By Danny Ertel, Founding Partner, Vantage Partners
Complex outsourcing relationships are always difficult to manage, but the unique characteristics of offshore deals complicate the challenge. Some early concerns about offshoring, such as political uncertainty and tax issues, appear to have become more manageable with experience. Others remain, however, with culture rising above the rest, according to hundreds of participants in Vantage’s new study, Managing Offshoring Relationships: Governance in Global Deals (see Figure 1). And the way customers and service providers manage cultural differences has a direct impact on the value they achieve in their deal.
What do we mean by culture?
Companies nearly always encounter different organizational cultures when entering into strategic relationships with external partners. After all, companies have different strategies, structures, risk positions, capabilities, and norms, and when the deal is more than a simple buy-sell transaction, those differences impact how they work together. Offshore relationships1, though, present unique challenges because of perceived cultural differences attributed mainly to the country or region where each company is located. And this means that the very approach partners take to discussing different structures, making strategic decisions, or reconciling different risk positions can be quite different. In this study, we examine the impact of perceived cultural differences across 13 key dimensions:
Figure 1: Top challenges in offshoring relationships
Individuals vs. groups (emphasis on individuals vs. groups)
Status and hierarchy (egalitarian vs. hierarchical)
Risk (risk-averse vs. risk-taking)
Directness of communication (indirect vs. direct)
Relationships vs. tasks (emphasis on relationships vs. tasks)
Time frame (short-term vs. long-term orientation)
Multi-tasking (emphasis on doing one thing at a time vs. multiple things)
Decision-making (consensual vs. authoritative)
Formality (informal vs. formal)
Agreements (reliance on implicit agreements vs. emphasis on contractual deals)
Ambiguity (tolerance for ambiguity vs. need for certainty)
Dealing with conflict (avoidance of conflict vs. direct engagement)
Making commitments (agreement even when not sure can deliver vs. reluctance to agree unless certain can deliver)
What cultural differences exist?
For most of these dimensions, at least two-thirds of customers see some cultural differences between their organization and their key offshore provider. Generally, customers say they are much more likely than their partner to confront conflict rather than avoid it, communicate directly rather than indirectly, and multi-task rather than focus on one thing at a time. Interestingly, for every dimension, providers are less likely to perceive significant differences with their offshore customer (see Figure 2).
Figure 2: Customers are more likely than providers to perceive significant cultural differences
This may be because providers see themselves differently from how customers see them. For instance:
Making commitments: 51% of providers see themselves as reluctant to make commitments unless absolutely sure they can deliver; only 26% of customers say that about their provider.2
Time frame: 59% of providers see themselves as oriented toward the long term, while only 33% of customers say that about their provider.
Another explanation is that customers see themselves differently from how providers see them. For instance:
Multi-tasking: 71% of customers say they emphasize multi-tasking, while only 45% of providers describe their customers that way.
Dealing with conflict: 47% of customers say they possess a tendency to confront and engage conflict; only 31% of providers say that about their customer.
Why do cultural differences matter? They can make critical outsourcing activities even harder
Critical outsourcing activities such as gaining buy-in with stakeholders, managing scope, managing performance, and generating innovation are challenges in complex outsourcing relationships because the necessary conditions for successfully engaging in them (e.g., efficient communication, effective commitment management, collaborative issue resolution) are frequently absent. In offshore deals, cultural differences around communication, commitment management, and issue resolution shake those foundations of effective governance activities.
It should be no surprise, then, that 38% of survey respondents say that cultural differences impact scope management3 (see Figure 3). And of those who say cultural differences impact scope management, 56% identify cultural challenges around directness of communication, 59% cite challenges around making commitments, and half note challenges around dealing with conflict (respondents could identify more than one challenge).
Figure 3: Cultural differences can make critical outsourcing activities even harder
Ineffective execution of scope management and other critical outsourcing activities impacts customers and providers in the following ways:
Low staff morale
Service complaints from end users
Time wasted on conflict, revisiting decisions
The bottom line: culture impacts the value you achieve in your deal
The study shows that cultural differences can prevent both parties from achieving the full value of their deal: 64% of respondents say that the impact of cultural differences is greater than 10% of annual contract value, and 33% say the impact is more than 20% (see Figure 4).
Figure 4: Cultural challenges have a significant impact on the value achieved
Manage cultural differences in your offshoring relationships to achieve maximum value
Implementation of various governance mechanisms, including joint skills training and health checks, can help the parties overcome cultural challenges, leading to increased satisfaction with the relationship.
89% of respondents with joint skills training and health checks in place are satisfied with how their organization has managed their principal offshoring relationship and only 3% are dissatisfied.
Only 65% of respondents with neither joint skills training nor health checks are satisfied with how their organization has managed the deal, while 18% are dissatisfied (see Figure 5).
Figure 5: Effective governance mechanisms may lead to increased satisfaction with offshoring relationships
For a copy of the full report
For a copy of Vantage’s Managing Offshoring Relationships: Governance in Global Deals study, written based on input from more than 400 customers and providers, please email email@example.com.