THE INFLUENCE OF
COMMUNICATION QUALITY ON OFFSHORE BUSINESS PROCESS
OUTSOURCING SUCCESS
From an Indian point of view
By
Arjan Knol
March 2009
University of Groningen
Faculty of Economics and Business
Master Thesis Master of Science in Business Administration Business & ICT University of Groningen
Faculty of Economics and Business Landleven 5
9747 AD Groningen The Netherlands http://www.rug.nl
Supervisor: Prof. Dr. E.W. Berghout OKS Group
232 A. Okhla Indl. Estate Phase III 110020 New Delhi
India
http://www.oksgroup.com
Supervisor: A. Malhotra, VP Delhi Operations Written by: Arjan Knol (1335138)
E-mail: a.j.knol.1@student.rug.nl / ajknol@gmail.com
Date: March 2009
Knowledge Solutions) Group in New Delhi, India as a management trainee. OKS Group is specialized in business process outsourcing and is a typical company that has taken advantage of the booming outsourcing market in India. Working at OKS has given me an excellent opportunity to conduct research for my master thesis on offshore business process outsourcing, from an Indian point of view.
This master thesis is written for the study Master of Science in Business Administration (MscBA) Business & ICT at the University of Groningen. The master thesis research is the final task required for the successful completion of this study.
For his constructive comments for the completion of this thesis I would like to thank my thesis supervisor Egon Berghout on behalf of the University of Groningen. And I would like to thank the management of OKS Group for their flexibility in enabling me to conduct research on outsourcing besides my regular work and for providing me with useful information during the interviews in a very open and honest way. Special thanks goes to CEO Vinit Khanna, CFO and my supervisor Aarti Malhotra and the managers and management trainees I have interviewed.
Arjan Knol
March 2009
problems on offshore business process outsourcing success from an Indian perspective, and as such contributes to existing research about outsourcing. Several communication quality problems have been identified that can be taken into account by primarily outsourcing vendors, but by clients as well, to ensure communication problems are also reviewed in (future) management processes of outsourced projects. This research stresses the importance of not overlooking communication quality problems in the general management of naturally communication-extensive offshore outsourced projects.
What is the impact of communication quality problems between a service receiver (client) and a service provider (vendor) on offshore business process outsourcing success from an Indian vendor’s perspective? Insight in the main question of this research is realized based on an extensive literature study on which a theoretical framework has been created. At first offshore business process outsourcing is described and defined. After this the definitions and attributes of communication quality and offshore business process outsourcing success have been identified, on which the theoretical framework is designed. Finally, the research analysis is based on 11 semi-structured interviews which have been conducted at an Indian outsourcing vendor based in New Delhi.
Offshore business process outsourcing (BPO) is defined as the act of transferring some of an organization’s business processes to external providers located outside the principal company’s country, as set forth in a contract. The attributes of communication quality that are used in this research are quality medium, timeliness, accuracy, completeness, consistency, credibility and interpretation differences. The attributes of offshore business process outsourcing success that are formulated for this research are flexibility, price, profitability and quality.
A list of communication quality problems between an Indian outsourcing vendor and its Western clients has been derived from the interviews and categorized in so-called themes. Examples of (grand) themes mentioned more than once in the conducted interviews are language difficulties, Skype connection problems, incomplete and inaccurate process instructions or a lack of communication about fluctuations in volume.
Several themes referring to communication quality problems have an identified influence on an outsourced project’s success. This influence has been identified on three of the four offshore BPO success attributes: flexibility, profitability and quality. The price success attribute has not been directly identified as influenced by the communication quality problems that are derived from the interviews.
To illustrate a communication quality problem influencing the quality success attribute of
a project an example as derived directly from an interview is given. A client continuously
failed to give consistent and accurate instructions to the Indian vendor about a new
project. The operational manager of this project and his team struggled for six months to
get the product quality of a new project right, but eventually was not able to reach the
Several other recommendations for Indian outsourcing vendors (and perhaps for their Western clients) have been formulated based on the results of this research as well. An interesting recommendation is a way to deal with the lack of communication from the client’s side about fluctuations in volume that is currently causing quite a lot of trouble for the outsourcing vendor by performing statistical forecasting research and improving the communication with the client on this point. A solution to adequately deal with volume fluctuations then is to temporary hire extra resources in advance in case they are necessary, to increase the flexibility of a project.
However, the conclusions of this research, although giving a deeper insight and stressing the importance of not overlooking the communication aspect, seem to be quite trivial.
The enormous difficulty in retrieving, as a Western trainee, core information about communication quality problems and their influence on the success of outsourced projects during the interviews with the Indian managers is, as a cultural issue, probably the reason for this. It seemed that the managers were naturally more eager to tell about project’s successes and more hesitant in mentioning project’s failures or aspects where possible improvements could be made; maybe even to an extent that they felt criticized on a personal level. This could be a reason that the price success attribute is not identified at all to be influenced by communication quality problems and this could also clarify that the credibility attribute in this research, in which trust and honesty issues are included, does not seem to have an effect on any success attribute of an outsourced project.
Based on personal experience, and there are probably a lot of Indians who will not agree on this point, the big dilemma lies in the difference between the Indian respectful and indirect way of communicating to preserve harmony and save face at all times and the Western direct and almost blunt way of searching efficiently for problems, formulate conclusions and implement recommendations. There is such a difference between India and the West in giving feedback or talking about problems or failures of a project, and this is exactly why the analysis phase of this research in which the interviews are conducted was so difficult.
A suggestion for future research is to combine the results of this research based on
statements derived from an Indian outsourcing vendor with a client’s point of view as
well, in an attempt to reach more interesting results. Another general suggestion is to
never start conducting this kind of research without having any experience with the, in
this case, Indian culture. As a final conclusion it is very interesting to see that the
communication difficulties for me as a Western trainee interviewing the Indian managers
for this research acts as a striking example of a communication problem between India
and the West that has influenced the results of this research. A difference in the way of
communicating between India and the West indeed does exist and should never be
underestimated. A suggestion in dealing adequately with cultural differences is that both
sides should adapt to each other instead of forcing one side to adapt fully to another. As a
possible recommendation cultural training for both the Indian vendor and its Western
clients could be a very good instrument in reaching this goal.
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TABLE OF CONTENTS
1 INTRODUCTION AND RESEARCH DESIGN _____________________________ 8 1.1 Introduction _______________________________________________________ 8 1.2 Research objective and scope ________________________________________ 10 1.3 Research questions ________________________________________________ 10 1.4 Research methodology _____________________________________________ 11 1.5 Outline__________________________________________________________ 12 1.6 Boundary conditions _______________________________________________ 12 2 OFFSHORE BUSINESS PROCESS OUTSOURCING _______________________ 13 2.1 Definition _______________________________________________________ 13 2.2 Trends __________________________________________________________ 14 2.3 Process _________________________________________________________ 15 2.4 Market segments __________________________________________________ 16 2.5 Statistics ________________________________________________________ 16 2.5.1 Global statistics _______________________________________________ 16 2.5.2 India specific statistics __________________________________________ 19 2.5.3 Conclusion ___________________________________________________ 21 2.6 Reasons in favor of offshore outsourcing _______________________________ 21 2.7 Reasons against offshore outsourcing __________________________________ 23 3 COMMUNICATION QUALITY AND OUTSOURCING SUCCESS ___________ 28 3.1 Definition communication quality ____________________________________ 28 3.2 Attributes communication quality_____________________________________ 29 3.3 Success factors offshore business process outsourcing ____________________ 33 4 FRAMEWORK COMMUNICATION QUALITY AND OFFSHORE BUSINESS PROCESS OUTSOURCING SUCCESS ____________________________________ 38
4.1 Framework Mohr _________________________________________________ 38 4.2 Framework Lee ___________________________________________________ 39 4.3 Framework Winkler _______________________________________________ 42 4.4 Theoretical framework _____________________________________________ 43 5 RESEARCH RESULTS _______________________________________________ 46 5.1 Interview overview ________________________________________________ 46 5.2 Interview methodology _____________________________________________ 48 5.3 Timely aspect of project success______________________________________ 49 5.4 Identification of themes ____________________________________________ 50 5.5 Themes matched with corresponding communication quality attributes _______ 51 5.6 Influence of communication quality attributes on offshore business process outsourcing success ___________________________________________________ 62
5.6.1 Influence on flexibility __________________________________________ 62
5.6.2 Influence on profitability ________________________________________ 63
5.6.3 Influence on price _____________________________________________ 64
5.6.4 Influence on quality ____________________________________________ 64
6 CONCLUSIONS, RECOMMENDATIONS AND RESEARCH LIMITATIONS ___ 66
6.1 Conclusions ______________________________________________________ 66
6.2 Recommendations _________________________________________________ 69
7
6.3 Research limitations _______________________________________________ 71
REFERENCES ________________________________________________________ 74
APPENDIX 1 INTERVIEW______________________________________________ 76
APPENDIX 2 STATEMENTS INTERPRETATION DIFFERENCES ____________ 80
APPENDIX 3 SCREENSHOTS ONLINE INTERVIEW _______________________ 81
APPENDIX 4 INTERVIEW THEMES _____________________________________ 82
APPENDIX 5 INTERVIEW RESULTS OFFSHORE BPO SUCCESS ____________ 89
8
1 INTRODUCTION AND RESEARCH DESIGN
1.1 Introduction
Offshore business process outsourcing (BPO) is booming. Aron states in his article:
“Consulting firm Gartner estimates that cross-border business process outsourcing will grow into a US$ 178.5 billion business by 2005 from US$ 123.6 billion in 2001. Other estimates suggest that the offshore BPO industry will grow to over US$ 230 billion in 2015.” (Aron et al., 2005). Future prospects about offshore BPO growth are extremely positive. Also driven by the fact that the focus of offshore BPO moves from outsourcing basic support processes (e.g. call centers) to the outsourcing of more knowledge-intensive processes as well (Ghodeswar et al., 2008).
Western companies outsource a wide range of business processes to developing countries offshore (e.g. India, China and Russia), mainly in order to cut costs and create a sole focus on the companies’ core competences. India can be seen as the number one country specialized in offshore BPO. Some quotes out of the book ‘Speaking of India – bridging the communication gap when working with Indians” (Storti, 2007):
• “India currently has two-thirds of the global market in offshore IT services and half of that in BPO”
• “The productivity growth of India’s IT services is the highest in the world”
• “Global spending on Business Process Outsourcing (BPO) is projected to grow from $100 billion in 2000 to $175 billion in 2008”
• “In 2005 BPO and IT revenues combined accounted for 5 percent of India’s entire GDP, and they are expected to contribute 7 percent of GDP – and account for 17 percent of all growth – by 2010”
• “The average salary of an Indian IT engineer is $5,000; an industrial engineer makes $390 a month”
• “A graduate with a master’s degree in business makes $7,500 a year (or one tenth of the U.S. equivalent)”.
Although the advantages of outsourcing are numerous and huge savings can be made, there are also many negative connotations. For instances the ones found in a case study about outsourcing failures published on the Internet by a company called E-Business Strategies (ebstrategy.com):
• Cogent road, mortgage banking: Cogent concluded after a failed outsourcing project, that took twice as long and due to a language barrier, that companies should never outsource mission critical projects overseas.
• Conseco, call center outsourcing: difficulties with distant process management.
• Dell, corporate support call centers: corporate customers complained so much that Dell decided to stop using a technical support center in India to handle calls from its corporate customers.
• Healtheon, offshore software development: decided to move to nearshore
outsourcing to prevent a loss of focus.
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• Lehman, internal help desk support: the level of quality and service support from the Indian firm Wipro Spectramind was not adequate and therefore the outsourcing project was stopped.
• Life time fitness: the director of software systems proposed three major reasons of the outsourcing failure of life time fitness: inexperienced labor, overemphasis on processes and project performance metrics problems.
• Shop direct, call center: moving back from call center jobs from India to the United Kingdom because of an inadequate service level provided by the Bangalore call center.
As an example of a failed project analyzed in academic literature; Khalfan presents in his article an extensive study of a failed BPO project in Kuwait (Khalfan, 2003).
Poor quality of outsourced work, cultural differences and the (unjustified or justified) fear of increasing unemployment rates in the West are examples of causes for failed projects.
Outsourcing has had a major influence on the micro and macro economic landscape over time. Relationships between companies are changing and transformations of whole industries are observed. As a consequence of this and because of the booming nature of outsourcing and the negative connotations, academic research about this topic has grown extensively too. Fortunately, the literature study performed prior of this research proofed there is room for further research. Tafti emphasizes that further research in the area of outsourcing is required: “Available literature on outsourcing risks is mainly prescriptive and, while mostly based on expert opinions, not adequately backed by empirical studies.”
(Tafti, 2005). Proceeding on this statement, more specific directions for further research on outsourcing risks are presented: execute comprehensive case studies and specify results according to regions or countries. Lee suggests future research on creating a deeper understanding of initial trust and initial distrust, by focusing on finding their antecedents (Lee et al., 2008). Winkler proposes to apply more extensive case studies to proof the impact of cultural differences in offshore outsourcing and to take a closer look at regional and country cultural differences (Winkler et al., 2008). Besides this, another extension proposed is to perform research about cultural differences from a vendor’s perspective instead of a client’s perspective. Lee implies a longitudinal research instead of a snapshot in time to track the dynamic features of outsourcing partnership over time and a closer look at regional and country differences for future research (Lee et al., 1999).
And, like Winkler, a research extension is proposed to perform research on outsourcing success from a vendor’s perspective instead of a client’s perspective.
Quite a lot of research has been performed to identify factors that influence outsourcing
success. Mohr, Lee and Winkler have proposed three theoretical frameworks about
business process outsourcing success impacted by several attributes of the relationship
quality between the service receiver and the service vendor (Mohr et al., 1994, Lee et al.,
1999, Winkler et al., 2008). Also, the work of Grover is related to the effect of
partnership quality on outsourcing success (Grover et al., 1996).
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An important and interesting aspect influencing the quality of a relationship (and therefore an outsourced project’s success) between a service provider (vendor) and a service receiver (client) is communication quality. Like Winkler did for cultural factors influencing outsourcing success as a more in depth extension to Lee’s research, this research will propose a framework to test the influence of communication quality on offshore business process outsourcing success (Winkler et al., 2008, Lee et al., 1999). By deriving case studies from BPO company OKS Group in New Delhi, this research is focused on an Indian vendor’s perspective. Research on this topic has been conducted by Lee, but in a less specialized way than this research and from a Western point of view (Lee et al., 1999). The results of the research of Lee can be found in chapter 4 of this document.
1.2 Research objective and scope Objective
The objective of this research is to investigate what the impact of the communication quality between a service receiver (client) and a service provider (vendor) is on offshore business process outsourcing success. In order to improve the understanding of the Indian perspective in particular, this research will focus on the Indian vendor’s perspective.
Scope
The scope of this research is narrowed to offshore business process outsourcing projects executed in India in relation to Western clients. Western clients are for this research considered to be based in North-West Europe and the United States. Communication can be between an Indian vendor and a Western client or between an Indian vendor with Western clients of a client. For instance an Indian manager talking with a Western client or an Indian call center operator talking with Western clients of a client.
1.3 Research questions Main question:
What is the impact of communication quality problems between a service receiver (client) and a service provider (vendor) on offshore business process outsourcing success from an Indian vendor’s perspective?
Sub questions:
1. What is offshore business process outsourcing?
2. What are the attributes of communication quality between the service receiver and the service provider?
3. What are the success factors of offshore business process outsourcing?
4. What attributes of communication quality between the service receiver and the
service provider influence the success factors of business process outsourcing?
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1.4 Research methodology
In order to gain an empirical insight on the influence of communication quality on outsourcing success, a qualitative research method with a series of personal semi- structured interviews based on case studies will be used. The arguments why a qualitative research method is chosen are in line with several arguments given by Winkler (Winkler et al., 2008):
• Personal interviews enable to identify causal relationships and how the partnership between client and vendor evolved over time
• The amount of existing cross-cultural studies is limited in the context of offshore outsourcing.
Moreover, using personal interviews within a qualitative research is a good way to derive examples and background information about (mis)communication between clients and vendors leading to project failures or success. These examples and background information cannot be identified properly when relying solely on statistics in a quantitative research. Moreover, examples from the past in the interviews are also given.
This results in more information than only a one-time snapshot about the project’s communication problems and its success.
A brainstorm session in a meeting with the higher management of OKS Group is used to derive the attributes of offshore business process outsourcing success, in combination with attributes given in the available literature.
The following methods of information gathering are used:
• Desk research: using existing information (secondary information) from academic articles from renowned magazines and journals to create a theoretical perspective.
• Field research: collecting new information through interviews (primary
information). In order to focus on an Indian vendor’s perspective, the primary
information will be preferably derived from OKS Group India itself.
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The table below proposes what kinds of desk and field research are used according to the sub questions.
Topic sub question Desk research Field research 1 Offshore business process outsourcing Literature study,
statistical information 2 Attributes communication quality and
relationship quality
Literature study 3 Success factors offshore business process
outsourcing
Literature study Brainstorm session 4 Impact communication quality on
offshore business process outsourcing success
Literature study Semi-structured interviews
Table 1: Research methodology
1.5 Outline
Chapter 2 of this document presents an overview on offshore business process outsourcing, answering sub question 1. In chapter 3 and 4 are the attributes of communication quality and offshore business process outsourcing success enumerated and is the theoretical framework about communication quality and outsourcing success included, as an answer to sub question 2 and 3. The results of this research (sub question 4) are presented in chapter 5 of this document. Finally, the conclusions, recommendations and limitations of this research are included in chapter 6.
1.6 Boundary conditions
The following conditions apply to this research:
• The research has to be finished and sufficiently graded within a maximum of one year. The research started at the 21
stof April 2008.
• The final deliverables are:
- A report for OKS Group New Delhi
- A report for the University of Groningen that meets the standard graduation requirements.
• The final report only contains information that is allowed by OKS Group to be published.
• The research should deal with appropriate issues regarding the study MscBA Business & ICT.
• The supervisor of OKS Group for this research is Aarti Malhotra, CFO OKS Group.
• The supervisor of the University of Groningen for this research is prof. dr. E.W.
Berghout.
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2 OFFSHORE BUSINESS PROCESS OUTSOURCING
At the start of the industrial age in the beginning of the 20
thcentury most companies were vertically integrated organizations, meaning that the activities of these companies were performed in-house. With more specializing companies in the 1960s and 1970s, outsourcing in the area of financial and operational support became a more common practice (Lee et al., 1999). However, the term outsourcing as part of a business strategy was first introduced in the late 1980s. On the second of October 1989, a $250 million outsourcing deal was signed between Kodak and IBM, with Kodak handing over its data center operations to IBM. While not the first, this deal triggered a global outsourcing trend emerging in the booming outsourcing figures presented in the introduction of this document (Rao, 2004).
For India specific, in the early 1990s American Express and General Electrics pioneered BPO in India by setting up back office operation facilities in Gurgaon, a suburb / small city West of Delhi. Also British Airways, who started a BPO back office in 1995 in India, can be seen as a pioneer. From then on many companies followed and India can now be seen as the main center for business process outsourcing (PriceWaterhouseCoopers, 2005).
2.1 Definition
There is no need to define a new definition on offshore BPO, since there are numerous definitions formulated in the available literature.
Ghodeswar defines offshore outsourcing as “the act of transferring some of an organization’s recurring internal activities and decision rights to outside providers, as set forth in a contract. When the outsourcing facility is located outside the principal company’s country this is termed as offshoring.” (Ghodeswar et al., 2008). Ghodeswar extends this definition by stating there are two types of outsourcing: information technology outsourcing (ITO) and business process outsourcing (BPO). “ITO involves a third party who is contracted to manage a particular application including all related server networks and software upgrades. BPO generally features a third party who manages the entire business process such as accounting, procurement or HR.”.
Khalfan defines outsourcing in general and BPO more specific as “a decision taken by an organization to contract-out or sell some or all of the organization’s IT assets, people and / or activities to a third-party vendor, who, in return, provides and manages the services for a certain time and monetary fee. BPO involves management responsibility for a complete business process or activity.” (Khalfan, 2003).
Tafti gives a shorter definition: “Outsourcing is defined as procuring of services or
products from an outside supplier or manufacturer in order to cut costs.” (Tafti, 2005).
14
Wüllenweber defines BPO “as the delegation of one or more entire business processes to third party providers, including all related resources, such as information technology (IT) and human resources.” (Wüllenweber et al., 2008). Wüllenweber then moves on with telling that the provider takes over the complete business function and is free to choose the implementation with BPO and that the outsourcer receives only the process result. Finally, Wüllenweber defines a business process as “a set of logically related tasks performed to achieve a defined business outcome”.
To conclude with combining Ghodeswar’s definitions, offshore business process outsourcing is defined as the act of transferring some of an organization’s business processes to external providers located outside the principal company’s country, as set forth in a contract (Ghodeswar et al., 2008).
2.2 Trends
The outsourcing of work has become a widely known practice for companies all over the world from as early as the 1960s onwards. Over the years, several outsourcing trends have been developed. Grover presents a good overview of these trends in his article (Grover et al., 1996).
Firstly, Grover states that, besides smaller companies who wish to obtain services that are not available internally, also large companies with mature (IT) departments choose to outsource work nowadays (Grover et al., 1996).
The next trend described by Grover is that a greater range and depth of services are being outsourced. Besides secondary processes, even critical activities are outsourced now (Grover et al., 1996). This is supplemented by Storti who describes in the chapter “Not just IT” that outsourcing nowadays is more than the outsourcing of software alone (Storti, 2007). Theoretically, any job that can be performed by computer or telephone can be done in India. And jobs that are currently performed 200 miles from the customer could easily be done half a world away. The kind of outsourced work is moving further than just the labor-intensive, repetitive and low-end technological work from the past towards sophisticated and more complex (technological) solutions.
Thirdly, a trend towards functional outsourcing is observed by Grover (Grover et al., 1996). Many companies are choosing the functions they wish to outsource instead of outsourcing all functions.
Fourthly, service providers are accepting management responsibility and risk nowadays (Grover et al., 1996). Formerly, outsourcing vendors accepted no management responsibility.
Finally, the nature of the relationship with the service provider is changing according to
Grover (Grover et al., 1996). The original client-vendor relationship has evolved to a
more intense business relationship.
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2.3 Process
Ghodeswar presents a clear overview of the stages of a typical outsourcing process, from the pre-contract phase towards the post-contract phase (Ghodeswar et al., 2008).
In the pre-contract phase the decision to outsource work is made from a strategic point of view. This results in the defining of which work exactly needs to be outsourced (scope) and a negotiation stage in which normally a contract is signed by the client and the vendor. The contract phase consists of the implementation of work in which the project is launched, managed and finally completed. The contract phase can be seen as the operational phase in which the actual work is executed. At last the contract is completed and the post-contract phase starts, consisting of maintaining and supporting the client.
The figure below visualizes the outsourcing process.
Figure 1: Outsourcing process (Ghodeswar et al., 2008)
This research identifies communication quality problems between the client and the
outsourcing vendor that can develop in all stages and phases of the outsourcing process.
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2.4 Market segments
The BPO market can be broadly broken down into four main segments (RocSearch, 2005):
• Human resources: payroll / benefits processing, training and development, hiring / staffing, employee benefits, management.
• Procurement services.
• Sales, marketing and customer care (CRM): customer services, customer analysis, call centers, consumer information services.
• Finance and administration: document management, billings, claims processing, accounts receivable, accounts payable, general ledger, accounting services, shareholder services.
A list of tasks, besides “basic” IT outsourcing, currently being done offshore in India is provided by Storti (Storti, 2007). Examples of some of these typical tasks that are being outsourced nowadays are credit card fraud detection, market research, demand planning, customer service, drafting patent filings, cash flow projects, video-editing and captioning, graphic design, transcribing physician’s notes, processing airline reservations or even math and science tutoring services over the telephone.
2.5 Statistics
Statistics about the outsourcing industry are provided by two reports from PriceWaterhouseCoopers and RocSearch, both from 2005 (PriceWaterhouseCoopers, 2005, RocSearch, 2005). At firstly global statistics are presented and after that India specific statistics.
2.5.1 Global statistics
The global BPO market is divided into 5 industries in the report of
PriceWaterhouseCoopers: information technology, financial services, telecommunication,
consumer goods / services and manufacturing (PriceWaterhouseCoopers, 2005). As
illustrated by the figure on the next page, the majority of outsourced work (43 percent) is,
perhaps unsurprisingly, part of the information technology industry.
17 Figure 2: Global BPO market by industry (PriceWaterhouseCoopers, 2005)
According to the report of PriceWaterhouseCoopers, the largest amount of outsourced work on a global level originates from companies from the United States (59 percent) (PriceWaterhouseCoopers, 2005). Or, in other words, companies originated in the United States were contributing to 59% of the total BPO market in 2005. On an Indian specific level the United States is also the biggest consumer with 66 percent. Companies originated in Europe, with 27 percent, are also relatively big contributors to the global BPO market. On an Indian specific level European companies consume 20 percent of the Indian BPO market. The figure below shows the global BPO market by geography.
Figure 3: Global BPO market by geography (PriceWaterhouseCoopers, 2005)
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The report of PriceWaterhouseCoopers also provides the size of the global BPO market in the year 2000 and 2005 and estimated for the year 2008, as illustrated in the figure below (PriceWaterhouseCoopers, 2005). In the year 2000 the global BPO market’s size was 119 billion dollars and in 2005 the market’s size has grown to 234 billion dollars.
This is an increase of 97% in 5 years, clearly illustrating the booming nature of the outsourcing industry. For 2008 the size of the global BPO market is an estimated 310 billion dollars, an increase of 32% in relation to 2005.
Figure 4: Size of global BPO market (PriceWaterhouseCoopers, 2005)
According to the report of RocSearch, 7,1 percent of the US and Canadian companies
outsource call center work to Indian providers, while the majority of 50,7 percent
outsources call center work to US providers (RocSearch, 2005). For European, African
and Middle-East companies, 9,4 percent chooses to outsource call center work to Indian
providers, while 20,3% outsources work to providers originated in the United Kingdom
and Ireland. Overall it can be stated that India is quite a popular outsourcing country, but
the figures imply a big growth potential for India too. The majority of outsourced call
center work is not outsourced to India after all. The table on the next page shows the
figures provided by RocSearch.
19
Outsourcing call center service provider location
US and Canadian companies
European, African and Middle-East companies
Asia, Pacific and Australian companies
Canada 11.0% 2.3% 2.0%
India 7.1% 9.4% 10.8%
United Kingdom and Ireland
5.3% 20.3% 5.9%
United States 50.7% 8.6% 9.8%
Other countries in the world
25.9% 59.4% 71.5%
Table 2: Country preference for outsourcing call center services (RocSearch, 2005)
One of the major arguments for Western companies to outsource work to offshore countries is from a cost perspective; the salaries in for instance India are considerably lower than in the US (PriceWaterhouseCoopers, 2005). The table below shows that the difference in salary between the US and India is indeed quite big: more than 2,5 Indians can work for 1 US employee in terms of salary. To conclude, these figures as shown in the table below illustrate that considering the annual salaries paid, India is from a cost perspective a very interesting country to outsource work to.
Country Salary (US dollars per year)
Ireland 19,500
United States 19,000
Australia 17,000
Philippines 9,000
India 7,500
Table 3: Salary differences (PriceWaterhouseCoopers, 2005)
2.5.2 India specific statistics
Besides providing global statistics about the size of the BPO market, the report of
PriceWaterhouseCoopers also provides statistics about the size of the Indian BPO market
(PriceWaterhouseCoopers, 2005). In 2003 the Indian BPO market’s size was 2,8 billion
dollars. In 2004 this grew to 3,9 billion dollars and in 2005 the BPO market grew to 5,7
billion dollars. In 2005, the size of the Indian BPO market was with 5,7 billion dollar 2,4
percent of the global BPO market’s size of 234 billion dollar. With only 2,4 percent of
the global BPO market’s size, an enormous growth potential for Indian BPO companies
is implied.
20 Figure 5: Size of Indian BPO market (PriceWaterhouseCoopers, 2005)
According to the report of PriceWaterhouseCoopers the growth of the BPO market in India has declined from 59 percent in 2003 to a still very high percentage of 44 percent in 2005 (PriceWaterhouseCoopers, 2005). The figure below shows the growth of the Indian BPO market.
Figure 6: Growth of Indian BPO market (PriceWaterhouseCoopers, 2005)
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2.5.3 Conclusion
To conclude, the statistics provided by the 2005 reports of PriceWaterhouseCoopers and RocSearch illustrate the booming nature of the BPO market with a global growth rate of 97 percent from 2000 to 2005 and an growth rate on an India specific level of 59 percent in 2003 (PriceWaterhouseCoopers, 2005, RocSearch, 2005). Companies originated in the United States and in Europe are stated as the biggest consumers of the BPO market and information technology is the biggest industry in the outsourcing sector. The figures about the salary comparisons also show that from a cost perspective India is indeed a very good country to outsource work to when comparing Indian salaries with other countries. Moreover and perhaps surprisingly, the statistics imply still a big growth potential for the Indian BPO industry: the majority of outsourced call center work was in 2005 not outsourced to India but to other countries and the size of the Indian BPO market was only 2,4 percent of the global BPO market’s size in 2005. However, the growth figures of both the global and the Indian BPO market show a slow decrease in 2005 in comparison with previous years. But, for India the growth rate in 2005 of the BPO market was still 44 percent.
2.6 Reasons in favor of offshore outsourcing
There are quite a lot of reasons in favor of outsourcing mentioned in several academic articles. This paragraph presents a summary of this and finishes with a conclusion in which the reasons in favor of outsourcing are combined in a figure.
Increased focus on core competences
The core competence theory proposed by Gottschalk suggests that activities that directly relate to the core competences of an organization should be performed in-house (Gottschalk, 2005). The activities that do not directly relate to the core competences should be outsourced. The term core competence first gained recognition in 1990 when Hamel and Prahalad pointed out their influence on an organization’s competitiveness.
According to them a core competence is “an area of specialized expertise that is the result of harmonizing complex streams of technology and work activity” (Prahalad et al., 1990). In other words, a core competence is what an organization excels in and what makes an organization unique in creating its competitive advantage. By outsourcing non- core activities, an organization is able to increase focus on its core competences. This states that the core competence argument is a strategic consideration.
The core competence argument is also mentioned by Lee who talks about the strategic benefits of outsourcing referring to “the ability of a firm to focus on its core business by outsourcing routine activities.” (Lee et. al, 1999).
Finally, according to Ghodeswar, who describes four drivers why companies choose to
outsource work, a focus on the core business by outsourcing non-core processes can be
reached (Ghodeswar et al., 2008).
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Cost reduction
One of the most obvious arguments why companies choose to outsource is the cost reduction argument.
Gottschalk mentions in the neoclassical economic theory that companies choose to outsource for a believed economical advantage through economies of scale and scope (Gottschalk, 2005). According to the theory, companies will assess available possibilities in order to reach a cost advantage to maximize profits. The decision to outsource certain activities is in this line of reasoning based on a cost advantage argument: if the external marketplace is able to produce products or services at a lower price than the company itself.
The economic theory of Gottschalk is supplemented by Lee who describes the economic benefits of outsourcing (Lee et al., 1999). These benefits refer to “the ability of a firm to use expertise and economies of scale in human and technological resources of the service provider and to manage its cost structure through unambiguous contractual arrangements.” (Lee et. al, 1999).
As mentioned in the SWOT analysis conducted by Nair, a reason for the cost advantage is in the first place the difference in salaries between Western countries and typical outsourcing countries like India and China (Nair et al., 2004). This is supplemented by the statistic paragraph included in this chapter.
Tafti presents numbers about a decrease in development costs that are in line with the cost advantage argument: “The US IT industry is estimated to save up to $390 billion through offshore outsourcing of software development by 2010.” (Tafti, 2005).
Several other authors such as Gottschalk, Lee, Winkler, LaMonica and Ghodeswar who are part of the literature study that is conducted prior to this research have included the cost advantage argument in favor of outsourcing as well (Gottschalk 2005, Lee et al., 1999, Winkler et al., 2008, LaMonica, 1998 and Ghodeswar et al., 2008).
Higher resource, technical, service or product quality
Besides the cost advantage argument, companies can also choose to outsource work for qualitative reasoning.
The resource-based theory presented by Gottschalk is based on the fact that a company can choose to outsource work in order to obtain extra resources or higher skilled resources to which the company otherwise would not have access to (Gottschalk, 2005).
The emphasis of the resource-based theory is on a company’s limited available internal
resources. “The resource-based theory of the firm holds that, in order to generate
sustainable competitive advantage, a resource must provide economic value and must be
presently scarce, difficult to imitate, non-substitutable, and not readily obtainable in
factor markets.” (Gottschalk, 2005).
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The argument to obtain a higher of resources through the outsourcing provider is also mentioned by Tafti and Winkler and in the improvement drivers of Ghodeswar (Tafti, 2005, Winkler et al., 2008, Ghodeswar et al., 2008).
Lee refers with his technological benefit to “the ability of a firm to gain access to leading-edge IT and to avoid the risk of technological obsolescence that results from dynamic changes in IT.” (Lee et. al, 1999). In other words, a reason in favor of outsourcing can also be from a technological point of view. As Ghodeswar mentions, technologies that otherwise would not be available can be obtained through the outsourcing provider (Ghodeswar et al., 2008).
The service quality argument is mentioned by Winkler and in an organizational driver by Ghodeswar (Winkler et al., 2008, Ghodeswar et al., 2008). Resources can be redirected from non-core activities to greater focus in serving the customer, which increases the service quality. This argument is in line with the increase in focus on the core competences when outsourcing non-core activities.
Finally, Tafti mentions that a higher overall quality of the work can be reached through outsourcing (Tafti, 2005). This is supplemented by Ghodeswar who states that the outsourcing of work can improve the operational performance, quality, timeliness and productivity (Ghodeswar et al., 2008).
Increased flexibility
According to Winkler and Ghodeswar outsourcing can also lead to an increased flexibility for a company (Winkler et al., 2008, Ghodeswar et al., 2008). An organization that has chosen to outsource work can be more flexible to deal with changing business environments and to meet changing opportunities.
Predictable cost structure
LaMonica adds a reason in favor of outsourcing not mentioned by the other authors of the literature study: outsourcing work enables a company to work with a predictable cost structure (LaMonica, 1998).
Summary
The main reasons in favor of offshore outsourcing as mentioned in this paragraph are: an increased focus on core competences, cost reduction, a higher resource, technical, service or product quality, an increased flexibility and a predictable cost structure.
2.7 Reasons against offshore outsourcing
Although the advantages of outsourcing are numerous, there are also convincing reasons
why companies choose not to outsource. The literature provides quite a lot of arguments
against offshore outsourcing. This paragraph describes these arguments and concludes
with a summarizing figure.
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Difficulties in assessing costs of outsourcing projects (hidden costs)
According to the transaction cost theory, as proposed in the article written by Gottschalk, contracts are never 100 percent complete in order to fully reduce all transaction costs that rise at (re-)negotiating agreements (Gottschalk, 2005). The theory states that when transaction costs are high, outsourcing is deemed to be relatively inefficient. Transaction costs are relatively high when tasks are complex and uncertain or when there is a difficulty in measuring task performance for instance.
Tafti also mentions the transaction costs argument (Tafti, 2005). The hidden costs of outsourcing that are often neglected in outsourcing agreements are for example vendor search costs, transition costs or cost associated with rolling back failed outsourcing deals.
Difficult contracting process
Gottschalk’s contractual theory states that an adequate and comprehensive contract is required in order to reach outsourcing success (Gottschalk, 2005). Incomplete contracts leave room for opportunism and post performance problems. The contracting process is often a difficult process that is hard to standardize, and therefore could be a reason why companies choose not to outsource but rather keep their activities in-house.
The contractual theory relates to the partnership and alliance theory, also proposed by Gottschalk (Gottschalk, 2005). The partnership and alliance theory refers to reducing the risk of inadequate contracting by partnering with outsourcing vendors. The goal of partnering is to share mutually compatible goals and this is often a difficult job to realize.
Finally, Gottschalk’s agency theory also relates to the difficulties in the contracting process (Gottschalk, 2005). The agency theory identifies two problems in agency relationships. Firstly, a conflict between desires or goals between the agent (outsourcing vendor) and the client in combination with a difficulty to identify what the agent is actually doing is mentioned. An example of this is when the client’s goal is to reduce costs and the outsourcing vendor’s goal is to maximize profits. Secondly, there is the problem of risk sharing when a difference between the perceived risks of the agent (outsourcing vendor) and the client exists. This problem could persist when a client and vendor have a different attitude towards the usage of new technologies for instance. In this manner the agency theory reflects to difficulties in the contract process (and difficulties in effective relationship management).
Tafti mentions in his article several risk factors related to offshore outsourcing (Tafti, 2005). One of these risk factors is the communication problems that could rise between an outsourcing vendor and its clients caused by poor contracting.
Internal conflicts
Several internal conflicts in a company can rise when the decision to outsource certain work is assessed.
Gottschalk’s theory of firm boundaries states that outsourcing is one of the means in
which organizational boundaries can be adjusted (Gottschalk, 2005). Horizontal and
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vertical integration of an organization’s design relates to this theory. The theory implies that before making the decision to outsource certain activities, it is important to consider the firm’s boundaries as part of the corporate strategy.
Also, Gottschalk’s stakeholder theory refers to the relationship of a company and its stakeholders (Gottschalk, 2005). This relationship is affected by four principles: honoring agreements, avoid lying, respecting the autonomy of others and avoiding harm to others.
When a company neglects one or more of these principles this will eventually result in less satisfied stakeholders. Since there can be significant differences in expectations and goals regarding outsourcing, it is important that companies deal effectively with these differences. The reason why this theory is mentioned here is that internal conflicts of stakeholders about the decision to outsource or not can have a major effect on the success of the outsourced project and therefore can be a reason against outsourcing.
Another internal problem is mentioned by Tafti when talking about diminished technical returns (Tafti, 2005). An outsourcing agreement can lead to a loss of key employees who feel threatened by it and find a job elsewhere.
Tafti also deals with possible internal problems in the outsourcing decision process (Tafti, 2005). A lack of management support or an inadequate assessment of the own company’s capabilities and resources in comparison with the outsourcing vendor are examples.
Finally, Tafti mentions outsourcing scope difficulties as an internal problem in choosing which specific activities to outsource and which to keep in-house (Tafti, 2005). A balance has to be found between total outsourcing and selective outsourcing, which is often a difficult task for companies.
Privacy and security problems
“A woman in Pakistan recently struck fear among IT executives who outsource. She had obtained sensitive patient documents from the University of California, San Francisco, Medical Center through a medical transcription subcontractor that she worked for, and she threatened to post the files on the Internet unless she was paid more money.” (Collet, 2004). Difficulties with securing sensitive data is an important reason against outsourcing. At OKS Group for example, employees get frisked and scanned every time they enter or leave the company building as part of the corporate security policy, in fear that sensitive data processed by the company can be stolen.
The privacy and security argument is also mentioned by Tafti and Rao (Tafti, 2005, Rao,
2004). According to Rao, data privacy and security of intellectual property are two
important issues that must be taken into consideration before looking offshore. Data
privacy laws of the home country must be acknowledged and intellectual property laws
are often a gray area in developing countries like India.
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Dependency on external vendor / loss of control
Tafti mentions that outsourcing can lead to a dependency on an outsourcing vendor resulting in a loss of in-house expertise and in some cases an inability to roll-back an outsourcing deal by rebuilding an own department again (Tafti, 2005). The dependency on an external vendor and the corresponding loss of control is something companies should take into account before taking the decision to outsource.
Inadequate physical infrastructure
Nair states that an inadequate physical infrastructure can be a reason against outsourcing as well (Nair et al, 2004). Apart from the state of the art technology parks found in the major IT cities in India (Bangalore, Hyderabad, Mumbai, Chennai, Delhi, etc.), the physical infrastructure in the rest of India is inadequate according to Nair. For example:
OKS Group, situated outside a technology park in an industrial estate area in South- Delhi, is tackled by power cuts several times a day during the warm months just before the monsoon.
Rao also mentions the physical infrastructure problem: “When separated by thousands of miles, managing the global sourcing relationship depends heavily on the quality and reliability of a country’s telecommunications infrastructure. In the case of outsourced customer services, such as call centers, this becomes even more critical.” (Rao, 2004).
Cultural issues
“Patterns of thought and behavior that seem so natural and ingrained in employees of offshore vendors may appear quite alien and incomprehensible to the companies that hire them.” (Rao, 2004). Cultural differences can have a major impact on outsourcing success and are therefore important to take into account before deciding to outsource work or not.
Communication problems
Significant communication problems can arise because of language difficulties between the outsourcing vendor and its clients. “In any communications-intensive process, as many outsourcing projects are, the ability to speak a common language is critical.” (Rao, 2004).
Rao also mentions that time zone differences resulting in communication difficulties can be a reason not to outsource as well: Time zone differences are a natural outgrowth of large geographical distances separating collaborating teams. While such differences are often touted as being beneficial by many outsourcing vendors (allowing 24/7 project work), the “friction of distance” can impede effective collaboration. Scheduling meetings with vendors to assess project status can be difficult when there is no overlapping of work hours. Each time zone represents a potential opportunity loss for simultaneous collaborative work and communications.” (Rao, 2004).
Summary
The main reasons against offshore outsourcing as mentioned in this paragraph are:
difficulties in assessing costs of outsourcing projects (hidden costs), difficult contracting
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process, internal conflicts, privacy and security problems, dependency on external vendor / loss of control, inadequate physical infrastructure, cultural issues and communication problems.
Three arguments that are not mentioned in the literature are included in this research as
well. At first there is the quality problem that could rise because of a potential lack of
skills of the outsourcing vendor. Examples can be, besides an already mentioned
language problem, the overall expertise of an outsourcing vendor required for a specific
process or fast employee turnover times. Secondly, an argument against offshore
outsourcing could be a fear of unemployment increase in the client countries. Thirdly, a
company can choose not to outsource because it feels a social responsibility in which for
instance the perception exists that labor is exploited with extreme low wages or unfair
working times in the country to outsource to.
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3 COMMUNICATION QUALITY AND OUTSOURCING SUCCESS
This chapter presents the attributes of the communication quality between clients and outsourcing vendors. Definitions of communication quality are given too. Finally, the success factors of offshore business process outsourcing are presented. The definitions and attributes are given in this chapter as a preparation on the framework used in this research (presented in the next chapter). This framework presents the theoretical basis of the attributes of communication quality that influence offshore business process outsourcing success.
3.1 Definition communication quality
In order to perform research about communication quality, it is important to define the meaning of the term first. Definitions of communication and communication quality have been found online and in academic articles. These definitions will be combined for this research.
Communication is defined by encyclopedia Encarta as “the process of sharing ideas, information, and messages with others in a particular time and place. Communication includes writing and talking, as well as nonverbal communication (such as facial expressions, body language, or gestures), visual communication (the use of images or pictures, such as painting, photography, video, or film), and electronic communication (telephone calls, electronic mail, cable television, or satellite broadcasts).”
(msn.encarta.com). According to encyclopedia Britannica, communication is “the exchange of meanings between individuals through a common system of symbols”
(brittanica.com).
Shelby defines communication quality as “the discrepancy between receiver expectations about and perceptions of technical, functional, and aesthetic communication processes and outcomes (Shelby, 1994, p. 11).” (Shelby, 1998).
Lee defines communication quality as “the degree of accuracy, timeliness, adequacy and credibility of the communication process between partners.” (Lee et al., 1999).
In the communication process, a communication sender and a communication receiver
can use a communication medium (e.g. e-mail or telephone) to transmit information or
exchange meanings. In this research, the communication quality between the Indian
outsourcing vendor OKS Group and its Western clients will be measured. The
communication quality in the communication process is for this research defined as and
measured by the discrepancy between a communication receiver and a communication
sender in the communication process of exchanging meanings. Therefore,
communication quality requires certain conditions to be met in order to ensure the
communication receiver understands what the communication sender means. An obvious
example of such a condition is a common language between the sender and receiver.
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The diagram included below illustrates the communication process between a sender and a receiver. A sender sends a communication message through a certain medium and the message is received by the receiver. A common understanding between the sender and the receiver is influenced by the communication quality. However, it is not true that a proper communication quality is the only requirement for a common understanding. For example, cultural differences between a sender and receiver or the intelligence of the receiver can also influence a common understanding.
Common understanding Influenced by the
attributes of the communication quality
between sender and receiver Medium E-mail, telephone, etc.
Receiver Sender
Figure 7: Communication process
3.2 Attributes communication quality
This research is based on the hypothesis that the quality of communication between a client and an outsourcing vendor influences the overall success of outsourced projects.
This paragraph presents the attributes of the communication quality, primarily derived from the available literature. At first the attributes as presented in the literature and two others will be described. After this, the attributes are summarized in the conclusion of this paragraph.
Because of its mainly subjective nature, the measuring of the communication quality between a sender and a receiver is rather difficult. However, several academic articles give useful information about the attributes and the measuring of communication quality.
According to Lee, communication quality is “the degree of accuracy, timeliness,
adequacy and credibility of the communication process between partners” (Lee et al.,
1999). In Lee’s interviews, service receivers (clients) decided if the manner and methods
of communication between them and their service providers were: timely or untimely,
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