Research on the drawback of offshoring wins international prizes
Companies often tend to have tunnel vision, when they choose to move parts of their business abroad. They are dazzled by benefits like lower production costs and ignore that the costs of expanding the business may far exceed the benefits. The pitfalls that companies often fail to see may be cultural differences, larger coordination costs or a simple factor like distance.
This issue is the basis of the PhD thesis of Marcus Møller Larsen, PhD student at CBS. During the summer he was awarded two international prizes for his research.
Numerous companies fail when they offshore their activities. They are not able to estimate how large an impact moving parts of the business to another country has on an organisation - and how much it in fact will cost. They are often surprised that it is much more expensive than expected, and a lot of companies have to withdraw their activities, says Marcus M. Larsen.
An almost naïve approach
A global survey from the international research network The Offshoring Research Network has demonstrated that almost half of the companies polled had experienced that the costs of moving their service activities abroad were higher than expected. The survey is based on responses from more than 3,000 participants from industries all over the world.
- Some companies have told me during interviews that they are in fact not completely aware of how to best manage this process. They feel compelled to just take the plunge and face the challenges as they arise. It is my thesis that this almost naïve approach may have serious consequences for future operations and results, says Marcus M. Larsen.
He does not have exact data on how Danish companies handle offshoring compared to companies from other countries. But because of high pay checks and a small domestic market, history shows that Danish companies have been offshoring activities to a very high extent. This means that a large part of those companies have faced the many challenges of offshoring.
A premature conclusion
LEGO has particularly experienced the implications of offshoring. In 2004, a financially stricken LEGO needed to make resources available and chose to move up to 80 per cent of their production from Denmark and USA to low-cost countries.
- Unfortunately, that was a premature conclusion. Only four years later, the company announced that the configuration they had established abroad did not work. It turned out to be far too complex. International coordination of relatively simple tasks was practically impossible, says Marcus M. Larsen.
LEGO decided to initiate an expensive process of change, in which they spent much more time planning the right way to handle the coordination challenges by having a global production.
Two factors make the difference between success and failure
Through his research, Marcus Møller Larsen has identified two factors that make the difference between success and failure. First and foremost, companies manage better if they are experienced in offshoring or have made a clear strategy to obtain knowledge about the consequences of moving activities abroad. Second, instead of applying the usual work methods intended for a national setting, it is important that the company focuses on taking a more global path.
- The LEGO example is very clear here. First, they only had little experience offshoring activities to such an extent, and at the same time they felt forced to act quickly. Second, they focused on a cheaper production and to a much less extent on how it would impact the organisation. As a consequence, they faced enormous challenges in coordinating and transferring knowledge. They had to start planning an efficient global organisation from scratch, says Marcus M. Larsen.
Marcus M. Larsen's research, which was published in his PhD ”The Organizational Design of Offshoring”, was awarded two international prizes during the summer; the “Barry M. Richman Best Dissertation Award” from the Academy of Management (AOM) and “Buckley & Casson Dissertation Award”, awarded by the Academy of International Business. Both organisations are highly respected within their fields, and those two prizes are seldom awarded to the same thesis.
Marcus M. Larsen was presented to the two prizes in Philadelphia, USA and Vancouver, Canada, respectively. The awards are worth USD 1,000 each.
- In the short term, it is a recognition of my research, and I find it rewarding that other people are interested in my findings. I am not yet aware what it will mean in the future, but hopefully others will study my work and take it seriously, says Marcus M. Larsen.
He wrote his PhD at the Department of Strategic Management and Globalization and is now assistant professor at the department.
For more information, contact Marcus M. Larsen.
Read the thesis
Academy of Management
Academy of International Business