Eight to Late

Sensemaking and Analytics for Organizations

Relational factors in managing outsourced projects

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Introduction

More often than not the success of an offshored IT initiative is measured using financial or operational metrics –  client-side managers  tend to focus on cost savings  and vendor-side managers on achieving service level metrics.  This is fine as it goes, but  is a limited view of the business arrangement. It is far more important for both parties to to focus on building trust and commitment to a long-term relationship. In a paper entitled, Evaluating the Success in International Sourcing of Information Technology Projects: The Need for a Relational Client-Vendor Approach, Peter Haried and K. Ramamurthy look into the role of  relational factors in  internationally sourced projects.  This post is a summary and review of the paper.

Project management methodologies and standards focus on the economic, contractual and operational aspects of  projects; they have very little to say about how client-vendor relationships should be managed.  Perhaps as a consequence, much of the research on offshored projects is based on agency theory or transaction cost economics, both of which focus on risk  and opportunistic behaviour from perspective of  clients (rather than vendors).  However, it is clear that vendors would generally have a different view of what constitutes risk or opportunism – a risk for a client is not necessarily one for the vendor. Further, as Haried and Ramamurthy mention in their introduction, success is in the eye of the beholder;  clients and vendors will differ on what constitutes success.  This suggest that a view which emphasizes relationships rather than contracts and SLAs  may provide a basis for a more inclusive approach to offshored initiatives.

Recent research has begun to look at the relational aspect of offshoring (see this paper or this one, for example).  According to Haried and Ramamurthy, however, little work has been done on integrating the relationship perspective with the traditional outcome-focused view.  Their work is an attempt to bridge this gap.

Theoretical Background

In a post entitled, To outsource or not to outsource, I discussed how transaction cost theory can provide organisations an insight into whether or not they should outsource work.  According to transaction cost theory, the cost of completing a transaction (from the client perspective) depends critically on:

  1. The complexity of the transaction: for example, implementing an ERP system is more complex than implementing a new contract management application.
  2. Whether or not it involves assets that are worth more within a relationship between two parties than outside of it: for example, custom IT services, tailored to the requirements of a specific company have more value to the two parties – provider and client – than to anyone else. This is called asset specificity in economic theory.

These factors can help determine whether or not an organisation should outsource their work, but they neglect the social-relational aspects of the outsourcing relationship. For instance, if the relationship is strong, a firm may feel confident enough to offshore highly complex, organisation-specific work.  Clearly, the relational aspect needs to be factored into in any offshoring decision.

The relational view is founded on the assumption that the relationship between the client and vendor is more important for success than a purely economic view. Haried and Ramamurthy use social exchange theory as the basis for their investigation. Quoting from Wikipedia, “Social exchange theory posits that all human relationships are formed by the use of a subjective cost-benefit analysis and the comparison of alternatives.” As such, it assumes that human relationships are based on an economic analysis, albeit a subjective one.

Research Model

Based on a survey of research literature, Haried and Ramamurthy identify the following as key variables that affect offshoring relationships:

  1. Information Sharing: this defines the degree to which the parties agree to share relevant information with each other. This is really just another term for effective communication, one of  the key  success factors of any project.
  2. Legal bonds: these are the legally binding agreements that are set out in the offshoring contract. The authors contend that many problems in offshoring deals can be traced back to the contract between the client and vendor. It is important for both parties to realise that the contracts are necessarily incomplete, and must be interpreted in a far-sighted manner.
  3. Client adaptations: adaptations made by the client to fit the processes and procedures of the vendor.
  4. Vendor adaptations:  adaptations made by the vendor to fit the processes and procedures of the client.
  5. Mutual obligations: beliefs that each party hold about their obligations to each other. These generally refer to items that have not been (or could not be) contractualised. Mutual obligations are a form of psychological contract.
  6. Intercultural competence: The ability to develop good interpersonal and working relationships with people from other cultures, and to resolve any conflicts or misunderstandings that may arise due to cultural differences.  Traditionally, intercultural differences have been viewed as a major obstacle in international sourcing arrangements. However, research seems to be somewhat equivocal on this point.

In my opinion, the selection of these factors is arbitrary: the authors do not offer any justification for choosing these six factors rather than others. For example, anecdotal evidence suggests that offshoring clients often complain about  the high turnover of vendor staff -the rationale being that it becomes difficult to build good working relationships when key contacts on the vendor-side change often. Given this, continuity (of relahionships) could have been considered a separate variable in much the same way as information sharing has been factored out of mutual obligations (information sharing is a mutual obligation).  Although this is just an example, it begs the question as to which other important relational variables might have been omitted from the study.

Haried and Ramamurthy identify the following factors as being measures of the  relational success of  an offshoring arrangement. In their model  these factors are assumed to be caused (or driven) by the above mentioned variables.

  1. Trust:  In most cases the client and vendor are located in different countries, so there’s plenty of scope for (negative) opportunistic behaviour on both sides. Given this, it is important that the  two parties trust each other. As such, the degree of trust developed is a good measure of the relational success of a project.
  2. Commitment: This refers to the effort that each side is willing to put in to maintaining the relationship. Very often this entails going beyond the contract. The ideal situation as far as commitment is concerned is when both parties have an exclusive arrangement to work with each other. Clearly, the degree of commitment is another measure of relational success. However, it isn’t clear to me that it is an independent factor because commitment depends on trust.
  3. Conflict: All relationships are prone to conflict, outsourcing arrangements are no exception. However, working through and resolving conflicts in a mutually acceptable manner can strengthen the relationship. Conflict can be quantified (sort of) via the overall level of disagreement between the two parties over matters such as goals, procedures, timelines etc. Clearly, the level of conflict is also a good measure of the relational success of the offshoring arrangement.

Again, these three success factors are chosen without justification,  omitting other possibly significant ones. For example, longevity of the relationship might also be a good indicator of the success of the relationship. Further, the causal connection  between variables and success factors  is far from clear; the authors hypothesise a cause-effect relationship  between the six relational dimensions and the three measures, but there is no justification offered.

Research Methodology

The authors gathered qualitative data through interviewing a number of offshoring client/vendor pairs about the relational aspects of the outsourcing arrangement. Vendors were contacted through the client – this is an important point which I’ll return to later. The clients were asked to provide information on two projects – one that had been completed recently and the other ongoing. The authors asked for permission to interview multiple stakeholders from both the client and vendor organisations. This provided diverse perspectives on the all questions that were asked. The questions asked pertained to the model discussed in the previous section, in the context of the project that the interviewees had worked on. The questions were open-ended so the interviewees had to think through their answers, not just tick a box.

The authors surveyed five  US-headquartered firms from the areas of financial service and manufacturing. These were the clients.  The outsourcing partners (vendors) – six in all – are all India-based outsourcing majors. The gathered data covered eight projects across the surveyed organisations.

Analysis

Below are the conclusions the authors drew from an analysis of their data. The findings are listed by each of the model variables.

Information exchange

Client Perspective

Most of the client-side interviewees indicated that communication (information exchange) was a key determinant of the success of the relationship.  In many projects the vendor had a on-site  team with whom client-side stakeholders could communicate directly. This was highlighted by clients as being an effective means to communicate. It placed the onus of communicating with the offshore team on the on-site vendor team.

Vendor Perspective

The vendor perspective matched that of the client. All vendors agreed that having an onsite team is critical to the success of the project.  Although some of the reasons offered by vendor-side stakeholders differed in detail from that of  those on the client-side,  this indicates that communication is indeed a key relational success factor.

Based on the above, the authors formulate the following proposition:

Proposition 1: Intense, open, and timely information exchange is crucial for relational success for both client and vendor stakeholders.

Vendor Adaptations

Client Perspective

Clients viewed adaptations made by the vendor as critical to the success of the outsourcing relationship.  Typically, the adaptations cited by clients included, working hours, processes and procedures, investments made in training staff and placing personnel on site.

Vendor Perspective

Most vendor-side interviewees agreed that the vendor needed to adapt to the client rather than the other way round. Further, many vendors recognized that this was a key to continuing the relationship. As one vendor-side  analyst put it,  “Up to a certain level, no matter what, we will accommodate because they know if we do not accommodate we will be out.”

The authors point out that these findings are consistent with transaction cost theory in that vendor adaptations are, in effect, a type of asset specificity.  They give the vendor an advantage over other vendors who may want to compete for the client’s business because they indicate that the vendor is serious about maintaining and enhancing the relationship with the client.

Based on the above, the authors hypothesise the following:

Proposition 2. Adaptations by vendors are vital for relational sourcing success evaluations by client and vendor stakeholders. These are even more important for client stakeholders than for vendor stakeholders.

I’m not sure I agree with the statement, “[vendor adaptations are] even more important for client stakeholders than for vendor stakeholders”. I’d say they’re at least equally important to vendors because the client could walk away from the relationship if the vendor is not willing to make adaptations.

Client Adaptations

Client Perspective

The responses here were a bit mixed. Clients-side managers believed that some adaptations would have to be made, and were worthy of making too. For example, one manager stated that offshoring would entail more rigorous documentation and adherence to internal processes– which he perceived as a Good Thing. On the other hand, one of the business analyst’s interviewed thought it odd that they (the client) should be making adaptations when they were the customer in the relationship. The perception seemed to be that the vendor should make adaptations, not the client.

Vendor Perspective

Some vendor-side interviewees indicated that clients would need to make adaptations to get the most out of offshoring.  Two areas singled out were: 1) adjusting to distributed teams and 2) adapting to cultural differences.  That said, vendors valued whatever adaptations their clients made, and realised that these adaptations indicated the seriousness of the client about the relationship.

Based on their findings, the authors propose the following regarding client-side adaptations:

Proposition 3. Adaptations by clients are essential for relational sourcing success evaluations by client and vendor stakeholders. These are even more important for vendor stakeholders than for client stakeholders.

Legal Bonds

Client Perspective

Most client stakeholders considered the offshoring contract to be of limited importance. In most cases, clients viewed the contract as a basis for the relationship, but not a comprehensive document containing last detail of the business agreement.  Client-side managers emphasized that the contract was intended to be flexible.

Vendor Perspective

The vendor, quite naturally, placed more emphasis on the contract. That said, most vendor managers noted that the contract described only the high-level goals, not how they would be achieved. Most vendors saw the contract as a means to engender trust and reduce conflict.  Based on interviewee responses, the authors make the following hypothesis:

Proposition 4. Legal bonds are considered key to relational sourcing success for vendor stakeholders to a greater degree than for client stakeholders.

Although the authors claim that these findings are consistent with social exchange theory, I suspect that the respondents may have glossed over difficulties –  see my post on some  pitfalls of contracts for more on why.

Mutual Obligations

Client Perspective

Many clients did not acknowledge that mutual obligations played a role in the relationship. However, some client-side stakeholders acknowledged that many vendor personnel went above and beyond the call of duty (and the contract). On the other hand, some senior managers felt they weren’t getting value for the large sums money they were spending.

Vendor Perspective

Vendor stakeholders were consistent in their belief that the contract could not capture everything, and that mutual obligations were an important determinant of the success of the relationship. Many vendor-side personnel claimed that they were doing several tasks that were not in the contract.

The authors suggest that the differences in perceptions of mutual obligations may be because many client-side personnel were simply not aware of what was written in the contract. In contrast, most vendor stakeholders had a good idea of what was contracted. Based on this, the authors make the following hypothesis:

Proposition  5. Mutual obligations are viewed by vendor stakeholders as essential for relational sourcing success, but not necessarily by client stakeholders.

Intercultural Competence

Client Perspective

Clients acknowledged the importance of intercultural understanding to the success of the relationship. However, most clients displayed a good awareness of cultural differences and what needed to be done to address issues arising from them.

Vendor Perspective

Like clients, all vendors acknowledged the importance of cultural differences. Like clients, they did not believe these presented any major problems.

The authors emphasise that their findings are not consistent with previous research (see this paper for example).  Based on their findings they propose the following:

Proposition 6. Intercultural competence is not a key determinant of relational sourcing success valuations by client and vendor stakeholders.

Summary results and conclusions

Based on their findings, the authors make the following points:

  1. Success of the relationship depends on many factors (in particular, those listed above), and any analysis must include both client and vendor perspectives. Many earlier studies included only the client perspective.
  2. Information exchange (communication) is acknowledged as a key factor by both clients and vendors.
  3. The clients expected vendors to make adaptations to the clients’ processes, but did not necessarily believe that they (the clients) needed to make any adaptations. The authors point out that this finding is inconsistent with transaction cost theory
  4. Clients did not always acknowledge the importance of contract, but the vendor always did.  The same was true of the role of mutual obligations. The authors speculate that this may be because client stakeholders weren’t always aware of what was contracted whereas vendor stakeholders invariably were.
  5. Neither clients or vendors believed that cultural differences were an unmanageable issue. The authors suggest that this may be because offshoring is now a well-accepted practice and that client firms have a better understanding of the potential problems that intercultural issues can cause.
  6. They acknowledge the limitations of their research: sample size, location of clients and vendors.  However, they do not acknowledge that clients and (especially!) vendors may not have been open in their responses. This is a particular concern because vendors were contacted through the client.
  7. They believe that their work may be useful to project managers who work on internationally sourced projects because it provides a set of key relationship dimensions that managers should focus on.  Maybe so, but readers should be aware that there could be other key  dimensions as I’ve noted earlier in the review.

To conclude: although the conceptual model presented by the authors has some shortcomings, project managers will find the paper a worthwhile read because it highlights the importance of relational factors in managing outsourced projects.

2 Responses

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  1. This is a very comprehensive and well-written post. I love that you write about trust since this is quintessential in any business, local or global. I think communication is also important, where milestones must be set clearly before starting any venture – big or small.

    Like

    Sshah

    May 25, 2010 at 2:23 pm

  2. Thanks for the feedback.

    Trust is indeed important, as is communication. Haried and Ramamurthy refer to the latter as information sharing in their paper.

    Regards,

    K.

    Like

    K

    May 25, 2010 at 5:31 pm


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