Mitigating hidden costs in service offshoring: a strategic management perspective

Purpose IT-enabled service offshoring has become a vital and widespread practice for firms seeking to realize various advantages. However, many firms suffer from “hidden costs” (the discrepancies between the expected and actual costs of offshoring), and these firms often find a disappointing outcome from their offshoring decisions. The purpose of this paper is to explore whether and how the adoption of an offshoring strategy can reduce such hidden costs and how this effect can be moderated by contextual factors, including the complexity of tasks and the accumulation of experience. Design/methodology/approach Based on survey data from the Offshoring Research Network, this study uses hierarchical regression analysis to empirically test the hypothesized relationships. Findings A corporate-wide strategy for guiding offshoring decisions may effectively reduce cost-estimation errors. This effect is amplified by increasing task complexity, but decreases with growing offshoring experience. Regardless of whether a strategy is initially in place, most firms learn to avoid cost-estimation errors only after several years. This finding suggests that firms have a limited ability to mitigate hidden costs in the short term. Practical implications The guidelines specified by an overarching strategy can better rationalize cost estimation and goal setting for individual offshoring projects, provide incentives for project participants to achieve preset aspirations, and enhance cost-efficiency in fulfilling offshoring activities and in coping with emerging contingencies. Firms tend to benefit more from establishing a formal strategy to reduce the hidden costs of more complex projects, especially if the firms involved have little offshoring experience. Originality/value This study empirically examines the hidden costs in offshoring from a strategic management perspective. This approach extends our understanding of cost estimates in offshoring, and it explores the influence of corporate strategy in the alignment of expected and achieved performances from IT-enabled service offshoring. The study also examines the boundaries of strategy’s ability to affect hidden costs, and it expands our knowledge of the relationship between strategy and experience.