Central and Eastern Europe: the new offshore location for
Business Process Outsourcing?
„A multiple case- study analysis on the outsourcing behaviour of German and
American companies to Central and Eastern European countries‟
By
Yvonne Reinhold
MSc Thesis for International Business and Management
Supervisor: Mr. Ad Visscher
Central and Eastern Europe: the new offshore location for
Business Process Outsourcing?
„A multiple case- study analysis on the outsourcing behaviour of German and
American companies to Central and Eastern European countries‟
By
Yvonne Reinhold
University of Groningen
Faculty of Economics and Business
MSc Thesis IB&M
MSc International Business and Management
Supervisor: Mr. Ad Visscher
Co-assessor: Mr. Drs. Henk Ritsema
ABSTRACT
Title: Central and Eastern Europe: the new offshore location for Business Process Outsourcing?
Author: Yvonne Reinhold Date: August, 2010
Keywords: Business Process Outsourcing, Central and Eastern Europe, offshore locations, decision-making process, market economies, culture, geographic distance, German and American Multinationals
TABLE OF CONTENT
1. INTRODUCTION AND RESEARCH DESIGN ... 7
1.1 Introduction ... 7
1.2 Problem Discussion ... 8
1.3 Research objective and scope ... 9
1.4 Research question ... 10
1.5 Disposition ... 10
2. BUSINESS PROCESS OUTSOURCING ... 11
2.1 Porter’s value chain ... 11
2.2 Definition of BPO ... 13
2.3 Reasons in favour of outsourcing ... 14
2.4 Reasons against outsourcing ... 16
2.5 Reasons in favour/ against offshore outsourcing to CEE countries ... 17
3. LIBERAL VS. COORDINATED MARKET ECONOMIES ... 20
3.1 Introduction ... 20
3.2 Liberal and coordinated market economies by comparison ... 20
3.2.1. Coordinated market economies; the German case ... 22
3.2.2. Liberal market economies; the American case ... 24
4. CENTRAL AND EASTERN EUROPE AS ATTRACTIVE BPO LOCATION FOR WESTERN MNCs ... 29
4.1 Introduction ... 29
4.2 The Central and Eastern European offshore market ... 30
4.3 Why CEE as offshoring destination?! ... 32
5. CONCEPTUAL FRAMEWORK ... 40
5.1 Conceptual model ... 40
6. METHODOLOGY ... 42
6.1 Research Approach ... 42
6.3 Data Sampling... 44 6.3.1 Sample ... 44 6.4 Data collection ... 45 6.5 Data analysis ... 47 7. RESULTS ... 48 7.1 Introduction ... 48
7.2 The German case ... 48
7.2.1 Modell Technik Gmbh & Co Formenbau KG ... 49
7.2.2 Daimler AG ... 54
7.3 The American case ... 58
7.3.1 Honeywell ... 59
8. ANALYSIS ... 64
8.1 Outsourcing strategy ... 64
8.2 The influence of institutional and cultural factors on the outsourcing decision and location ... 66
8.3 American or German companies, which market economy benefits more from Business Process Outsourcing, liberal or coordinated? ... 71
8.4 Revised theory... 73
9. CONCLUSION ... 76
REFERENCES ... 80
APPENDICES ... 86
A: Factors that could influence the outsourcing decision of a company ... 86
B: Global Services Location Index ... 87
C: Location Attractiveness Index of outsourcing locations ... 88
D: Swot analysis of Central and Eastern European outsourcing locations ... 89
E: Germany as BPO location... 90
G: German BPO Market Segmentation 2009 ... 91
H: Growth of labour costs 2000-2008 of EU countries ... 92
I: German BPO market forecast ... 92
1. INTRODUCTION AND RESEARCH DESIGN
1.1 Introduction
In the last decades MNEs were forced to find new best practices to stay competitive in an extremely dynamic environment. Globalization, accelerated technological advancements and the entrance of new international players from emerging markets have increased competition creating a more turbulent environment where businesses compete (Kedia, Mukherjee, 2009). Consequently, many firms in all industries are restructuring their value chains. Outsourcing in general became one important tool to achieve this goal, because organizations need to be more flexible, leaner and more focused on their core competencies in order to stay competitive and responsive in hypercompetitive environments (Achrol, 1997, Jacobides, 2005, Schilling & Steensma, 2001, cited by Kedia, Mukherjee, 2009).
Organizations outsource operations for a number of reasons, the most prominent is cost cutting (Herath, 2009). Another common reason is a firm‟s desire to focus its resources on those activities that are considered its strengths, often referred to as core competencies. Organizations further support their outsourcing decisions by reasoning that vendors possess economies of scale that are unavailable to an individual firm (Tafti, 2005).
Consequently, following major economic reforms many low cost countries have opened their markets for Western offshoring clients.
However, offshoring benefits cannot be achieved if the associated risks are not properly identified and managed (Tafti, 2005). Offshoring activities can have a lot of disadvantages. Main problems are the barriers associated with physical, geographical, cultural or temporal dispersion that have been largely conquered by the ongoing technological revolution (Kedia, Mukherjee, 2009).
Therefore, nearshoring can be one possibility to better control offshore success, since nearshore describes the outsourcing to a country that is located near it (Gonzalez et al., 2006). According to Rao (2004) this proximity helps to mitigate certain problems typically associated with offshore outsourcing.
acquiring a growing interest as a nearshore destination particularly for German firms (Gonzalez et al., 2006).
Eastern Europe already gained world‟s attention almost two decades ago, when former Soviet satellite states were gaining their independence and began introducing democratic and market reforms (Callaghan, 2008). The importance of political and economic stability cannot be overstated. The ongoing process of European integration will doubtless further boost the attractiveness of this region. Even the mere prospect of extending the euro zone to include new member states has contributed to more stable exchange rates (Zimmermann et al.)
Finally, fundamental shifts brought by globalization and market integration will have complex influence on offshore outsourcing. Eastern and Central European countries that joined the EU in 2004 are likely to capture a bigger market share of the Business Process Outsourcing market. Especially companies from Western Europe may be interested in making use of the business process outsourcing facilities in this region. Reasons therefore are stability of institutions guaranteeing democracy, the rule of law, respect for human rights, and the promotion of free market economy (Kshetri, 2007). Moreover, cultural compatibility and similar ethical backgrounds cause for more conformity between the outsourcing vendor and its client (Kshetri, 2007).
Thus, there seems to be an influence of institutional and cultural factors that are affecting the offshore success of Western companies due to more congruence of home and host country. Therefore, nearshore destinations could be a wiser decision (Janhs et al., 2006).
1.2 Problem Discussion
Business Process outsourcing (BPO) has seen considerable growth during the past years. However, there are indications that the expected economic benefits are not always achieved. There are situations where a number of extra costs arise in offshore outsourcing that can offset the client‟s expected cost savings from lower labour costs in low-wage countries (Dibbern, 2008).
First, more research needs to be done to find different outsourcing alternatives to manage risks (Herath, 2009) since country and individual level factors must be taken into account when evaluating outsourcing options and managing offshore vendor relationships (Rao, 2004).
Second, the influence of different types of institutional country-of-origin factors of Western MNCs with regard to the offshore choice to Eastern and Central European countries has not been researched before. Research has been done upon institutional theory to develop an understanding of factors affecting the pattern of the global flow of offshore and Business Process Outsourcing (Kshetri, 2007).
Third, not only bearing in mind considerations related to cost savings, but also other pros and cons before making the offshore decision are necessary (Gonzalez et al., 2006). Regarding the types of “offshoring” models chosen by companies today, possibly further differentiated by factors such as nationality can provide more insights (Jahns et al., 2006).
For this reasons above, my thesis aims to explain and explore the influence of institutional and cultural factors when making an offshore decision for Western MNCs to countries in Eastern and Central Europe.
1.3 Research objective and scope
Objective
The objective of this research is to investigate how cultural and institutional factors of American and German MNCs, all located in Western Europe, influence the final business process offshore decision to Eastern and Central European countries.
Scope
1.4 Research question
Main question:
To what extent do cultural and institutional factors influence Business Process Outsourcing decisions of German and American MNCs located in Western Europe to Central and Eastern European countries?
Sub questions:
1. What is business process outsourcing (BPO)?
2. How do home market institutions (liberal vs. coordinated market economies) influence Business Process Outsourcing decisions to Central and Eastern European countries? 3. How do cultural (dis)similarities of Western MNCs influence Business Process
Outsourcing decisions to Central and Eastern European countries?
4. Is offshoring to Central and Eastern European countries attractive to MNCs located in Western Europe in terms of costs, institutions and cultural aspects?
1.5 Disposition
2. BUSINESS PROCESS OUTSOURCING
Outsourcing gained importance in the 1970s, when large and diverse corporations were considered to be underperforming and even became more important in the 1980s with respect to the global recession (Kakabadse, 2005). This caused a change in strategy and companies started focussing on carrying out fewer activities in their value chain. Consequently, the idea that companies needed to be vertically integrated and self sufficient turned into the belief that organizations should focus upon their core business and de-integrate by outsourcing non-core activities (Kakabadse, 2005, see also Figure 2.1). This is also in accordance with Prahalad and Hamel‟s (1990) theory about core competences of a corporation. According to these authors, competitiveness derives from an ability to build, at lower cost and more speedily than competitors core competencies in the long run. Moreover the real source of advantage is the management‟s ability to adapt to quickly changing opportunities (Prahalad and Hamel, 1990).
Figure 2.1: The evolution of Offshoring (Hewitt, 2004)
2.1 Porter’s value chain
According to Porter, value activities can be divided into two broad types, primary- and support activities. Primary activities are listed along the bottom of Figure 2.2 which are Inbound Logistics, Operations, Outbound Logistics, Marketing & Sales, and Service. Since Business Process Outsourcing (BPO) is a part of the support activities, primary activities will not be discussed more deeply. Support activities are procurement, which refers to the function of purchasing inputs used in the firm‟s value chain, such as raw materials, supplies and other consumable items as well as assets such as machinery, laboratory equipment, office equipment and buildings. Other support activities are technology development, Human Resource Management and Firm infrastructure. Firm infrastructure consists of a number of activities including general management, planning, finance, accounting, legal, government affairs, and quality management. Infrastructure, unlike other support activities, usually supports the entire chain and not individual activities.
Based on the examination of the support activities, an organization can decide which non-core processes can be outsourced to gain more advantages against its competitors.
Consequently, Business Process Outsourcing according to Porter is the outsourcing of support activities of a company‟s value chain, such as Human Resource Management, Technology Development, Firm Infrastructure and Procurement to be able to focus more on primary activities to gain more competitive advantage.
2.2 Definition of BPO
Herath et al. (2009) define offshore outsourcing as the delegation of non-core operations or jobs from internal production within a business to an external entity in a country other than the one where the product or service will be sold or consumed (Herath et al, 2009).
Khalfan (2003) defines outsourcing as a decision taken by an organization to contract-out or sell some or all of the organization‟s IT assets, people and/or other supply activities to a third party vendor, who in return, provides and manages the services for a certain time and monetary fee (Khalfan, 2003).
According to Tafti (2005) outsourcing is defined as procuring of services or products from an outside supplier or manufacturer in order to cut costs (Tafti, 2005). This is in accordance with the definition of Kumar et al. (2007) who state that outsourcing is the practice of using outside firms (domestic or foreign) to handle work normally performed within a company to decrease costs due to lower wages and salaries and the need to maintain competitive advantage (Kumar et al., 2007).
Kshetri (2007) specifies BPO as a long-term contracting of a firm‟s non-core business processes to an external service provider. In offshore BPO the firm and the client are located in different nations (Kshetri, 2007).
Ghodeswar (2008) gives a more comprehensive explanation of offshore outsourcing. He defines outsourcing as the act of transferring some of an organisation‟s recurring internal activities and decision rights to outside providers, as set forth in a contract. BPO generally features a third party who manages the entire business process such as accounting, procurement or Human Resources. When the outsourcing facility is located outside the principal company‟s country this is termed as offshoring (Ghodeswar et al. 2008).
Summary
This may lead to the decision to outsource some or all of the support activities of a company‟s value chain to a third party and to keep only primary activities in-house to gain more competitive advantage by focusing only on core competences.
Therefore, the process of outsourcing support activities to a third party can be defined as Business Process Outsourcing.
2.3 Reasons in favour of outsourcing
Focus on core competencies
The core competencies theory assumes that all activities a company performs that are not core competencies should be outsourced unless these non-core competencies are part of a process to protect competitive advantage. Only activities that are core competencies should be performed in-house (Gottschalk et al., 2005).
Kedia et al. (2009) argue that certain functions are generic activities among different industries and can be decoupled from their respective value chains. As a result, firms can focus on their core competencies to develop superior capabilities in order to outcompete other firms in the same industries, while externalizing the decoupled or disintegrated functions. Moreover, well-developed core competencies create more competitiveness for the firm and therefore can protect a company‟s market share (Kedia et al., 2009).
Ghodeswar et al. (2008) mention that firms fundamentally have three kinds of processes: core processes to gain strategic advantage, critical non-core processes, which are important but not competitive differentiators, and non-core non-critical processes that are necessary to run the business. Outsourcing non-core processes allows companies to invest more time and resources in their core activities that are crucial for a company‟s competitive advantage (Ghodeswar et al., 2008). This is also in accordance with Tafti (2005) who argues that one common reason for outsourcing is a firm‟s desire to focus on its core competencies (Tafti, 2005).
Location specific resource advantages
Dunning (1988) identified three categories of factors that impact the location decision made by firms: infrastructure, country risk factors and government policy (Kedia et al., 2009). Location specific advantages could be input cost advantages, such as low wages and the availability of low cost natural resources; labour productivity, transport costs and psychic distance from the market to the home base of the MNE (Kedia et al., 2009).
Cost reduction
Economic theory argues that companies decide to outsource to attain cost advantages from assumed economies of scope and scale. The motivation of the firm is driven by profit maximization. The decision to outsource depends on the possibility to save costs (Gottschalk et al., 2005).
Ghodeswar mentions that one of the key drivers for outsourcing are financial aspects, more specific to reduce costs, generate additional profits and reduce capital outlay (Ghodeswar et al., 2008). This is also in accordance with Tafti (2005) who states that the most prominent reason for outsourcing is cost cutting (Tafti, 2005).
Cost savings derive not only from the provider‟s economies of scale that are passed on to the customer through more economical prices but also and mainly from the difference in salaries between the staff in the country of the customer firm and the staff working for the firm which supplies the outsourced services (Gonzalez et al., 2006).
Increased flexibility
According to Kedia et al., (2009) disintegrated, leaner and more modular organizational forms allows for increased flexibility. Organizational flexibility refers to a firm‟s ability to perform new things quickly. Furthermore, an increased level of outsourcing delivers more flexibility which helps firms to respond quickly to unanticipated threats and opportunities of the market and therefore can better meet external demand (Kedia et al., 2009).
Knowledge arbitrage
2.4 Reasons against outsourcing
Contracting issues
The contract is one of the most important components when decide to offshore. The contract describes the services the vendor provides and discusses financial and legal issues. Therefore, it must be ensured that every aspect of the outsourcing process will come up in the contract (Tafti, 2005). However, communication problems between vendor and client are most of the time reason for poor contracting.
In partnership and alliance theory, companies pool their resources to achieve mutually compatible goals they could not achieve easily alone. At the same time, a partnership can reduce the risk of inadequate contractual conditions (Gottschalk et al., 2005).
Agency theory can be another example of contracting problems. The agency problem arises when the desires or goals of the principal and agent conflict and it is difficult or expensive for the principal to verify what the agent is actually doing (Gottschalk et al., 2005). There may be major problems for the principal in choosing a suitable agent and monitoring the agent‟s work. Another problem that can occur are differences in interests. The client might to reduce costs, while the vendor organization wants to maximize profits (Gottschalk et al., 2005).
Internal problems
A problem that can occur when a company decides to outsource is that employees feel not comfortable with the step their company made and see their jobs threatened, even if they are not directly affected from the outsourcing agreement. This can lead to a loss of key employees, because they may re-orientate and seek employment elsewhere (Tafti, 2005).
Another conflict outsourcing companies might deal with is the loss of access to new technologies. There is no guarantee that the vendor will update his used technologies to new and more modern standard. Even if the vendor stays current with the newest technology there is often nothing in an outsourcing contract that binds the vendor to provide this technology to all its customers as long as he fulfils his contracting agreement (Tafti, 2005).
to stakeholders for moral reasons and therefore have to keep in mind the different groups of interest to make outsourcing decisions or processes successful (Gottschalk et al., 2005).
Hidden costs
When outsourcing agreements are made, the outsourcing part needs to make sure that all aspects of existing or arising costs are covered. Otherwise, the company face the risk of hidden costs by the vendor (Tafti, 2005).
But in line with Gottschalk et al. (2005) complete contracting is often impossible through which transactions costs arise. Therefore, re-negotiation agreements are necessary from time to time to reduce these costs completely. Moreover, when transactions costs are high due to higher uncertainty or complexity, outsourcing is seen as inefficient compared with internal, hierarchical administration (Gottschalk et al., 2005).
Due to the need to know not only the providers, but also the legislation, the labour culture and, the country where those providers are located, increases the expenses related to trips, lawyers and advisors, who can help to make better decisions in this field (Gonzalez et al., 2006).
Another risk factor mentioned by Gonzalez et al. (2006) are the potential fluctuations affecting the exchange rates of currencies, since prices may vary as a result of fluctuations on the agreed currency.
Loss of expertise
When a company decides to outsource parts of its support activities to a third party, there will originate a loss of expertise, because there is no longer the need to employ all employees of the outsourced activity. This can have a long-term impact on the company (Tafti, 2005).
2.5 Reasons in favour/ against offshore outsourcing to CEE countries
Privacy and security problems
corruption and incompetence of those who interpret and enforce the law. Finally, there is a significant diversity and inconsistency of foreign laws and regulations (Tafti, 2005).
However, Central and Eastern Europe might be an opportunity for Western companies, because most of these countries already joined the EU. The European Union is considered to have stricter privacy laws than in the U.S. (Kshetri, 2007).
Cultural differences and language barriers
Cultural differences can be decisive for the outcomes of outsourcing projects. If not being aware of different patterns and behaviours outsourcing projects are more likely to fail. As Rao (2004) argues; patterns of thought and behaviour 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). However, Central and Eastern European countries have a better understanding of Western European culture than their Asian counterparts (Kshetri, 2007).
Another issue many companies have to deal with when deciding to outsource to another destination is the language barrier. The ability to speak a common language is crucial, but nevertheless not always the case and make outsourcing projects more difficult and easier to fail (Rao, 2004). An outsourcing relationship can be conceptualized as an extension of the client‟s company culture. This pressure requires the outsourcing firm to “walk and talk the same cultural language” as the client firm (Kshetri, 2007). Eastern Europe as a whole shows cultural similarities, attractive costs, a good knowledge of languages, solid technical skills and minimum regulatory problems for Western European enterprises (Gonzalez et al., 2006).
Communication problems, time zone differences and the friction of distance
The strategic nature of many outsourcing processes requires constant communication. But time zone differences make communication more difficult and complex due to no overlapping of working hours and long distances. The “friction of distance” can impede effective collaboration (Rao, 2004). Each time zone represents a potential opportunity loss for simultaneous collaborative work and communications. That‟s why some organizations have been looking for outsourcing providers closer to their home country.
Summary
more on core business and therefore the goal can be to build long term relationships with a vendor partner.
3. LIBERAL VS. COORDINATED MARKET ECONOMIES
3.1 Introduction
This chapter discusses the main characteristics of liberal and coordinated market economies and subsequently explains the institutional and cultural systems of Germany and the US more in depth.
Liberal and coordinated market economies are based on different national traditions and cultural norms and values. Therefore, these economies differ mainly in their financial system or market for corporate governance, their internal structure of firms, industrial relations and their educational system. These differences in their systems also demand different corporate cultures. Thus, American business culture differs a lot from the German one. Later on in this research, different structures of various market economies and their dissimilarities in corporate culture shall explain differences in Business Process Outsourcing decisions for German and American companies.
3.2 Liberal and coordinated market economies by comparison
In liberal market economies, firms coordinate their activities primarily via hierarchies and competitive market arrangements, whereas in coordinated market economies, firms depend more heavily on non-market relationships to coordinate endeavours with other actors and to construct their core competence (Hall and Soskice, 2001).
In liberal market economies, the equilibrium outcomes of firm behaviour are usually given by demand and supply conditions in competitive markets, while in coordinated market economies the equilibria are more often the result of strategic interaction among firms and other actors. Another important part of coordinated market economies are powerful business or employer associations, strong trade unions, extensive networks of cross- shareholding, and legal or regulatory systems designed to facilitate information sharing and collaboration (Hall and Soskice, 2001).
independent of current profitability. Moreover, to lay off employees is more difficult, since the economy is in favour of long-term employment (Hall and Soskice, 2001).
Consequently, long-term employment is more feasible where the financial system provides capital on terms that are not sensitive to current profitability. Conversely, fluid labour markets may be more effective at sustaining employment in the presence of financial markets that transfer resources readily among endeavours thereby maintaining a demand for labour (Hall and Soskice, 2001).
The following figure supports this argumentation. A highly developed stock market indicates greater reliance on market modes of coordination in the financial sphere, and high levels of employment protection tend to reflect higher levels of non-market coordination in the sphere of industrial relations.
Figure 3.1: Stock market capitalization (Hall & Soskice, 2001)
3.2.1. Coordinated market economies; the German case
“… the stakeholder theory demands that interests of all stakeholders be considered even if it reduces company profitability. In other words, under the shareholder theory, non shareholders can be viewed as “means” to the “ends” of profitability; under the stakeholder theory, the interests of many non-shareholders are also viewed as “ends”.” (Smith, 2003 cited by Stadler, et al., 2006).
In coordinated market economies, the company has an independent will and is not founded on the concept of market capitalism. What is good for the company might not be good for the shareholders (Cernat, 2004).
The financial system or market for corporate governance in coordinated market economies typically provides companies with access to finance that is not entirely dependent on publicly available financial data or current returns. Access to this kind of capital makes it possible for firms to retain a skilled workforce through economic downturns and to invest in projects generating returns only in the long run. Therefore, investors are provided with the necessary inside information about the project of the company (Hall and Soskice, 2001) by the presence of dense networks linking the managers and technical personnel inside a company to their counterparts in other firms on terms that provide for the sharing of reliable information about the progress of the firm. Another key factor next to reliability is reputation. CMEs usually have extensive systems for what might be termed „network reputational monitoring‟ (Vitols et al. 1997, cited by Hall and Soskice, 2001).
The coordinated market economy is based on the prominent role of banks and on extensive cross-ownership links in corporate finance and control. It is common for banks in this model to own significant proportions of shares in their portfolios as a way of controlling their major clients‟ economic activities (Cernat, L., 2004).
according to different procedures across Europe, but in many cases employees have the right to appoint or recommend several members to the supervisory board (Cernat, 2004).
Top managers in CMEs rarely have the possibilities for unilateral actions. Major decisions need to be agreed on by supervisory boards, which include employee representatives as well as major shareholders, supplier and customers and managers in similar positions. This decision-making process ensures the sharing of information and the continuing of the reputation of a company (Hall and Soskice, 2001).
The supervisory board has been designed to control the management board not only on behalf of the shareholders, but also to protect public interest. The supervisory board has the right to approve certain categories of management decisions with far reaching consequences (Braendle, U., Noll, J., 2007). Figure 3.2 shows the decision making process in coordinated market economies.
Figure 3.2: Corporate governance in coordinated market economies (Cernat, 2004)
Long-term employment contracts and the premium that firm structure places on a manager‟s ability to secure consensus for his project lead managers to focus on the maintenance of their reputations (Hall and Soskice, 2001).
Education and training systems are an important element of coordinated market economies since the use of highly skilled workers requires a system that provides workers with the necessary skills (Hall and Soskice, 2001).
Long-term contracts are quite usual in coordinated market economies. That‟s why companies cannot rely on the movement of scientific or engineering personnel across companies as it is the case in liberal market economies. Therefore, coordinated market economies make use of inter-company relations to facilitate the diffusion of technology across companies (Hall and Soskice, 2001).
The German management system can be characterized as organized competition, long-term orientation, a stakeholder orientation, high investment, stable capital structures, a sense of community and loyalty to the firm (Calori, 1994). Moreover, the German organization is more specialized by function, the operational units have less autonomy, decisions are made by an executive committee, and coordination is achieved through numerous headquarters staff and planning (Calori, 1994).
3.2.2. Liberal market economies; the American case
“A modern corporation has no social responsibility to society only to its shareholders who are the owners of the business. There is one and only one social responsibility of business – to use its resources to engage in activities designed to increase its profits as long as it stays within the rule of the game, which is to say, engages in open and free competition, without deception or fraud.” (Friedman, 1970, cited by Nwanji, T., et. al., 2007)
This system is based on the concept of market capitalism and therefore founded on the belief that self-interest and decentralized markets can function in a self regulating, balanced manner. These institutional settings are especially based on and strengthen profit orientation, short-term perspectives and individualism (Cernat, 2004).
information to value the company. LMEs lack a corporate network to provide investors with inside information about the company (Hall and Soskice, 2001).
The maximization of shareholder value is the primary goal of a company (Stadler et al., 2006). Thus the key goal of corporate governance in a liberal market economy is to ensure a maximum return to investors. Control is exercised through board membership and legal rights of appointment and dismissal (Lane, 2003). Share ownership is widely dispersed and shareholder influence on management is weak (Cernat, 2004).
Corporate governance in liberal market economies is about two things – accountability and communication – accountability is about how those entrusted with the day-to- day management of company's affairs are held to account to shareholders and other providers of finance. The second aspect is how the company communicates the accountability to the wider world: to shareholders: to potential investors: to employees; to regulators: and to other groups with a legitimate interest in its affairs (Pricewaterhousecoopers 2003 cited by Nwanji, T., et. al., 2007).
The internal structure differs a lot from that in coordinated market economies. Boards of directors are seen as a linking part between the different interest groups within a company to guarantee “good governance” (Braendle, Noll, 2007).
The one-tier board system (with only an administrative organ) has the advantage that the common responsibility of its members for management and control provides much more flexibility for board organisation, and therefore a faster decision making. But the system lacks independence of control because of board members too often being dependent on the CEO (Braendle, Noll, 2007).
Figure 3.3: Decision-making process in liberal market economies (Cernat, 2004)
Industrial relations in liberal market economies generally rely heavily on the market relationship between individual worker and employer to organize relations with their labour force. Top management has unilateral control over the firm, including the right to hire and fire. There are no works councils or other bodies that represent the interests of employees. Moreover, trade unions are less powerful than in CMEs (Hall and Soskice, 2001).
The education and training systems of liberal market economies are generally complementary to these highly fluid labour markets. Employees are provided with more general skills instead of specific skills, because companies are afraid that other companies will hire away their highly educated employees. Consequently, general skills that can be used in many different firms are one element for career success (Hall and Soskice, 2001).
Inter-company relations in LMEs are based on standard market relationships and enforceable contracts. Extensive reputation building, as in CMEs, is not the case in LMEs due to the lack of dense business networks. Technology transfer takes place by the movement of employees from one company to another (Hall and Soskice, 2001).
Finally, to give a more comprehensive overview, table 3.4 shows the main differences between LMEs and CMEs.
Liberal market economies Coordinated market economies
Emphasis on Profitability over responsibility Responsibility over profitability
Decision-making process Centralized Decentralized
Orientation Short-term Long-term
Objective Maximization of profit Long-term welfare of employees/ survival of
company
Performance Measured on productivity Social performance + productivity
Corporate governance Shareholder/ One-tier board Stakeholder/ Two-tier board
Social responsibility Individual, not organizational matter
Individual and organizational Table 3.4: Main differences of LMEs and CMEs
Summary
In general, in LMEs corporate structures concentrate authority in top management. There are no employee representatives or other institutions who can influence the decision making process of top managers. This lack of control makes it possible for companies to release labour when facing more pressures from financial markets. There is a fully shareholder orientation that concentrates on the maximization of profit. Moreover, this short-term focus makes following a new strategy to take advantage of the shifting market opportunities easier. In CMEs, on the other hand, access to finance and technology often depends on the attractiveness of a company and thus on its reputation. The German system is characterized by strong links between banks and industry. Furthermore, decision-making processes are not only influenced by shareholders, but also by its stakeholders. The system of co-determination with workers‟ representatives on the board cause for a certain influence on the decision-making process of a firm. Trade unions are an important institution in CMEs, since most of the workers representatives are also members of the trade unions, who are negotiating for better working circumstances for their employees. Since highly skilled employees are especially important in the German system, in contrast to the American system, there is a special focus on education and training. Moreover, since the priority in CMEs lies at the long-term orientation with supplier and client relationships over short-long-term financial objectives, the emphasis in CMEs is more on responsibility over profitability.
coordinate their endeavours using the market structures that less developed nations usually provide, while CMEs often pursue corporate strategies that rely on high skills and institutional infrastructure that is difficult to secure elsewhere (Hall and Soskice, 2001).
Hence, based on the argumentation above, LMEs are more able to adapt to changing environments than CMEs, since CMEs rely heavily on highly skilled employees that are hard to find elsewhere, while LMEs focus more on employees that are able to fulfil more than one task, thus who are more generalists than specialists. Moreover, in CMEs not only the firm itself decides about changes in strategy, but there are more institutions involved, due to higher social responsibility of a firm, which is not the case in LMEs. Due to lack of social responsibility to employees and the society, American companies have more freedom and possibilities to faster decision making processes, when it comes to changes in the environment, since they only have to justify for their shareholders. Therefore, the following hypotheses can be made:
Hypothesis 1: American firms are more willing to outsource than German firms, since the market structure of LMEs provides more opportunities for fast decision making and flexible changes in firm structure.
Hypothesis 2: German firms are more reluctant to outsource than American firms, since they have more social responsibility against its employees and their society.
Hypothesis 3: German companies take competitive advantage from highly skilled employees that are harder to find across borders, which negatively influences the outsourcing behaviour, while American firms make use of more generalist skills that can be found also in less developed nations, which positively influences the outsourcing behaviour.
4. CENTRAL AND EASTERN EUROPE AS ATTRACTIVE BPO LOCATION FOR WESTERN MNCs
4.1 Introduction
In the past years, Central and Eastern European countries emerged as one of the premier global hubs for offshoring, supplying primarily Western European clients (A.T. Kearney, 2009).
Many Western companies have been placing less emphasis on cost savings and more on ensuring that outsourced functions fall into line with their business model (Savita Iyer, 2007). One of the main reasons why Western European and U.S. firms are focussing more on Eastern European Countries as offshore location is the concentration on overall performance.
European companies have compelling near shore options, enabling them to manage the outsourcing operation easier than offshoring. Nearshoring gives companies the possibility to avoid many cultural and communication barriers. It‟s easier to manage an outsourcing operation in person than it is over the phone. Another advantage of Central and Eastern European countries are not only cultural advantages, but also economical factors that are of importance. Low prices, diversified population, and technically trained college students attract Western companies to Eastern and Central Europe (The bitter taste of offshoring, 2006).
According to Ang and Ipken (2008) nearshore services align overseas delivery centres with the customer‟s primary time zones and, hence, the benefits of proximity in travel time and same working day communications. Moreover, nearshoring also leverages better understanding of the business and legal environments and greater language and cultural compatibility (Ang, Inkpen, 2008). Central and Eastern European countries such as Hungary, Poland, Slovakia, Czech Republic, and Russia are the new emerging nearshore destinations.
offshoring to geographical far destinations can cause problems with regard to cultural reasons and differences in common interests.
4.2 The Central and Eastern European offshore market
Eastern Europe lags far behind as the most popular offshore location for IT and Business Process Outsourcing. The region has less than 1 percent worldwide market share. More prominent are still Asian offshore locations, but this might change in the future, since the demand for offshoring among Western companies rose by half from 2004 to 2006 (McKinsey, 2006). Consequently, there is still potential that Eastern Europe emerges as a favourite offshore location.
Figure 4.1.: Global market for offshored services, 2003 (McKinsey, 2006)
Figure 4.2: IT and BPO industry (neoIT, June 2004)
More than 20 percent of all offshore projects of European firms in recent years have gone to Central and Eastern Europe. By the end of 2006, there were a total number of 183 BPO operations across Central and Eastern European countries. Poland has been the leading destination, followed by the Czech Republic. Poland, the Czech Republic and Hungary account for 77% of the total Business Process Outsourcing into CEE countries (DTZ, 2007). Romania is emerging as a BPO destination. In 2006, the country attracted over 30% of the total BPO in 2006 (DTZ, 2007).
4.3 Why CEE as offshoring destination?!
Offshoring in this region offers three primary advantages: low wages in comparison to Western European countries and the US, a relatively low risk profile for key factors such as reliable infrastructure, and cultural and geographical proximity to Western Europe (McKinsey, 2006). The new members of the European Union, above all Slovakia, Bulgaria and Romania can offer average labour cost savings of 40 to 60 percent over costs in Western Europe, while non-EU countries can offer cost advantages of 60 to 80 percent (McKinsey, 2006).
Main reasons why Central and Eastern European countries are used as offshoring location is its proximity to Western European companies. Central and Eastern European countries have close geographical and cultural connection with its Western European neighbours and their markets. Nearshore locations are seen as a complementary and alternative sourcing option to offshore locations in for example Asia.
Reasons why Western companies decide to choose nearshore destinations as favourite offshore location are the lower costs for communication between the client and the vendor of the service. Reasons why costs decrease are personal contact, common language and cultural understanding (DB Research, 2006). Nevertheless, nearshore destinations cannot offer the same cost advantage that is provided by offshore locations (see also Figure 4.4)
Most Eastern European countries have achieved impressive development since the fall of the Soviet Union. Macroeconomic stabilisation, robust growth and a rising standard of living are the results of a largely successful transition process (Deutsche Bank Research, 2006).
Figure 4.5: GDP forecast for new EU members (DB Research, 2006)
Nowadays, most of the Central and Eastern European countries are members of the European Union (neoIT, April 2004) and have implemented European law to secure a stable and predictable political climate that makes investments more secure (A.T. Kearney, 2005). Successful BPO now requires more than just low costs (see also Figure 4.6). The CEE region offers Western companies the availability of skills, quality education structures, healthy work cultures, flexible labour markets, and the availability of suitable modern office accommodation. However, future paths of BPO in these countries depend on the development of each of the above elements (DTZ, 2007).
Central and Eastern European countries do not offer the same labour cost savings than offshore destinations in Asia. But still labour costs are considerable lower than in Western Europe, even if there is a significant gap between CEE and India and China for example (see Figure 4.7). However, low labour costs have been the key driver for the BPO invasion of CEE and will remain, at least short-term. Wages in Bulgaria and Romania are as low as a fifth of those in Germany. But due to economic growth rates in CEE countries, the difference in labour wages has been narrowed the following years. The costs in recent years have risen considerably (see Figure 4.8). Between 1996 and 2004 labour costs in the new EU member states rose by an average of 7.7 percent each year (DB Research, 2006).
This wage inflation will decrease the competitiveness of the CEE region as BPO destination, especially in city hotspots as Krakow, Wroclaw and Prague. Unemployment rates are less than 3 percent in Prague, for example (DTZ, 2007). Call centres are moving to cheaper provincial university towns were unemployment is higher and a market of flexible students exists.
Figure 4.8: Wages in CEE countries (DB Research, 2006)
In CEE countries, the German language is quite widespread under the population. Almost 40 percent of schoolchildren in the new EU member states learn German, which makes the region especially interesting for German companies. The fact that German is taught at school does not mean that this language is spoken fluently, but as a matter of fact, there is a basis to build upon and at least a general understanding of the language.
Figure 4.9: Percentage of CEE schoolchildren who learn German (DB Research, 2006)
Figure 4.10: Percentage of cultural and language obstacles (DB Research, 2006)
Misinterpretation in communication is a major aspect that gives rise to additional costs in offshoring processes. The possibility of wrong interpretations of implicit language by signals and expectations depends predominantly on the cultural backgrounds between the sender and the receiver of the message.
Furthermore, looking at the attractiveness index calculated by A.T. Kearny in 2004 and 2009 of Central and Eastern European countries, a drastically change can be stated. In 2004, especially Eastern European countries where extremely popular as offshoring location, but there were evident changes in the past. As Table 4.11 shows, the Czech Republic ranked 4th in 2004 as one of the most popular offshoring location, but looking at the table 4.12 the country only ranks 32nd in 2009 as one of the most attractive locations. This is also the case for Poland, the country ranked 10th in 2004 and in 2009 only 38th as one of the most attractive locations. Hungary experienced similar falls as the other two Eastern European countries.
Country rank Financial/costs structure Business environment People skills & availability Total score 1. India 3.72 1.31 2.09 7.12 2. China 3.32 0.93 1.36 5.61 3. Malaysia 3.09 1.77 0.73 5.59 4. Czech Republic 2.64 2.02 0.92 5.58 5. Singapore 1.47 2.63 1.36 5.46 10. Poland 2.88 1.57 0.88 5.33 11. Hungary 2.71 1.68 0.90 5.29 21. Russia 3.25 0.51 0.89 4.65
Country rank Financial/costs structure Business environment People skills & availability Total score 1. India 3.13 2.48 1.30 6.91 2. China 2.59 2.33 1.37 6.29 3. Malaysia 2.76 1.24 1.97 5.98 13. Bulgaria 2.83 0.89 1.62 5.34 18. Estonia 2.06 0.93 2.20 5.19 19. Romania 2.63 0.91 1.58 5.12 32. Czech Republic 1.74 1.14 2.07 4.94 33. Russia 2.39 1.45 1.08 4.92 37. Hungary 1.95 1.01 1.92 4.88 38. Poland 1.82 1.22 1.73 4.77 40. Slovakia 2.05 0.94 1.75 4.73 42. Ukraine 2.63 0.97 0.99 4.58
Table 4.12: Most attractive outsourcing locations in 2009 (A.T. Kearney, 2009)
The winners in Central and Eastern Europe are Bulgaria and Romania, ranked on the 17th and 19th. Both countries are also members of the EU, but with a lower cost profile than most other member states (A.T. Kearney, 2009). (For further information see also Appendices B and C)
Country profile of some CEE countries
The Czech Republic
The Czech Republic remains one of the most attractive offshore destinations in the region. It offers competitive compensation costs within the IT sector, a highly skilled labour force and reliable infrastructure. High property prices in Prague are encouraging a shift to less expensive cities such as Brno or Plzen. Honeywell has started operations in the Czech Technology Park in Brno.
Hungary
Hungary‟s proximity to European markets has benefits for the country. Moreover, the country can provide high education levels and language skills, as well as political and economical stability.
Poland
support large-scale operations, more so than many other countries in this region. (More company profiles can be seen in Appendix D)
Summary
The Central and Eastern European region has acquired more importance as offshore location over the last few years. Reasons for this were low wages compared to Western European countries, but this advantage decreased the last years, since wages are catching up, however they did not reached Western European standards, until now. The main cause for the wage increase is the reached economic and political stability of Central and Eastern European countries. Most of the countries are members of the European Union since 2004 or joined in the last two years. When looking only at the cost factor, Bulgaria and Romania are more profitable than Poland, Hungary and the Czech Republic that belong to the countries with the highest labour costs in this region. Despite of it all, Central and Eastern Europe never were as attractive as Asian offshore locations with regard to their labour costs. India scored rank 1 in 2004 as well as in 2009 with regard to their cost structure, which is far less than in Central and Eastern Europe.
On the other hand, Central and Eastern Europe can provide companies with highly skilled employees, which is not the case for most Asian countries, especially India and China. This makes Central and Eastern Europe especially important for Western companies that demand for skilled employees. Moreover, this region provides better language skills than Asian countries. Due to their proximity to Western Europe, many employees can speak more than one foreign language. Next to English, German is the most available language in this area. Other advantages of this region are short travel times to the offshore location, but also a better cultural understanding between Western and Eastern Europe. Also the fact, that there are many different cultures and nations settled down on one continent has caused for more cultural understanding.
Hypothesis 5: Central and Eastern Europe will lose its importance as offshore location, since wages come closer to Western European standards and still less cost savings can be realized for Western companies
Hypothesis 6: German firms benefit more from cultural and language similarities than American firms when outsourcing to Central and Eastern Europe.
5. CONCEPTUAL FRAMEWORK
To recapitulate the most important concepts from the theoretical framework, a conceptual model is depicted with its related linkages. Additionally, the conceptual model paves the way to answer research question of this thesis.
5.1 Conceptual model
As previously mentioned, every company is influenced by the national system of its home country. Therefore, decision making processes of companies can differ extremely across countries. Reasons therefore are different cultural and institutional backgrounds. American and German economies do not only differ a lot on a cultural basis, since Americans are known for their extreme individualistic orientation, while the German culture is characterized by a more collective orientation and team spirit of the work force, but there also significant differences in their home market economies.
American companies are influenced by its liberal market economy, which means that firms coordinate their activities primarily via hierarchies and competitive market arrangements (Hall & Soskice, 2001). Moreover, the stability of a firm depends on demand and supply conditions in competitive markets.
In Germany, companies rely more heavily on non-market relationships to build their core competences (Hall and Soskice, 2001). Moreover, employer associations and trade unions play an important role in coordinated market economies.
Due to the fact, that American and German companies are influenced differently by their home environment and therefore affect their company‟s policies and strategies differently, it can assumed that there also will be significant differences in the decision-making processes. This is of importance when it comes to the question which cultural and institutional factors influence American and German MNCs decision-making process to outsource to Central and Eastern European countries. Due to the theoretical argumentation in the previous chapters it can be expected that German and American companies have different motives why to choose Central and Eastern Europe as offshore location.
possibility to manage an outsourcing operation in person than on the phone is more guaranteed when choosing a closer offshoring location.
Consequently, based on the analysed theory, there seems to be evidence that institutional, cultural and finally geographical factors can influence the location decision of a company. Due to the different cultural and institutional backgrounds there will be probably differences in the process of the decision making which location finally will be chosen.
Therefore, the following conceptual model was constructed:
Figure 5.1: conceptual model (author, 2010)
6. METHODOLOGY
The methodology part describes the research approach, data sampling, data collection and data analysis.
6.1 Research Approach
According to Thomas (2004), a researcher has to take into consideration two distinct phenomena when formulating a research question to make it an interesting research question; the single phenomenon and the multiple phenomena.
The main research question of this thesis is:
To what extent do cultural and institutional factors influence Business Process Outsourcing decisions of German and American MNCs located in Europe to Central and Eastern European countries?
“Organisation” is one of the single phenomena applicable in this research. According to Thomas (2004) organizational decision processes are anarchic rather than rational, and consequently can differ between nations and countries.
Second, the multiple phenomenon “co-relation” is applicable as for instance the different cultural and institutional factors of different MNCs might vary in their influence towards certain aspects in the decision-making process to outsource.
The research question of this thesis tries to find an answer based on explanation, not on incidence questions (Yin, 1981). It shall explain to what extent cultural and institutional backgrounds of German and American MNCs influence the decision-making to outsource and explore how this finally will determine the outsourcing location.
6.2 Research Strategy
The open research question of this thesis suggests conducting a case study. A case study is likely to be used in early stages of novel research or to provide freshness in perspective to an already existing topic (Eisenhardt, 1989). A case study is an empirical inquiry that investigates a contemporary phenomenon within its real life context; when boundaries between phenomenon and context are not clearly evident; and in which multiple sources of evidence are used (Yin, 1989, cited by Thomas, 2004). Case studies can be done by using either qualitative or quantitative evidence (Yin, 1981).
In this thesis, a case study is used, since the topic of interest has not been investigated before. Many authors (Ghodeswar, 2008, Gottschalk, 2005, Tafti, 2005) have investigated risk factors that are influencing outsourcing processes such as contracting issues, communication issues, but almost no research has been done to understand outsourcing behaviour from companies based on their institutional and cultural backgrounds.
Moreover, this thesis makes use of a multiple case study, which brings certain advantages. The logic of adopting a multi-case design differs from that of survey sampling. The aim of this study is descriptive, that‟s why cases are chosen so that they will reflect the varied attributes of the population from which they are drawn. The cases are selected because they are predicted to display the same characteristics (literal replication) or because they are predicted to exhibit different ones (theoretical replication) (Thomas, 2004). In this thesis, both cases are chosen to probably show theoretical replication, since American and German MNCs originate from totally different cultural and institutional backgrounds, through which different effect on the decision-making process will be expected.
A multiple case study also allows the researcher to analyze if his results are replicable by several cases in order to enhance generalizability or if the case is idiosyncratic to a single case (Eisenhardt, 1989, Eisenhardt & Graebner, 2007).
6.3 Data Sampling
The sample is chosen on the basis of theoretical sampling, which means that these cases are selected because they are particularly suitable for illuminating and extending relationships and logic among constructs (Eisenhardt & Graebner, 2007).
If multiple cases are to be studied, it is hard to say how many cases should be investigated (Thomas, 2004). According to Eisenhardt (1989), between four and ten cases is usually sufficient, when making use of multiple case study research. In spite of it all, given the constraints in time, financials and availability in this research, it makes sense to sample extreme cases in order to more easily observe contrasting patterns in the data (Eisenhardt & Graebner, 2007). This sampling approach is also known as “polartypes”. In this thesis, it is assumed that the two cases are differently embedded in their home market institutions. Therefore, the polar dimension “home market institution” is justified as this study is investigating the effect of home market institutions on their influence on Business Process Outsourcing decisions to Central and Eastern European countries. Accordingly, it can be expected that for one case the emphasis will be on low influence of home market institutionalism, while the other will be more affected by its home institutions.
6.3.1 Sample
In this study, the case firms were selected based on the definition of a multinational company (MNC). MNCs by definition operate across the borders of nation states and societies (Harzing & Sorge, 2003). Even within the IB field there is no consistency on the number of countries in which a company must operate to qualify as a multinational. It is the multi-country organizational presence that defines a MNC (Westney & Zaheer, 2001). “The multinational corporation (MNC) must simultaneously adapt to and operate within multiple societies and, hence, multiple environments. Their central management is confronted with the challenge of designing systems than retain sufficient unity and coherence to operate as common enterprise and, at the same time, to allow sufficient latitude and flexibility to adapt to greatly varying circumstances.”(Scott, 1992, cited by Westney & Zaheer, 2001).
Since the industry the companies are operating in is less important as the purpose of this study is to examine the outsourcing behaviour of support activities of MNCs with different national backgrounds, and not the outsourcing behaviour of primary activities of a firm, the operating industry is not the most significant. Moreover, a lot of authors examined the risks of challenges of Business Process Outsourcing of Multinationals in general (Tafti, 2005, Rao, 2004, Gottschalk, 2005, Ghodeswar, 2008), not in specific industries. Hence, this approach is justified to investigate MNCs coming from different industries.
Besides, the cases were selected via theoretical sampling, but also on the basis of availability.
6.4 Data collection
In order to gain an empirical insight on the influence of cultural and institutional factors on Business Process Outsourcing decisions, a qualitative as well as quantitative research method will be used.
Moreover, using personal interviews is a good way to derive supplementary information about the offshore decision making process of German and American MNCs. Quantitative research alone does not assure that more specific background information about a company can be guaranteed.
The following methods of information gathering are used:
Desk research: using existing information (secondary information) from academic articles from peer reviewed magazines and journals, and academic books to create a theoretical angle. Company documents and website, as well as other secondary information were gathered.
Sub question Desk research Field research 1. Offshore business process
outsourcing
Literature study -
2. Impact of home market institutions on the decision making process
Literature study Interview 3. The influence of national culture on
offshore decision to Eastern Europe
Literature study Interview 4. The attractiveness of Central and
Eastern European countries for German and American MNCs
Literature study Interview
In each firm, 2 à 3 persons well acquainted with the process of Business Process Outsourcing were interviewed to reduce knee-jerk reaction through which data can be biased. By using numerous and highly knowledgeable informants who view the focal phenomena from diverse perspectives limits this bias (Eisenhardt & Graebner, 2007).
During the data collection, semi-structured interviews were conducted. However, the questions asked to the respondents did not change. But the main advantage of semi-structured interviews is that the interrogator is able to change the order in which questions are presented and can therefore change the interview in a certain direction (Thomas, 2004). It gives the interviewer the opportunity to ask questions differently or to enquire more deeply. Moreover, the questioner can encourage the respondent to give more widespread information about a topic.
Furthermore, the interview questions were prepared in two different languages (German and English) to guarantee that there is a good understanding of the essence of the questions. This is especially necessary in the German case, since English skills are less developed than in other countries. Because of the fact that the interviews for the American case were conducted at the subsidiary in the Netherlands, the spoken language during the interview was Dutch, even if the survey was formulated in English. Speaking in the native language possibly increased the information flow of the respondents.
6.5 Data analysis
The length of the interviews did not exceed the 90 minutes maximum (Thomas, 2004). The interviews were conducted in a period of approximately 45-60 minutes. To ensure the correctness of the collected data during the interview, it was possible to contact the respondents by telephone of email after the interview was hold in case there were possible inaccuracies in the collected data.
7. RESULTS
7.1 Introduction
The business practice of offshoring focuses on the relocation of labour intensive service industry functions to locations remote to the business centre in low wage countries. This process was driven by the improvement in international telecommunications capacity and the reduction in global telecommunications costs. Second, over the past two decades the PC has enabled the computerization and digitization of most business services. Consequently, information can now be transmitted over long distances at very low cost and with little loss of quality (McKinsey, 2003).
The prime motivation for offshoring is that it reduces labour costs. There are very large differences in the wages paid for equivalent skills between higher and lower wage countries.
U.S. businesses dominate the global share of offshoring, accounting for some 70 percent of the total market. Europe and Japan account for the remainder of the market, with the UK as dominant player (McKinsey, 2003).
Obviously, there are significant differences in the decision to offshore business processes to third parties in low wage countries, since American companies are dominating this market, while European, especially German companies seem more reluctant to outsource. This chapter discusses the offshore decisions of German and American companies to Central and Eastern European countries resulting from this research.
7.2 The German case
