report and presentation
The impact of cultural differences in offshore
outsourcing�??Case study results from German�??Indian
application development projects
Jessica K. Winkler & Jens Dibbern & Armin Heinzl
Published online: 23 February 2008
# Springer Science + Business Media, LLC 2008
Abstract Offshore outsourcing to vendors in foreign
countries causes unique challenges which need to be
understood and managed effectively. This paper explores
cultural differences in IS offshoring arrangements involving
German client organizations that outsource application development
activities to Indian vendors. For this purpose, a
research framework is developed based on both theoretical
considerations and specific empirical observations from
multiple case studies. The goal is to (1) explore the nature of
cultural differences in offshore outsourcing arrangements in
depth and to (2) analyze the relationship between those
cultural differences and offshore outsourcing success. Based
on the case findings, implications and practices for the
management of offshore development projects are outlined.
The results indicate that cultural differences in terms of power
distance, IS designer values, and an active versus passive
working attitude critically affect several dimensions of
relationship quality, thereby influencing offshore outsourcing
success. A clear definition of roles and mechanisms, strong
leadership, and an active management of culture by adapting
to either the client�??s or the vendor�??s national culture appeared
to be effective ways to manage cultural differences.
Keywords Offshoring . Outsourcing . Cultural differences .
Application development . Case study
1 Introduction
In the early 1990s, offshoring of software work to
development centers in low wage countries pertained to
large Western companies such as IBM and SAP who
systematically attempted to take a hold of wage differences
and resources of a global market. With the rise of the new
millennium, former development countries such as India
and emerging nations in Eastern Europe began to establish
themselves as outsourcing vendors in the global market of
IT services, drawing from a growing pool of qualified IS
resources (Bode and Mertens 2006; Hirschheim et al.
2004). Given this global supply, offshore outsourcing of IT
services has become a widely adopted part of many global
organizations�?? sourcing strategies, especially in the laborintensive
domain of application services. Similar to domestic
outsourcing, however, offshore outsourcing is associated with
the typical market-based frictions. These frictions pertain to
the very nature of systems development and maintenance as
services that require a lot of communication and cooperation
between the client (e.g., users, business managers, as well
as systems analysts and architects) and the vendor (e.g.,
solutions architects, systems designers and programmers). It is
therefore of little surprise that studies on domestic outsourcing
have shown that effective relationship management that is
aimed at reducing frictions is one of the key challenges and
success factors of IS outsourcing (Goles 2001; Grover et al.
1996; Kern 1997; Lee and Kim 1999).
Inf Syst Front (2008) 10:243�??258
DOI 10.1007/s10796-008-9068-5
J. K. Winkler (*)
Department of General Management and Information Systems,
University of Mannheim,
Schloss, S 134, 68131 Mannheim, Germany
e-mail: [email protected]
J. Dibbern
Department of General Management and Information Systems,
University of Mannheim,
Schloss S 135, 68131 Mannheim, Germany
e-mail: [email protected]
A. Heinzl
Department of General Management and Information Systems,
University of Mannheim,
Schloss, S 219/220, 68131 Mannheim, Germany
e-mail: [email protected]
Offshore outsouring, however, brings about yet another
challenge to relationshipmanagement: the cultural differences
between client and vendor. Existing literature on IS offshoring
frequently mentions cultural differences and associated problems
(Heeks et al. 2001; Krishna et al. 2004; Nicholson and
Sahay 2001; Rao 2004; Vogel 2005). However, the actual
effect of cultural differences on offshore outsourcing success
has not been analyzed in a systematic way. When examining
the emergent literature, it is striking that little attempt has
been made to draw on existing research on outsourcing
success factors (for an overview see Dibbern et al. 2004) and
to analyze the influence of offshore-specific factors. Existing
studies have mostly discussed offshore outsourcing as a
separate phenomenon, either on a conceptual basis (Carmel
and Agarwal 2001; Kliem 2004; Krishna et al. 2004; Rao
2004) or by developing �?˜best practices�?? based on case studies
(Heeks et al. 2001; Kaiser and Hawk 2004; Nicholson and
Sahay 2001; Rottman and Lacity 2004). However, when
looking closer, there is considerable overlap between the
arguments pertaining to IS outsourcing success in general
and IS offshore outsourcing success in particular.
Accordingly, the main goal of this paper is to draw a link
between general outsourcing success factors and offshorespecific
factors. From the range of offshore-specific factors
(Carmel and Agarwal 2001; Gopal et al. 2003; Heeks et al.
2001; Kliem 2004; Krishna et al. 2004; Nicholson and
Sahay 2001), the focus is set on cultural differences in
offshore outsourcing of application development. The
following research questions will be addressed:
1. How can cultural differences in offshore outsourcing be
characterized?
2. How do cultural differences affect the success of
offshore application development projects?
Specifically, offshore development projects involving
German customer organizations and Indian vendor organizations
are considered. By focusing on offshoring projects
to India, the results of this study may be compared to other,
mostly USA and UK based studies that also analyzed
offshore outsourcing to India (such as Heeks et al. 2001;
Kaiser and Hawk 2004; Nicholson and Sahay 2001;
Rottman and Lacity 2004). Our study takes an exploratory
approach, thereby attempting to identify relevant cultural
differences in German�??Indian software development projects
and to analyze the influence of those differences on
established determinants and measures of outsourcing
success from studies on domestic outsourcing.
2 Research framework
This work starts with an a priori development of a
theoretical, heuristic framework (Eisenhardt 1989), thereby
allowing for a focused analysis of the role of cultural
differences in offshore outsourcing. It will serve as a guide
for gathering qualitative data, ensuring that those factors
that turned out to be relevant in previous (offshore)
outsourcing studies will be considered. The research
framework is shown in Fig. 1.
The influence of relationship quality on offshore
outsourcing success essentially reflects previous findings
about success factors of outsourcing relationships. The
focus of this study will be to analyze how those factors are
influenced by cultural differences. It is important to note
that the framework serves as a conceptual framework that
guides our research (Eisenhardt 1989; Kubicek 1977); we
do not intend to test specific relationships between selected
variables. The framework shall foster our understanding of
the factors that may be influenced by cultural differences.
In the spirit of Eisenhardt�??s (1989) process of building
theory from case study research, we specified our dependent
variable based on existing outsourcing literature,
which is the relation between relationship quality and
offshoring success. Moreover, we outline our preliminary
thoughts about potential cultural differences; however, we
do not a priori specify specific relationships between
cultural differences and our dependent variable. Instead,
the influence of cultural differences will be examined in an
exploratory fashion by the means of case study analysis.
In the following, the constructs will be presented in detail.
Furthermore, based on literature on cross-cultural issues and
offshore outsourcing, cultural dimensions will be selected
which lend themselves to explain cultural differences between
clients and vendors in IS offshore outsourcing arrangements.
2.1 Success measures in IS outsourcing literature
Two ways of measuring success have commonly been
applied in the literature on IS outsourcing (see Dibbern et
al. 2004, pp. 69 ff.): (1) the realization of initial expectations
and (2) the level of overall satisfaction. As existing
studies indicate, the reasons for offshore outsourcing center
around saving costs, getting access to skilled and qualified
resources, increasing flexibility, and receiving a good
quality of services (Bartenschlager et al. 2005; Carmel
and Agarwal 2001). In contrast to domestic outsourcing
(Teng et al. 1995), strategic considerations play a less
Offshoring success
Cooperation (+)
Conflict (-)
Vendor performance (+)
Cost reduction
Resource quality
Increased flexibility
Service quality
Relationship quality
Cultural
Differences
Trust (+)
Fig. 1 Research framework
244 Inf Syst Front (2008) 10:243�??258
significant role for the offshore outsourcing decision and
only become relevant in later stages (Carmel and Agarwal
2002). Therefore, this study will use four measures of
offshore outsourcing success, that is, cost reduction,
resource quality, increased flexibility, and service quality
(Grover et al. 1996; Lee and Kim 1999; Saunders et al.
1997) (Fig. 1). In aggregate, these four success indicators
amount for a higher level of overall satisfaction with an
outsourcing arrangement (Goles 2001; Grover et al. 1996).
2.2 Success factors in IS outsourcing literature
In various empirical studies, the quality of the relationship
between the client and the vendor was found to have a key
influence on outsourcing success (Goles 2001; Grover et al.
1996; Lee and Kim 1999). The concept of a client�??vendor
�?˜relationship�?? is related to Social Exchange Theory (Blau
1964) which explicitly considers social processes between
two parties. This client-vendor relationship becomes highly
relevant in offshore outsourcing of application services,
since such tasks require an ongoing exchange of information
between the parties involved (Ramarapu and Parzinger
1997).
In our study, relationship quality will be defined as the
degree of connectedness between a client and a vendor in
an aim to achieve specified goals. It is indicated by four
attributes, that is, trust, vendor performance, cooperation
and conflict (Grover et al. 1996; Lee and Kim 1999). The
level of trust, that is, the confidence in the other�??s
benevolence (Ring and Van de Ven 1994) was found to
be a major attribute of outsourcing relationships (Grover et
al. 1996; Heinzl and Sin�Ÿ 1993; Lee and Kim 1999;
Sabherwal 1999; Willcocks and Kern 1998). Existing
findings suggest that higher levels of trust positively affect
the quality of the relationship between the client and the
vendor (Grover et al. 1996; Lee and Kim 1999). The
performance of the vendor�??s employees, that is, the results
which they achieve, was also found to have a positive effect
on the quality of the relationship (Grover et al. 1996).
Furthermore, the cooperation between the client and the
vendor, that is, the common pursuit to perform (Kern 1997),
was found to have a positive effect on their partnership
(Grover et al. 1996; Kern 1997). Finally, Lee and Kim
(1999) suggest that conflict, that is, the incompatibility of
activities and goals, has a negative effect on the partnership.
2.3 Cultural differences in IS offshore outsourcing
The concept of �?˜cultural differences�?? or �?˜cultural distance�?? is
a common concept which has been applied in a variety of
cross-cultural research in order to assess differences
between two national cultures (Shenkar 2001, p. 519).
Cultural differences refer to the extent to which the
members of two distinct groups differ on one or more
cultural dimensions, that is, their shared values, norms,
beliefs and assumptions that help them organize and
structure the world (based on Roberts and Wasti 2002,
p. 545).
From the variety of cultural dimensions which have been
identified and analyzed in the literature (Lytle et al. 1995),
five dimensions are selected which will be included in the
IS offshore outsourcing research framework. The dimensions
are evaluated in terms of their suitability to explain
cultural variations that may affect the success factors
identified in domestic outsourcing. Two dimensions�??
individualism and power distance�??are selected based on
findings from existing cross-cultural studies (Hofstede
1980) which showed differences between Germany and
India. In addition, three dimensions are selected based on
cross-cultural studies (Doney et al. 1998; Earley 1993;
Kumar and Bjorn-Andersen 1990; Lytle et al. 1995;
Triandis 1982) and existing IS offshoring literature (Carmel
and Agarwal 2002; Heeks et al. 2001; Hirschheim et al.
2004; Nicholson and Sahay 2001; Rao 2004; Vogel 2005).
In the following, the selected dimensions will be illustrated
and exemplified in a comparison between India and
Germany.
Individualism/collectivism In one of the most influential
cross-cultural studies which was conducted by Hofstede in
the 1970s, Hofstede (1980) identified four dimensions to
describe national cultures. Individualism, that is, �?œthe
degree to which people in a country prefer to act as
individuals rather than as members of groups�?, was found
to be one of those characteristic dimensions (Hofstede
1993, p. 89). In Hofstede�??s study (1983), Germany was
found to be more individualist, whereas India was found to
be more collectivist. In recent studies, the Indian culture is
also described as collectivist (Sahay and Walsham 1997;
Sinha and Sinha 1990). Differences in individualism/
collectivism are likely to have some influence on the
cooperation. In a study on collectivistic and individualistic
work groups, Earley (1993) found that collectivist individuals
show lower performance when working by themselves
or as part of an outgroup, that is, a group they do not
identify with, as compared to collectivist individuals that
work in an ingroup, that is, a group they identify with and
feel they belong to. In contrast, individualistic people were
found to perform better when working alone (Earley 1993,
p. 335). The results suggest that individualists and
collectivists perform differently in different group settings.
If a group is made up of employees from different cultures,
differences in individualism may result in different levels of
performance in a given group setting. In another study,
Doney et al. (1998) propose that the degree of individualism
has an influence on the way how trust is built. They
Inf Syst Front (2008) 10:243�??258 245
argue that individualists are more likely to develop trust
through calculative and capability processes, that is,
through a control of behavior and through an assessment
of competencies and abilities, whereas collectivists rather
develop trust through prediction, intentionality and transference
processes, that is, through an observation of
consistency, through shared values and beliefs, and through
connections that are perceived to be strong and reliable
(Doney et al. 1998, p. 610 ff.). As Doney et al. point out,
differences in the degree of individualism or collectivism
may hinder the process of building trust.
Power distance On the dimension of power distance, that
is, the extent to which unequal distribution of power is
accepted within a society (Hofstede 1993, p. 89), Germany
and India showed the highest discrepancy in Hofstede�??s
study (1983). In Germany, power distance was found to be
quite low, suggesting a rather equal distribution of power
between superiors and subordinates, whereas in India
power distance was found to be rather high. Social
relationships in India have been described as hierarchical
(Sahay and Walsham 1997). Those findings are consistent
with what has been observed in several studies on IS
offshore outsourcing. Indian professionals were described
as submissive and hierarchically oriented, or sometimes as
�?˜always saying yes�?? (Heeks et al. 2001, p. 57; Nicholson
and Sahay 2001, p. 36). The less hierarchical client
organizations were not used to the Indian organizations�??
rigid hierarchies, which frequently led to conflicts (Vogel
2005, p. 14). Furthermore, Doney et al. (1998) propose that
the degree of power distance�??similarly to individualism�??
influences the way how trust is developed. They argue that
in high power distance cultures, trust is developed through
calculative, prediction and capability processes, whereas in
low power distance cultures, trust is more likely to be
developed through intentionality, transference and calculative
processes. Just as in the case of individualism�??
collectivism, differences in the degree of power distance
may hinder the process of building trust.
Activity/passivity In offshore outsourcing arrangements
between German clients and Indian vendors, some German
clients have observed that Indian co-workers tend to keep
to specifications, often unreflectedly, rather than actively
contributing their own ideas. Furthermore, some German
clients have complained about lacking communication on
behalf of their Indian vendors (Vogel 2005, p. 14). In crosscultural
literature, such behaviors are described by the
degree of activity or passivity, that is, the �?œextent to which
individuals in a culture see themselves as doers (active
shapers of the world) or beers (passive reactors to the
world)�? (Lytle et al. 1995, p. 178). Depending on the
degree of activity, different management styles are more or
less effective. Participatory forms of management are likely
to be more effective in active cultures, whereas directive
methods of management are considered more effective in
passive cultures (Triandis 1982, p. 148). Managers may
have certain expectations about the level of activity, and
they will chose their management style accordingly.
However, if they do not account for cultural differences in
activity, conflicts may arise or the performance my not be
as expected.
Communication styles In offshore outsourcing arrangements
between German and Indian organizations, English
is usually the common language in which the two parties
communicate. Since English is not a native language for
either of the countries, differences in language skills and
language usage can cause difficulties in communication and
misunderstandings (Carmel and Agarwal 2002; Hirschheim
et al. 2004; Rao 2004). The way in which language is used
frequently interplays with the way in which a culture
communicates. In abstractive cultures, only that information
which is considered significant and relevant is communicated
in an explicit and precise way. In contrast, associative
cultures also communicate many other�??seemingly
irrelevant�??things which are associated with an issue
(Triandis 1982, p. 150). In high context cultures, information
which is communicated usually carries some sort of
symbolic or embedded meaning. Communication in low
context cultures, in contrast, occurs very directly without
implicit or hidden meaning (Lytle et al. 1995, p. 183).
Communication can also occur with greater or lesser
reference to the context of an issue. Holistic cultures take a
more systemic view on issues, that is, all aspects that may be
affected by a decision are discussed in its context. In
contrast, linear cultures look at issues in a more isolated
way, that is, aspects associated with a decision are looked at
separately (Lytle et al. 1995, p. 182). Differences in
communication styles can lead to misunderstandings and
thus hamper the cooperation or even cause conflicts in
offshoring arrangements.
IS designer values Kumar and Bjorn-Andersen (1990)
found that the process of IS development is influenced by
the underlying values of the IS designers. These values
were found to differ between countries. IS designer values
are shaped by the developer�??s individual background, that
is, socialization and education, her or his personal context,
that is, organizational and societal environment, the
chosen IS development methodology, that is, prescribed
development guidelines and standards, and the control and
reward structure of an organization (Kumar and Bjorn-
Andersen 1990, pp. 529 ff.). These values can be
technical, economical, or socio-political in nature. In the
case described by Nicholson and Sahay, the Indian
246 Inf Syst Front (2008) 10:243�??258
developers used a methodology that placed emphasis on a
structured and disciplined development approach that
followed international standards. The client�??s UK employees
used different methodologies, however, the client�??s
management pursued the goal of intendedly imposing the
vendor�??s methodology onto their own organization. The
UK client successfully adapted to the new methodology
(Nicholson and Sahay 2001). The case provides an
example how differences in IS designer values can be
successfully addressed. However, differences in IS designer
values may also cause disruption or affect performance
when expectations towards certain standards are
not met.
It should be noted that the cultural dimensions �?˜power
distance�?? and �?˜activity�?? are not completely disjunctive.
Activity may be a result of power distance. That is, if
power distance is high, a lower level of activity should be
expected. However, in order to grasp different aspects of
power distance and activity, different dimensions will be
used.
3 Empirical exploration
In order to gain empirical insights into the field of offshore
application development, multiple case studies were conducted
between August and October 2005. The case study
method was chosen as it is especially applicable for the
purpose of theory building (Eisenhardt 1989). Personal
interviews with key informants enabled us to find out about
how the offshore outsourcing relationships evolved over
time and to identify causal relationships (Benbasat et al.
1987; Yin 2003). Moreover, due to a rather limited amount
of existing cross-cultural studies in the context of offshore
outsourcing, a qualitative research method was deemed to
be appropriate.
For the purpose of data gathering, a total of nine project
managers and senior IS managers from five German
companies were interviewed to describe their experiences
with six specific offshore development projects with Indian
vendors. Two of the six cases (Bank1a and Bank1b) were
conducted at the same company. The respective company
representatives were interviewed in an open one-hour
interview. The interview language was German. All interviews
were face-to-face, except for one interview which
took place via conference call. The interviews were based
on a semi-structured interview guideline that included
several questions about each phase of the offshore
outsourcing process (decision and implementation). The
participants were also requested to describe issues and
situations in which they had to handle cultural differences.
In addition, the interviewees were asked to evaluate the
offshore outsourcing projects with regard to the different
success measures on a scale between 0% and 100%. The
interview guideline is included in the Appendix.
All interviews were tape-recorded and transcribed. The
transcripts from the interviews were aggregated into a case
protocol which comprised 54,449 words and 108 pages of
text. In order to become familiar with the individual cases,
the interview data was processed for each case. Based on
the transcripts and some general information from the
companies�?? websites, case write-ups and case profiles
containing the qualitative data were made. A brief overview
of the cases is given in Table 1.
The projects were encoded and structured using the
software NVivo. The coding involved the identification of
cultural themes. Based on the interviewees�?? descriptions of
situations in which they had to handle issues related to
cultural differences, those text passages were assigned
codes that best described the issues and cultural themes
(Stake 2006). Furthermore, text passages with statements
relating to the pre-specified relationship dimensions of the
Table 1 Case overview
Case Logis1 Tele1 Insur1 Bank1a Bank1b Finance1
Sector Transportation Telecommunication
Financial services Financial services Financial services Financial
services
Interviewees Project
manager
Senior IS
manager
Project manager Project manager,
Senior IS manager
Project manager,
Senior IS manager
2 senior IS
managers
Application to
be developed
offshore
Handling
system
System
landscape for
B2B
E-business solution
for re-insurance
Payment systems Payment system Sales
cooperation
platform
Offshore
outsourcing
arrangement
Onsite-offshore
model
Onsite�??offshore
model
Offshore model Onsite�??offshore
model
Offshore model Onsite�??
offshore
model
Number of
personnel
(onsite, offshore)
Onsite�??
offshore
model (4:5)
Onsite�??offshore
model (40:40)
Offshore model
(0:10)
Onsite�??offshore
model (2:7)
Offshore model
(0:14)
Onsite�??
offshore
model (8:42)
Inf Syst Front (2008) 10:243�??258 247
theoretical framework (i.e., trust, vendor performance,
cooperation, and conflict) were selected during this part of
the coding procedure. Finally, management reactions to
address issues and cultural differences were identified. The
coding procedure to identify cultural themes and relationship
dimensions is illustrated in Table 2.
Building on the individual case findings, a cross-case
analysis was conducted (Miles and Huberman 1994; Stake
2006; Yin 2003). Patterns were searched throughout the
cases and similarities and differences were discussed based
on the constructs of the research framework and the preselected
cultural dimensions. Based on the coding of
cultural themes, �?˜grand themes�?? were identified, that is,
themes that recurred across several cases. Thereafter,
relationships between the extracted cultural themes and
the pre-specified cross-cultural dimensions as well as the
success factors and success measures were examined across
the cases (Stake 2006). The analysis procedure is outlined
in Fig. 2. The findings are presented in the following
section.
4 Findings
4.1 Success
At the time when the interviews were conducted, the
offshore development projects were perceived as successful
in the majority of the cases. Initial expectations about cost
improvement, increased flexibility and service quality were
also fulfilled to a large extent (80�??100%). This is also
reflected by a rather high level of perceived overall
satisfaction (80�??100%). However, the projects had not been
successful from the start, as challenges occurred in all
projects that the managers needed to cope with. Accordingly,
the perception of certain success factors varied within
the cases in the course of time. As it will be shown in the
following section, cultural differences between the clients
and the vendors caused some recurring problems in the
relationship between the client and the vendor that had to
be dealt with as the projects proceeded in order to ensure a
successful cooperation.
4.2 Cultural analysis
4.2.1 Matching themes and cultural dimensions
All of the companies studied observed some cultural
differences during the cooperation with their offshore
vendors. In the following, several cultural themes will be
presented. Grand themes, that is, themes which appeared
throughout a number of cases, as well as individual themes,
that is, themes which were identified only in one individual
case, will be pointed out. The cultural themes will be linked
to the cultural dimensions identified in Section 2.3.
Grand theme 1: The Indian professionals have difficulty in
saying no One theme which appeared in the majority of the
Table 2 Coding of cultural themes and relationship dimensions
Case Quote Theme (code) Relationship dimension
Insur1 �?œIt turned out to be a real problem in the course of the project that
the Indian professionals like to nod�??which doesn�??t necessarily
imply �?˜yes�??.�? (Project manager)
Difficulty in saying no NA
Logis1 �?œThey have difficulty in saying no, they have a hard time saying �?˜I
haven�??t understood�?? or �?˜I want to ask further questions�??. This is
getting better. In the beginning, it was more difficult. They simply
accepted and said �?˜Yes, I will do so�??. At some point, this comes up
and I say �?˜Gee, if we had only talked about this for two minutes.
Then this [inappropriate software quality] could have been
prevented�??.�? (Project manager)
Difficulty in saying no Vendor performance
(software quality)
Bank1a �?œThey have a different way of addressing problems. While I prefer to
work in a very analytical and structured way, Indian professionals
are often pragmatic and prefer short and straight ways to reach their
objectives.�? (Project manager)
Different development
approaches (structural vs.
pragmatic)
NA
Bank1b �?œI didn�??t expect that we would have to define the processes and
templates ourselves. That we would have to say four or five times,
�?˜this is plain text�??, or �?˜you have to use content from this
do
