1.5 Future challenges and opportunities

1.5 Future challenges and opportunities

We have described how firms, supported by their respective countries and industry associations, are vying with each other to provide ˜outsourcing services globally. These outsourcing providers have to compete with other entities that provide ˜insourcing and ˜nearsourcing services. ˜Insourcing refers to in-house IT departments competing with external firms for providing IT services to their own organization (Hirschheim and Lacity, 2000). ˜Nearsourcing refers to firms in countries such as Mexico and Barbados who are competing primarily for the US markets based on the value proposition of greater geographical and cultural proximity to the USA as compared to outsourcing providers like India (Lapper and Tricks 1999). Nearsourcing countries also become cheaper alternatives for locating Indian programmers for projects in North America and for working around the problem of visa restrictions. (Mexico, for example, increased its offshore IT income by more than 80 per cent to $30 million in 2000.) Microsoft is one of a number of international companies outsourcing to a Mexican company, Softek, where engineers earn approximately $1,000 a month, less than a third of the pay in the USA but double that for the equivalent worker in India. Venezuela and Brazil are also potential nearsourcing options for US firms. Carmel and Agarwal (2002) also describes Canada as a potential nearsourcer as it has a 30 per cent cost advantage relative to the USA, on a par with Brazil and Ireland. Our definition of nearsourcing is not simply restricted to transatlantic relations as there is already evidence of Chinese companies serving Indian and Japanese firms. Both insourcing and nearsourcing will potentially be strong competitors to GSW in the future as firms learn about the limits to doing software work at a distance.

The various global options that firms adopt to meet software needs also introduce complexity when deciding on a specific country and firm. A manager has to process a multitude of information, commonly available through electronic sources whose credibility is often unverifiable. This decision is influenced by factors such as the type of work to be outsourced, the infrastructure in place and the perceived risks, strengths and weaknesses of the different vendors. To some extent, particular types of software development may be best suited to particular countries and firms, implying that companies need to develop a portfolio of outsourcing vendors from different countries. Microsoft has offshore arrangements in India, Russia and Israel. IBM s JavaBeans project involves centres in Riga, Minsk, Beijing, Bangalore and North Carolina. Nortel has its own development labs or alliances with companies in different countries including India, the UK, Canada, Israel and Vietnam. While this portfolio approach opens up a range of possibilities, it also creates extreme complexities, as managers have simultaneously to coordinate work in different cultures and work systems.

From the supplier side, the competition is intense . India faces stiff competition from Russia and China and to a lesser extent from Vietnam and the Philippines in the Far East. The nature of competition is dynamic as companies are continuously seeking new markets and technologies. The more mature Indian software companies such as Infosys and Wipro, in their attempts to go up the value chain, are seeking to enter into consultancy- type contracts where they not only implement and solve problems, but also define them. Such mature companies do not see China, just entering the outsourcing arena, as a major threat but instead, view management consultancy firms like Pricewaterhouse- Coopers and Arthur Andersen as their key future competition. Initially, Chinese firms can find their competition coming from the new tier-two and tier -three Indian firms springing up in towns like Mysore and Mangalore which are satellite to Bangalore, and whose costs are lower than the ˜top ten such as Infosys and Wipro, and on a par with the Chinese firms. The future possibilities for growth will no doubt be shaped by the ability and capacity of firms to deal with the volatility and uncertainty of the GSW market. Countries such as India, which at the time of writing had a more than 60 per cent dependence on the USA, have the extremely complex task of reducing this dependence by penetrating new markets in Europe and East Asia. The Indian industry must also seriously reconsider their strategy for human resources (HR) development, as they cannot depend on people going continually to the USA. In 2001, a large number of expatriate programmers were ˜benched or returned to India, resulting in a slowdown in the recruitment of new graduates. While this setback is largely confined to the younger developers, there is the danger that in the long run this will make middle management hard to come by, leading to serious problems in developing project management capabilities.

As companies enter new domains and countries, they have the important task of developing strategies that blend adopting a global outlook and building on local strengths.

A key challenge is to develop capabilities to handle complex communication and coordination problems in conditions of time, space and cultural separation. These problems are magnified in the absence of reliable infrastructure and in domains where user specifications are constantly subject to change. Mature project management abilities , especially the capability to deal with quality and time standards, will be another important determinant of where work is sourced. While outsourcing firms are becoming increasingly sophisticated in developing systems to create transparency in their operations, the demands and expectations of clients are constantly increasing. This implies a process of continuous learning, reflexivity and renegotiating the terms of the relationship. IP regulations, which may not have been a significant issue when doing lower-end and maintenance work, become crucial as suppliers try to go up the value chain and seek profit sharing and royalty-based arrangements. How well countries can revamp their legal systems and create confidence and trust among the investing companies will be an important factor in the future. There is a need to have realistic expectations of what can and what cannot be done in a distributed setting and to realize that ICTs on their own cannot ˜make geography history .

In summary, we have discussed the nature of organizational forms, the kind of work and the global trends that surround GSW. These key features, which are summarized in table 1.1 are interconnected and together shape the future challenges and opportunities in the management of GSA arrangements.

Table 1.1: Key features defining and shaping GSAs

Defining themes

Key features

Nature of organizational relationship: GSA

Network structure spread across temporal, spatial, organizational and national boundaries
A new breed of smaller ˜born global firms
Central role of ICTs in coordinating network activities
ICTs necessary but not sufficient condition for effective coordination

Nature of work done: GSW

GSW reflects features of both services and manufacturing
GSW involves varying level of intellectual and creative input
There are varying levels of scalability Magnified influence of social and human issues
Rapid technological and organizational change in GSW requires continuous reflexive monitoring

Nature of global trends

Multiple options for customers of GSW in terms of countries and firms
Heightened competition for suppliers in a rapidly expanding marketplace
Competition from ˜nearsourcing and ˜insourcing vendors Need to develop blend of global and local approaches to management
As GSW becomes increasingly common, there is the need to understand the process of how a GSA relationship works in practice

While the practice of GSW has come a long way in developing strategies and approaches to deal with the complexities of managing GSAs, the field of information systems research lags far behind in understanding how these relationships work in practice. Prior research in this area has been limited more to national than to global settings, with a focus primarily on services such as the maintenance of help desks or call centres and transaction systems such as airline ticketing. Another feature of this research has been its focus on understanding how various factors influence managers decisions to enter outsourcing contracts. Some of these factors include communication and coordination problems, local context and cultural issues and unrealistic expectation of managers (Apte 1990; Vitalari and Wetherbe 1996; Carmel 1999; Gupta and Raval 1999). While the knowledge of these factors sensitizes us to important issues in deciding the feasibility of entering into outsourcing arrangements, they are rather static in nature and have limited capability to explain how a GSA relationship that is inherently processual can unfold over time.

This book is written with the assumption that GSW has to a great extent been normalized in business practice in that it is seen to be advantageous to both vendors and customers. The relevant question then is not ˜whether we should enter into GSA relationships but how can we manage them more effectively? : the challenge is to focus on how these relationships play out in practice over time and what we can do to make them more effective. With these challenges in mind, the guiding question in this book is how GSA relationships evolve . This question is addressed through empirical investigations of seven longitudinal case studies whose analyses are informed through a variety of theoretical perspectives. A unifying backdrop to these analyses is the context of globalization within which these relationships are situated. As a starting point, therefore, in chapter 2 we first discuss the analytical relationship between the processes of globalization and then identify its defining features. These features provide the content of investigation of the subsequent case studies.