Cross-Cultural Differences (Risks of Outsourcing)
What has played the role of an important foundation in seeking to identify the driving forces behind the success of offshore IS project is the agency theory. As a result, the contribution of relational concepts in leading the project towards success has not been given much attention in text books and literature. Thus, this analysis attempts to deal with the gap by bringing together the literature on culture along with the “social embeddedness” standpoint to relate the reasons and the process of how the relational elements have an impact on the longevity and productivity of offshore information system projects that are quite critical by their nature (Rai, Maruping and Venkatesh, 2009).
This paper outlines cultural variations that are both interpersonal and organizational in nature as examples of critical success factors. Employing information that was gathered from a longitudinal field research of over a hundred and fifty offshore information system projects administrated by over twenty project managers, it was revealed that a connection exists between the two ways of measuring success of offshore IS projects and the conceptualized relational elements. The two measures of success for the offshore IS projects are customer satisfaction and project cost excesses. The relationship between the two went beyond the impact of the characteristics of the project and the factors underlying the agency theory (Rai, Maruping and Venkatesh, 2009).
In the study conducted by Rai, Maruping and Venkatesh (2009) it was revealed particularly that a smooth flow of information, collective problem solving and collaborations that give rise to trust decrease instances of cost excesses and enhance the contentment of customers. A connection between the cultural variations at both the collective and organizational level was revealed with the success of offshore information system project. The paradigm went on to account for approximately forty percent of the differences in the two measures. This was for projects that were represented by a client (Rai, Maruping and Venkatesh, 2009).
The model only accounted for around thirty five to thirty seven percent of the costs excesses and customer contentment for projects that had no client representation. Together, the findings have essential conceptual and pragmatic implications in terms of managing the relationship between customer and vendor when working together with outsourcing organizations and coming up with project teams for offshore information systems (Rai, Maruping and Venkatesh, 2009).
The analysis revolves around the outsourcing of development projects that are centered on information systems. The process entails the development project being off-shored by the organization of a client to the vendor organization, which is situated in a different country (Carmel and Agarwal 2002 as cited in Rai, Maruping and Venkatesh, 2009; Gopal et al. 2002 as cited in Rai, Maruping and Venkatesh, 2009). Two of the biggest hubs for outsourced it jobs have come to be India and China. What further adds to their status is that the populations of both the countries are increasing promising human capital in the field of information technology for the future as well as supplying enough for the present (Friedman 2005 as cited in Rai, Maruping and Venkatesh, 2009).
What is of even more interest is that the outsourcing of tasks related to IS development in these countries continue to gain speed as an increasing number of organizations aspire and work towards reducing their costs related to the project. The costs that they are striving to reduce are not confined to the routine, transaction-centric systems but also incorporate complicated systems of a strategic nature (Carmel and Agarwal 2002 as cited in Rai, Maruping and Venkatesh, 2009).
This increasing emphasis and move towards outsourcing had led to a yearly growth percent of twenty and it has been approximated that over seventeen billion dollars have been spent on off-shored IS development projects in India (Thibodeau 2005 as cited in Rai, Maruping and Venkatesh, 2009). It is also predicted that the outsourcing industry of the country alone will touch the sixty billion dollar mark by the end of the year 2010 (Ribeiro 2005 as cited in Rai, Maruping and Venkatesh, 2009).
The increasing attention of overseas countries to offshoring has resulted from an increasing demand to reduce labor costs. However this is not the only reason and other factors that have led to the triggering of outsourcing decisions include the “Six Sigma quality control systems” and “Level-5 Capability Maturity Model (CMM) certifications” along with other process capabilities (Kaiser and Hawk 2004 as cited in Rai, Maruping and Venkatesh, 2009).
Even though there are a number of possible benefits that can be derived from outsourcing projects related to the development of information system, there also exists certain challenges that do not render outsourcing the best solution to every problem. Even after following suggestions related to the appropriate outsourcing of tasks given by the agency theory, a number of organizations and corporations have claimed that they still experienced cost excesses in their activities and went ahead of their budgeted time and costs when their projects were outsourced.
A closer examination of projects that were not successful when outsourced, were further investigated and finally led to the revelation that they were unsuccessful because of relational factors. Relational factors include such things as miscommunication between the client-vendor organizations because of the cultural variations. These, in turn contribute to the increase in costs and hamper customer satisfaction (Bertch 2003 as cited in Rai, Maruping and Venkatesh, 2009; Krishna et al. 2004 as cited in Rai, Maruping and Venkatesh, 2009; Sahay et al. 2003 as cited in Rai, Maruping and Venkatesh, 2009).
The challenges translate into various substantial implications for the organization, particularly when the projects are strategic and unique by nature and have an intricate scope, provided that projects like these need to make use of the integration of underlying information over the setting of customer and vendor organizations (Nicholson and Sahay 2004 as cited in Rai, Maruping and Venkatesh, 2009). The type of the interaction in the process of exchange between the two organizations is characterized by relational factors. These factors can have a substantial effect on the transfer and bringing together of the respective information (Uzzi, 1997 as cited in Rai, Maruping and Venkatesh, 2009) that is important for the success of outsourced tasks related to IS development. Thus, the task that remains is of comprehending the contribution of relational factors in affecting the success of the important outsourced IS projects after considering the strategic and intricate nature of the respective projects and the challenges to be faced (Rai, Maruping and Venkatesh, 2009).
Looking through a conceptual standpoint, considerable advancements have been carried on about how to administrate and deal with outsourced information system projects, mainly by considering and reviewing the literature present on the subject that has assessed the factors related to the agency theory. These factors also included the contracts, both official and psychological as well as the details of the characteristics of the project (e.g., Banerjee and Duflo 2000 as cited in Rai, Maruping and Venkatesh, 2009; Choudhury and Sabherwal 2003 as cited in Rai, Maruping and Venkatesh, 2009; Gopal et al. 2003 as cited in Rai, Maruping and Venkatesh, 2009; Koh et al. 2004 as cited in Rai, Maruping and Venkatesh, 2009; Nidumolu and Subramani 2003 as cited in Rai, Maruping and Venkatesh, 2009).
The respective analysis offers substantial backing about the fact that official and structured systems of controls, services and characteristics of the project have an effect on the viability of outsourced information system projects. Nevertheless, agency theory does have some limitation when it comes to its power of explanation. It confines the focus of the researcher or the organization to the incentives of people acting in their own self-interest and to structured paradigms that protect those behaviors (Dyer and Singh 1998 as cited in Rai, Maruping and Venkatesh, 2009; Uzzi 1997 as cited in Rai, Maruping and Venkatesh, 2009). It also is not very direct in dealing the relational components of inter-organizational affairs.
The outsourcing of projects related to the development of information system entail that team working in the organizations be of a certain level so that effective collaboration can be carried out to bring together specialized and implicit information spread over the setting of the organization and the existing culture (Koh et al. 2004 as cited in Rai, Maruping and Venkatesh, 2009; Nicholson and Sahay 2004 as cited in Rai, Maruping and Venkatesh, 2009).
The social embeddedness standpoint, in these situations puts forth that the framework of the exchange has a considerable effect on economic decisions (Uzzi 1997 as cited in Rai, Maruping and Venkatesh, 2009). The primary point to note here is that the unlike atomistic fair exchanges, the embedded relations depict mutual standards and principles, decrease the use for managing and keep a check and provide support to the exchange of information as well as to the bringing together of specialized information and competencies.
The financial implications of social embeddeness are forecasted to be particularly essential in a setting like that of an important information system project development that entails the integration of implicit information and the addressing of unique and intricate problems. Therefore, the standpoint of social embeddedness is a tool that offers to provide a clear picture if one wants to comprehend the contribution of the relational factors in the success of outsourced IS projects (Rai, Maruping and Venkatesh, 2009).
If one is to increase his/her comprehension and develop an insight about how to monitor and control outsourced IS projects, Johns’ (2006 as cited in Rai, Maruping and Venkatesh, 2009) suggestions come in useful. He recommended that the theory be contextualized by assessing the effect of characteristics of social framework in the setting of outsourced IS projects. It should be assessed how the adopted cultural features of the project affect its success and performance.
Later, the social embeddedness standpoint needs to be contextualized to the setting of the outsourcing of IS projects and a cultural variation framework should be applied to assess mutual principles and standards for those projects that are represented by a client (John, 2006 as cited in Rai, Maruping and Venkatesh, 2009). The variations can be evaluated in two different levels:
1)
Among the cultural standards at work (Hofstede et al. 1990 as cited in Rai, Maruping and Venkatesh, 2009) between the vendor and the client organization
2)
Among the adopted cultural principles between two important roles (e.g., Srite and Karahanna 2006 as cited in Rai, Maruping and Venkatesh, 2009) of the client representative and the project leader
In their study, the researchers tested the hypothesis statistically after employing an analysis over one hundred and fifty five important information system projects that were outsourced from American organizations to a certain vendor organization in India that had Level 5 CMMi certification. This analysis adds to the overall literature on information system outsourcing by developing justifications of project and agency features for the success of the IS project, with elements associated to social framework and cultural variations (Rai, Maruping and Venkatesh, 2009).
The setting of outsourcing entails the client organization, which is onshore, seeking the products of the vendor organization that is offshore to administrate and manage the project of information system and by doing so, develop an intercultural exchange interaction while working on the project. This paper puts forth the idea that agent-theoretic standpoint does not entirely grasp the essence of the social framework along with the cultural setting of the transfer interaction wherein the outsourced information system development projects take place (Rai, Maruping and Venkatesh, 2009).
Jensen and Meckling (1976 as cited in Rai, Maruping and Venkatesh, 2009) elaborated by identifying the agency relationship as an agreement wherein one or more than one party agree to carry out a certain service on the behalf of the principle that also makes necessary that the agent be empowered with a certain decision making power by the principal (p. 308). Premised on this definition, the agency perspective outlines the exchange relationship within the outsourced project as a fair value relationship between the vendor and the client organization with the least amount of information transfer and trust and restricted amount of collective decision making. Therefore, whereas agency perspective suggests the points on how the objectives and practices of the agent and the principal can be arranged by means of offers and agreements, it does not take into account the ways the social framework of the outsourced information system project impacts on the economic decisions and results (Rai, Maruping and Venkatesh, 2009).
Studying intercultural arrangement is especially significant and relatable in today’s environment in the field of international management (outsourcing in particular) as the cultural components can considerably impact the capability of organizations to survive against competition. Even though several researches have attempted to assess the influence of cultural components on international business concerns, the outcomes have not depicted a very conclusive or consistent finding.
The deficiencies in our comprehension of society and culture, its characteristics and the process of its impact on the interaction between organizations in a collaborative environment can be because of a number of reasons. First and foremost, the generic presumption in the majority part of the research states that nation can be appropriately employed as a substitute for cultural diversity. This may not be entirely true. Moreover, culture is not a compilation but is made up of organizational and national culture at the very least (Mittal, 2010).
The assessment of compound cultural affect on inter-organizational interactions is necessary as firms are integrated in the greater environment within which they are found and the alliance managers who are placed in various organizational and national cultures tend to understand and react to behavior of their partners in contradictory ways. The principles, behavior and norms of the managers are identified by both the cultural and the national settings along with the organizational environment of where they work (Mittal, 2010).
Given that any firm can be identified by its different organizational and national way of doing things, the important questions that arise are this: what is the type of relationship when the two organizations collaborate in the form of an alliance? What is the way through which the cultural elements affect the type of interaction between the project leaders in the two organizations? What is of more importance, the corporate or the national culture? (Mittal, 2010)
Instinctively, the outcome of the alliance between two organizations can be made possible or can be hampered by cultural differences. Cultural fit, as a term can be used to depict a phenomenon where cultures of the two organizations are in congruence and are thereby leading to an addition in value by means of shared trust, devotion, learning and effective communication. This analysis endeavors to depict a theoretical outline, to identify the elements of cultural fit that affects the standard of the interaction between two organizations in alliance (Mittal, 2010).
The paradigm depicted in the paper conducted by Mittal in 2010 premises on two basic things. Firstly, it is assumed that inter-firm interactions are founded on between the people present in the organizations who are part of the alliance. When these entities come together, the interaction condenses down to two people who are in alliance, from each of the organizations (Mittal, 2010). The relationship between the two entities can be comprehended by assessing the interaction between the two individuals of the organizations (Kale, Singh et al. 2000 as cited in Mittal, 2010). Secondly, the principles and behavioral norms of the leaders in the interaction are identified by both the cultural and national background, along with the organizational environment (Mittal, 2010).
In the following paragraphs, three sections are detailed. The first one entails the identifying of cross border collaborations. Second, the paper considers the idea of culture at both the organizational and national level and thirdly, it talks about the possibility of cultural fit among the organizations in alliance (Mittal, 2010).
Undoubtedly, cross cultural collaboration are a part of alliances as a whole. Alliance can be broadly defined as collaboration between organizations targeted at following mutual goals that are strategic in nature (Das and Teng 2001 as cited in Mittal, 2010). It can also be stated as a development of of action revolving around an amalgamation of capabilities and competencies of the partnering organizations (Rajan, Varadarajan et al. 1995 as cited in Mittal, 2010). However these definitions do not appreciate the finer aspects of cross border alliances.
Cross border alliances have been defined by Parkhe (1991 as cited in Mittal, 2010) as a comparatively lasting inter-organizational collaborative interaction revolving around the transfer between borders that makes use of competencies and governance frameworks from autonomous entities present in two states, or more. These entities come together for the collective achievement of personal objectives associated with the business purpose of each organization in alliance (Mittal, 2010).
Literature on this particular field internationally revolves around volumes of inter-cultural variation between countries and the affect on corporate norm, practices and actions. Werner (2002 as cited in Mittal, 2010) in his literature review highlighted that the concerns related to culture contributed majorly in the entry mode concerns, global joint ventures, international exchange, FDI and internationalization of decisions. Thus factors specific to culture are important in facilitating inter-cultural collaboration. This is so because the success of the endeavor rests on the alliance between the two organizations (Mittal, 2010).
Inter-cultural collaborations when they are translated into client-vendor interactions have also acknowledged the significance of cultural components for an enduring and . This is so because cultural variation can have a substantial implication on the relationship’s nature (Trent and Monczka 2003 as cited in Mittal, 2010) and ultimately affect the performance that is led by the respective relationship (Mittal, 2010).
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