Aside from cost savings, firms may have other incentives to offshore. The availability of abundant, skilled and flexible human capital in the developing countries is one of the main drivers of offshore outsourcing. The global IT service delivery model has one fundamental hypothesis: IT skills, knowledge and services can be competitively extracted, reconstructed and delivered across borders, time zones and business entities. (Gartner Research, 2003).
Hui and Beath (2002) noted that, although the early theory-based literature drew heavily on transaction costs theory, recently there has been much more interest in applying a resource-based view or social exchange theory to understanding outsourcing decisions and outcomes. Dibbern et al. (2004) examine resource-based and resource dependent theories, which view a firm’s resources as the sole foundation for the implementation of the company’s strategy. While resource-based theory emphasizes a firm’s internal resources, resource-dependency theory focuses on various resources in the company’s external environment.
In regard to resource-based theory, Barney (1991) points out that a firm can only gain competitive advantage if heterogeneity and immobility of the firm’s resources exists. In contrast, from a resource-dependant perspective, Pfeffer and Salancik (1978) argue that all organizations are, in varying degrees, dependant on at least some of the elements of their specific external environments, due to the control these environments have on their resources (Amberg et al., 2005).
Sako (2005) argues that transnational corporations invest generally either to seek local markets and/or to use those locations as export platforms with access to local resources such as low cost labour or natural resources. The offshoring of IT and other business services mainly falls under the export-platform FDI category; and with a plentiful IT professional pool and education system, the offshore countries guarantee the availability of human resources, which reduces the uncertainty and avoids increases in production costs due to labour shortages. Cost savings in offshoring are achieved mainly due to the host countries’ lower personnel cost base and less rigid labour structures, rules and regulations, which plague Western economies (McDowall, 2003).
In one hand, Khan et al (2002) argue that one main reason for offshore outsourcing is that very often there isn’t enough talent in their own country. They suggest that the shortage of IT professionals in the developed countries drove costs up and this led organisations to look elsewhere for alternatives. Some firms want to outsource in their own country, but the personnel available for specific tasks does not have the sufficient qualifications. According to the e-skills UK Bulletin, 3% of British ICT firms were proving difficult to fill vacancies that they had, due to a lack of candidates with a suitable skills profile (Round and Lovegrove, 2005). Additionally, IDC Research (1999) report estimated that skill shortages in the IT sector in the US and Europe would be close to 2 million by 2002, with Europe alone accounting for shortage of over one million. The report went on to state that the shortage of skilled IT professionals was due to the lack of training and company attrition. Organisations find that they cannot hire the necessary people they need and have to either pay very high salaries for employees or high rates for contractors (Farrell, 1999). Besides, by outsourcing offshore, firms no longer have to maintain a workforce and they, therefore, don’t have to invest in employee training and infrastructure.
In the other hand, Davey and Allgood (2002) explain that the availability of a skilled pool of English (or client country languages in general) speaking developers with the latest technical knowledge, able to handle large projects and produce quality software, is attracting many major companies to outsource systems development projects offshore. Firms have found that ‘mean time to recruitment’ tends to be lower in countries such as India, where they can employ offshore people more easily and quickly than can in the UK (Ovum Holway report, 2003). Moreover, IDC Research (1999) report confirms that the combination of low cost and high quality software development workforce is one factor potential outsourcers examine for before choosing an offshore country. The level of education of IT professionals in these offshore countries is also another factor that is worth of noting. Nearly all are university graduates and a third of Microsoft’s 180 new programmers in India hold PhDs from U.S. universities (Corbett, 2003). Computer science graduates in a country like India outnumber the entire population of the UK. Many of these individuals were educated at ‘elite institutions’ and now work in high-quality companies (kentonline, 2005).
In addition, Carmel and Agarwal (2000) find that the global resource factor for IT offshoring include the inability to find IT professionals at home, the search for world-class talent, the search for specific skills and expertise (e.g. knowledge of specific programming language), the desire for stable workforce because of a attrition of IT resources at home, and offshore workforce quality. And with the effect of deregulation and the imitability of technology, Mabey and Mayon-White (1993) predicts the existence of ‘stateless’ corporations in which people, assets and transactions move freely across international borders, time zones and business entities. Therefore, IT professionals will become a part of a global resource pool that any company that is looking to streamlining its operations can utilise (Lucas, 2004).
Furthermore, Dess and Lumpkin (2002) argue that because of their late entry into the IT industry, countries like India are not locked into older-generation technologies. And since it takes time to reengineer an existing organisation that is set its methods or culture, most of the business process reengineering initiatives of the 1990s, that were designed to improve quality and efficiencies, failed (Yourdon, 2004). Though, the offshore vendors do not have to reengineer or adapt old processes or structures as they are able to implement superior working procedures right from the beginning. In addition, the majority of vendors in developing countries are SMEs whose decisions depend on a few individuals while vendors in developed countries are usually big corporations with set structures and prices that cannot be straightforwardly changed without affecting the bottom line.