IT Outsourcing practices of German companies

In current times we cannot talk about technology and globalization as a separate subject. We need to be aware that both are linked, thus how can we talk about improvements and innovations in a world where there is still a reluctance for cooperation with other cultures in the sphere of IT?

Karina Toral

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IT Outsourcing practices of German companies.

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Carlos' Opinion
IT Outsourcing.

Since I started my times at ARP and Bechtle in 2017, the topics of Future of Work and Challenges of Mobility were almost my every day lectures.

And one of the questions that arised was, how technology can be a solution when the rent of offices and places to live are rising in highly populated cities?

It seems that the times when people have to leave their hometown to seek education or job opportunities are staying in the past. 

The rush of adopting the “Home-Office Experience” for many become true.

And certainly for some people who are able to work remotely, also meant that they don’t have to travel or move around the city, therefore there is less traffic, and less cars on the street has also meant less pollution.

With the rise of remote work in the last year, the IT industry has shown that it is the leading industry when it comes to work from home. 

IT outsourcing has been a practice that many worldwide corporations have incorporated as part as their human resourcing plans.

Technology advancements, far for being a threat, has shown to open up opportunities that decades ago were unthinkable.

Technology has also been a bridge builder when it comes to create jobs all around the world.

On my first series of Thought Leaders, I invited Karina Toral to share her master thesis work on IT Outsourcing. 

I met Karina for the first time at the Hochschule Heilbronn cafeteria.

Karina studied the same master as me, International Business and Intercultural Management, one year before. 

Personal traits that I could say about Karina are that she is friendly, reflective and enthusiastic.

Same spirit she showed around the Hochschule Heilbronn community.

On a professional level, Karina and I have had the same interests regarding to Digital Marketing and IT, where she currently works at Cobalt as Senior Business Development.

In this article, I share with you part of Karina’s Master Thesis related to the topic about IT outsourcing practices in German companies.

 

Information Technology
Outsourcing
- Key Concepts.

In this digital era, people and companies are driven by the use of technology, and as globalization takes a fast pace in this world, it takes a more important role in international business as it helps reducing the geographical distances and thus the transaction costs between companies.

Outsourcing has been one of the outcomes resulting from globalization and a solution that has worked for many firms as a way to stay competitive and strive with global players.

Even though the use of the terminology outsourcing is relatively new, this activity goes back in time when Adam Smith already in 1700 mentioned it in the Theory of Competitive Advantage by stating that countries and economies could reduce costs by hiring cheaper labor in less developed countries (Haveckin, 2012).

One area that has derived in the last decades from the need of competitiveness and digital market conditions prevailing these days is IT outsourcing, which has arisen from these global needs and has been one of the fastest growing industries due to technological developments such as the internet and development of network devices.

Several authors have described and analyzed the use of IT outsourcing in the global economy, as well as its advantages and disadvantages; however, it is important to examine what IT outsourcing refers to, and which factors have influenced its use and practice in the global economy.

Thus, to have a broader perspective of the industry and understand the current situation of the IT outsourcing market in Germany, this chapter begins with a brief overview of those concepts and terms enclosed in the outsourcing terminology.

For purposes of this research and to clarify, client is used as a way to define anyone in needs of services, implying a firm or individual looking for external services. The terms ‘customer’, ‘buyer’ also refer to ‘client’.

On the other hand, ‘provider,’ ‘vendor’ or ‘external services provider’ are used synonymously to refer to any firm or in some cases individual providing services to the client.

Outsourcing Definition.

As competition continues to rise and companies are more exposed to constant changes, firms need to be aware and ready to look at the best possible ways to reduce costs and stay competitive.

Outsourcing has been a practice performed since the beginning of commerce as a way for companies to save and cut costs.

The concept of outsourcing emerged from the terminology Resource, Outside and Using (Weinert, and Kirsten, 2005), as a mode for obtaining resources from abroad.

Similar, the firm Deloitte and Greaver (2013; 1999) define it as when a company contracts one part of the business function or activity to an external supplier, and this may involve the transfer of people, processes and assets with the establishment of a contract.

Since the main idea of outsourcing is to relocate activities to an external party as a way to be more efficient and save costs, since earlier times this activity has been practiced when economies started already seeing the advantages of delegating those activities they were not expert on to other providers.

Outsourcing is a common activity that most people do almost every day.

For instance, farmers get outsourced to grow food (doing what they do best), and individuals leave the creation of clothes to specialists.

Firms, similar to people, outsource to cut costs and time. In fact, what has made this activity so popular in the last couple of years is due to the type of activities that are outsourced and the range of these (St. Amant, 2010, p.32).

So what makes this concept different from a standard purchase and sell transaction?

Outsourcing involves more than just the acquisition of a good or a service. It is usually under a contract and must have written agreements from both the client and external vendor based on their needs and expectations.

It also implies the transfer of knowledge and constant communication between different teams to achieve the desired goals.

Therefore, it comprises more than just a monetary transaction between two parties but also implies transfer of people, knowledge, communication, and culture between the client and external vendor.

The idea behind it is that no one is an expert in all tasks. In every company there are areas in which a company is specialized on, and the rest should be performed by someone expert in the areas the company is not expertise on.

Thus reducing the time allocated in areas in which the firm is not specialized, so then the company can focus on its core activities and therefore become more competitive (St.Amant, 2010,p.23).

Insourcing Definition.

Insourcing is considered a similar activity as outsourcing, with the difference that it is an action performed internally.

It is performed when the company delegates its IT tasks to a subsidiary or an internal IT department (Chakrabarty, S, 2010, p.127).

Currie & Willocks (1998) also define it as when a firm decides to keep a large part of its IT services in-house and insource it within the same company.

Several authors agree that insourcing can result in considerable advantages for the firms practicing it, such as: Having greater control over the resources, safeguarding an opportunistic behavior from the external vendor, and saves time and effort when the IT services are very technical or specific.

Thus, the firms do not not need to spend time and money to explain the processes to the external providers (Chakrabarty, S.2010; Currie & Willcocks,1998).

Other authors state other reasons of practicing insourcing are related to security, absence of expertise with external vendors, and the possibility of better cost benefits by sending the work to an internal subsidiary rather than paying to an external provider (Karamouzis et al.,2004 cited by St. Amant.2010)

Backsourcing Definition.

In the field of outsourcing, another activity that is being practiced is backsourcing, which is defined as insourcing what was being outsourced previously.

In other words, it means bringing back to the company those services that were being done by an external party so that the activities can be performed back in-house (Kotlarsky, J. & Bognar, L. J, 2012, p.79).

For instance, some companies might apply an outsourcing strategy at the beginning of the process, by sending some of their IT operations to an external party located abroad, but later due to costs or strategical reasons the firm decides to bring back in house this IT functions that were previosly outsourced (Dibbern et al.,2004).

IT Definition.

The concept of IT has been present for several years.

However, there are still some authors that do not state a clear distinction between IS (information systems) and IT (information technology).

While some academics refer to IT as an academic discipline “[…] that contains all aspects of computing technology” (Lunt B et al., 2008, p. 9), others define it more accurately, even already considering the concept of internet on it.

For instance Tan, et al. (2009, p. 30) state that IT includes applications and functions such as software and hardware that is required for internet connection.

Dolan (2006, cited by Raisinghani, M et al.,2010, p.51) describes IT/IS as all those services such as network and computer operations, research and development, software development and maintenance, among others.

One of the most recent definitions about IT is from the organization COMPTIA(2016) which defines it as a system used to create, store, exchange and utilize information in various forms to accomplish objectives through the use of hardware, software, services, information and digital business.

Being IT one of the most dynamics industries nowadays, what most of the definitions and literature are lacking is a concise concept considering other areas included in IT.

For example concepts such as web-hosting, website design, as IT has evolved to be part of everything and to be present everywhere: cars, buildings, domestic machines, mobiles, etc.

IT Outsourcing Definition.

In today’s technology driven world, digitalization and technology have become part of the global economy and companies have needed new ways to adopt it as part of their business strategies.

Thus, IT outsourcing has become one of the most used solutions to meet the market and customer needs at accessible prices.

The importance of this industry is so significant that in 2016 according to Statista(2017), the IT Outsourcing industry accounted for 69 percent of the total global outsourcing revenue with a total of USD 52,9 billion.

Analysts also predicted that it will grow at a CAGR of 5.84% over the next years (Research and Markets, 2015).

But how is ITO defined and what does it imply? IT Outsourcing can be defined by adding the two terms previously explained; IT and Outsourcing, which refers to delegating IT functions or some of these to external suppliers as a mode to save costs and leverage the company’s IT needs to an external party.

In broad terms, ITO is defined as the way companies turn their IT activities to external vendors located either in the same country or miles away from the client’s firm (Pfannenstein and Tsai, 2004; Schniederjarns et al.,2004). According to Rouse (2010), ITO also involves transferring the “how” to produce an IT service or product to an external party, and holding the responsibility for “what” needs to be delivered.

ITO can be a one time transaction for the development of a new information system or an ongoing delivery of IT services (St.Amant, 2010, p.38). Interesting to note that this definition has not changed considerable over the last decade.

In 1992 authors such as Loh and Venkatraman (1992,p.9) specified that this activity implied a contribution not just between the transfer of technology but also considering “the significant contribution by external vendors in the physical and human resources associated with the entire or specific components of the IT infrastructure in the user organization […]”,(Loh and Venkatraman 1992,p.9) which nowadays still considers the human and physical factors.

Globalization Definition.

When referring to the implication that IT Outsourcing has had over the last couple of years in the global economy, it is imperative to outline the importance of globalization as part of this activity.

Technology has contributed to the rise of globalization and has been appointed by several authors as one of the most influential promoters of globalization.

However, even if this concept is widely used and practiced, in the literature seems that there is not a general definition and consensus for this terminology.

Thus, several institutions and authors define it in different ways; nonetheless most of the definitions agree that it is a process involving not only economical transactions, but also people, policies, and knowledge “through the leverage of resources and capabilities across borders […] ” ( Hill, J. 2005, p. 67).

The OECD defines it as the process of closer economic integration of global markets: financial, product and labor (OECD, 2006).

Others such as Roll (2006, cited by Askarzai and Unhelkar, 2010, p.399) define it as an activity occurring in today’s world economy to remove barriers such as language and culture.

With technology and in particular the rise of Internet as part of globalization, it has also helped decreasing the physical barriers between buyers and clients, because “when technology relocates, it does not do so in a vacuum.

It relocates along with capital and labor in multiple contexts of culture, economy and politics […] “(Yoder, Eccarius-Keller & Cherukuri, 2010, p.431).

Therefore, it allows companies to get a faster and easier access to workers located in many parts of the world and thus reducing the costs related to mobility between client and buyer.

Hibbert (2005, cited by Askarzai and Unhelkar, 2010, p.399) concluded that globalization happens as a result of various factors, such as global economy, competition, communication, language, business, bodies, investment, loans, trade, culture, work, and politics.

Therefore, it is essential to take into account all these variables when considering ITO as part of globalization, as it means relocating not just knowledge, capital, and labor, but also social factors such as culture.

Types of Outsourcing.

One of the most crucial decisions that a firm has to make when has decided to practice outsourcing is the way in which this practice will be performed.

Several aspects have to be considered, such as the benefits that the practice will bring in the long term, the risk involved, the proximity with the external vendor, and the desired control over the operations, among other reasons.

Thus, based on these aspects, there are different types of outsourcing practices which have an impact on the level of outsourcing performed.

Offshoring.

This type of outsourcing is one of the most common nowadays, especially by firms looking for cost effectiveness and maintaining its core competencies inside the organization.

With the rise of globalization and deregulations of trade barriers, the numbers of deals performed with this type of outsourcing have increased over the last decade.

In 2003 a 20 research conducted by CIO Research found that from hundred and one IT interviewed executives, more than 50 percent stated that their company started doing offshoring after the year 2000 (CIO Research, 2003, cited by Erber, G and Sayed-Ahmed, A.,2005,p.101).

Today, this concept is so widely known and globally practiced that almost every paper written about outsourcing includes a section related to offshoring as it is one of the principle disrupters of today’s global economy.

Most of the varied definitions about the term outline that offshoring is a type of outsourcing performed when a client contracts a vendor company outside of the customer’s nation.

Generally, in this kind of outsourcing, the provider is located miles away from the outsourcing client and tends to represent the major “cultural and linguistic distance between the client and the outsourcing vendor” (Jain, Kundu, Niederman, 2008 cited by St. Amant, 2010. p.22).

Since offshoring activities frequently take place between countries located at different time zones and with various cultural backgrounds, more challenges tend to arise due to dealing with diverse teams located in various geographical locations.

Therefore, external forces such as globalization, human capital, business focus, IT changes, and reform pressures, (Cheon et al., 1993) have a significant impact on the decision to offshore (Figure 2).

offshore
Figure 2. External forces affecting offshoring decisions. Adapted from Trampel, J.2004, p.2

As shown in figure 2, the external forces may have an impact on the firm’s decision to offshore. Nevertheless, there have been several studies related to offshoring regarding its 21 evolution, impact and the factors that influence its development (Camel & Awargal,2002; Roman & Lacity,2004; Duta & Roy,2005 cited by St.Amant,2010,p.112).

Srivastava,., Teo, & Mohaptra, T (2010) performed one of the few studies to find if the costs and size of a company were influential to practice offshoring.

The study focused on explaining how companies choose to offshore and concluded that since large firms have higher number of resources and capital, are more willing to take risks.Therefore, the decision to offshore is more common in these type of companies.

Another significant finding from this study was that that businesses with low financial leverage tend to offshore at higher intensity than those with higher costs.

Consequently, it was concluded that companies that use offshoring as an outsourcing practice, are not looking for short term cost reduction, but for a long term benefit.

Nearshoring.

In the past few years, organizations have started to realize that even though offshoring is a good strategy for saving costs, the implications of having someone located miles apart of their actual firm´s location could also bring difficulties into the business relationship.

This can be the result of having long distance communication, building of trust, supervision, among others.

Therefore, this led to another type of outsourcing; Nearshore, which emerged as a response to the leading offshore country, India.

Since the main outsourcing practitioners are located in the USA or Europe, firms have started to look for other options closer to their main company´s headquarters as a way to have a closer contact with their external vendor providers and at the same time maintain control over their activities (St. Amant,2010).

Nearshore is then described as an outsourcing activity performed when the service provider is located outside the firm´s country but in the same time zone. Countries that share borders or neighbors have a nearshore relation (Ibid).

Since nearshoring is an activity that takes place between a client and vendor located in different countries, some people might not differentiate this type of outsourcing with offshoring.

It has to be clear that nearshore takes place between countries that are neighbors. There is no time zone difference, and in some cases, the language might be the same.

In a study about offshoring and nearshoring differences, Goerse, van Gils and Zantinge (n.d) stated that one of the major distinctions between both types of outsourcing are the cost related issues. Since the distance and times zones are reduced in nearshoring, the costs tend to be less than when offshoring.

The cultural differences is another factor that may impact on the costs. According to Deutsche Bank AG (2006), the closeness in geography, culture, and language plays an important role when deciding where to outsource.

Other studies have also appointed that nearshoring has been a practice adopted by firms looking to reduce the risks of outsourcing.

For instance, the firm Neoris (2008,p.2) found that when outsourcing deals are performed (especially in the mode of offshoring), the initial savings could seem higher than when deciding nearshore.

However, when analyzing the hidden costs incurred by managing people from a different time zone and with cultural differences, the savings tend to be larger in nearshore operations.

Onshoring.

Organizations use outsourcing operations to gain advantages over costs, IT skills or to focus on their core competencies.

However, when the tasks that need to be performed are complex, and the communication between both sides is crucial for the success of a project, it is then that a company prefers to deal with someone located not only in the same time zone but within the same country (Chakrabarty, 201,.p.133).

Crane et al. (2010) state that onshoring is similar to offshoring, with the only difference that the work is sent to low cost areas within the same country of the client.

However, according to the firm McKinsey (2014, p.16), this type of outsourcing is rarely performed by companies looking to outsource their IT operations.

Their study outlined that regarding ITO activities; onshoring is rarely practiced by global companies as IT managers do not see the same advantages as with offshore and nearshore practices.

Other authors such as Trampel, J(2004) state that with onshoring the risk taken by a company to outsource is lower than with offshoring, due to an easier monitoring of the activities performed, as the companies are in the same time zone.

Even though when referring to the terminology “outsourcing” most people frequently assume that it implies sending jobs overseas to low-cost countries, with onshoring (which is also an outsourcing modality) the opposite happens; jobs are kept in the country and forwarded to a different company within the same country of the client.

The German IT outsourcing market: Theoretical Research

IT Industry in Germany.

Due to the latest technological advances and the fastest demand for IT products and services prevailing worldwide, global firms have started to incorporate information systems as part of their business strategies.

In European companies, this is not the exception.

While the UK is Europe’s biggest IT spender, Germany is becoming an important market in the IT industry.

Recent studies state that the German market is becoming more digital and technology aware as the German population demands more IT products and services.

GTAI estimated that in 2009, around 70 percent of the German population was using online tools and Germany is ranked as the European country with the most internet users (GTAI. 2011. P, 3).

Thus, the IT market in Germany is one of the most important for the country’s economy.

For instance, Eito’s research estimated that in 2016 the ITC market in Germany was valued in €160.5 billion (cited by IIC, 2017).

Regarding the German IT segments with the highest growth, according to the firm Capgemini (2014), the IT services and the telecom industry (See Figure 9) are among the segments with the highest growth in Germany.

In the case of outsourcing, it is the strongest division of the IT services industry in Germany.

Specialists agree that one of the events that impacted the IT services industry in Germany, principally the outsourcing market was the economic crisis from 2009, which resulted in many companies hiring external companies to perform their IT activities.

Many firms that were skeptical and reluctant to outsource, after this event started outsourcing as a mode to save costs and stay competitive during the economic crisis.

After this event, many companies followed this tendency and started investing on ITO services.

IT-Market-Value-2014
Figure 9. IT Market Value by Segment (in EUR billion). (Von Zallinger, 2014, p.6)

The economic crisis also resulted in the emerging of IT companies in Germany.

Thus, from 2008 to 2014 the number of businesses focused on the software and IT services increased from 70,723 to 83,825 IT firms, at an annual percentage growth rate of 2.65 percent (Statista, 2017).

However, with the increasing number of companies dedicated to the IT industry, and the demand for people specialized in these areas, it has resulted in a significant lack of IT professionals.

In Europe since the last couple of years, there has been an IT workforce deficit of thousands of skilled workers which has not yet been met (Forbes, 2017).

Moreover, this applies to Germany as well, as in 2016 had a demand for more than 43 thousand IT specialists and around 36 percent of German firms stated facing challenges to find the right IT skilled professionals(Computer Weekly,2016; Forbes, 2017).

The lack of IT professionals is a challenge that German firms have to face regularly, being the SMEs and Micro companies the most affected.

The Statistisches Bundesamt (Destatis. 2017) found that more than 50 percent of German enterprises with more than 250 employees have difficulties for filling their IT vacancies. Meanwhile, micro companies (1 to 9 employees) are experiencing the most problems filling the IT vacancies due to the current lack of IT professionals in the market.

While more firms need to adapt to the IT needs of the market, the demand for IT professionals keeps prevailing.

Thus, as estimated by Bitkom, in the next couple of years, around 60 percent of IT-Mittelstand companies will hire new employees related to the IT industry (Bitkom, 2015, p.6).

Similarly, the firm A.T Kearney (2013.p, 8) also stated, that the German deficit on IT professionals is predicted to continue and that by the year 2020, around 60 thousand IT positions would remain unfilled.

This empty gap of IT professionals will be significant, as according to CBI the Ministry of Foreign Affairs (2015,p, 4) in the last years there has been a declining interest in academic IT education and the retirement of IT practitioners as a result of the aging population in Europe.

Due to this labor shortage of IT professionals, specific policies have been initiated to favor the development of the IT industry and therefore mitigate the shortage of IT labor.

For instance, in Germany, the Green-card initiative started as a mode to increase the immigration of highly skilled workers (López-Bassols, V, 2002).

This initiative has beneficiated multiple companies and industries in Germany, such as the automotive industry, where large corporations like BMW have been beneficiated and attracted IT professionals to their workforce (Derksen, B, and Luftman, J, 2016,p, 32).

Historical perspective; IT Outsourcing in Germany.

Germany is a nation that has experienced a significant number of changes in the last twenty years.

As mentioned in Chapter 2.3.1., by 1990 many US companies have already started practicing ITO; however, in Germany, this was completely different.

Germany had just been recovering from a politically divided country, and only few companies were looking to outsource their IT activities at this time.

The beginning of ITO in Germany, according to Kreutter and Grime (2012, p.12) began in 1990 when the company Daimler-Benz AG opened a division line under Daimler Benz to serve its information technology, leasing and telecommunication services.

This external branch line was named Debis Daimler-Benz InterServices AG, and Debis Systemhaus was the central IT division set to perform IT activities for the Daimler group.

Debis was the first firm formed from a multinational company and configured to deliver ITO services.

Debis marked the path for German companies willing to follow similar strategies for their IT services. In 1992 Deutsche Telekom and Siemens also created sister companies to build its ITO businesses and projects.

This not only occurred in IT related companies but also companies from more traditional industries started to recognize the importance of IT outsourcing and therefore launched ITO companies that could satisfy their own IT needs.

For instance, the steel company Thyssen established Thyssen Informatik and the firm Hochtief, a company under the name Hochtief Software AG as a tactic to deliver ITO services for internal purposes (Kreutter and Grime 2012, p.13).

Following these incorporations, the signing of one of the biggest deals in Germany by IBM in 1995 with the firm ‘Gothaer Versicherungen’ marked a new chapter in the ITO market in Germany.

As a result, companies as Siemens, ThyssenKrupp, and Deutsche Telekom started making strategic moves to cultivate new customers and be part of this growing industry.

New acquisitions and expansions started emerging, for instance, Deutsche Telekom in the year 2000 acquired Daimler’s Debis Systemhaus and similarly Capgemini took over Hochtief Software as a way to expand and improve its position in the German market.

Furthermore, many companies recognized that to obtain German clients and have a local presence; the best approach was to acquire already established companies to have a localized approach. However, by 2006 this changed when the German ITO market commenced following the paths used by US firms and started competing with global players.

International companies such as TCS, ACS, and Capgemini among others increased their global presence by participating in the German market and expanding their services into the country. This resulted in a significant number of IT companies operating in the country which by 2009 accounted approximately 75,000 IT companies, giving employment to around 820,000 employees in the software and IT sector (GTAI, 2011, p.3). Thus, by 2009, the German IT market had become a significant market, ranked as the fourth largest market in the IT sector regarding revenue, only situated after the USA, Japan and China (GTAI, 2011, p.3).

German IT outsourcing market size in terms of revenue and contract value.

Given the rise of technology and German IT companies operating in the country by 2009 as stated above, German companies had to look for ways to cope with the increasing demand for IT services and products, and thus look for the best ways to stay competitive.

Thus, ITO became a solution for those firms looking to save costs and focus on its primary IT activities.

In Germany, ITO started being practiced in the 1990s when companies opened IT subsidiaries as shared services as a way to serve their information technology activities.

The most known case was, for example, Debis, the IT shared service center of Daimler Benz. However, over time with the internet boost and digitalization, the strategy applied by German companies in the 1990s had to be adapted to the global changes.

Companies besides looking for saving costs as their primary goal also started looking for ways to maintain flexibility within their projects and to focus on their core activities (IT Sourcing Europe, 2011).

Thus, the ITO market in Germany started becoming a significant market and companies began practicing it as a mode to leverage their IT needs.

This resulted in many businesses looking for external IT providers that could supply their IT needs, not only located overseas but also within Germany.

Many of the IT serviced providers that emerged in Germany were created with the purpose to serve their internal German clients and market.

Companies such as Atos IT Solutions and Services GmbH (part of Siemens), Arvato Systems Group, Accenture GmbH, among others, having a presence in Germany have contributed to the ITO market in Germany by serving clients located in the same territory (Lünendonk 2015,p.7)

The existence of these firms in the German market had then contributed to the ITO revenue in Germany.

Thus, according to the study by Lünendonk (2015, p.6) in 2014 the IT services German market in terms of revenue (which includes IT outsourcing), accounted for €36.2 billion and it was expected that from 2017 until 2021 the market will grow by 4.9 percent (Lünendonk.2015.p, 12).

A figure showing the prevalence of onshoring, as German firms are sending their IT services to companies located within Germany to some of the companies mentioned above.

Concerning the IT outsourcing contract values, the ITO deals in Germany grew in the last couple of years, as an example, by 2004 Germany signed ITO contracts worth €7.25 billion, representing 12.5 percent of the total value of worldwide contracts awarded. Being just behind the UK and the U.S.A, Germany passed from having a share less than 1 percent in 2000 to a 12.5 percent by 2004 of the total value of ITO contracts (Carpenter, D, and Agrawal, V, 2010, p.11).

In 2016, according to the study by the firm KPMG (2017,p.24), the top five countries in the European, Middle East and Africa with the most ITO contract values signed were the UK, France, Netherlands, Norway, and Germany(See figure 11).

Germany signed 24 ITO deals worth USD$1.09 billion. Even though Germany occupies the fifth place in the ranking, the number of deals signed were relatively high as compared to the Netherlands or Norway.

However, in terms of value, these countries had contracts worth more.

The tendency of having multiple ITO contracts is a trend that has been practiced in Germany, Switzerland, and Austria over the last years. German companies are now signing shorter contracts, with multiple vendors as a way to reduce the risks of having all the IT activities with one supplier.

Therefore, the number of multimillion contracts has been decreasing (Szymanski, 2015).

IT-outsourcing-deals
Figure 11. ITO deals by Total Contract Value in EMA region. (KPMG ‘Global IT-BPO outsourcing deals analysis’ .2017, p.24)

Recent studies also state that the value of ITO contracts has decreased as a result of the number of offshore service providers opening subsidiaries in Germany.

Thus, the number of offshore and contract values is lower.

These offshore external providers are opening subsidiaries in Germany as a way to be seen as local companies, obtain trust from local German firms (GTAI,2016), and be able to operate under the same business structure, time zone and culture.

For example, the IT and consultancy Indian firm Wipro is a clear case of this situation.

Since 2003 the company has been present in the German market with development centers in cities as Munich, Nuremberg and with sales offices in Frankfurt, Cologne, and Meersbuch (Wipro.com, 2013).

Discussion

The primary goal of this research was to identify how German firms are adopting IT outsourcing and which factors determine its outsourcing practices.

Therefore, four goals were established in order to answer this central question:

1) To analyze the German and global IT outsourcing market in terms of revenue, deals and contract values.

2) To identify the factors that influence the implementation of IT outsourcing in Germany.

3) To explore the impact of culture on IT outsourcing practices in Germany.

4) To investigate the IT outsourcing practices performed by German companies.

During the theoretical and empirical research conducted, several outcomes emerged which addressed the main goals of this thesis.

Hence, in the following section, the findings will be discussed and analyzed.

One of the primary goals of this research was to analyze the German and global ITO market in terms of revenue, deals and contract values.

From the theoretical research, this study found that ITO is a business strategy that in the last years has been escalating.

Technology is becoming one of the most important pillars of the world economy.

Therefore IT outsourcing activities are becoming an important strategy to cope with the demand for technology.

This finding is consistent with Dhar, S (2010, p. 229) who found that as the e-business revolution and the demand for IT skills prevails, ITO will become more important in the next couple of years.

Willcocks and Lacity (2012) mentioned that this market was worth USD$9 to $12 billion in 1989 and the predictions on those days were that it was going to become one of the most important markets for the global economy and thus facilitating the transfer of knowledge.

These predictions indeed became a reality as, according to the most recent studies, the actual global ITO market was estimated in USD$314.92 billion in 2015 and is expected to reach USD$481.37 billion by 2022 (AB Newswire 2017).

If we now turn to the German ITO market, the current study found that Germany is the fifth country by importance in the European Union with most ITO contracts signed.

According to the research by the firm (KPMG, 2017, p.24), Germany signed 24 ITO deals worth USD$1.098 billion in 2016.

The most interesting finding from this was that compared to other European countries, Germany signed more ITO deals.

However, these were worth less compared to countries such as France, the UK, Netherlands, and Norway.

This could be explained as German firms are signing more contracts worth less and with multiple vendors.

The business landscape in Germany, composed by the Mittlestand plays a significant role as a great percent of the German companies fall under this scheme.

Characterized by being family-owned businesses and with interest on keeping control of the activities performed near to its installations.

These companies tend to be risk averse when it comes to practice offshore activities.

Thus, some are reluctant to share their IT activities with external providers.

This also seems to be consistent with other research by the firm EY (2013.p, 42) which found that 80 percent of the German companies belonging to Mittelstand organizations preferred to do ITO in-house.

These companies have their IT operations and activities performed by own trained personnel which are the company’s employees or external employees working for the project under a limited time contract.

This also confirms previous studies conducted about the German preference for IT outsourcing.

For instance, Klimpke et al.(2011), found that SMEs prefer to collaborate with German ITO service providers as it is easier to deal with the same culture and in the same country, as having control of their IT activities is essential for the business.

The second objective of this study was to identify the factors influencing the implementation of ITO practices in Germany.

The current study found that German firms identified several factors that affect the implementation of their ITO practices.

The emerging factors were divided into external and internal.

The external forces are those present in the market and which impact the way organizations operate, are influenced by external forces from the organization or the management (Beaumont and Sohal. 2004, p. 696).

On the other hand, internal factors are those reasons that due to organizational goals or strategies are important for the company.

Regarding the external factors impacting the implementation of ITO in Germany, as the research conducted revealed for German firms when deciding where to outsource and implement ITO practices, the geographical proximity and time zone plays a significant role in their decision.

Geographic proximity facilitates the communication between the vendor and the German firm, and it also facilitates the understanding of the project.

This finding supports previous research from the European Intelligence Report (2012) where German firms participating in the study rated geographical proximity as one of the most important factors when deciding on their outsourcing destination.

A reason for the interest in having ITO external services providers located near to the German companies could be linked to the importance that Mittelstand organizations have in Germany.

The mindset of these companies is lead towards keeping close control of their activities and doing business with those they trust (Venohr, Fear, and Witt, 2015.p, 14).

Another outcome resulting from this study is the impact of the lack of IT professionals in the country.

Interviewees mentioned that it was difficult to find the right IT professionals for their projects, also stating that it is not optimal to use their internal IT employees for a short period.

Therefore ITO offers them a solution to their needs and at lower costs.

This result matches those observed in the study performed by The Statistisches Bundesamt (Destatis. 2017) which found that 56 percent of German enterprises with more than 250 employees, have difficulties filling their own IT vacancies due to the lack of IT professionals.

Some possible explanations to this can be related to the declining interest in academic IT and the decreasing population in Europe, as many IT practitioners are retiring.

Despite the fact that German firms are struggling to find the appropriate IT skills in the market, some public initiatives have facilitated in some way the availability of IT professionals in the German market.

For instance, initiatives as the Green-card strategy which started as a mode to increase the immigration of highly skilled workers (López-Bassols, V. 2002).

However, despite the governmental input towards initiatives as this, in recent years there have also been restrictions in regards to hiring external employees for more than a period, and thus these regulations have had an impact on the level of ITO implementation in German firms.

For instance, one of the interviewed companies mentioned that due to German law changes regarding hiring external companies, many German firms are unwilling to offshore their IT activities.

This result corroborates findings from a study by the company EY (2013) where 80 percent of the German companies mentioned favoring doing IT in-house activities.

A decision which can also be explain by the fact that the legal environment does play a significant role, especially if it affects the number of external companies that a German firm is allowed to hire or the implications that this may have for the company in legal terms.

Regarding the internal factors influencing on the ITO practices, perceptions resulting from the empirical research emerged in business strategy (DiRomualdo, A., Gurbaxani, V., 1998), focus on core capabilities (IT Sourcing Europe, 2011), and cost savings (Weinert, and Kirsten, 2005).

These outcomes go in line with previous studies (Dhar.2010; Klimpke et al., 2011; Dibbern.2004) where these internal factors are outlined as some of the most mentioned drivers for practicing IT outsourcing.

Germans firms seem to be aware of the importance that digitalization and automation bring to their industries and economy.

Hence many are adopting strategies that help them embrace these trends into their daily operations. The latest adoption of industrialization is Industry 4.0, and as mentioned by one of the interviewees, ITO is becoming an important part of their business strategy as it supports them in adapting the current needs of the industry; a stronger need for focusing on smart technologies and automation lead by Industry 4.0.

This finding supports previous research from McKinsey (2015)  where more than 50 percent of German firms stated that ITO is a viable option for their businesses as a way to adapt to the needs of Industry 4.0 into their company.

Another significant finding was that firms that look to decentralize their operations see in ITO a solution for focusing on their core capabilities. As Barney (2002 cited by Rouse, A, 2010) describes it, outsourcing services can be used to fill the firm’s gaps in resources and capabilities.

Thus companies should outsource those skills that are not part of their core business. A practice which seems common in German companies and which also can be assumed to be part of the German business landscape  where there is a strong need for having a high degree of specialization and control over those core activities that make the company successful.

This goes along with the findings from Venohr, Fear, and Witt (2015, p. 14) who stressed that “in many cases, companies still prefer to concentrate activities critical for their sustained competitive advantage at their German headquarters […].”

Furthermore, another significant finding from the empirical research of this study is that cost savings seem to be a common factor for practicing ITO activities in German firms.

From a theoretical perspective, this can also be seen in several studies and literature reviewed (St Amant, 2010, p.32; Hibbert. 2005; Williamson, 1985; Ruiz,E.,Wieandt, M.,Maletzky M.,2010,p.310;Trampel,2004) where it was stated that one of the main factors for implementing ITO in the organizations is for cost savings.

Levering non-core capabilities and accessing external know-how from low wage countries also leads to lesser costs and thus price savings for the firms.

The third objective of this research was to explore the impact of culture on IT outsourcing practices in Germany to address how it affects the practices between German firms and external IT service providers.

As the empirical and theoretical research demonstrated, culture does have an impact in ITO practices.

Levina and Vaast (2008) stated that when firms get to work together in an outsourcing activity, the different mentalities, economies, and social backgrounds “may define the organizational boundaries between them, leading to power dynamics that undermine collaboration […]” (Allen et al. 2002; Nicholson et al. 2006 cited by Levina and Vaast, 2008).

Cultural differences between German firms and external vendor providers located nearshore or offshore seem to have a substantial impact on the ITO practices and its results.

Previous studies have investigated cross-cultural IT outsourcing projects specifically in offshoring, and propose that culture needs to be taken into account as an essential aspect of the ITO process (Wende, E; Philip, T.,2011.,pp.4).

During the empirical research, the evaluated firms stated that communication, management style, and quality perception were some of the most perceived cultural differences when conducting ITO activities with their service providers. These findings match those observed in similar studies (Beaumont, N., 2010 p.100; Kvedaraviciene, G, and Boguslauskas, V, 2010, p.191; Gartner, 2006) were cultural differences affected the perception towards ITO and the outcome of the ITO projects.

Among these cultural differences, communication was one of the most cited in the research conducted.

The communication differences usually emerged in offshoring practices between German firms and Asian vendors.

There are several possible explanations for this result if we take a look at intercultural studies for instance from Edward Hall (1976) who concluded that communication styles could vary from country to country, divided in direct and indirect.

In collectivist cultures (Hofstede, Hofstede and Minkow 2010), such as the Indian and Malaysian culture, communication tends to be indirect. In this cultures, it is inferred that the other person knows what the speaker is trying to inform through the use of gestures, body language, among others (Beaumont, N, 2010, p.98; Jørgensen, M, Yamashita, Ai, n.d).

Another interesting finding regarding the impact on culture on ITO is that German firms have different management approach in comparison to their external vendors, especially if the ITO activities are performed nearshore or offshore, which is somehow affected by the influence of culture.

According to the literature, the management style can be one of the most important and complex levels of cultures (Adler, 1980), as it does not only groups the company’s values but also the employees, as it has part of their regional and individual culture embedded.

Authors such as Duening and Click (2005, cited by Kvedaraviciene, G and Boguslauskas, V., 2010, p, 6) mentioned that this also tends to be one of the most ignored levels of culture in international endeavors when customers and providers from different countries work together, leading to failure.

This accords with the findings of this study as in one of the interviews conducted; a respondent stated that due to poor planning and the difference in time delivery with their Polish IT external vendor, it lead to a different result of from their expectation.

This result can also be inferred to be influenced by the various cultures of the two parties involved.

As Hall ( 2017) stated, in the case of high context cultures, (like Poland), people do not need to explain certain behaviors or make them explicit, and time in these cultures is seen as valuable but does not have a high priority.

Therefore these societies tend to be more flexible. While on the other hand, low context cultures such as the German culture tend to say what they think and therefore make their communication more clear, time is precious and considered as an opportunity cost (Hall’s Cultural Factors, 2017). Thus, these perceived differences could also be the result of different cultures performing ITO activities between each other.

The fourth aim of this study was to investigate the IT outsourcing practices performed by German companies.

First of all, during the empirical research, it was found that German firms depending on their business strategy decide on how to adopt an ITO practice.

For instance, it was discovered that one of the most adopted practices by German firms is to perform their IT activities in-house or under their control.

By this, it means that offshore is being practiced but with an internal IT team located in a geography far away from the German firm, known as offshore-insourcing (Chakrabarty.2011.p, 133).

A possible explanation to this could be related to the influence of culture on the ITO practices.

German firms, if considered under the Mittelstand category prefer having control of their operation but at the same time recognize that to be competitive, they must save costs and ITO offshoring offers this advantage.

Therefore, having a subsidiary located in a low wage country offers all the benefits of an offshore practice but without the risks of losing control over the operations.

It also minimizes the costs of data privacy, language barriers, and having different organizational structures (Wiener, p.57; Venohr, Fear & Witt .2015).

This finding confirms previous research in which German firms stated that offshore is not their preferred IT outsourcing practice (EY, 2013, p.13).

Analysis of empirical results demonstrates that German companies besides practicing offshoring-insourcing, recognize as important to have their external IT service providers close to them, especially for regional business strategies.

Nearshore operations seem to be practiced in countries located in Eastern Europe, being Poland one of the most mentioned countries. The close ties between culture, language and time zone between Germany and Poland seem to be attractive for German firms.

Having control of the projects, as mentioned earlier in this section, is also one of the aspects that most German companies look into when deciding on their ITO practices (Wreham et al., cited by Boroujerdi, M., Wang, Y, 2013, p.6).

This goes in line with the study performed by McKinsey in 2015 (p.53) resulting in 30 percent of German firms mentioning that when deciding on their ITO practices, nearshore was one of the preferred locations.

It was found that for German companies when it comes to maintaining the relationship with an external provider, it is critical to have a close relationship with the vendors and to have face to face communication as a way to building trust and making the project understandable.

This result may be explained by the fact that as literature and sociocultural studies state; the German culture is recognized to be a long term oriented culture and high on uncertainty avoidance (Hofstede, Hofstede and Minkow. 2010; Schroll-Machl. 2008).

Therefore, building trust is important to have successful long term projects and for avoiding future misunderstandings. A finding that also corroborates the study by Burchell and Wilkinson (1996.p, 10) in which found that 80 percent of Germans are interested in establishing long term business relationships as security, and the exchange of confidential information play a significant role in their business practices.

Consequently, trusting and meeting face to face their counterparts of activities is necessary for their business practices.

Even though the study reached its central objectives and answered each of the four aimed goals, there were several limitations of the research.

First of all, the researcher faced limitations concerning actual figures for the ITO market in Germany.

Since it is a practice that many firms prefer to keep as confidential, few public information was available.

Secondly, because of time limitations, this research was conducted only with a small sample of the population and did not consider all the sectors in Germany.

Therefore some of the findings may just be adjustable to some industries such as the automotive and IT software.

The current research is also limited by the actual data privacy concerns in Germany.

Therefore many firms were reluctant to share information regarding this market.

Despite the constraints encountered during the investigation, the information obtained from literature and empirical research resulted in interesting outcomes regarding the objectives of this present study.

Conclusion

The rising demand for IT resources and activities has become a priority for every industry.

Nowadays technology is everywhere, and global companies have realized that technology has become a vital element of our global economy and daily life.

Thus, global firms have started adopting new strategies and ways to cope with this current demand for technology.

As a result, IT outsourcing has become an answer for companies to address this request and access IT services at lower prices, as a way to strengthen their core competencies.

During this research, it was important to analyze how one of the largest markets in Europe, and one of the top global economies is coping with the demand of technology and the current challenges in the industry.

Therefore, the present study aimed to analyze how German firms are adopting IT outsourcing and which factors are determining its outsourcing practices.

Until now, there had been few studies that have addressed this question and directed its analysis towards this topic; analyzing the current German IT outsourcing market and investigating the factors influencing its practices in the same study.

Most of the earlier studies conducted have based their research on cultural aspects in the form of case study analysis between German firms and a particular culture, while some others have only addressed the entire ITO European market with only a few insights about the German market.

Hence, this research combined previous literature and studies to review and analyze the current German ITO and its practices, while investigating the internal and external factors that influence the decisions of German companies for performing this activity.

The results of this research revealed that with the increasing demand for technology as a consequence of the rise of the internet, digitalization, and the e-commerce industry, among others, the IT global spending has been rising, and is expected to continue growing.

Firms and sectors which before did not consider technology as part of their core activities are now adopting new business models and strategies to incorporate technology into their products and services. The government, telecom, banking and financial sectors are an example of the sectors that have increased their interest to adopt technology as part of their core activities.

Thus, the results of this study revealed that these sectors had become an engine for the growth of the ITO market in the last years.

In 2016 the sectors mentioned above signed the most ITO contracts and is expected that by 2020 the ITO activities of these sectors will increase 1.5 more.

However, despite these predictions, it is anticipated that ITO may also be affected by the latest economic and political challenges prevailing in the market, for instance, the UK leaving the European Union. This may change the global ITO structure, and while some studies suggest that this could increase the UK IT outsourcing spending and deals, other studies indicate that this will replace the UK’s position and Germany might take its place.

Meanwhile one of the most significant findings that emerged from this study is some challenges and factors present in the market are preventing a full adoption of ITO by German enterprises.

The study found that German firms are not yet fully leveraging the operations to external providers, thus performing complete ITO activities.

Analyzing the German business landscape and how companies are structured, the perception assumed is that the low tendency to outsource especially in offshore practices is derived from the Mittelstand values and business structure.

It was found that when Mittelstand companies have subsidiaries abroad, there is a preference for having control on their activities.

Therefore, there is a reluctance to delegate the operations to the external branches. German firms tend to focus on long term relationships and place great emphasis on the relationship with their customer, therefore are categorized as risk averse by some authors. This finding resembles the results of this research regarding how German firms approach ITO activities.

Since during this study, it was found that German companies need to have control of their operations and to keep most of the core capabilities in-house.

As this study revealed, this could also be one of the reasons why many German firms prefer to perform IT outsourcing in the form of offshore-insource, as this gives them security and control over the activities and external providers, thus facilitating the outsourcing process.

Similarly, it was found that the geographical proximity also plays a significant role for German firms. Working with neighbor countries eases the control of their IT activities, and the communication is easier as both client and external vendor are located in the same time zone.

Furthermore, it represents certainty by working with companies geographically close and who share similar cultural ties and history.

Another external factor that resulted from the study is that German firms are outsourcing as a way to overcome the lack of IT skills prevailing in the German market, which is estimated in approximately 45 thousand IT professionals (2016).

Thus, many firms to cope with this challenge look for the availability of these skills, especially in nearby countries.

Countries located in Eastern Europe seem to cover this aspect, where the supply of talented IT skills is high, and at lower prices than in Germany.

Additionally, it is a market where the German language is learned since early stages.

A factor that was recognized to be an essential element for German firms when deciding on their ITO practices and highly embedded in the culture.

Language facilitates the communication between clients and the external providers in ITO activities.

Thus it is reflected in the ITO practices and outcomes of a project.

Findings show that when German firms engage with external vendors located in far distant countries (offshoring), communication differences among both sides seems to be a latent catalyst for the project outcomes.

Consequently, there is a higher interest from German firms to outsource to countries where this cultural difference is minimal, thus practicing nearshoring.

The quality perception was another of the aspects that emerged as an important factor and being affected by the culture.

A factor which is correlated to Germany’s cultural dimension of low in power distance, high in individualism, and high on uncertainty avoidance.

This factor appeared to be significant and influencing German decisions on their ITO providers and practices.

Similarly, the differences in project approach lead by the difference in culture between German firms and external vendors, especially in cases where the external vendor was from a high context culture versus a low context culture, (being Germany characterized as a low culture), seem to have implications for the ITO practices.

Another significant outcome of the present study exposed that due to the encountered differences in culture, German firms’ perception towards offshoring might be affected. As a result, firms have started considering to insource or nearshore to mitigate the issues encountered in previous offshoring practices.

Hence, the culture was found to have an impact on ITO practices.

Furthermore, this study derived that German firms look for cost reduction, to focus on core capabilities and improve their business strategy.

These factors seem to have influenced the direction taken by German companies when deciding on their outsourcing strategy.

Similarly, as with the external factors mentioned above, it was found that the internal factors have influenced their practices.

Being nearshore and inshore the most representative practices in the German market.

In regards to Offshoring, it is a practice that although is being performed, it is rarely fully adopted as a strategy, and if practiced, it takes the form of offshore-insourcing.

Taken together, these results suggest that German firms practice all different types of outsourcing, but depending on the factors influencing their strategy, it varies.

For example, in-house outsourcing is performed when the IT activities are crucial for the enterprise, and the core capabilities must be kept in-house.

For that reason, all the knowledge has to stay inside the company.

In some cases, companies hire external consultants or providers that work for a particular time on the project and at the company´s premises.

On the other hand, nearshore is executed when the company sees as important to have communication with the external provider at the same time zone, and quality is also regarded as important.

Insource-offshoring is mostly practiced when the firm wants to focus on its core activities and delegate the non-fundamental IT activities to external providers.

The findings of this study have a significant number of important implications for future practice.

IT outsourcing should not just be seen as an economic and strategic action to transfer the IT work to firms located in other countries.

It should be regarded as a teamwork practice performed in a globalized economy. It is a practice that has implications in the way we interact with other people, cultures, in the politics and the economy.

Therefore, for German firms to start adopting it at a full level and be successful, they must be aware of the implications that an activity such as this can bring not just to the German economy and business, but to their levels of innovation.

In today’s global economy where the most successful firms apply a sharing strategy, it is important to adopt a collectivistic approach by doing business with those that are good at what they do, thus transferring the activities to externals and get better results.

Thus, German firms need to realize that to keep focusing on those areas they are good at, is important to cooperate internationally and transfer those IT activities and needs to the best IT professionals in the world. Moreover, cultural differences as the ones found to have an influence on the ITO practices during this study, should not be seen as a threat.

Working with other cultures and outsourcing should be seen as a way to discover new IT developments and become more competitive.

By this way, everyone can beneficiate with the best of both worlds, the German mindset and quality, and the know-how and IT skills from offshore locations.

Some References.

Atradius (2016). Market Monitor – ICT industry – Germany | Atradius. [online] Available at: https://atradius.at/publikationen/market-monitor—ict-industry—germany.html
[Accessed 18 Jul. 2017].

Deloitte (2013). The Outsourcing Handbook, a guide to outsourcing. London [online] Available at: https://www.deloitte.co.uk/makeconnections/assets/pdf/the-outsourcing-handbook-a-guide-to-outsourcing.pdf[Accessed 2 May 2. 2017].

DiRomualdo, A. & Gurbaxani, V (1998). Strategic intent for IT outsourcing. Sloan Management Review 39. Available at: http://sloanreview.mit.edu/article/strategic-intent-for-it-outsourcing/
[Accessed 1 May 2017]

 

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