By Danny Ertel, Co-Founder and Joe Bubman, Consultant, 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 one rising above the rest, according to hundreds of participants in Vantage Partners’ “Managing Offshoring Relationships: Governance in Global Deals” study: culture. And the way customers and service providers manage culture 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 relationships, 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:
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 (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 (avoid conflict vs. engage directly)
Making commitments (agree 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, they 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.
Customers that offshore to Latin America believe their provider communicates directly and confronts conflict.
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.
Another possible 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.
While culture is consistently rated as the top challenge across geographies, individual regions and countries present unique differences and challenges. For instance, customers from the U.S. and elsewhere that offshore to Latin America and providers that deliver from Latin America rated ambiguity and risk as the greatest challenges in their engagements. In the rest of the world, ambiguity and risk were relatively less significant challenges while directness of communication was rated a much more significant challenge.
Two of the biggest challenges customers report with their providers in India are their perceived tendencies to communicate indirectly and avoid conflict, even though providers in India don’t ascribe those tendencies to themselves. Customers that offshore to Latin America, though, believe their provider communicates directly and confronts conflict. Unsurprisingly, providers in Latin America also see themselves differently from how providers in India view themselves—a stronger preference for direct communication, a greater comfort with informality, and a stronger tendency to engage and confront conflict.
Why do cultural differences matter?
Cultural differences contribute to the difficulty of engaging in critical outsourcing activities such as managing scope, generating innovation, and managing performance. For example, 69% of survey respondents say that cultural differences have an impact on scope management. And of those 69%, half identify significant cultural challenges around directness of communication, half cite significant cultural challenges around making commitments, and 45% note significant challenges around dealing with conflict (respondents could identify more than one challenge).
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
Nearly everything you do in an outsourcing deal is geared towards achieving maximum value from the contract. That’s why you attend to the relationship, and that’s why you should pay attention to culture. The study shows clearly 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%.
Manage cultural differences in your offshoring relationships to achieve maximum value
Our research also shows that the impact of cultural differences can be minimized with effective governance. Implementation of various mechanisms, including joint skills training and health checks, can help the parties overcome cultural challenges, leading to increased satisfaction with the relationship.
Among those respondents with joint skills training and health checks in place, 89% are satisfied with how their organization has managed their principal offshoring relationship and only 3% are dissatisfied.
Among those with neither joint skills training nor health checks, only 65% are satisfied with how their organization has managed the deal and 18% are dissatisfied.
About Vantage Partners, LLC
Vantage Partners leads the field of relationship management, building on more than 20 years of research and consulting experience with the world’s leading companies. A spin-off of the Harvard Negotiation Project, Vantage Partners helps customers and providers enter into, manage, and (when necessary) remediate working relationships. Vantage works with clients on specific transactions, as well as on enhancing their institutional capabilities to make effective negotiation and relationship management a repeatable process. For more information, please visit www.vantagepartners.com