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The Ceo’s Decision-Making Process Model on Service Offshore Outsourcing: Using Theory of Reasoned Action (Tra)

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THE CEO’S DECISION-MAKING PROCESS MODEL ON SERVICE OFFSHORE OUTSOURCING: USING THEORY OF REASONED ACTION (TRA) Mark Yang Department of Information, Operations and Technology Management College of Business Administration The University of Toledo 2801 W. Bancroft St. Toledo, Ohio, USA 43606 Phone: (419) 787-3453 Fax: (419) 530-2290 E-mail: [email protected]

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utoledo. edu Jeen Lim Department of Marketing and International Business College of Business Administration The University of Toledo 2801 W. Bancroft St. Toledo, Ohio, USA 43606 Phone: (419) 530-2922 Fax: (419) 530-4610 E-mail: jeen. [email protected] du ABSTRACT This present study attempts to fill the gap through providing the CEO’s decision-making process model with regard to service offshore outsourcing activities which becomes important strategy to maintain firm’s competitive advantage. Arguably, the CEO is the main domain of decision making authority on such important agenda of the firm as service offshoring. The research model includes 1) key antecedents of service offshoring deriving from various outsourcing literatures, 2) CEO’s propensity (attitude and subjective norm), intention and behavior, and 3) regulatory environmental factors.

As a theoretical base, Theory of Reasoned Action (TRA) will be used. Managerial implication as well as future research direction will be provided. Keywords: Offshore outsourcing, Key Antecedents of Service offshoring, Decision-making process, Chief Executive Officer (CEO), Theory of Reasoned Action (TRA) INTRODUCTION Recently, service offshoring has brought the tremendous increasing attention and concern to both practitioners and researchers due to the rapidly-changing structure of the U. S. mployment and the growing importance of its significant impact on the U. S. economy. This trend has been more and more visible due to “the rise of globally integrated knowledge economy”, which has both good and bad impact on the U. S. economy: it may be good because U. S. firms may enjoy the cost benefits, utilizing large best pools with relatively low cost; it may be also bad because they are likely to lose control of their core businesses or lose white-collar jobs of the U. S. counterpart.

Up to now, large body of research has addressed the various issues of service offshoring. However, current scholarly works tend to be fragmented and especially, few attempted to examine inside of firm’s decision-making process with regard to service offshore outsourcing. Such decision-making process model may be useful to contribute to the previous – 4491 – body of research on service offshore outsourcing in that to my knowledge, very few papers produced from top management perspective (except [47]) and this process model may help top management, esp.

Chief Executive Officer (CEO) avoid to make hasty decision, resulting in saving huge economic losses. This paper is organized as follows. The following section provides literature reviews. The third section presents the research model which includes such variables as 1) key antecedents which are major criteria for determining service offshoring drawn from the extant literatures on outsourcing activities; 2) CEO’s propensity; 3) CEO’s Intention and Behavior; and 4) regulatory environment (moderating variable). Series of research propositions are developed.

The conclusion section provides the managerial implication as well as future research direction. LITERATURE REVIEW The role of top management on affecting firms’ strategy choices and performance has been well-documented [13] [14] [40] [9] [15]. Quality of leadership of top management, esp. CEO, determines the fate of the firm. For example, under Jack Welch’s leadership General Electric Company (GE) within 20 years has been drastically transformed into one of the largest and most admired company with $ 500 billion’s market value from a market capitalization of $12 billion.

It shows the critical role of CEO in advancing the firm in terms of organizational performance. Excellent outcomes start with wise and prudent decision-making. In that regard, CEO is considered the main domain of decision-making authority on important agenda of the firm such as offshoring service. Theory of Reasoned Action (TRA) [12] [2] is a general model that does not specify the beliefs that are operative for a certain behavior [8]. The TRA postulates that one’s behavior is determined by his /her behavioral intention (BI) to perform the behavior.

BI is divided into two conceptually distinct variables: 1) one’s attitude (A) toward performing the behavior, and 2) one’ subjective norm (SN) about performing the behavior. Once attitudes and subjective norms are formed, CEO may have inclination whether or not to make certain choices. Actual behavior is the transmission of such intention into action. Significance of the role of environment on the strategy formulation and organizational outcome has been extensively examined [25] [29] [16] [24]. The CEO’s decision to offshore services will be greatly contingent on the regulatory environment a firm faces.

The regulatory environment can, to some extent, act to facilitate or hinder offshoring. Regulation environment becomes a moderating variable that can weaken or enhance the relationship between (1) the drivers of offshoring and top management’s propensity; and (2) top management’s propensity and intention and actual behavior. RESEARCH MODEL The research model is about the CEO’s decision making process on service offshore outsourcing. It includes four key antecedents (i. e. , decision-criteria) of service offshore outsourcing and the CEO’s propensity, intention and behavior.

This model also attempts to examine the moderating role of regulatory environment between (1) the key antecedents and the CEO’s propensity; and (2) the CEO’s propensity and the CEO’s intention and behavior. Cost Advantage ([18] [19]) Cost advantage refers to the extent to which a client firm can achieve cost reduction, productivity or profitability through service offshore outsourcing activities. One of the most commonly quoted reasons is that managers feel that they can gain cost advantages by employing – 4492 – outside suppliers to perform certain services and produce certain products.

Cost reduction remains the major explanation for the drivers of outsourcing. Some researchers argue that an important foundation of cost reductions is the outsourcing firm’s access to economies of scale and the distinctive know-how or expertise that a large outsourcing vendor (i. e. , supplier) can bring. [4] [32] Nohria and William [30] discovered that to be a steady industry winner, a firm must increase its productivity by around twice above than the industry’s average. There are a number of studies that focus on explaining the relationship between outsourcing and productivity growth.

Today’s knowledge and service-based economy offers numerous opportunities for wellrun companies to increase profits through outsourcing [30]. When used properly, outsourcing can boost profitability to the firm in many ways (i. e. , staffing, capabilities, facilities, and payroll, etc). The most obvious reason why a firm offshores services is also for cost advantage. In regard to offshoring activities, wage differential (i. e. , lower labor cost with comparable quality of work) between U. S. and other developing countries motivates top management to offshore. Risk Control ([17])

Risk control refers to the degree to which a client firm control the risk such as amount of involved outsourcing value (i. e. , scale of the contract), outsourcing complexity (i. e. , level of contract difficulty) and outsourcing duration (length of the contract) that might occur through outsourcing. Management needs to assess and evaluate the risks and their impact at various levels such as strategic, tactical and operational levels [43]. The level of contract complexity also can influence on the level of risk. Complexity refers to the degree to which activities are diversified with the outsourcing function.

The more complex a contract is, the more risky its implementation is. Length of contract duration [19] can affect the complexity of an outsourcing relationship. When an outsourcing contract’s duration requires a longer period of time, both diversity of business relationships and complexity of contract management increase. As a result, longer duration contracts expose the outsourcing company to greater level of risk due to managerial uncertainty. Infrastructure Maturity ([17] [23]) Infrastructure maturity refers to the degree to which both firms (i. e. , client and vendor) have developed telecommunications (i. e. Internet and mobile telecommunication) and transportation (i. e. , logistics, 3PLs) infrastructure. Technology advancement makes organizational and national borders less significant when it comes to the decision regarding relocation of service functions. Telecommunication infrastructure is essential for electronically transmitted services. Lack of telecommunication system will be a hurdle for trade with U. S. Transportation infrastructure refers to the availability of logistics. The increase in competition and growing awareness of the role of logistics lead more companies to exploit the potential of outsourcing.

Cultural Compatibility ([20]) Cultural compatibility refers to the degree to which both firms (i. e. , client and vendor) can interchangeably accept cultural dissimilarities including language (i. e. , English), ethnic linkage, or cultural difference. In the context of a firm’s offshoring decision, language similarity between a client and vendor firm is important. Language similarity is measured by the extent to which a vendor firm is exposed to English (i. e. , English fluency). Ethnic linkage is also important for offshoring outsourcing service activities. Ethnic linkage between the managers of both firms (i. . , client and vendor) in origin and destination countries increases cultural compatibility. Such – 4493 – linkage improves social capital [45]. Cultural difference refers to the degree to which firms may not accept a counterpart’s culture. These cultural differences may increase difficulties associated with managing employees. We propose that four factors that have influenced firms’ outsourcing decision will affect to some extent firms’ service offshoring decision. Therefore, we regard these four factors as the key antecedents of the CEO’s decision for service offshore outsourcing.

Theory of Reasoned Action (TRA) In firms’ decision-making for service offshoring, CEO is the key person who actually involves in that process with collaborative effort of top management and board of directors. According to TRA, attitude toward offshore outsourcing services is generated by the individual’s salient belief about the consequences of adopting service offshoring practices (behavioral beliefs) and evaluation of these consequences (i. e. , positive or negative outcomes). Positive feelings toward offshoring will lead top management to form optimistic attitude, in turn intention to behave (i. e. willingness to offshore outsourcing services). After careful examination of the four key antecedents, i. e. , cost advantage, risk control, infrastructure maturity, and cultural compatibility, the CEO forms positive or negative attitude toward offshoring. Subjective norm is generated by the normative beliefs that the person attributes to what relevant others (i. e. , social referents) expect her to do with respect to adopting offshoring services as well as her motivation to comply with those beliefs. Social referents possibly include firm’s board of directors, stockholders, firm’s customers, or CIO [47].

The strength of social referents’ normative belief and motivations will actually determine the CEO’s final decision to offshore services. Once attitudes and subjective norms are formed, the CEO may have inclination whether or not to make decision for offshoring services. In turn, actual behavior will be transmitted from such intention. The above discussions lead to: Proposition 1: The key antecedents of service offshore outsourcing, (a) Cost Advantage, (b) Risk Control, (c) Infrastructure Maturity, and (d) Cultural Compatibility will have a positive impact on top management’s attitude and subjective norms to offshore outsourcing services.

Proposition 2: Top management’s positive attitude and norms that was formed through careful assessing key antecedents of service offshoring will have a positive impact on top management’s actual behavior (i. e. , both intention and decision to offshore services). Moderating Effect: Regulatory Environment ([17] [20]) Regulatory environment refers to explicit regulative processes, existing laws and rules that influence offshoring outsourcing [49]. In this case, government plays a major role.

For example, in case of offshoring software industry, government can affect restrict or facilitate the import and export of equipment, software, or data across the country. Government is also the main enforcers of intellectual property laws (i. e. , patent, copyright) 36]. Companies in the U. S. will not choose to offshore key functions if they are concerned about the security of key processes or products [37]. Generally, three types of regulatory factors can be categorized: 1) Tariff/ Non-tariff barriers; 2) privacy laws and 3) rule of law.

We propose that above regulatory environment factors will play moderating roles in affecting the relationship between the key antecedents and the CEO’s final decision to offshore outsourcing services. Proposition 3: The relationship between (1) the key antecedents and the CEO’s propensity and (2) CEO’s propensity and intention and behavior for offshore outsourcing services will be moderated by regulatory environment. – 4494 – Table 1: Key constructs (Definitions and Supporting Literatures) Construct Definition Literature Cost Advantage (CA) The degree to which a client firm can achieve cost reduction, operating efficiency (i. . , productivity) or profitability that is related to economic benefit through service offshore outsourcing activities Smith et al. , 1998; Jiang et al. , 2006; Jiang et al. , 2007 Risk Control (RC) The degree to which a client firm controls the risk that might occur through service offshore outsourcing activities, risk such as amount of involved value (i. e. , Scale of the contract), complexity (i. e. , Level of contract difficulty) and duration (Length of the contract). Smith et al. , 1998 Stremersch et al. , 2003; Carson, 2007; Jiang and Qureshi, 2006; Jiang et al. , 2007 Infrastructure Maturity IM) The degree to which both firms (i. e. , client and vendor) have developed telecommunications (i. e. , Internet and mobile telecommunication) and transportation infrastructure. Cultural Compatibility (CC) The degree to which both firms (i. e. , client and vendor) can interchangeably accept different cultural backgrounds including language (i. e. , English), ethnic linkage, or cultural difference. Kshetri, 2007 Regulatory Environment (RE) Explicit regulative processes, existing laws and rules such as trade barriers, privacy laws and rule of law that influence service offshore outsourcing activities

Scott, 1995; Jahns et al. , 2006; Kshetri, 2007 Jahns et al. , 2006; Metters and Verma, 2008 Figure 2: Theoretical Model Key Antecedents Cost Advantage (CA) Risk Control (RC) Infrastructure Maturity (IM) H1 The CEO’s Attitude and Subjective Norms toward offshoring Hservices 3 (PROPENSITY) Cultural Compatibility (CC) H3 Regulatory Environment (RE) – 4495 – H2 The CEO’s DecisionMaking to offshore services (INTENTION) (BEHAVIOR) CONCLUSION Nowadays, outsourcing and offshoring decision is not an alternative option to choose but a mandatory passport to lead firms to sustain competitive advantages over rivals.

In this regard, this paper seems to be of less value because many firms offshore service jobs anyway. However, the key antecedents that were shown in present study may help management as useful decision tools and become critical in succeeding to reap the full benefits of the offshoring activities to the firm. This is a meaningful attempt to go inside of firms’ decision-making process though it may not be perfectly useful for managerial decision. It is primarily because through this model, management can rethink before they launch the service offshoring activities, asking themselves “why we pursue” and “then, how we can reap the full benefits. This present study attempted to consider four key antecedents of service offshoring which are important decision-credentials for top management, esp. CEO to offshore. Although these are not direct determinants of service offshoring decision, they are the ones in which firms need to consider before actual decision is made in that they encompass different aspects. Cost advantage and risk control are considered economic aspects. Since cost elements are always one of the most important reasons for firms’ decision of certain activities, cost advantage and level of risk control needs to be carefully examined before initial launch is kicked off.

Infrastructure maturity is considered environmental or infrastructural aspect. Availability and development of telecommunication and transportation infrastructure is critical for service offshoring—its fast and reliable delivery. Lastly, cultural compatibility is considered cultural aspect. Language (i. e. , English) fluency, ethnic linkage, or cultural difference will actually determine long-term relationship between a client and vendor firm across the country.

These decision-criteria will help top management to consider the different aspects of offshoring activities, which are economic, environmental (infrastructural) and cultural dimensions. This present study also identified three different aspects of regulatory environment which are trade barriers, privacy laws, and rule of law. Trade barriers are associated with a relation-type regulatory factor in that they determine the magnitude of relationship between countries which are involved in offshoring activities.

Privacy laws are coupled with a risk-type regulatory factor in that lack of privacy laws will make a client firm to be exposed to information (data) loss. Rule of law such as political institution, court system or sound citizenship is linked with security-type regulatory factor in that poor rule of law (i. e. , vendor firm) is regarded as major obstacles to offshoring and cause to critical security problems. For future research, three major works need to be done. First, to make empirical study possible, measurement items for each key antecedent and CEO’s propensity, intention and behavior need to be developed.

For operationalization of key variables, more refined work should be continued. In this case, both secondary data and survey method may be appropriately used. Second, for completeness of the model or further analysis, outcome and performance measure might be added. Third, for extension of this paper, it might be an interesting attempt if general decision-making process model which includes other top management teams and board of directors is provided. * References Available Upon Request (Mark Yang: [email protected] utoledo. edu) – 4496 –

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