnership motivation, we are interested in the expectation of Chinese suppliers to evolve current relationships. Thus, our fourth research question is: RQ4: How to evolve current relationships? 4. Research design To answer the above research questions, we have used a questionnaire-based survey to collect data. First, a preliminary questionnaire with both open-ended and close-ended questions was designed by reading literature. Second, a pre-study was performed to validate the quality of questions in the preliminary questionnaire, and to get answers on the open questions. Based on the results of the pre-study, most open questions in the preliminary questionnaire were redesigned into closed questions. In addition, the problematic questions in the preliminary questionnaire were revised. Then, the revised questionnaire was used to collect data in a main study. 4.1 The preliminary questionnaire The preliminary questionnaire has 10 sections. Sections 1 and 10 contain questions on background information of projects, companies and respondents. Questions in the other sections are relevant to research questions in this paper. 4.2 The pre-study to verify and refine the preliminary questionnaire The pre-study included two steps, where individual interviews were followed by a workshop. Individual interviews. We interviewed project managers from different software suppliers. A workshop discussion. After the individual interviews, we revised most open questions in the preliminary questionnaire into closed questions and made a second version of the preliminary questionnaire. We then organized a group discussion (a workshop) with 30 industrial experts to verify and comment on the second version of the questionnaire. Based on inputs from the workshop, we revised the questionnaire into a final version. The final questionnaire includes 66 questions and takes about forty minutes to be filled in. 4.3 The main study In the main study, the data was collected by cooperating with the CSO 1. The sample selection and data collection process were as follows: Establish the target population. We randomly selected 2,000 companies from a database of the CSO, which included about 6,000 Chinese software companies. Send invitation letters by email to obtain possible participants. We sent invitation letters by email to the 2,000 selected companies. The invitation letter introduced the survey and specified that the survey participant would be rewarded with either the final report of this survey or an annual membership of the CSO with a worth of 00 Chinese Yuan. We got responses from 300 software outsourcing companies. These companies were later used as the original contact lists. Send questionnaires by email to possible participants. The unit of our study is defined as a finished software outsourcing project. We sent questionnaires (as word files) by email to the 300 companies and asked them to select one or more projects to answer the questionnaire. As we cannot get the complete list of relevant projects in each company, the selection of projects within the companies was decided by the respondents themselves, i.e. a convenience sample. Collect filled-in questionnaires with follow up. From the 300 companies, we first got 40 questionnaires back. To ensure the quality of the data, we excluded 10 questionnaires answered by respondents with less than three-year working experience. For the remaining 30 questionnaires, we contacted the respondents again by telephone to clarify possible misunderstandings and/or to fill-in the missing data. At the same time, we contacted the rest of 260 companies through telephone to persuade them to fill in the questionnaire. By doing this, we got 23 more completed questionnaires back.. Results and discussions of research questions In this section, we first present an overview of the collected questionnaire. After that, we show the results of each of the four research questions, each followed by a detailed discussion and conclusion..1 Overview of collected questionnaires Participating companies. Based on the number of employees, the participating companies include 7 small, 22 medium, 8 large, and 4 super-large software companies, as shown in Fig. 1. Comparison with the profile of the number of employees in Chinese software 1. The real name was omitted for confidential reasons 472

industry [2], it shows that most of the companies participated in our survey were medium and large ones. 80% 70% 60% 0% 40% 30% 20% 10% 0% The distribution of Chinese software companies and investigated companies 67% 17% 26% 3% 6.% 20% 10% 0.% Small(<=0) Medium(1-300) Large(301-1000) Super large(>1000) software companies in China outsourcing companies we investigate Fig. 1. The size distribution of companies Respondents. Most respondents are IT managers, project managers, or software architects. More than 70% of the respondents had at least five years experiences of software development. All of them had at least a Bachelor s degree in computer science or telecommunication. Projects. All 3 projects were finished software outsourcing projects. The mean duration of these projects (before the first delivery) was 161 days, and mean project effort was 178 person-days. Twenty one projects were outsourced from the US or European companies and 32 projects were outsourced from Japanese companies. The application domains of the final products of these projects are shown in Figure 2 (including only application domains relevant to more than one project). It shows that ERP, content management system, financial management systems, and management information systems dominate the profile of the outsourced software. Examples of application domains, which are related to only one project, are web applications, health information systems, and embedded software..2 Results of research questions and discussions.2.1. RQ1: How are the relationships built? Results on RQ1. Here, we first investigated how many years the Chinese suppliers have been working with their outsourcers. Results shown in Figure 3 illustrate that majority of them have less than five-year cooperation with outsourcers. Num ber of cases 12 10 8 6 4 2 0 2 2 4 2 2 1 2 Application domains 11 3 6 Web server and mail server Operation System Office antomation Multimedia software Middleware Management Information System Hardware driver Financial management software ERP E-business Content Management System Fig. 2. Application domains of the final products of the investigated projects Number of cases 2 20 1 10 0 3 The durations of cooperations 8 23 > 10 years -10 years 3-4 years 1-2 years less than 1 year Years Fig. 3. The durations of cooperation We also asked respondents to define their relationship with outsourcers on the investigated project and listed alternatives, such as contract relationship, partnership, joint-venture, fully subsidiaries, and others. Results are shown in Figure 4 and illustrate that about half (26 out of 3) of them think that they have contract relationship with outsourcers. To know how a relationship is built, we listed alternatives as following: a) Broker company model, i.e. a company that has information about both the outsourcers and the suppliers provides the service for either outsourcers or suppliers to find a partner [23]; b) Hub model, i.e. a company in country A uses its subsidiary in country B to outsource to another company in country B or C [23]; c) Find the outsourcer yourself; d) Fully owned subsidiary; e) Others; f) Do not know. Results shown in Figure illustrate that only 12 of 3 suppliers used a third party, e.g. broker or hub, as a bridge to build relationship with outsourcers. Most of them either contacted outsourcers directly or are fully owned subsidiaries. 13 6 473

30 2 Relationships between vendors and clients 26 by themselves, rather than through a third party. The majority of such Chinese software companies have only limited years of cooperation with outsourcers..2.2 RQ2: How are conflicts solved? Number of cases Number of cases 20 1 10 0 12 Partnership Contract based Joint Venture Fully owned subsidiary Different relationships Fig. 4. Relationships between suppliers and outsourcers 2 20 1 10 0 7 How the relationships were built 22 Broker Hub find outsourcer self 12 3 fully owned subsidiary Means of building relationship 1 others Fig.. How the relationship was built 12 6 do not know Discussion on RQ1. Based on data collected before 2004, Krishna et al. [13] pointed out that software suppliers in developing countries, such as China, often focus on particular outsourced projects that offer the opportunities to gain domain expertise (e.g. in the banking sector) or to move up the value chain, from tasks such as simple maintenance to higher levels of project involvements or ownership. Our data (mainly collected in 200 and 2006) in Figure 2 show that Chinese suppliers have moved from simple tasks into building complete software solutions, such as ERP and content management systems. However, the durations of working with their outsourcer are mostly less than years, which is shorter than traditional outsourcing countries, such as India (India had already $4 billion market capitalization in software for foreign clients in 1999 [14]). In addition, Chinese suppliers still rely mostly on themselves to get the initial contact with outsourcers. The broker or hub model [23] have not been much used. Conclusion on RQ1 is: Most Chinese suppliers investigated in our study find their customers/outsourcers Results on RQ2. To study this research question, we first classified Chinese suppliers into two categories based on their own-claimed relationship with their outsourcers. One is the contract-relationship group with 26 companies. Another is partnership-relationship group with 27 companies including fully owned subsidiary. Since jointventures are usually based on strategic partnership [8, 18], we also classify suppliers with this relationship in the partnership-relationship group. For three possible scenarios that need communication and cooperation during the projects, we compared the practices and performance of the contract-relationship group with the partnership-relationship group. Scenario 1: deal with confusions. We ask the suppliers what they will do if there is discovered ambiguity or confusion in various documents, e.g. requirement, design, or testing documents. The listed options are: a) Contact the outsourcer directly; b) Deal with confusions locally; c) Discuss confusions locally first, then contact the outsourcer if these confusions cannot be resolved; d) Ignore them; e) Other process; f) Do not know. In addition, we asked for the average person-hours spent to resolve one ambiguity. The options are a) More than 100; b) Between 0 and 100; c) Between 20 and 29; d) Between 9 and 49; e) Less than 9. Scenario 2: deal with defects. We ask the suppliers what they will do if defects (caused by the outsourcer) in various documents are discovered. The same alternatives are used as the first scenario. We also asked the effort to resolve one defect, using the same alternatives as in the first scenario. Scenario 3: deal with changes. We ask what they will do if there are requirements or design changes. This question is an open question. The results of the scenario 1 and 2 show that companies in the contract-relationship group use similar process and effort to deal with confusions and defects as companies in the partnership-relationship group. For the third scenario, 22 out of 27 suppliers in the partnership-relationship group give detailed descriptions on the process of resolving document changes. Sixteen of these 22 suppliers showed cooperative behaviour with outsourcers, i.e. they seek ways to achieve mutual objectives while bargaining extra payment or extended delivery time [20]. However, six others worked with their outsourcers as in the contract relationship, i.e. simply confirm the changes with outsourcers and do whatever the outsourcers have required. Sixteen of 26 contractrelationship companies explained their detailed process of handling changes. Surprisingly, nine of these suppliers 474

work with their outsourcers as partners and have previously negotiated a lot with outsourcers to ensure mutual wins. Only seven suppliers work as customervendor, i.e. sacrifice self-gains to satisfy outsourcers. Discussion on RQ2. The terms partnership has been shown to be abused [18]. Suppliers who claimed to have partnership with their outsourcer may not resolve conflicts as partners. On the other hand, suppliers without partnership with their outsourcer may work cooperatively. Our data show the same trend in China. Results of the third scenario also help to explain why there are no significant differences of processes and performances between the partnership-relationship group and the contract-relationship group in the first and second scenarios. It may be because people do not work according to their own-claimed relationships. Conclusion on RQ2 is: Chinese suppliers process and methods to solve conflicts with their outsourcer sometimes are still not consistent with their own-claimed relationship with outsourcers..2.3 RQ3: What is the project performance? Results on RQ3. To investigate this research question, we compared the performance of the investigated projects. The performances are measured by three variables, i.e. cost, schedule, and outsourcer satisfaction, using a -point Likert metrics. We first used one-way ANOVA to compare performances of projects in the partnership group with those in the contract-relationship group. Results show no significant performance differences between projects in these two groups. Since the results of RQ2 show that the own-claimed relationship may not be consistent with the real practices, we reclassified the suppliers based on their answers to RQ2. By excluding 17 projects without answers to the third scenario of RQ2, we put remaining 2 suppliers into the partnership-relationship group and 13 into the contractrelationship group. We then re-do the same one-way ANOVA analysis, and still find no significant performances differences of projects in these two groups. Discussion on RQ3. Our data do not show significant positive correlations between types of partnership and the success of outsourcing, which is against the conclusion of [9]. The possible explanation is that our study unit is a project instead of a firm in [9]. The success of a project may be affected by many other factors, such as the complexity of the technology, the development process, and the capabilities of developers. Conclusion on RQ3 is: Relationship between suppliers and outsourcers may not be a deciding factor for the success or failure of an outsourced project..2.4 RQ4: How to evolve the partnership? Results on RQ4. With respect to the expectations of suppliers, we asked whether they would like to move current relationships into real partnerships and why. Twenty-nine of 3 participants answered yes and the remaining answered do not know. None of them answered no. Besides more market share, long-term cooperation, and mutual-wins, Chinese suppliers motivations of building partnership with outsourcers also include learning management experience, improving efficiency to resolve conflicts, and improving project efficiency. In addition, we asked the respondents opinion on the major obstacles to Chinese software outsourcing industry and their proposed solutions. The ineffective communication with outsourcers is listed as a major challenge. The respondents especially complain that there are not enough personnel who know how to effectively negotiate and discuss with outsourcers from different language and cross-culture backgrounds. Discussion on RQ4. Different IS outsourcing arrangements, such as spin-offs, joint ventures, strategic alliances or traditional outsourcing, are associated with different motivations and intents [4]. For example, the major motivations in the case of total outsourcing were to reduce IS costs, focus on core business, eliminate an IS function, and gain access to managerial/technical expertise. The rationale behind joint venture/strategic alliance sourcing was to develop sector specific knowledge, generate new business opportunities, and gain access to specialized technical expertise. An anticipated cost saving was the criteria used in most of the outsourcers to measure the success of IS outsourcing [1]. The majority of work examines issues of interest to the outsourcers []. Determination of success is done using, for most part, measures of outsourcers benefits not supplier s benefits. For outsourcing to be effective, both parties need to obtain value from the arrangement. While outsourcers typically look forward financial saving as key benefits, our data show that Chinese suppliers seek to make an acceptable rate of return on outsourcing contracts, to acquire industry specific knowledge, and to build a strong reputation in their industry. Conclusion on RQ4 is: Partnership is expected to give other benefits beyond business profits. 6. Final discussion 6.1 General discussion Based on the results from our study, we suggest the following strategies for Chinese software suppliers in order to improve their businesses. Build real partnerships and implement win-win strategy with the outsourcer. A case study investigating 47

the determinants of outsourcing success concludes that partnership arrangements are more successful than pure supplier relationships, especially when combined with tight contracts [21]. Chinese suppliers are at the stage of establishing and growing phases [12] of the long-term relationship with their outsourcers. Results of RQ1 reveal that most Chinese suppliers are still new players in the offshore outsourcing markets. Although some of them felt that they have built partnership with the outsourcers, results of RQ2, however, show that their ways of doing business still follow the traditional contract-based model. Fortunately, results of RQ4 show that some Chinese suppliers are aware of partnership benefits and are moving from a buyer-seller relationship to a win-win partnership. Improve the suppliers capability to manage the relationship and communication with outsourcer. Incompetent personnel and inappropriate project staffing lead to failures in outsourcing projects [22]. In addition to traditional technical knowledge of building software, new knowledge is needed to ensure the success of offshore software outsourcing. The cross-cultural compatibility is another important factor in partnerships [10]. When partnership did occur, it usually exists as a collection of intangibles rather than a formalized arrangement [10]. Due to cultural differences between Chinese suppliers and outsourcers abroad, it may be more difficult for Chinese suppliers to establish and perform real partnerships with the outsourcers. Results of RQ4 indicate that personnel with capability to manage partnership with outsourcers are absent. Improve the study of partnership in the offshore software outsourcing. Most studies of IS outsourcing are confined to a single-country perspective and neglect the insight gained from multinational or cross-cultural research []. Foreign subsidiary arrangement of software outsourcing faces national-cultural differences [3]. The other arrangements, such as joint venture or alliance with foreign company and foreign outsourcing contracting, face both national-cultural and organizational-culture differences. To our knowledge, our study is the first one to investigate the partnership issues in offshore software outsourcing from the suppliers perspective. Results of RQ3 indicate that a mixture of culture, language, geographic distance with various business relationships makes it more difficult to predict the performance of outsourcing. Thus, more studies are needed to investigate partnership in the context of offshore outsourcing. 6.2 Threats to validity Construct validity. In this study, most variables and alternatives are taken directly, or with little modification from existing literature. We did a pre-study to ensure the quality of the questionnaire, and nearly 10% of the questions and alternatives in the final questionnaire were revised based on the pre-study. Internal validity. Although we promised respondents a final report or the annual membership as a reward, most respondents acted as volunteers and selected the report. We therefore generally believe they answered the questionnaire truthfully. However, a possible threat is that the respondents might have failing memory on past projects, because our unit of study is a finished project. We asked only one person of each project. Different persons may have different answers on one question. External validity. There were more than 11,0 software companies registered in China in 200 [2]. However, the initial database we used contained only about a half of them. Although we have put a lot of effort on data collection, we only got response from 41 companies out of randomly selected 2000 ones. For the remaining 199 companies, we do not know their reasons for not participating. The respondents answered the questionnaires based on projects, which in each company were selected based on convenience. All the above issues may bring external threats to the conclusion of this study. 7. Conclusion and future work This paper has presented results of a state-of-thepractice survey on establishing, maintaining, and evolving relationship between Chinese software suppliers and their outsourcers. Our main conclusions are: Most Chinese software suppliers still have limited years of cooperation with their outsourcers. Better facilities or routines are needed to help them to establish the initial contact with outsourcers. There is still no consistence between the ownclaimed relationship and the actual practices. More guidelines are needed to train Chinese suppliers to establish partnerships with outsourcers and to maintain such relationships. The actual partnership between outsourcers and suppliers do not decide the success or failure of outsourced projects. However, it can bring other benefits to suppliers. To smooth the cooperation between Chinese suppliers and outsourcers abroad, more personnel with proper language skills and cross-cultural knowledge are needed. The results of this study reveal several important issues that deserve further investigation. First, what are possible advantages and challenges of using brokers in the context of Chinese culture? Second, what are possible performance effects of factors, such as language, geographic distance, and culture? Third, how to explain certain phenomena discovered in this study, for example, that the broker or hub model has rarely been used? 476

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