NRG WORKING PAPER SERIES
OFFSHORING IN THE SERVICE SECTOR
A EUROPEAN PERSPECTIVE
Désirée van Gorp Pieter Klaas Jagersma Motoko Ike'e January 2006 no. 06-06
Nyenrode Research Group
NRG WORKING PAPER SERIES
Offshoring in the Service Sector
A European Perspective
Désirée van Gorp Pieter Klaas Jagersma
Motoko Ike’e January 2006 NRG Working Paper no. 06-06
NRG
The Nyenrode Research Group (NRG) is a research institute consisting of researchers from Nyenrode Business Universiteit and Hogeschool INHOLLAND, within the domain of Management and Business Administration.
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Abstract
This paper provides insights about the implications of offshoring for the service sector.
It is found that a majority of service firms successfully relocate their core activities under direct control to foreign locations and are predominantly driven by strategic motives to do so. Offshoring, although demanding for the organization, is important for the competitiveness of service firms in the future.
Keywords
Offshoring, Outsourcing, Global sourcing, Service sector
Address for correspondence Désirée van Gorp
Assistant Professor of International Business Director of Nyenrode Institute for Competition
Nyenrode Business Universiteit, Breukelen, The Netherlands Telephone: + 31 (0) 346 291260
E-mail: [email protected] Pieter Klaas Jagersma
Professor of International Business and Export Management Nyenrode Business Universiteit, Breukelen, The Netherlands Professor of Strategy, Vrije Universiteit Amsterdam
Motoko Ike’e
Research fellow, Nyenrode Institute for Competition
Nyenrode Business Universiteit, Breukelen, The Netherlands
1. Introduction
Offshoring, the relocation of business activities to foreign locations, has lead to an intensive debate both inside and outside business communities. It is a challenging research field and on the strategic agenda of many firms as well as the subject of government policy in several countries. While some focus on the opportunities of offshoring for value creation for both companies and the economy as a whole (e.g.
Farell, 2005), others focus on the threats and have a more critical perspective on offshoring. They argue that the phenomenon results in job losses and wage erosion. In their view specific companies may well benefit, but this is not the case for the welfare of countries or workers as a whole (e.g. Levy, 2005). What both perspectives have in
common are that the offshoring trend will continue to be an issue on the strategic agenda of firms and to have an impact on the competitiveness of nations (Garner, 2004;
Venkatraman, 2004; Doh, 2005). The challenge is not whether to participate in this trend, but how to do so.
The executed research study focuses on offshoring’s - the consequences and the resultant effects of offshoring (including relocations of offshored activities to other locations) for the service sector. Research on offshoring has focused mainly on the production
industry. The impact on the service sector has remained largely unknown. Given the size and impact of the service sector on the global economy (OECD, 2004c), the magnitude of offshoring activities in this sector deserves to be further researched.
Based on the research study results, this article analyzes offshoring behavior and trends in the service sector with a focus on the offshoring activities of Dutch and US service firms in The Netherlands as a case study. It answers the main research question: If Dutch and US firms representing selected service categories and operating in The Netherlands offshore their business activities? In answering the main research question, this paper elaborates on the type of offshoring and offshored activities, preferred locations and dominant motives, barriers and key success factors behind offshoring.
2. Methodology
We have chosen sample populations among foreign, including US, and Dutch service firms in The Netherlands for the research study from the following service categories:
Business services, Telecommunication, Transport and Financial. The different service categories are selected based on their relative importance to the Dutch economy.
Business services has been one of the fastest growing service categories in the Dutch economy. Between 1990-2000 it contributed 23% of value added growth and 31% of employment growth of the Dutch total market sector (CPB, 2001). Furthermore, the service categories telecommunication, transport and finance are referred to as key infrastructure service categories (Worldbank Group, 2005) for national economies.
The total sample of 1,713 service firms is drawn from the FT 500 list combined with data of annual reports and chambers of commerce on foreign and Dutch service firms in The Netherlands. This total sample list included 160 doubles that were deducted. Therefore the total sample population for the research study is 1,553 service firms of which a total number of 557 service firms responded. Of this total number of In-tab interviews, there were 8 anonymous and 7 break-offs. The total number of valid In-tab interviews is, therefore, 542 and the total attempted interviews are 1,553. The “response rate” is defined as the percentage of total attempted interviews that are completed. Calculated by the following formula:
RR = I / (I + (R + NC + O)).
RR = Response rate I = In-tab interviews R = Refusals and break-offs NC = Non-contacts
O = Other non-interviewed eligible cases
Based on this formula, the response rate is based on 542 In-tab interviews, 996 Refusals, 7 break-offs and 8 anonymous, 0 Non-contacts and 0 other non-interviewed eligible cases.
Therefore, I = 542, R = (996 + 7+8) = 1011 and O = 0.
RR = 542 / (542 + (1011 + 0 + 0)) = 542 / 1553 = 0,349 (542 / (542 + 996+8+7)) * 100% = (542 /1553) *100% = 34,9%
The questionnaire used for this research is designed with online survey tools. SPSS was employed for the analysis of the results. Of the total respondents, 295 mentioned that they are not and have not been offshoring neither have they expressed plans to offshore activities within the next three years. This paper focuses on the respondents with
offshoring experience respectively, those expressing offshoring plans for the future - making up a total of 247 valid responses. This number is comprised by 39,30% service firms with offshoring experience and 6,27% service firms with offshoring plans within the next three years. The respondents are represented in distinctive service categories in the following way: 76,11% business services, 10,93% transport, 8,50% financial, and 4,45% telecommunication.
4.45%
8.50%
10.93%
76.11%
Tel ecommun ication
Busi ness servi ces Transport
Fi nancia l
39.30%
54.43%
6.27%
Yes, has offshore d
Yes, wil l pla n to offsho re No, no pl ans
The total of 247 valid responses is divided in 146 Dutch and 101 foreign firms. Of the 101 foreign firms, there were 48 US firms.
As with regard to the Dutch respondents 79,45% stated to have offshore experience and 20,55% of them mentioned plans to offshore within the next three years.
Tel ecommuni cation 2.74%
Busi ness servi ces 80.82%
Transport 8.22%
Fi nancial 8.22%
Yes, has offshored 79.45%
Yes, wi l l plan to offshore 20.55%
As with regard to the US respondents (i.e. firms headquartered in the US and operating in The Netherlands), 95,83% stated to have offshore experience. 4,17% of the total US respondents mentioned plans to offshore within the next three years. The latter
percentage is too low for making a valid analysis as is the case for the percentage of US firms engaged in offshore outsourcing i.e., both data sets will not be used for the analysis given in Chapter 5.
Tel ecommu nication 8.33%
Busi ness servi ces 72.92%
Transport 10.42%
Fi nancia l 8.33%
Yes, has offshore d 95.83%
Yes, wil l pla n to o ffsho re 4.17%
In Chapter 3, the differences between offshoring and outsourcing are discussed.
Subsequently in Chapter 4, the importance of the service sector in relation to offshoring is discussed. In Chapter 5, The Netherlands is taken as a case study for offshoring in the service sector. This chapter is followed by an analysis of the available data on the
offshoring behavior of US and Dutch firms operating in The Netherlands in Chapter 6.
The observations made in this chapter are explained, linked and put into a broader perspective in the conclusions and recommendations in Chapter 7.
3. Offshoring versus Outsourcing
This paper’s focus is on offshoring in the service sector. Offshoring can be done in the following two ways (UN, 2004):
1. Captive offshoring – internally, through the establishment of foreign affiliates.
2. Offshore outsourcing – externally, by outsourcing services to a third-party.
Offshoring and outsourcing are sometimes treated identical as companies seem to choose them for similar reasons, such as to focus on core competencies, to increase flexibility and to realize cost savings. However, offshoring cannot be regarded as purely interchangeable with outsourcing. There are some important differences between these two phenomena.
Offshoring always involves a foreign location and in the case of captive offshoring direct control. This is not the case for outsourcing which can be executed on the domestic market and involves a third-party. Captive offshoring is usually preferred by firms when strict control is crucial, information is sensitive and internal interaction is important. It is also preferred when a firm seeks to capture savings and other advantages or when there is a lack of local firms that can provide the required services (UNCTAD, 2004a).
Offshore outsourcing is more likely when direct control is not an issue and for back- and front-office work that has a low complexity level, can be standardized and separated from other activities (Kamarkar, 2004). Furthermore, whereas captive offshoring is part of foreign direct investment (FDI) outflows, offshore outsourcing is part of export figures (UN, 2004).
The choice for captive offshoring or offshore outsourcing is related to choice of entry mode. Not only in manufacturing but also in the service sector, entry mode is considered as influential to firms’ performance. Many researchers have identified linkage between the resultant performance and entry mode usage by companies. Entry modes differ for the service and manufacturing industry (Brouthers and Brouthers, 2003). Furthermore, Lu and Beamish (2001) consider that the performance of companies in expansion depends on making their right choice of entry modes. According to other authors (e.g., Anderson and Gatignon, 1986; Terpstra and Yu, 1988), “desirable” entry mode choice plays a crucial role to the performance of the organization (i.e. investment returns). A
“wrong” choice of entry mode produces higher transaction costs, risks, and fewer
strategic options than “desirable” choice of entry mode does – companies will face a variety of strategic issues, risks, and other factors, which other entry modes cannot satisfy easily. Ekeledo and Sivakumar (2003) noted that entry mode is dependent on firm
specific resources to take advantages and to improve.
According to some researchers, such as Erramilli (1990) and Knight (1999), the entry mode used by the service sector is determined by the level of tradability – whether or not the service can be exportable, and subjective to the degree of physical customer
interaction (Vandermerve and Chadwick, 1989; Erramilli and Rao, 1990; Ekeledo and Sivakumar, 1998; Clark et al., 1999; Javalgi et al., 2003). For example, storable services and service activities that do not involve physical customer interaction are exportable.
However, such operation and standardization of services may be limited due to
adaptation needs for different cultures and for physical proximity (Zeithaml et al., 1985;
Nicoulaud,1989; Mathe and Perras, 1994; Javalgi and White, 2002). Kotabe and Murray (2003) found that service firms choose internal sourcing, depending on the companies’
businesses’ sensitivity to tacit knowledge and intellectual property, and the physical proximity requirement of activities. The choice for a specific entry mode is linked to the choice for captive offshoring or offshore outsourcing or a combination of both types of offshoring.
4. Service Sector
Over a period of time, the added value of the service sector on overall economic activity has increased. Paradoxically, relatively little research has been done on the service industry at large (Contractor et al., 2003). By the end of the nineties, service businesses were dominating industrialized economies (Davis, 1999) and the value of cross-border trade in services were about 20% of total cross-border trade (WTO, 2001). It became the largest and fastest-growing sector of the world economy and providing more than 60%
of global output (WTO, 2001). Despite a steep decline of the overall world trade in 2001 with a weak recovery in 2002, worldwide exports of different categories of commercial services increased in 2002 (WTO, 2003). These figures underline the importance of the service sector for the world economy and the shift from manufacturing to service industries which is taking place (Barkema et al., 2002).
Cross-border trade and foreign direct investment (FDI) in services have continued to increase in almost all OECD economies and the pace of internationalization of services has been faster than of non-service activities (OECD, 2004a). Services are becoming more tradable by some referred to as the ‘tradability revolution’ (UN, 2004). Due to advances in information communication technology it is possible for more and more services to be produced in one location and consumed elsewhere. At the same time, there are barriers for offshoring services. These barriers are related to the need for proximity to markets, lack of international recognition of professional qualifications and globally agreed privacy rules, interaction with customers, trust and confidence, technological limitations, confidentiality of information, need to adapt rapidly to customer needs and regulations and legal requirements (e.g. regarding privacy) raising transaction costs and limiting international trade in services (UN, 2004).
Some researchers believe that the service sector cannot be standardized as much as the manufacturing industry (Lovelock and Yip, 1996; McLaughlin and Fitzsimmons, 1996;
Samiee, 1999). However, many services became storable leading to an increase of services export (Erramilli and Rao, 1993) and the structure of foreign direct investments also has shifted towards services. Whereas in the early 70s this sector accounted for one-quarter, in 1990 this share was less than 50% and in 2002 it was about 60%. The forecast is that relocation of a wide range of corporate functions in the service sector is set to continue.
Not only the structure of FDI has shifted towards services, the composition of services is also changing. Whereas until recently trade and finance were dominating, electricity, water, telecommunications, storage, transport and business services are becoming more prominent (UN, 2004). The shift of FDI towards services can be explained by the following developments:
• In general, services are becoming more dominant in economies. By 2001 this sector accounted for 72% of GDP in developed countries and 52% in developing countries.
• Although there is an increase of tradable services, a number of services are still not tradable – they need to be produced when and where they are consumed.
The shift from manufacturing to service offshoring activities has an impact on the
offshoring phenomena. The reason is that the globalization and offshoring process of the service sector is different from manufacturing with regard to (UN, 2004):
• Degree of internationalization – although the service sector is larger than the manufacturing, only some 10% of its output enters international trade compared with over 50% for manufacturing.
• Pace of globalization – pace of globalization of services is faster than in manufacturing.
• Involvement of firms/sectors - relocation of services is executed by firms in all sectors whereas goods production has involved mainly manufacturing firms.
• Skill intensity – skill intensity for services is generally higher than is the case for offshored manufacturing activities. Today’s offshoring of services involves highly skilled jobs and is different from offshoring in the manufacturing industry in the past several decades that involved low skilled labor (Levy, 2005). According to Levy (2005) the decline in low skilled labor jobs was compensated by benefits from the growth of new skill and capital intense industries.
• Degree of flexibility – offshored services are generally more footloose than relocated manufacturing activities because of lower capital-intensity and sunk costs (especially services that do not require high skills).
As far as offshore destinations are concerned, developing countries, including Eastern European countries dominate over half of offshoring activities. In 2001, it was Ireland, India, Canada, and Israel representing 71% of service offshoring, which are mostly software development and IT services. 37% of service offshoring came from developing countries in 2002. In 2003, it was 51%. Offshoring activities in the service sector are in a majority of the cases related to IT and software and business services. According to UNCTAD (2004a), the increasing interest for offshoring activities in developing countries points out service firms’ preference for decision criteria is predominantly represented by costs and market growth.
In recent years, there have been two notable changes about how service firms internationalize – location preference and strategy choice behavior (OECD, 2003).
While service firms historically preferred developed locations to developing locations,
service FDI data shows that this is no longer the case. Service firms chose to expand more to developing locations. Another interesting characteristic of the
internationalization process of service firms is that their strategies are widely divided in choosing their locations between developed and developing locations. Thus
internationalization of the service sector is expanding into developing countries. This is especially due to rising ownership and location specific advantages (OECD, 2003).
During 1987-2003, the cross-border investments involved merger & acquisition (M&A) activities. Virtually three quarters of M&A activities in the service sector originated from developed countries, mostly from Western Europe into developing countries
(UNCTAD, 2004b). With deregulations of service markets and liberalization of FDI policies, and competitions in home markets, the service sector is globally expanding.
According to Dunning (1993), the following factors are considered to be driving this trend:
• Ownership specific advantages: obtaining new markets, local knowledge, and skilled assets and labor.
• Location specific advantages: entering open markets with FDI favorable policies.
• Internalization advantages: safeguarding intellectual property and the right, ensuring quality standard, capturing market knowledge, minimizing transaction
(negotiation) costs and these advantages are created best by host countries that offer considerable market size, relatively FDI favorable labor protection and infrastructure improvement. This is for example represented by India, China, and Eastern European countries (OECD, 2003). Their market size is considerable, their local inputs are improving and cheap, their infrastructures are in
development and educated skilled workers are readily available. Their foreign investment friendly policies – particularly FDI restriction on corporate
governance – became a relief to service firms in developed countries as market entry in those countries is highly restricted (OECD, 2003).
What does this mean with regard to offshoring for firms operating in the service sector?
Service firms are increasing their offshoring activities. They offshore their activities abroad not only to lower costs but also to deal with increased demands for services and for their quality (UNCTAD, 2004a). The most important drivers behind offshoring in the service sector are the impact of technology development to the industry, increased
competition’s impact, and relaxation of regulations (Leamer and Storper, 2001).
Researches have identified improving quality of services produced, consolidating activities for economies of scale, and accessing certain skills or markets as main reasons for choosing offshoring (UNCTAD, 2004a).
Table 1: FDI stock for service sector in 1990 and 2002 adapted from UN 2004 – showing increasing dependency economies of developed and developing countries on services.
Service sector 1990 2002
Inward stock of
world FDI 49% 60%
Trade 25% 18%
Finance 40% 29%
Business activities 13% 26%
Transport, storage and communications
3% 11%
Other services 19% 16%
Outward stock of world FDI
47% 67%
Trade 17% 10%
Finance 48% 34%
Business activities 7% 36%
Transport, storage and communications
5% 11%
Other services 22% 9%
Developed
countries Developing
countries Developed
countries Developing
countries Central and Eastern Europe Inward service
FDI stock 83% 17% 72% 25% 3%
Outward service
FDI stock 99% 1% 90% 10% -
5. Case study: The Netherlands
The shift from manufacturing to service sector with regard to offshoring activities, is increasingly relevant to The Netherlands. Its economy is dependent on the service sector (i.e., 74,4% of GDP) in services (Worldbank Group, 2004). It is relatively even more reliant on this sector compared to a majority of other Western European countries.
Worldwide the degree of transnationalization of transnational companies and countries, in which they operate, is increasing. As far as the degree of transnationality1 of host economies is concerned, The Netherlands ranks fourth on the index of developed countries (UN, 2004). On the inward FDI index, The Netherlands ranks high in terms of FDI potential and performance. The main challenge is to ensure continuing success (UN, 2004). According to the same source, The Netherlands ranks forth on the list of 20 leading investor economies as far as the outward FDI performance index is concerned.
The index captures two aspects of performance. The first is ownership advantages referring to firm-specific competitive strengths arising from for example innovation, brand names, managerial and organizational skills. A high index indicates that a country’s firms have strong ownership advantages that they are exploiting abroad or wish to increase by foreign expansion. Secondly, the index captures location factors including economic (such as relative market size, production or transport costs, skills,
infrastructure and technology support) as well as policy and institutional (such as taxes, labor regulations and FDI-related policies) factors in home and host countries. A high index value in this respect may indicate that a country is less desirable as a location compared to other foreign locations.
The Dutch economy is under performing when compared with the Euro zone for the sixth consecutive year. For 2005, the international economic growth will show a global slow down (especially the economies of the US and Euro Zone). When combined with the rising value of the Euro and oil prices (prices rise and position compared to
competitors will get worse) the growth of only 1% can be explained (CPB, 2004). This picture is in accordance with the Global Competitiveness Report (WEF, 2001-2004),
1 Transnationality index is an average of the four ratios: FDI inflows to gross fixed capital formation for 1999-2001; FDI inward stocks to GDP in 2001; value added of foreign affiliates to GDP in 2001;
and employment of foreign affiliates to total employment in 2001.
which shows that The Netherlands dropped in the ranking from 8th (2001) to 15th (2002) and then to 12th (2003, 2004) on the Growth Competitiveness Index (GCI). This Index evaluates the potential for the world’s economies to attain sustained economic growth over the medium and long term. The main reason for the decrease of the Dutch position is the substantive raise of wages in the 1990’s, which caused a worsening price
competition position. The GCI is founded on the three pillars of economic growth (WEF, 2004): macro-economic environment, quality of public institutions, and technology (progress). Another study, carried out by the Institute for Management Development (IMD), showed that The Netherlands went from 4th (2000) to 15th (2004) on the World Competitiveness Scoreboard (IMD, 2004). This index states the
attractiveness of countries for investors. The most important factors for the lower ranking were among others increasing bureaucracy and a less flexible government.
The first studies published about the offshore status of The Netherlands were published in the beginning of this century (Deloitte & Touche (D&T), 2002-2004; Dutch Ministry of Economic Affairs, 2003). They draw attention to the offshoring activities of the Dutch manufacturing industry. These studies were the first to investigate the offshore status of The Netherlands, but had some limitations. There is a lack of evidence that
‘stated preferences’ will turn into reality and that there could be a hypothetical bias as there are no sufficient motivations (as is the case with questionnaires) to tell the truth (SEO, 2004). Companies will answer strategically as to influence policymakers and stakeholders. For example when shareholders believe offshoring is a hot topic and take an interest in the company, the government subsidizes companies to stay in the country.
Furthermore, there could be a hypothetical bias as there are no sufficient motivations (as is the case with questionnaires) to tell the truth. In addition, the response ratios are questioned as they are very low (SEO, 2004). In the case of the D&T reports, the response ratio is 8-9% versus 29% in the research study of the Ministry of Economic Affairs. This is not representative in terms of the number and profile of the responding companies. The limitations are the reason why the aforementioned studies can only be used as indicative studies (SEO, 2004).
The SEO (Foundation for Economic Research of the University of Amsterdam) executed a study on captive offshoring in the Dutch production industry and analyzed the International Direct Investment Database of the OECD to make an international
comparison of Dutch foreign investments between1990-2001. In it’s analysis of different sectors (Agriculture, Mining, Industry, Energy & Water, Construction, Retail, Catering, Transportation, Telecommunication, Business Services, Real Estate, Other), SEO (2004) concluded that industry and business services are the two most active in offshoring. Due to this study’s focus on the manufacturing industry, however, it can not be used for an analysis of the offshoring behavior of service firms. SEO concluded that investments by Dutch companies are primarily done in Western Europe and Scandinavia, followed by investments done in the US and Canada. When compared to these numbers, investments in Eastern Europe and Asia are marginal. These conclusions were based upon values over a 12-year period meaning that a (eventual) trend would not be noticed. Therefore, SEO also considered data on a yearly basis. From these datasets it concluded that there is no trend in the investments done by Dutch firms. These figures are related to
manufacturing industry and do not include offshore outsourcing. When the industrial employment ratio of several Western countries was compared it showed that the loss of employment in Western industries did not result in an increase of employment in low wage countries like Poland or Hungary. The value of the industry sector in The
Netherlands compared with the total economy has indeed decreased over the years, but SEO concludes there is no substantial displacement of employment and businesses from The Netherlands towards low wage countries (SEO, 2004). Nevertheless, for some parties in The Netherlands, such as the employees organisation, the content of the aforementioned reports give reason for a defensive attitude towards offshoring (CWI, 2004).
According to a report by UNCTAD (2004a), 40% of the top 500 companies in the European service sector are already taking part in the offshoring process. The World Economic Forum (2004) reveals that The Netherlands’ competitiveness as an offshoring location itself is steadily decreasing. To get a better picture of the offshore status of The Netherlands, the Dutch Ministry of Economical Affairs (2005) recently conducted a survey regarding captive offshoring and offshore outsourcing. The report’s main focus is on offshoring and not outsourcing and includes companies from both the manufacturing and the service industry. For this study a statistically sound response ratio was used. The majority of respondents (84%) indicated that they were not planning to offshore
activities, whereas on average more than 9% did offshore business activities and about 6% of the respondents were planning to do so. When examining the offshore percentage
for companies representing different service categories the following estimates were made: ICT (11,4%) dominated, followed by banking and insurance (7,6%) , publishing and printing (7,2%), transport (6,0%) and postal and telecommunication (2,3%).
According to the same source the top three destinations for offshored activities applying to all researched sectors are: Middle and Eastern Europe, Western- and Southern Europe and Asia. According to the authors low cost countries are dominating offshore locations.
Most offshored activities are low skilled manufacturing activities. As far as the motives for offshoring is concerned most companies, participating in the study of the Dutch Ministry of Economic Affairs, mentioned cost savings and entering new markets as the dominant drivers behind offshoring.
6.1. The analysis
In this part of the paper the offshoring trends and behavior of Dutch and US firms representing selected service categories and operating in The Netherlands is analysed. In doing so, the type of offshoring and offshored activities, preferred locations and
dominant motives, barriers and key success factors behind offshoring are elaborated on.
The analysis is made based on the following distinctions:
• Dutch and US service firms operating in The Netherlands; and
• Captive offshoring and offshore outsourcing and a combination of both types of offshoring - except for US firms executing offshore outsourcing as the number of US respondents involved in this type of offshoring is too low to make a valid analysis.
6.2. Type of offshoring
Service firms were asked how they are offshoring activities namely under direct control (captive offshoring), via a third party (offshore outsourcing) or a combination of both types of offshoring.
They responded in the following way (as visualised in the graphs below):
Dutch US
26.72%
20.69%
52.59%
Captive offshoring
Capti ve offshoring 71.74%
Offshore outsourcing 6.52%
Combi nati on 21.74%
Offsho re outsou rcing Combi nation
Dutch service firms: Captive at 52,59%, Combination at 26,72%, and Offshore outsourcing at 20,69%. US service firms: Captive at 71,74%, Combination at 21,74%, and Offshore outsourcing at 6,52%.
The dominant form of offshoring for both US and Dutch firms is captive offshoring meaning that a majority of respondents choose to relocate their business activities to foreign locations under direct control versus doing it via a third party.
6.3. Type of offshored activities
The most frequently mentioned activities that are offshored by service firms:
Dutch firms experienced in offshoring
6.27%
9.90%
7.26% 6.93%
9.24%
6.93%
8.58%
14.52%
5.61%
14.52%
10.23%
0%
2%
4%
6%
8%
10%
12%
14%
16%
Inbo un
d log istics Ope
rations Out
boun d log
istics Ma
rketing Se
rvice IT-inf
rast ruct
ure
HRM Tec
hnol ogy
/ Appl ication dev
elop ment Proc
urem ent
Sa
les O
ther
Offshored activities
% mentioned
US firms experienced in offshoring
6.56%
13.11%
7.38%
6.56%
11.48%
9.84%
6.56%
12.30%
7.38%
13.93%
4.92%
0%
2%
4%
6%
8%
10%
12%
14%
16%
Inbo und l
og istics Ope
rations Out
boun d logi
stics Ma
rketing Se
rvice IT-inf
rast ruct
ure
HRM Tec
hnol ogy
/ A pplication dev
elop ment Proc
urem ent
Sa
les O
ther
Offshored activities
% mentioned
Dutch firms mentioned as top three of offshored activities: (1) technology development and sales (both 14,52%); (2) operations (9,90%); and (3) service (9,24%). US firms
mentioned a similar top three of offshored activities but in a different sequence namely sales (13,93%) and operations (13,11%) followed by technology development (12,30%).
In the case of captive offshoring, the top three offshoring activities for Dutch firms, sales, service and technology development, dominate. US firms add in their top three:
operations and IT-infrastructure. Dutch respondents applying offshore outsourcing mention in their top three of offshoring activities: technology development, sales and in third place, operations and service (equally). When involved in a combination of both types of offshoring the top three for Dutch firms does not change, except for the fact that service does not appear on the third place. US firms, however, list the following top three: (1) service, (2) operations, IT-infrastructure and technology development (equally weighted); and (3) inbound logistics and sales (equally weighted).
When asked whether these activities are core or non-core activities service firms, the response is as follows:
US firms experienced in offshoring 71.74%
15.22%
13.04%
0%
10%
20%
30%
40%
50%
60%
70%
Co re ac
tivitie s
Non- core
activitie s
Bo th
Core or non-core
% mentioned
Dutch firms experienced in offshoring 69.83%
16.38%
13.79%
0%
10%
20%
30%
40%
50%
60%
70%
Co re ac
tivitie s
Non- core ac
tivities
Both
Core or non-core
% mentioned
Both US (71,74%) and Dutch (69,83%) service firms involved in captive offshoring and a combination of both types of offshoring refer to their offshoring activities as core
activities.
Technology development, sales, operations, service are most frequently mentioned as activities that are offshored.
There are more common denominators than differences in type of activities related to the different forms of offshoring and Dutch and US offshoring behavior.
Most relocated activities to foreign locations are considered to be core activities by respondents.
6.4. Motives
The most frequently mentioned motives for offshoring of service firms:
US firms experienced in offshoring 18.18%
12.12%
3.03%
15.15%
6.06%
7.07%
14.14%
9.09%
1.01% 1.01%
4.04%
2.02%
7.07%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Co st sa
vings Impro
ve compet
itiven ess Lega
l adv anta
ges Follow c
ust/su pplie
rs Lab
or cos t Nether
land s Qu
alified em ployees En
ter n ew ma
rkets Increas
e qu ality/ser
vice Focus
core activi
ties Fo
llow com
petitor s Incre
ase f lexibi
lity Ac
cess tec hno
logy Other
Motives for offshoring
% mentioned
Dutch firms experienced in offshoring 18.10%
5.60%
2.16%
15.09%
8.19% 8.19%
12.50%
4.74%
3.45%
0.00%
5.17%
1.72%
15.09%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Co st sa
vings Impro
ve c ompet
itiven ess Lega
l adv anta
ges Fo
llow cus t/suppl
iers Lab
or cos t Nether
land s Qu
alified em ployees En
ter n ew ma
rkets Incr
ea se qu
ality/ser vice Fo
cus c ore activ
ities Fo
llow com
petitor s Incre
ase flex ibility Ac
cess techno
logy Other
Motives for offshoring
% mentioned
Both US and Dutch firms operating in The Netherlands mention as top three motives for their offshoring activities (1) save costs (US 18,18% and Dutch 18,10%); (2) follow customers/suppliers (US 15,15% and Dutch 15.09%); and (3) entering new markets (US 14,14% and Dutch 12,50%). Frequently mentioned motives by respondents in the category ‘other’ are sales and market growth, learning about customers and markets, presence at offshore location and control over offshored activities. For Dutch firms executing offshore outsourcing, cost savings together with avoiding high labor costs in The Netherlands, and the availability of qualified employees are motives for relocating business activities to foreign locations. Dutch service firms executing a combination of both types of offshoring (captive offshoring and offshore outsourcing) refer to costs savings, follow customers/suppliers and avoiding high labor costs in The Netherlands as their main drivers for offshoring. US service firms using the combination refer to cost savings, improving competitiveness, availability of qualified employees, entering new markets and increasing quality/service as reasons for relocating their business activities.
The most important motive for offshoring mentioned by service firms:
US firms experienced in offshoring
13.95%
11.63%
2.33%
27.91%
2.33%
4.65%
13.95%
9.30%
13.95%
0%
5%
10%
15%
20%
25%
30%
Co st savi
ngs Impr
ov e c
ompet itivenes
s Lega
l advant ages
Fo llow
cust/su pplier
s Labo
r cos t Nether
lands Qual
ified empl oyees Ente
r new markets
Incr ea
se qu ality/ se
rvices Oth
er
Most im portant m otive
% mentioned
Dutch firms experienced in offshoring
20.95%
4.76%
1.90%
22.86%
2.86%
4.76%
17.14%
3.81% 3.81%
17.14%
0%
5%
10%
15%
20%
25%
30%
Co st savi
ngs Impr
ove co mpe
titiv eness Lega
l adva ntage
s Follow
cu st/suppl
iers Labo
r cos t Nether
lands Qual
ified e mpl
oyees En
ter ne w mar
kets Increa
se qu ality/ se
rvices Incre
ase flexib
ility Ot
her
Most im portant m otive
% mentioned
Following customers/ suppliers is by both categories (US 27,91% and Dutch 22,86%) of firms mentioned as the most important motive for offshoring. Exceptions are Dutch firms involved in offshore outsourcing and US and Dutch firms involved in a
combination of both types of offshoring. These respondents mentioned cost savings as the most important driver for relocation of their business activities to foreign locations.
The most frequently mentioned motive for withdrawing offshoring activities to The Netherlands for both Dutch and US firms is the fact that offshoring activities is difficult to manage.
When asked if service firms have or are planning to withdraw offshored activities, and their motives for doing so, an overwhelming majority answer that they did not and are not planning to withdraw activities (US 89,13% and Dutch 87,93%). Only a relatively small number of service firms answers positively of which a majority refers to
withdrawing some (US 10,87% and Dutch 9,48%) versus all (US 0% and Dutch 2,59%) activities. Motives for withdrawing most frequently mentioned by Dutch firms: are difficult to manage, cultural conflict, and focus on other markets. US firms also refer to difficult to manage and in addition to increasing labor costs at offshore location as well as low financial performance of offshored activities.
The most frequently mentioned goals that were achieved by service firms:
US firms experienced in offshoring
14.89%
13.83%
3.19%
9.57%
4.26%
3.19%
13.83%
7.45%
1.06%
4.26%
6.38%
1.06%
17.02%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Co st sa
vings Impr ove
com pe
titiven ess Lega
l adv ant
ages Fo
llow c us
t/suppl iers La
bor cos t Ne
ther land
s Qu
alified empl oyees En
ter n ew m
arkets Increas
ed qual ity/se
rvice Fo
cus c ore a
ctivi ties Fo
llow com
petitors Incre
ase flex ibility Ac
cess techno
logy Other
Achieved goals
% mentioned
Dutch firms experienced in offshoring
18.98%
12.04%
1.85%
8.33%
4.63% 5.09%
7.41%6.94%
4.17%
0.93%
6.02%
1.39%
22.22%
0%
5%
10%
15%
20%
25%
Co st sa
vings Impr
ove co mpe
titiven ess Lega
l adv ant
ages Fo
llow cust/su
ppl iers Labo
r cos t Ne
ther land
s Qu
alified empl oy
ees Ente
r new mark
ets Incr
ease d qual
ity/se rvice Fo
cus c ore acti
vities Follo
w com petitors Incre
ase flex ibility Access
tech nology Other
Achieved goals
% mentioned
The fact that a majority of US and Dutch respondents plans to continue respectively expanding their offshoring activities can be explained by the fact that most of them have achieved their goals through offshoring. Dutch respondents referred in their top three of most frequently goals achieved: cost savings (18,98%), improve competitiveness
(12,04%) and follow customers and suppliers (8,33%). US firms referred in their top three cost savings (14,89%), improve competitiveness and enter new markets (both 13,83%), and follow customers and suppliers (9,57%). With regard to ‘other’ goals achieved respondents mentioned turnover/sales most frequently.
Most important motive for offshoring is strategic, namely, follow customers and suppliers.
Whereas the drivers behind captive offshoring are more strategic and include motives such as follow customer/suppliers and enter new markets; the motives to get involved in offshore outsourcing and a combination of both types of offshoring are relatively more cost related (i.e., cost savings and avoiding high labor costs in The Netherlands).
A majority of respondents are not withdrawing nor are planning to withdraw their activities. The most frequently mentioned motives by Dutch service firms for
withdrawing or planning to withdraw their offshoring activities are related to strategic issues, whereas for US firms they are predominantly cost/financial related.
Important reasons for continuing their offshoring activities, is the fact that respondents reached their goals in terms of cost savings and turnover/sales. Also more strategic goals, such as improving competitiveness and following customers and
suppliers, were accomplished by offshoring.
6.5. Offshore locations
The most frequently mentioned offshore destinations by service firms are:
(1) Western Europe (US 46,94% and Dutch 51,20%); (2) Central Europe (Dutch
rank hore
of
ns dominating Western Europe are Germany, UK, Belgium, France and Spain. US firms, although already operating in The Netherlands, add The
Republic, Top three of preferred regions for offshoring activities of both Dutch and US firms are:
15,66%) and South/Eastern Asia (US 19,39%); and (3) South/Eastern Asia (Dutch 13,25%) and Central Europe (US 8,67%). US firms involved in captive offshoring the Pacific instead of Central Europe third. For Dutch service firms involved in offs outsourcing the top three destinations are different: South Eastern Asia is dominating, followed by Western Europe and Central Europe. As far as service firms combining both types of offshoring are concerned, US and Dutch firms mention the following top two preferred offshore regions: (1) Western Europe; and (2) South/ Eastern Asia. On a third place, Dutch firms mention North America and US firms refer to Central Asia and Central Europe.
Offshoring locatio
Netherlands after Germany as offshore location in Western Europe. In Central Europe for both US and Dutch firms these are the following countries: Poland, Czech
Romania and Hungry. As far as South/Eastern Asia is concerned, India and China are by far the dominating offshore locations for US and Dutch firms alike.
Dutch firms experienced in offshoring
7.53%
3.92%
13.25%
2.11%
0.60% 1.20%
15.66%
3.92%
0.60%
0%
10%
20%
30%
40%
No rth Am
erica So
uth Am erica
Sout h/ Ea
stern Asia Ce
ntral A sia
Wes tern As
ia Pacific
Wes tern E
urope Cent
ral Eu rope
Africa Wo rldw
ide
Destinations
% mentioned
51.20%
50%
US firms experienced in offshoring
3.57% 2.55%
19.39%
2.55%
1.02%
6.63%
%
8.67%
4.08% 4.59%
0%
10%
20%
30%
40%
Nor th A
mer ica
So uth Am
erica South/ Ea
ster n As
ia Ce
ntral A sia
Wes tern
Asia Pacific W
ester n E
urope Centra
l Euro pe Africa Wo
rldw ide
Destinations
% mentioned
46.94 50%
Offshore locations for both and US and Dutch service firms are similar. Whereas in Western and Eastern Europe the preferred offshore locations are more evenly spread over a number of countries, South/Eastern Asia is dominated by India and China.
6.6. Barriers
The most frequently mentioned barriers for offshoring activities of service firms:
US firms experienced in offshoring
4.26%
25.53%
8.51% 8.51% 8.51%
27.66%
17.02%
0%
5%
10%
15%
20%
25%
30%
Politic al situ
ation Lega
l Qual
ified empl oyee
s Qual
ity o f wo
rk Difficul
t to mana
ge Cu
ltural di ffere
nces Othe
r
Barriers
% mentioned
Dutch firms experienced in offshoring
1.47%
21.32%
5.88% 6.62%
16.91%
27.94%
19.85%
0%
5%
10%
15%
20%
25%
30%
Politic al situ
ation Lega
l Qual
ified empl
oyees Qual
ity of wor
k Difficul
t to m anag
e Cu
ltural d iffer
enc es
Other
Barriers
% mentioned
Many respondents mentioned to experience no barriers at all for relocation their business activities to foreign locations (US 47,83% and Dutch 26,72%). As far as barriers
mentioned, the top three for Dutch service firms are cultural differences (27,94%), legal issues (21,32%), and the fact that offshored activities are difficult to manage (16,91%).
Barriers that are mentioned by US firms resemble those listed by Dutch firms namely cultural differences (27,66%) and legal issues (25,53%). With the exception of the barrier
‘difficult to manage’, which is mentioned as often by US respondents as quality of work and quality of employees (8,51%). The other barriers that are frequently mentioned are communication, financial performance, difficulties to enter new market and physical distance.
The most important barrier for offshoring mentioned by service firms:
US firms experienced in offshoring 31.58%
10.53% 10.53% 10.53%
31.58%
5.26%
0%
5%
10%
15%
20%
25%
30%
35%
Lega l
Qual ified e
mploy ees
Qual ity o
f wo rk
Diffic ult to
man age
Cu ltural di
ffere nces
Other
Most im portant barrier
% mentioned
Dutch firms experienced in offshoring
25.97%
9.09%
6.49%
20.78%
23.38%
14.29%
0%
5%
10%
15%
20%
25%
30%
35%
Lega l
Qual ified e
mploy ees
Qual ity o
f wo rk
Diffic ult to m
ana ge
Cu ltural di
ffere nces
Other
Most im portant barrier
% mentioned
Service firms refer to legal (US and Dutch) and cultural differences (US) as most
important barriers. When examining the barriers for the two different types of offshoring and a combination of both, it becomes clear that a majority of US and Dutch
respondents involved in captive offshoring do not experience any barrier at all. As far as barriers are experienced with this type of offshoring, they are related to cultural
differences and legal issues. In addition, Dutch firms list in the top three ranking difficult to manage and availability of qualified employees. As far as offshore outsourcing is concerned, Dutch service firms mention barriers related to difficult to manage, qualified employees, and legal issues and quality of work (equally weighted). When involved in a combination of both types of offshoring, cultural differences, legal issues and difficult to manage are mentioned by US and Dutch firms. In addition, US respondents consider quality of work to be a barrier.
A large number of respondents does not experience any barriers for their offshoring activities. This is especially the case for service firms engaged in captive offshoring.
Most important barriers mentioned by US and Dutch service firms are legal issues and cultural differences and the fact that offshored activities are difficult to manage. The exceptions are Dutch respondents involved in offshore outsourcing for which quality of work is more often a barrier than legal issues are.
