The fear factor in remote based development
eastern foreign cultures satisfying western initiatives
Technology has spearheaded the race for globalisation. The success of remote based initiatives, fuelled by considerable cost savings has spiralled the growth of GeoInitiatives (global initiatives). The objective of this paper is to focus on the factor of fear that shrouds remote based initiatives. The contents of this paper, apart from the authors’ thoughts, also include the views and ideas of selected technology, business, social, and political leaders in the USA, the western world, and the eastern world. Since the target audience of the paper is the senior level executive management and, due to brevity, we will not delve deeply into methodologies or technicalities.
Throughout the document we will be using the terminology “GeoInitiatives” defined as business initiatives in strategic geographical locations that maximise shareholder values. GeoInitiatives use resources in strategic geographical locations to develop a product or provide services that results in cost effectiveness, operational efficiency or profitability to the GeoInitiators.
“The fear of failure can be debilitating but the aroma of success can be tantalising when the West meets the East in GeoInitiatives.”
The speed of doing business has enhanced considerably in the past century. Recent technological advancements, with the increased power of voice and data communications, enable teams to collaborate more effectively. Organizations in the West and the East have joined forces in a symbiosis that is mutually beneficial to both. While the West gets their business objectives accomplished efficiently and cost effectively, the East gains attractive financial rewards. Though this results in a win-win situation for the Western and Eastern firms, there are pitfalls to be aware of when the West meets the East.
Many Western companies are thrilled to capitalise on the human intellect, skilled labour force and the low labour costs available in the Eastern world. But many projects end in failure or result in costly overruns through rework. Once bitten, they tend to shy away from such initiatives. This has resulted in a fear factor enveloping Western firms that GeoInitiatives are extremely risky and fraught with pitfalls outweighing the advantages involved. We will now focus on the market impact of GeoInitiatives with an emphasis on the Information Technology (IT) industry.
Market Impact of GeoInitiatives
Many Eastern countries such as China and India stand out to be attractive places for Western firms to outsource business functions. The IT unemployment rates and wage increases in the US forced many American companies to initiate offshore outsourcing. The 30% - 50% cost savings benefits projected by GeoInitiatives to the Eastern world, counteracted the fears that threatened outsourcing. As a comparison, the wages of an IT worker in the East averaged $8,593 in 2003, whereas their US counterparts that they replaced earned salaries of $80,286 (Deloitte, 2004).
The Eastern firms’ capacity to undertake outsourced Information Technology tasks will grow extensively and about 800,000 existing US, IT jobs are expected to migrate to the Eastern world over the next five years (Travis, 2004). A Forrester Research study estimates that 3.3 million service jobs will be outsourced in the next fifteen years (Mehlman, 2003). US Senator Joe Lieberman, fears that the US will lose its competitive advantage and knowledge, if US companies continue to outsource work offshore (Lieberman, 2004). Gartner Inc. highlights three areas of concern due to offshore outsourcing: loss of intellectual assets, future talent and organizational performance (Pastore, M., 2003).
Technology infrastructure has improved considerably providing a globally distributed work environment. Voice over Internet Protocol (VoIP) enables cost effective voice communications over the Internet. This has significantly reduced the cost of long distance phone service. This technology makes it possible to host customer service call centres anywhere in the world at a fraction of the cost of landlines.
Proprietary methodologies and delivery models are emerging to effectively coordinate and exchange tasks and deliverables in a globally distributed environment. As the global market is being developed, many Eastern firms are strategically implementing delivery models and setting up its locations among emerging nations.
A number of Multi National Companies (MNC) are moving (have already moved) to the Eastern countries attempting to compete with local Eastern offshore firms. By taking advantage of the same human capital to which local Eastern firms have access, IBM and EDS pose a viable new entry threat as low cost providers of software and BPO services. As existing, low cost providers of these services, local firms now face increasing cost pressure, and consequently decreasing margins.
To combat the threat of new entrants, prominent firms in the East tend to open offices in other Eastern countries, as far as the Internet infrastructure and human capital permit. The goal is to translate and implement well-developed methodologies and practices in these countries. Eastern Europe has low labour costs, is culturally similar to Western Europe, and is in a developing economy. Eastern firms are looking into tapping this market to take advantage of the local resources and cultural knowledge to gain market share in Western Europe.
Market Response to GeoInitiatives
“Sure offshore outsourcing is a little scary, but only temporarily. In the end the market will correct for it – US technology workers and companies will find a different niche. Lower cost is the only advantage; higher profit is the only shareholder value. I don't think there are any value-added capabilities that do not exist in the US.” – Martie Woods, Senior Vice President – Major U.S. Advertising Agency
“A lot of companies certainly fear the unknown. Companies who haven't tried out offshore outsourcing before, develop their fears around – is it going to work? How am I going to support it? Do I need now to have this company support this application? One of the challenges is that if you want to have a support staff in the US, when you outsource a development project, either you need to continue using your relationship with the offshore developer to do maintenance work or you have to transition your internal people to understand the program that was just written. Making sure that an easy transition exists, between application development, production and support .is vital” – Marc Saffer, Senior Executive from a leading Video and Music Distribution Firm in the US.
The professional outlook is to increase shareholder value, doing whatever it takes to get the products or services to the consumer at competitive costs. Many senior IT management professionals feel that some companies have explored and gone too far into outsourcing their internal functions. Maybe they have to pull back a little. Most companies haven't gone far enough to benefit from the advantages of offshore outsourcing.. The kind of IT projects that could be a candidate for offshore outsourcing could be the ones that tend to be labour intensive and can be easily integrated into the home environment. Projects that are “tactical” in nature needs more ongoing supervision and hence require increased implementation expenses causing it to be cost-prohibitive to outsource.
The major advantage is in outsourcing the application development and then the application maintenance. Certainly the main advantage is the reduction in cost. The other advantage is that many of the Eastern companies, especially the larger ones are better organized with ISO 9000, CMM Level 5, etc., and have a better process than most typical application development organizations possess.
Outsourcing entire IT operations to Eastern firms must be approached cautiously. There seems to be a balance between what makes sense to be done offshore with what makes sense to be accomplished onshore. When there are situations like complex tactical situations to be handled, corporations would prefer local resources and/or firms to take care of the operations. It makes logical sense to outsource projects that have clear definitions on the deliverables as well as articulate standards, for cost benefits. If the projects are “less clearly” defined, it could develop into problem situations requiring costly rework.
“Bread is made of flour and water. In the Jewish community, it is called Bagels, while it is called Biscuits in the Black Community” Dr .E. Delber Gray, (President, Michigan Minority Business Development Corp, MMBDC)
“I suppose one of the down sides of work moving off shore is the internal challenges and social issues that are created in the wake of jobs being lost as the work is removed from our shores. I am sure that more negatives could be drawn from these situations, but much is based on emotions and short sightedness. Enough of that…”– Manager (Multi National Firm based in the U.S.)
Off shoring has inevitably resulted in products being developed at lower costs overseas and being made available to the US consumer at decreasing costs over the years. There is a “world of opportunity” to collaborate and benefit from. The current trend seems to be for the West to utilize resources from the East to provide better returns on their investments. The Western culture, especially the US, is into promoting cultural compatibility to work together for global advantages which makes countries in the East tend to adopt Western culture. However, the global market supply/demand ratio is going off balance as countries from the East tend to adopt the Western lifestyle pushing up the cost of living, which in turn increases the outsourcing costs.
Fears and Concerns Regarding GeoInitiatives
Losing jobs to Foreign Countries
The social misconception of the West about “losing local jobs to countries abroad” causes anxiety and animosity towards the concept of offshore outsourcing. Laws were proposed to block outsourcing government jobs in New Jersey, Connecticut, Hawaii, Maryland, Michigan, Missouri, North Carolina, and Washington. The California Senate passed a bill on August 26, 2004 banning state and local authorities from outsourcing work (Sify, 2004).
Fears Related to Retaining Human Capital in the East
Another major concern is the attrition rates in the Eastern countries, which are going through growth, reliant on offshore possibilities. With the involvement of Multi National Companies (MNC) in offshore outsourcing activities, attrition rates are increasing. Western firms would prefer to deal with the same “personnel” who have been supporting them in the past but they may no longer be available.
Fears of the Unknown
A number of companies from the West, who haven't had opportunities to experience the outsourcing phenomena, might be afraid of the “unknown”. Mysteries about offshore outsourcing combined with fears and anxiety of project success stop these companies from exploring the offshore outsourcing world.
Fears of Failure
There have been negative results regarding outsourcing of the customer service jobs. There are instances of customer service jobs being brought back to the US due to low levels of tolerance for breakdown in communications and problems resulting in a number of unhappy customers. Dell Computers moved its customer service jobs back to the US in January, 2004 as a result of increasing levels of customer complaints.
Fears of Project Costs Going High
Low wages in Eastern countries are not getting lower. In India, due to the competition for jobs, pay raises in the country in 2003, outpaced that of the global average. Half of the workers received at least a 10 percent raise. The top 10 percent received an increase of more than 40 percent. Low wages may not last forever.
Fear of Information Security
Another hurdle might be the technology area. The proprietary environment may have to be duplicated for efficient development and support. Companies are worried about losing their intellectual property, sensitive business information to a third party that is out of the premises, especially offshore. Unless a well developed relationship is established it is difficult to arrive at a strategic alliance level and trust relationship. Attrition rates certainly concern corporations as the resources could take the business knowledge and go and work for a competitor in the future.
The Fear of All Fears - Fear of Losing Strategic Control
“It is a fatal error to outsource the entire operations offshore. Total outsourcing will result in the loss of intellectual capital that resides within the corporation and might adversely affect the operations of the corporation in the future. When it comes to situations where your internal team who understands the business and the company culture is being replaced with an offshore entity, you tend to rely on those resources for your company's future prospects. There seems to be a balance of what needs to be done onsite versus what can be sourced offshore.” - Marc Saffer, Senior Executive from a leading Video and Music Distribution Firm in the U.S.
The dominant fear among the US businesses is the fear of losing strategic control over their core teams, operations, products, in-house talent, and intellectual property. They are now at the mercy of an overseas vendor or partner that they do not see daily. This lack of direct control raises anxiety and fear in the business owners and senior management of a geo-initiator. Most Western outsourcing firms feel that they are doing what they need to survive. As a result, there are concerns about corporations losing their competitive edge by outsourcing key innovative components offshore. While corporations may be improving their individual competitiveness in the short run, they could be collectively undermining their own competitiveness for the long haul. Thus, it is essential in a GeoInitiatives relationship to address the dominant fear and the related fears and concerns through a professional, social and political perspective. Global teams and global markets for products and services have become a reality today. So let us examine the factors that cause teams and people from disparate and different cultures to work together as cohesive units.
Factors That Should Drive GeoInitiatives (Global Cultures to Work Together).
Exhibit 1: Factors Driving GeoInitiatives
Exhibit 1 displays many of the factors driving global cultures to work together. The primary factor driving GeoInitiatives is generally financial rewards. Financial rewards result in profitability to the business due to cross-regional selling, economies of scale, lower operational costs or efficiency in services or product development. Global cultures will work together if they trust each other and their ethics. Human intellect draws diverse cultures together fuelled by the domain knowledge, domain experience, innovation and creativity. Global markets promote cross-regional selling, provide companies with a global presence and establish global standards enabling the best practices in the industry to be adopted worldwide. The technology media consisting of the telephone, fax, Internet, VOIP, videoconferencing, etc has brought global cultures closer, enabling them to collaborate more effectively. Enhanced data and information security has increased the use of technology in various global cultures. Effective communication breaks down the barrier between global cultures. The use of a common language and common terminologies encourages cross-cultural teams to interact with each other effectively. Global collaboration is enhanced when the communication channels and processes are well defined. Professional, cultural and personal tolerances and flexibility are vital if global teams are to function together effectively. The varied time zone between the West and the East enables global teams to work round the clock. This factor can be a boon or a bane for the businesses involved. Finally the personality compliance plays a role in global teams. Generally the eastern teams are passive while the western businesses are aggressive allowing both sides to exist peacefully for the benefit of each other, which is further enhanced by the interpersonal skills.
Thus the overwhelming advantages of GeoInitiatives drive global cultures closer to each other permitting them to work efficiently and effectively. While the advantages are tremendous, there are also dire pitfalls to be aware of which will be covered in the next section.
Pitfalls to be Aware of in GeoInitiatives
Exhibit 2: Pitfalls in GeoInitiatives
There are various pitfalls (Exhibit 2) to avoid in GeoInitiatives. Often such endeavours culminate in failure, resulting in financial setbacks. Incorrect estimations result in costly financial overruns. Inadequate quality standards prevent the development of bug free products or services resulting in product or service failure. When the business processes are not clearly defined they become bad candidates for GeoInitiatives. Operational inefficiency occurs when the non-core elements of the business cannot be managed by GeoInitiatives cost effectively. Having an incorrect calibre of workforce results in the development of products or services that do not meet the business specifications. Unethical standards result in a breakdown in trust and the business relationship. Since the GeoInitiatives extend across boundaries, the laws, rules and regulations of the different geographic regions adds to the complexity of the product or service due to the necessity of compliance to the various regions. Technology breakdowns result in lost time and effort as it hinders the progress of the GeoInitiatives. An inadequate communication model thwarts the free flow of information resulting in misconceptions, frayed nerves and frustration. The eastern culture generally tends to be passive while individuals from the western culture are more aggressive. Hence, it is easy for the western firms to dominate the GeoInitiatives and push their counterparts resulting in an attrition of their respect and compliance to the initiative. Intolerance or inflexibility at a professional, personal or cultural level can break the cohesiveness of the global teams due to heightened frictions between the individuals involved in the imitative. When problems and conflicts arise, it is extremely vital to have an effective conflict resolution strategy in place to ensure the smooth functioning of the individuals in the GeoInitiatives.
Thus there are major pitfalls that dog GeoInitiatives but being aware of them and mitigating the risk involved ensure the success of the project.
Success in GeoInitiatives (Business Models & Methodology)
GeoInitiatives are considered successful if the products produced satisfy the objectives of the initiative, are completed within budget and on time without compromising quality. Due to the triple constraints triangle (time, cost and quality) that affects any GeoInitiatives, a change in any one of them will affect the other two.
GeoInitiatives have become a part of the global business industry. Over time, the business delivery models have matured and various vendors have been able to satisfy the initiatives successfully which has driven and led to the success and increased volume of GeoInitiatives.
The challenge is in identifying the best business model that works for a GeoInitiatives. In order to embark on this process, the business must attempt to analyse itself / take actions (Exhibit 3) from a GeoInitiatives perspective.
Exhibit 3: GeoInitiatives Actions
Define Business Processes
The business must have clearly defined business processes. Whether it be outsourcing of the infrastructure, application, managed services or product development, if the process cannot be clearly defined, it is not an ideal candidate for GeoInitiatives.
Determine the critical and non-critical business processes/products
Now that the business process/product has been defined, it is essential to determine the core/critical processes and the non-critical processes. Once the processes/products have been separated, the dependencies between the processes/products need to be determined. If the dependencies between the processes/products are complex and the numbers of dependencies are extremely high, then the project might not be an ideal candidate for GeoInitiatives.
It is easier to outsource non-critical/non-core processes to gain higher operational efficiency and cost effectiveness. Many businesses do not fear outsourcing non-core processes since the security of their core competency / knowledge is not at stake. If a business needs to pull out of a GeoInitiatives, when a non-core process is involved, the impact on the business is lesser.
Core-processes/critical processes may be outsourced, but the vendor that is selected must have a sound, mature, and proven delivery model, before such an initiative is undertaken. When critical processes are outsourced, the business takes a risk of losing control over their core-competency and knowledge. They become captives of the outsourced vendor and unless a strong relationship is in place, the business risk is heightened. This becomes a dominant fear in GeoInitiatives. The advantages to such levels of outsourcing are that the vendors in reality become business design partners with the ability to refine the processes and increase the cost effectiveness and efficiency. Thus the decision to take up GeoInitiatives to support the core or non-core processes lies with the shareholders/senior management.
Decide on the Business Delivery Model
Next, determine an appropriate vendor with a business delivery model that is proven and mature. There are different business delivery models: ones that take an entire project and deliver it while others approach it in a modular fashion delivering the different modules as their domain expertise and knowledge increases.
Once a business delivery model and the vendor have been selected, adhering to the Project Management Institute (PMI®) methodology enhances the chances of project success and delivery. The PMI methodology deals with vital issues such as setting up the project management plan, communication model, conflict management strategy, risk management, etc. Since the PMI methodology is well defined, we will not attempt to re-invent the wheel and expand on it in this paper but would rather prompt the reader to the Guide to the Project Management Body of Knowledge (PMBOK® Guide. www.pmi.org ).
In conclusion, we would like to state that, based on our interviews and research, we found that the dominant fear involved with GeoInitiatives has been the fear of losing strategic control over the business.
The advantages of GeoInitiatives are apparent. Expanding operations around the world enable US businesses to operate in closer proximity to growth markets and new customers, improving economies of scale for global enterprises while tapping the best and brightest talents from all around the globe (Mehlman, 2003). Thus there are distinct advantages in GeoInitiatives but there are also the pitfalls.
The key to addressing the fear factor, lies in understanding the dominant fear, the related concerns, the global cultures, the delivery models, implementing a sound project management methodology and following it faithfully.
The West fuels the demand, while the East fills the supply. Both the worlds have opportunities to benefit in a mutually beneficial symbiosis. Thus we conclude our paper with our opening quote “The fear of failure can be debilitating but the aroma of success can be tantalising when the West meets the East in GeoInitiatives.”
Readers interested in further information are encouraged to access the website www.geoinitiatives.com
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Travis, L. (2004, May 19) 800,000 IT Jobs Moving from US to India Affects the Strategic role…, AMR Research. Retrieved on Jan 31, 2005, from http://www.amrresearch.com/Content/View.asp?pmillid=17270&docid=11023
© 2005, Jacob Mathews & Benaud Jacob
Originally published as a part of 2005 PMI Global Congress Proceedings – Singapore