NRG WORKING PAPER SERIES
OFFSHORING IN THE SERVICE SECTOR
A EUROPEAN PERSPECTIVE
Nyenrode Research Group
Désirée van Gorp
Pieter Klaas Jagersma
Motoko Ike'e
January 2006 no. 06-06
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
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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: d.vgorp@nyenrode.nl
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.
3
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%
4
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.
Fi nancia l
8.50%
Transport
Tel ecommun ication
4.45%
10.93%
Yes, has offshore d
39.30%
No, no pl ans
54.43%
Busi ness servi ces
76.11%
Yes, wil l pla n to offsho re
6.27%
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.
5
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.
Fi nancial 8.22%
Tel ecommuni cation 2.74%
Yes, wi l l plan to offshore 20.55%
Transport 8.22%
Yes, has offshored
Busi ness servi ces
79.45%
80.82%
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.
Fi nancia l 8.33%
Tel ecommu nication 8.33%
Yes, wil l pla n to o ffsho re 4.17%
Transport 10.42%
Busi ness servi ces
72.92%
Yes, has offshore d 95.83%
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.
6
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 backand 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
7
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).
8
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.
9
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,
10
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
11
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
Trade
Finance
Business activities
Transport,
storage and
communications
Other services
49%
60%
25%
40%
13%
3%
18%
29%
26%
11%
19%
16%
Outward stock of
world FDI
47%
67%
Trade
Finance
Business activities
Transport,
storage and
communications
Other services
17%
48%
7%
5%
10%
34%
36%
11%
22%
9%
Developed Developing
countries countries
Developed
countries
83%
17%
72%
99%
1%
90%
Inward service
FDI stock
Outward service
FDI stock
Developing Central and
countries
Eastern
Europe
25%
3%
10%
-
12
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 transnationality 1 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),
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.
1
13
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
14
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
15
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.
16
They responded in the following way (as visualised in the graphs below):
Dutch
US
Combination
Combi nati on
26.72%
21.74%
Offshore outsourcing
6.52%
Offsho re outsou rcing
Capti ve offshoring
20.69%
71.74%
Captive offshoring
52.59%
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
16%
14.52%
US firms experienced in offshoring
16%
14.52%
13.93%
14%
13.11%
14%
12.30%
12%
9.24%
8.58%
7.26% 6.93%
8%
6.27%
6.93%
5.61%
6%
% mentioned
% mentioned
12%
10.23%
9.90%
10%
9.84%
10%
8%
7.38%
6.56%
7.38%
6.56%
6.56%
6%
4%
4%
2%
2%
0%
0%
4.92%
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ve
le
de
t
Sa
n
en
io
at
em
lic
ur
pp
oc
Pr
/A
gy
lo
no
ch
Te
M
e
ic
fr a
in
R
H
IT
rv
Se
in
et
io
at
nd
d
un
bo
ut
r
pe
k
ar
M
O
O
u
bo
In
e
ur
s
ic
s
ic
st
gi
lo
ct
ru
st
g
ns
st
gi
lo
er
th
t
O
en
pm
lo
s
ve
le
de
t
Sa
n
en
io
at
em
lic
ur
pp
oc
Pr
/A
gy
lo
no
ch
Te
M
e
ic
fr a
in
R
H
IT
rv
Se
in
et
io
at
nd
d
un
bo
ut
r
pe
k
ar
M
O
O
u
bo
In
Offshored activities
11.48%
Offshored activities
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
17
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
Dutch firms experienced in offshoring
71.74%
70%
70%
60%
60%
50%
50%
% mentioned
% mentioned
69.83%
40%
30%
20%
16.38%
13.79%
40%
30%
20%
10%
10%
0%
0%
13.04%
t
ac
es
it i
ti v
ac
es
iti
iv
es
it i
ti v
ac
es
iti
iv
e
or
-c
on
e
or
th
Bo
N
C
t
ac
e
or
-c
on
e
or
th
Bo
N
C
Core or non-core
15.22%
Core or non-core
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.
18
6.4.
Motives
The most frequently mentioned motives for offshoring of service firms:
US firms experienced in offshoring
Dutch firms experienced in offshoring
20%
20%
18.18%
18.10%
18%
18%
15.09%
16%
14.14%
14%
12.50%
12.12%
12%
10%
8.19% 8.19%
8%
5.60%
6%
9.09%
10%
7.07%
8%
7.07%
6.06%
4.04%
3.45%
4%
2.16%
1.72%
2%
0.00%
0%
3.03%
2.02%
2%
1.01% 1.01%
0%
gy
lo
er
no
th
O
ch
te
y
l it
ss
bi
ce
xi
Ac
fl e
s
se
or
tit
ea
cr
pe
In
m
es
co
i ti
w
ti v
e
ll o
ac
vic
Fo
re
er
co
/s
s
i ty
cu
al
Fo
qu
ts
se
ke
ea
ar
cr
m
s
In
ew
ee
oy
rn
pl
s
te
nd
em
En
d
rla
e
ie
li f
th
e
ua
Q
t N ers
os
li
rc
pp
bo
su
/
st
La
cu
es
w
ss
ag
ll o
nt
ne
Fo
va
ive
ad
tit
pe
m
co
l
ga
Le
s
ng
vi
sa
e
ov
t
os
pr
Im
C
gy
lo
er
no
th
O
ch
te
y
l it
ss
bi
ce
xi
Ac
fl e
s
se
or
tit
ea
cr
pe
In
m
es
co
i ti
w
ti v
e
ll o
ac
vic
Fo
re
er
co
/s
s
i ty
cu
al
Fo
qu
ts
se
ke
ea
ar
cr
m
In
s
ew
ee
rn
oy
pl
s
te
nd
En
em
rla
d
ie
he
li f
et
ua
t N ers
Q
os
li
rc
pp
bo
su
/
st
La
cu
es
w
ss
ag
ll o
nt
ne
Fo
va
ive
ad
tit
pe
m
co
l
ga
Le
s
ng
vi
sa
e
ov
t
os
pr
Im
C
Motives for offshoring
12%
6%
5.17%
4.74%
4%
15.15%
16%
15.09%
% mentioned
% mentioned
14%
Motives for offshoring
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.
19
The most important motive for offshoring mentioned by service firms:
US firms experienced in offshoring
Dutch firms experienced in offshoring
30%
30%
25%
25%
22.86%
27.91%
20.95%
20%
17.14%
17.14%
15%
% mentioned
% mentioned
20%
15%
13.95%
13.95%
9.30%
10%
10%
4.76%
5%
4.76%
1.90%
2.86%
3.81%
3.81%
13.95%
11.63%
4.65%
5%
2.33%
2.33%
0%
0%
v
sa
s
t
pe
m
co
g
in
t
pe
m
co
gs
in
s
ce
vi
er
er
th
/s
O
ty
i
al
qu
se
ea
ts
cr
ke
In
r
a
m
ew
s
rn
te
ee
oy
En
pl
em
s
d
ie
nd
li f
rla
ua
he
Q
et
tN
os
rc
rs
ie
bo
pl
La
up
/s
st
cu
w
llo
es
Fo
ag
nt
va
ss
ad
ne
ve
it i
l
ga
Le
t
os
e
ov
pr
Im
C
v
sa
er
y
lit
th
bi
O
i
x
es
fl e
ic
rv
se
se
ea
cr
y/
t
i
In
al
qu
se
ts
ea
cr
ke
In
ar
m
ew
es
rn
ye
te
o
En
pl
em
s
d
nd
ie
lif
rla
ua
he
Q
et
tN
os
rs
rc
ie
pl
bo
up
La
/s
st
cu
w
s
llo
e
Fo
ag
nt
ss
va
ne
ad
ve
it i
l
ga
Le
t
os
e
ov
pr
Im
C
Most im portant m otive
Most im portant m otive
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.
20
The most frequently mentioned goals that were achieved by service firms:
US firms experienced in offshoring
Dutch firms experienced in offshoring
18%
25%
22.22%
17.02%
16% 14.89%
20% 18.98%
13.83%
14%
13.83%
% mentioned
% mentioned
12%
15%
12.04%
10%
8.33%
7.45%
8%
6.38%
6%
7.41% 6.94%
4.63% 5.09%
5%
9.57%
10%
4.26%
6.02%
3.19%
4%
4.17%
1.85%
0.93%
1.39%
2%
4.26%
3.19%
1.06%
1.06%
0%
0%
gy
lo
er
no
th
O
ch
te
y
l it
ss
bi
ce
xi
Ac
fl e
s
se
or
tit
ea
cr
pe
In
m
es
co
i ti
w
ti v
ce
ll o
ac
vi
Fo
re
er
/s
co
s
i ty
al
cu
qu
Fo
d
ts
se
ke
ea
ar
cr
m
s
In
ew
ee
oy
rn
pl
s
te
nd
em
En
d
rla
e
ie
li f
th
e
ua
Q
t N ers
i
os
pl
rc
up
bo
/s
st
La
cu
s
w
ge
ss
ll o
ta
ne
Fo
an
ive
dv
tit
la
pe
ga
m
Le
co
e
ov
pr
gs
Im
in
av
ts
os
C
gy
lo
er
no
th
O
ch
te
y
l it
ss
bi
ce
xi
Ac
fl e
s
se
or
tit
ea
cr
pe
In
m
es
co
i ti
w
ti v
ce
ll o
ac
vi
Fo
er
re
/s
co
ty
i
s
al
cu
qu
Fo
d
ts
se
ke
ea
ar
cr
m
In
s
ew
ee
rn
oy
pl
s
te
nd
En
em
rla
d
ie
he
li f
et
ua
t N ers
Q
os
li
rc
pp
bo
su
/
st
La
cu
s
w
ge
ss
ll o
ta
ne
Fo
an
ive
dv
tit
la
pe
ga
m
Le
co
e
ov
pr
gs
Im
in
av
ts
os
C
Achieved goals
Achieved goals
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.
21
6.5.
Offshore locations
The most frequently mentioned offshore destinations by service firms are:
US firms experienced in offshoring
Dutch firms experienced in offshoring
50%
50%
40%
40%
% mentioned
% mentioned
51.20%
30%
20%
46.94%
30%
19.39%
20%
15.66%
13.25%
10%
10%
7.53%
3.92%
2.11%
0.60%
1.20%
6.63%
3.57%
3.92%
2.55%
2.55%
0.60%
8.67%
4.08%
4.59%
1.02%
0%
0%
e
id
ia
As
pe
ro
Eu
e
op
ur
lE
w
ld
or
W
ca
tr a
en
ri
Af
C
ia
As
rn
te
a
ic
a
si
lA
rn
te
es
W
fi c
ci
Pa
tr a
en
s
Ea
h/
rn
te
es
W
C
ut
So
a
ic
er
er
Am
Am
h
th
or
ut
So
N
e
id
pe
pe
ro
Eu
o
ur
lE
w
ld
or
W
ca
tr a
en
ri
Af
C
as
/E
th
rn
te
es
W
fi c
ci
Pa
ia
As
rn
te
es
W
a
si
lA
ia
tra
As
en
rn
te
C
u
So
a
ic
er
a
ic
er
Am
Am
h
th
or
ut
So
N
Destinations
Destinations
Top three of preferred regions for offshoring activities of both Dutch and US firms are:
(1) Western Europe (US 46,94% and Dutch 51,20%); (2) Central Europe (Dutch
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 rank
the Pacific instead of Central Europe third. For Dutch service firms involved in offshore
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 of
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 locations dominating Western Europe are Germany, UK, Belgium, France
and Spain. US firms, although already operating in The Netherlands, add The
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 Republic,
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.
22
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
Dutch firms experienced in offshoring
30%
30%
27.94%
27.66%
25.53%
25%
25%
21.32%
19.85%
20%
16.91%
% mentioned
% mentioned
20%
15%
17.02%
15%
10%
10%
8.51%
8.51%
8.51%
6.62%
5.88%
5%
5%
4.26%
1.47%
0%
0%
O
C
D
er
th
l
ra
tu
ul
y
li t
ua
o
of
e
er
es
nc
e
ag
an
k
or
m
w
n
io
at
e
ag
an
s
ee
oy
pl
em
ff
di
d
ie
li f
ua
t
lt
icu
iff
Q
Q
tu
si
al
ic
l
ga
Le
lit
Po
er
th
m
es
nc
re
ffe
di
o
k
or
s
ee
oy
pl
em
w
of
l
ra
tu
ul
y
lit
ua
d
ie
lif
ua
t
lt
icu
iff
O
C
D
Q
Q
n
io
at
tu
si
al
ic
l
ga
Le
l it
Po
Barriers
Barriers
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:
23
US firms experienced in offshoring
Dutch firms experienced in offshoring
35%
35%
30%
30%
31.58%
31.58%
25.97%
25%
25%
% mentioned
20%
14.29%
15%
% mentioned
23.38%
20.78%
20%
15%
10.53%
9.09%
10%
10.53%
10.53%
10%
6.49%
5.26%
5%
5%
0%
0%
O
C
D
er
th
es
nc
e
ag
an
e
er
m
ff
di
o
k
or
s
ee
oy
pl
em
w
of
l
ra
tu
ul
y
lit
ua
d
ie
lif
ua
es
nc
e
ag
an
e
er
m
ff
di
t
lt
icu
iff
Q
Q
er
th
l
ra
tu
ul
o
k
or
s
ee
oy
pl
em
w
of
t
lt
icu
iff
y
li t
ua
d
ie
li f
ua
l
ga
Le
O
C
D
Q
Q
l
ga
Le
Most im portant barrier
Most im portant barrier
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.
24
6.7.
Success factors
The most frequently mentioned success factors for offshoring of service firms:
US firms experienced in offshoring
Dutch firms experienced in offshoring
30%
30%
26.76%
26.92%
25%
23.72%
25%
21.13%
20.51%
20%
% mentioned
% mentioned
20%
15%
11.54%
10.26%
15.49%
15.49%
15%
11.27%
9.86%
10%
10%
7.05%
5%
5%
0%
0%
O
Q
er
th
rin
ho
re
l tu
cu
fs
of
s
ee
oy
pl
em
e
dg
le
d
ie
li f
ua
ow
Kn
e
g
g
in
n
io
at
t
ke
ar
m
z
ni
ga
or
nc
rie
pe
Ex
e
ur
e
dg
le
er
th
s
ee
oy
pl
em
re
r
ho
l tu
cu
fs
of
n
io
at
t
ke
ar
m
z
ni
ga
or
e
dg
le
d
ie
lif
ua
ct
ru
St
ow
Kn
O
Q
ow
Kn
e
nc
rie
pe
Ex
e
ur
e
dg
le
ct
ru
St
ow
Kn
Success factors
Success factors
In the top three ranking of success factors, qualified employees (US 21,13% and Dutch
23,72%) and knowledge of the market at the foreign location (US 26,76% and Dutch
20,51%) are listed by both Dutch and US firms but in different sequence. Whereas
Dutch firms add to their top three: knowledge of culture at offshore location (11,54%);
US firms add, structure of their organization (15,49%).
The most important success factors for offshoring mentioned by service firms:
US firms experienced in offshoring
Dutch firms experienced in offshoring
40%
30%
27.08%
35.29%
25.00%
25.00%
35.29%
35%
25%
30%
% mentioned
% mentioned
20%
15%
10.42%
10%
7.29%
25%
20%
15%
11.76%
8.82%
10%
5.21%
5%
8.82%
5%
0%
0%
O
er
th
a
iz
s
ou
vi
an
rg
lit
bi
la
ai
Av
e
Pr
O
y
fs
of
g
ex
em
s
ee
oy
pl
s
ee
oy
pl
e
nc
rie
pe
t
ke
re
ar
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Most im portant success factor
Most im portant success factor
Most important success factor for Dutch firms is the availability of qualified employees;
and for US firms, knowledge of the market at the offshore location and equally weighted
the availability of qualified employees.
When analysing the different types of offshoring with regard to success factors, both US
and Dutch service firms involved in captive offshoring refer to qualified employees,
knowledge of market and structure of their own organization. With regard to offshore
25
outsourcing activities Dutch firms mention offshore experience in their top three
important success factors, in addition to qualified employees and knowledge of the
market. US and Dutch respondents combining both types of offshoring mention most
frequently as success factors: qualified employees, knowledge of the market at offshore
location, and structure of their organization. Whereas US firms add offshoring
experience to their top three list of success factors, Dutch firms add knowledge of
culture at offshore location.
Success factors referring to knowledge of the market and culture at the offshore
location and structure of the own organization show that preparation at home can
enhance the success of the offshoring process.
26
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6.8.
Future offshore behavior and trends
The US and Dutch respondents with offshore experience mentioned most frequently the
following challenges for their future offshore activities (1) adapt to local culture; (2)
human resources; and (3) legal structure of offshoring activities (US and Dutch) and
structure of the own organization (US). Other challenges for future offshoring activities
include communication due to different languages and managing these activities. Just like
the barriers mentioned in paragraph 6.7., these challenges for the future show how
important it is to prepare the organization for getting involved in offshoring activities.
As is referred to in Chapter 2, of all respondents 20,55% of Dutch service firms versus
4,17% US firms is currently not involved in offshoring, but intends to engage in
offshoring activities within the next three years. Just like experienced service firms, their
most important motive for engage in offshoring activities is a strategic one namely to
increase and to maintain their competitiveness in the future. Other motives in their top
three ranking of motives are cost savings costs and entering new markets. Captive
offshoring is the preferred form of offshoring for their offshoring activities.
As far as activities are concerned that Dutch service firms plan to relocate in the future,
they most frequently mention: operations, technology development and sales. Just like
the experienced service firms, they expect to mainly offshore core-activities when it
involves captive offshoring or a combination of both types of offshoring. This is
different for their offshore outsourcing activities where they expect their non-core
offshoring activities to dominate.
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When expressing their plans for offshoring, South/Eastern Asia dominates as offshore
location for both captive and offshore outsourcing activities. Central Europe and
Western Europe rank number two and three in most frequently mentioned offshore
destination for future offshore activities. Only the respondents expressing plans to
engage in a combination of both types of offshoring mention Central Europe most
frequently as offshore destination; this is followed by South/Eastern Asia and
subsequently by South America and Western Europe (both locations are equally often
mentioned). Compared to the findings in paragraph 6.5., this means a shift of preferred
offshore locations from Western Europe to developing countries.
The most important barrier respondents expect to encounter in relocating their activities
to foreign locations is the fact that they are difficult to manage. Also in their top three of
barriers are cultural differences and legal issues. As far as their expected most important
success factors are concerned, they refer to knowledge of the market at the offshore
location. Furthermore, they mention the availability of qualified employees and
knowledge of the market at offshore location in their top three of success factors.
7.
Conclusions and recommendations
From the analysis made in Chapter 6 there is reason to believe that a shift in strategic
thinking about offshoring in the service sector is necessary and that more research
focused on different service categories and types of offshoring in this field should be
executed. Although there are similarities, this research confirms that captive offshoring
and offshore outsourcing cannot be regarded as interchangeable. Service firms often
relate them to different offshore locations, motives, barriers and key success factors and
sometimes activities.
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Captive offshoring is the dominant type of offshoring both of US and Dutch firms and
seems to be demanding on the organization and its management. An important barrier is
the fact that it is difficult to manage. Furthermore, the fact that captive offshoring is
dominating the offshore behaviour of respondents, means that a majority of them chose
to relocate their business activities to foreign locations under direct control. This trend
will continue in the future and will have an effect on the FDI outflow of The
Netherlands and to a lesser extent on the international trade figures regarding services,
which is influenced by offshore outsourcing activities.
It can be concluded from the analysis that for captive offshoring strategic motives
dominate. For countries it means that in order to be an attractive location for captive
offshoring activities, they will have to compete on quality of work, availability of qualified
employees and favorable rules and regulations for FDI’s. Developed countries in
Western Europe to date are leading in attracting captive offshoring activities and its main
competitors in the future are especially South/Eastern Asia and Central Europe to
maintain this position.
For offshore outsourcing cost savings is the most important driver for relocating
business activities to foreign destinations (i.e., countries’ will have to compete on costs in
order to attract offshore outsourcing activities of service firms).
Furthermore, it can be concluded that most of the offshored activities are core activities.
This may explain the shift from offshoring activities involving low to high skilled
employees. This is in line with the trend that offshoring in the service sector in general
NRG 06-06 Offshoring in the service sector - Van Gorp, Jagersma and Ike'e - 30 of 38
involves more highly skilled employees then is the case in the manufacturing industry.
A large number of US and Dutch respondents experience no barriers in offshoring their
activities. Furthermore, a majority of US and Dutch respondents have achieved their
goals through offshoring (e.g., cost savings, improving their competitiveness and
turnover/sales). This may explain on the one hand why the majority of respondents
want to continue or expand their offshoring activities in the future and on the other hand
why an overwhelming majority did not withdraw their activities from offshore locations.
Offshoring starts at home and is seen by many service firms, participating in this research
study, as tool to maintain and to increase their competitiveness. The organization,
management, and employees involved should be prepared for offshoring and incorporate
it in their strategic decision making process for example in regard to choosing the
appropriate form of offshoring (captive offshoring, offshore outsourcing or a
combination of both). This is mirrored in the key success factors relating to, for example,
knowledge of the market and culture at the offshore location and structure of the own
organization. A well prepared organization results in the difference between successful
and not successful offshoring behavior.
Much has been written on the pro’s and con’s of offshoring without knowing the
magnitude of this phenomena. It is the service sector that dominates economies of the
developed world and increasingly plays an important role in the economies of developing
countries. The fact that so little is known about offshoring in the service sector and the
offshore behavior of service firms in particular, may explain the defensive attitude of
most developed nations. The questions are not whether to participate in offshoring or
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whether or not service firms should relocate their business activities to foreign locations.
The question is how to remain or become an attractive offshore location and how to
decide whether offshoring should be a part of a service firms’ growth strategies (i.e.,
using offshoring to create a competitive advantage).
This shift in strategic thinking can only be made on the basis of facts about offshoring in
the service sector. This paper aims to contribute to insights about the phenomena of
offshoring in the service sector. Further research should be executed to complete this
picture based on which countries and service firms alike can make sound strategic
decisions related to offshoring.
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