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2.6. Summary

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The recent rapid development and dissemination of information technologies have had enormous economic impacts through the transformation of work processes and organisational structures. Large parts of the economy have become digitized which has enabled business activities to be conducted in entirely new ways, as well as across large distances. As a result offshore outsourcing has become strategic option on every firm’s plate and implementations of offshoring contracts are becoming commonplace, particularly in IT services. Gartner Inc research estimates that offshore outsourcing accounts for nearly 10% of the $536 billion global IT services industry. The trend is expected to continue as some estimates have IT outsourcing growing at 30% annually for the foreseeable future (Kumar and David, 2003).

Technological advances, opening of markets at both global and national levels and improved governance for offshore activities in the developing countries have enabled offshoring to be institutionalized in different forms, from captive operation, cooperation in form of joint ventures to market solutions such as third-party offshoring. Moreover, companies are now able to use time zone difference to run 24-hours, seven-days-a-week business which shortens production time. This form of cross-country division of labour had been predicted by various studies to lead to overall positive economic effects.

The focus on IT costs reduction appears to be the primary motivation for outsourcing. Cost pressures caused by intensified global competition propel the trend of outsourcing services to offshore areas. A survey by Deloitte and Touche (2003) found that for 82 % of the firms surveyed the major motive behind their offshoring decision was cost cutting. The wage difference in newly industrializing countries has made it possible to have savings up to 60% (Trampel, 2003).

However, when offshoring is only about cutting costs, businesses are reluctant to outsource complex processes, even though doing so will have a bigger impact on their bottom lines. Therefore, most of authors argue that expected benefits from offshoring should go beyond the obvious cost savings and include extended and improved quality of services as well as access to skills and infrastructure. In fact, through offshoring, businesses can access more skilled labour markets and balance the shortage of IT professionals in the developed countries. In addition, the adoption, by offshore providers of modern quality certification standards that are better than in vendor countries, has made it an even easier to client to ensure that the work process is more visible.

With increasing experience in offshoring, some nuances have emerged as specific options of offshoring. Nearshore is a term used for differentiation. It is used to differentiate both firms and nations. It emerged as a reaction to the main offshore destination: India. India represents many hours to travel, many time zones away, and is seen to represent a very different culture; while a nearshore destination is associated with relatively easy travel, similar time zones, and closeness in culture and/or language. The literature revealed that other cost components that had so far been ignored increased with regional and cultural distance. Locational and geographical differences will continue to play a role. This implies that distance and proximity are not disappearing with offshoring. To the contrary, distance still matters.