Entre expectativas, optimismos y posibilidades

In regards to risk types and perceived impact on offshore outsourcing activities it was surprising to note that the political risk concerns most mentioned related to home/client-country political fall-out or change of regulatory frameworks with implications for the outsourcing business model. This observation highlights that political risk exposure has a dual nature with potential impact on both the location decisions and the manner in which the outsourcing activity is executed.

The impact of the home political risk was further determined to be sector specific i.e. the highly regularized utility industry would be more exposed to policy changes pertaining to data access and security profiling. Similarly, offshoring from highly unionised regions like Europe appear to have much greater potential impact than from the US, due to more defined legislation. The significance of the featured risks pertaining to home country repercussions or change of regulatory requirements, and the strong emphasis on labour related vulnerabilities highlight that a broader conceptualization of political risk considerations is valid and not currently defined in a manner that allows for unambiguous classification of relevant political risk events allow for an understanding of which risks are of concern for the offshoring service industry. A changing regulatory regime has the potential to significantly alter the costing model underlying the offshoring activities, posing a substantial risk for companies’ committing into contracts with external service suppliers or establishing extensive captive capacities abroad. The risk of changes in data management regulatory frameworks, closely followed by loss of intellectual property (IP) and corruption, were also among the top risk considerations suggesting that the nature of offshore outsourcing political risk exposure revolves more around the key categories of policy and legal predictability and institutional capacity, confirming the relevance of integrating mechanisms to capture institutional differentiations as a means of expanded conceptualization of external uncertainty beyond the reliance on composite political risk indicators as suggested in Slangen and Tulder (2009) and Busse and Hefecker (2006). The findings support the critic contending that external

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uncertainty needs to be conceptualized more broadly and proposes the concept of governance infrastructure of host countries covering “public institutions and

policies created by governments as a framework for economic, legal and social relations” (Slangen and Tulder, 2009, p. 279). The research therefore highlights

the need to expand the conceptualization and operationalization of formal external uncertainty, and encourage entry modes research to measure external uncertainty by other political dimensions such as government effectiveness, regulatory quality, control of corruption (Slangen and Tulder, 2009) and corruption and bureaucracy (Busse and Hefecker, 2006). On a similar note the findings support the possible integration of constructs from institutional economics (North, 1990) to better ascertain risk exposure pertaining from both host and home institutions.

Surprisingly, the notion of political instability relating to government stability and social unrest, featured less frequently despite traditional focus within the literature. One explanation is that due to the evidence-based methodology looking at actual exposure in existing cases, the study only captures post-contract political risk incidents. As highlighted by one interviewee “we would not locate to

Syria under the current circumstances, even if labour cost is substantially cheaper (Interviewee 16)”, the industry is not keen on exposing service chains to

predictably unstable countries, especially with the availability of more stable alternative candidate locations for outsourcing. The findings are therefore a reflection of the inherent bias in the focus of the research, as most companies have already integrated these risk considerations into their initial location decisions. However, the findings also suggest that even in the event that political instability or social unrest occurs, the inherent risk management mechanisms such as diversification of the suppliers and ability to scale-up operations in alternative locations, support companies in minimizing impact substantially. The real concern appears to be felt when the political risk impacts on costing and business competitiveness, like through organized labour strikes or policy changes with implications for the underlying costing model.

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As highlighted the findings also suggest that there are limited discrepancies on political risk experiences in terms of frequency ratings between BPO and ITO engagements, both highlighting organized labour strike as one of the main impacts categories. Even though more discrepancy emerged through the impact perceptions there is limited evidence that ITO and BPO engagements are detrimentally different in terms of political risk exposure. However, compared with the KPO findings it was possible to observe a scope shift towards concerns relating to regulatory frameworks and contract enforcement, and more impacted by potential IP loss, contract enforcement limitations and legal predictability. The association of Knowledge-based Outsourcing (KPO) with loss of IP, policy change on foreign ownership and contract enforcement risks, suggests that institutional capacity i.e. legal enforcement of IP rights and contracts becomes increasingly important as the value of product or service is enhanced. As stated,

“most of the high-end R&D or IP type development or intellectual property type development happens at in-house locations. So most of the high-end work is done internally with their own employees their own buildings – everything is their own – only thing is that it may happen to be in an offshore location”. The reason they do that is they don’t trust others to do it, I don’t think it is a scare issue, it is about whether they can expose that and still have the right control (Interviewee #17).

Hence the findings suggest that for purely transactional work most firms are comfortable outsourcing to third-party companies, while for high-end activities they prefer to keep the process internal, supporting the TCE premise of internalization to avoid supplier opportunistic behaviour and minimization of associated transaction costs. Overall, the findings suggest that political risk exposure is specific to the nature of the offshored business activity and what risk management steps have already been taken to address the exposure. The findings further suggest that these specific risk exposures be considered in the context of low versus high value service delivery as a key distinction for political risk exposure.

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3.4.3 The impact of entry mode on risk perceptions and vulnerability