14.2: Offshoring, Outsourcing

Learning Objectives

1. Be able to explain the terminology related to international HRM.
2. Define global HRM strategies.
3. Explain the impact of culture on HRM practices.

As you already know, this chapter is all about strategic human resource management (HRM) in a global environment. If this is an area of HRM that interests you, consider taking the WorldatWork Global Remuneration Professional certification (GRP). The GRP consists of eight examinations ranging from global rewards strategy to job analysis in a global setting¹.

Before we begin to discuss HRM in a global environment, it is important to define a few terms, some of which you may already know. First, offshoring is when a business relocates or moves some or part of its operations to another country. Outsourcing involves contracting with another company (onshore or offshore) to perform some business-related task. For example, a company may decide to outsource its accounting operations to a company that specializes in accounting, rather than have an in-house department perform this function. Thus a company can outsource the accounting department, and if the function operates in another country, this would also be offshoring. The focus of this chapter will be on the HRM function when work is offshored.

The Global Enviornment

Although the terms international, global multinational, and transnational tend to be used interchangeably, there are distinct differences. First, a domestic market is one in which a product or service is sold only within the borders of that country. An international market is one in which a company may find that it has saturated the domestic market for the product, so it seeks out international markets in which to sell its product. Since international markets use their existing resources to expand, they do not respond to local markets as well as a global organization. A global organization is one in which a product is being sold globally, and the organization looks at the world as its market. The local responsiveness is high with a global organization. A multinational is a company that produces and sells products in other markets, unlike an international market in which products are produced domestically and then sold overseas. A transnational company is a complex organization with a corporate office, but the difference is that much of the decision making, research and development, and marketing are left up to the individual foreign market. The advantage to a transnational is the ability to respond locally to market demands and needs. The challenge in this type of organization is the ability to integrate the international offices. Coca-Cola, for example, engaged first in the domestic market, sold products in an international market, and then became multinational. The organization then realized they could obtain certain production and market efficiencies in transitioning to a transnational company, taking advantage of the local market knowledge.

Table \(\PageIndex{1}\) Differences between International, Global, Multinational, and Transnational Companies

Global	Transnational
Centrally controlled operations	Foreign offices have control over production, markets
No need for home office integration, since home office makes all decisions	Integration with home office
Views the world as its market	High local responsiveness
Low market responsiveness, since it is centrally controlled
International	Multinational
Centrally controlled	Foreign offices are viewed as subsidiaries
No need for home office integration, as home office makes all decisions	Home office still has much control
Uses existing production to sell products overseas	High local responsiveness
Low market responsiveness

Globalization has had far-reaching effects in business but also in strategic HRM planning. The signing of trade agreements, growth of new markets such as China, education, economics, and legal implications all impact international business.

Trade agreements have made trade easier for companies. A trade agreement is an agreement between two or more countries to reduce barriers to trade. For example, the European Union consists of twenty-seven countries (currently, with five additional countries as applicants) with the goal of eliminating trade barriers. The North American Trade Agreement (NAFTA) lifts barriers to trade between Canada, the United States, and Mexico. The result of these trade agreements and many others is that doing business overseas is a necessity for organizations. It can result in less expensive production and more potential customers. Because of this, along with the strategic planning aspects of a global operation, human resources needs to be strategic as well. Part of this strategic process can include staffing differences, compensation differences, differences in employment law, and necessary training to prepare the workforce for a global perspective. Through the use of trade agreements and growth of new markets, such as the Chinese market, there are more places available to sell products, which means companies must be strategically positioned to sell the right product in the right market. High performance in these markets requires human capital that is able to make these types of decisions.

The level of education in the countries in which business operates is very important to the HR manager. Before a business decides to expand into a particular country, knowledge of the education, skills, and abilities of workers in that country can mean a successful venture or an unsuccessful one if the human capital needs are not met. Much of a country’s human capital depends on the importance of education to that particular country. In Denmark, for example, college educations are free and therefore result in a high percentage of well-educated people. In Somalia, with a GDP of $600 per person per year, the focus is not on education but on basic needs and survival.

Economics heavily influences HRM. Because there is economic incentive to work harder in capitalist societies, individuals may be more motivated than in communist societies. The motivation comes from workers knowing that if they work hard for something, it cannot be taken away by the government, through direct seizure or through higher taxes. Since costs of labor are one of the most important strategic considerations, understanding of compensation systems (often based on economics of the country) is an important topic. This is discussed in more detail in Section 14.3.3 “Compensation and Rewards”.

The legal system practiced in a country has a great effect on the types of compensation; union issues; how people are hired, fired, and laid off; and safety issues. Rules on discrimination, for example, are set by the country. In China, for example, it is acceptable to ask someone their age, marital status, and other questions that would be considered illegal in the United States. In another legal example, in Costa Rica, “aguinaldos” also known as a thirteenth month salary, is required in December². This is a legal requirement for all companies operating in Costa Rica. We discuss more specifics about international laws in Section 14.3.5 “The International Labor Environment”.

Table \(\PageIndex{2}\) Top Global 100 Companies

Rank	Company	Revenues ($ millions)	Profits ($ millions)
1	Walmart Stores	408,214	14,335
2	Royal Dutch Shell	285,129	12,518
3	Exxon Mobil	284,650	19,280
4	BP	246,138	16,578
5	Toyota Motor	204,106	2,256
6	Japan Post Holdings	202,196	4,849
7	Sinopec	187,518	5,756
8	State Grid	184,496	−343
9	AXA	175,257	5,012
10	China National Petroleum	165,496	10,272
11	Chevron	163,527	10,483
12	ING Group	163,204	−1,300
13	General Electric	156,779	11,025
14	Total	155,887	11,741
15	Bank of America Corp.	150,450	6,276
16	Volkswagen	146,205	1,334
17	ConocoPhillips	139,515	4,858
18	BNP Paribas	130,708	8,106
19	Assicurazioni Generali	126,012	1,820
20	Allianz	125,999	5,973
21	AT&T	123,018	12,535
22	Carrefour	121,452	454
23	Ford Motor	118,308	2,717
24	ENI	117,235	6,070
25	J.P. Morgan Chase & Co.	115,632	11,728
26	Hewlett-Packard	114,552	7,660
27	E.ON	113,849	11,670
28	Berkshire Hathaway	112,493	8,055
29	GDF Suez	111,069	6,223
30	Daimler	109,700	−3,670
31	Nippon Telegraph & Telephone	109,656	5,302
32	Samsung Electronics	108,927	7,562
33	Citigroup	108,785	−1,606
34	McKesson	108,702	1,263
35	Verizon Communications	107,808	3,651
36	Crédit Agricole	106,538	1,564
37	Banco Santander	106,345	12,430
38	General Motors	104,589	—
39	HSBC Holdings	103,736	5,834
40	Siemens	103,605	3,097
41	American International Group	103,189	−10,949
42	Lloyds Banking Group	102,967	4,409
43	Cardinal Health	99,613	1,152
44	Nestlé	99,114	9,604
45	CVS Caremark	98,729	3,696
46	Wells Fargo	98,636	12,275
47	Hitachi	96,593	−1,152
48	International Business Machines	95,758	13,425
49	Dexia Group	95,144	1,404
50	Gazprom	94,472	24,556
51	Honda Motor	92,400	2,891
52	Électricité de France	92,204	5,428
53	Aviva	92,140	1,692
54	Petrobras	91,869	15,504
55	Royal Bank of Scotland	91,767	−4,167
56	PDVSA	91,182	1,608
57	Metro	91,152	532
58	Tesco	90,234	3,690
59	Deutsche Telekom	89,794	491
60	Enel	89,329	7,499
61	UnitedHealth Group	87,138	3,822
62	Société Générale	84,157	942
63	Nissan Motor	80,963	456
64	Pemex	80,722	−7,011
65	Panasonic	79,893	−1,114
66	Procter & Gamble	79,697	13,436
67	LG	78,892	1,206
68	Telefónica	78,853	10,808
69	Sony	77,696	−439
70	Kroger	76,733	70
71	Groupe BPCE	76,464	746
72	Prudential	75,010	1,054
73	Munich Re Group	74,764	3,504
74	Statoil	74,000	2,912
75	Nippon Life Insurance	72,051	2,624
76	AmerisourceBergen	71,789	503
77	China Mobile Communications	71,749	11,656
78	Hyundai Motor	71,678	2,330
79	Costco Wholesale	71,422	1,086
80	Vodafone	70,899	13,782
81	BASF	70,461	1,960
82	BMW	70,444	284
83	Zurich Financial Services	70,272	3,215
84	Valero Energy	70,035	−1,982
85	Fiat	69,639	−1,165
86	Deutsche Post	69,427	895
87	Industrial & Commercial Bank of China	69,295	18,832
88	Archer Daniels Midland	69,207	1,707
89	Toshiba	68,731	−213
90	Legal & General Group	68,290	1,346
91	Boeing	68,281	1,312
92	US Postal Service	68,090	−3,794
93	Lukoil	68,025	7,011
94	Peugeot	67,297	−1,614
95	CNP Assurances	66,556	1,396
96	Barclays	66,533	14,648
97	Home Depot	66,176	2,661
98	Target	65,357	2,488
99	ArcelorMittal	65,110	118
100	WellPoint	65,028	4,746
Source: Adapted from Fortune 500 List 2010, http://money.cnn.com/magazines/fortune/global500/2010/full_list/ (accessed August 11, 2011).

Global HR Trends

Howard Wallack, director of Global Member programs for the Society for Human Resource Management (SHRM), talks about some of the global HR trends and gives tips on how to deal with these trends from the HR perspective.

HRM Global Strategies

When discussing HRM from the global perspective, there are many considerations. Culture, language, management styles, and laws would all be considerations before implementing HRM strategies. (Beechler et al., 2004) argued that for multinational companies, identifying the best HRM processes for the entire organization isn’t the goal, but rather finding the best fit between the firm’s external environment (i.e., the law) and the company’s overall strategy, HRM policies, and implementation of those policies. To this end, Adler and Bartholomew developed a set of transnational competencies that are required for business to thrive in a global business environment (Adler & Bartholomew, 1992). A transnational scope means that HRM decisions can be made based on an international scope; that is, HRM strategic decisions can be made from the global perspective rather than a domestic one. With this HRM strategy, decisions take into consideration the needs of all employees in all countries in which the company operates. The concern is the ability to establish standards that are fair for all employees, regardless of which country they operate in. A transnational representation means that the composition of the firm’s managers and executives should be a multinational one. A transnational process, then, refers to the extent to which ideas that contribute to the organization come from a variety of perspectives and ideas from all countries in which the organization operates. Ideally, all company processes will be based on the transnational approach. This approach means that multicultural understanding is taken into consideration, and rather than trying to get international employees to fit within the scope of the domestic market, a more holistic approach to HRM is used. Using a transnational approach means that HRM policies and practices are a crucial part of a successful business, because they can act as mechanisms for coordination and control for the international operations (Pudelko & Harzing, 2007). In other words, HRM can be the glue that sticks many independent operations together.

Before we look at HRM strategy on the global level, let’s discuss some of the considerations before implementing HRM systems.

Culture as a Major Aspect of HRM Overseas

Culture is a key component to managing HRM on a global scale. Understanding culture but also appreciating cultural differences can help the HRM strategy be successful in any country. Geert Hofstede, a researcher in the area of culture, developed a list of five cultural dimensions that can help define how cultures are different (Hofstede, 2011).

The first dimension of culture is individualism-collectivism. In this dimension, Hofstede describes the degree to which individuals are integrated into groups. For example, in the United States, we are an individualist society; that is, each person looks after him- or herself and immediate family. There is more focus on individual accomplishments as opposed to group accomplishments. In a collective society, societies are based on cohesive groups, whether it be family groups or work groups. As a result, the focus is on the good of the group, rather than the individual.

Figure \(\PageIndex{1}\): One of the factors of culture is nonverbal language, such as the use of handshakes, kissing, or bowing. Wikimedia – CC BY 2.0.

Power distance, Hofstede’s second dimension, refers to the extent to which the less powerful members of organizations accept that power is not distributed equally. For example, some societies may seek to eliminate differences in power and wealth, while others prefer a higher power distance. From an HRM perspective, these differences may become clear when employees are asked to work in cross-functional teams. A Danish manager may have no problem taking advice from employees because of the low power distance of his culture, but a Saudi Arabian manager may have issues with an informal relationship with employees, because of the high power distance.

Uncertainty avoidance refers to how a society tolerates uncertainty. Countries that focus more on avoidance tend to minimize the uncertainty and therefore have stricter laws, rules, and other safety measures. Countries that are more tolerant of uncertainty tend to be more easygoing and relaxed. Consider the situation in which a company in the United States decides to apply the same HRM strategy to its operations in Peru. The United States has an uncertainty avoidance score of 46, which means the society is more comfortable with uncertainty. Peru has a high uncertainty avoidance, with a score of 87, indicating the society’s low level of tolerance for uncertainty. Let’s suppose a major part of the pay structure is bonuses. Would it make sense to implement this same compensation plan in international operations? Probably not.

Masculinity and femininity refers to the distribution of emotional roles between genders, and which gender norms are accepted by society. For example, in countries that are focused on femininity, traditional “female” values such as caring are more important than, say, showing off. The implications to HRM are huge. For example, Sweden has a more feminine culture, which is demonstrated in its management practices. A major component in managers’ performance appraisals is to provide mentoring to employees. A manager coming from a more masculine culture may not be able to perform this aspect of the job as well, or he or she may take more practice to be able to do it.

The last dimension is long-term–short-term orientation, which refers to the society’s time horizons. A long-term orientation would focus on future rewards for work now, persistence, and ordering of relationships by status. A short-term orientation may focus on values related to the past and present such as national pride or fulfillment of current obligations. We can see HRM dimensions with this orientation in succession planning, for example. In China the person getting promoted might be the person who has been with the company the longest, whereas in short-term orientation countries like the United States, promotion is usually based on merit. An American working for a Chinese company may get upset to see someone promoted who doesn’t do as good of a job, just because they have been there longer, and vice versa.

Based on Hofstede’s dimensions, you can see the importance of culture to development of an international HRM strategy. To utilize a transnational strategy, all these components should be factored into all decisions such as hiring, compensation, and training. Since culture is a key component in HRM, it is important now to define some other elements of culture.

Table \(\PageIndex{3}\) Examples of Countries and Hofstede’s Dimensions

Country	Power Distance	Individualism/Collectivism	Masculinity/Femininity	Uncertainty Avoidance	Long/Short Term Orientation
New Zealand	22	79	58	49	30
UK	35	89	66	35	25
United States	40	91	62	46	29
Japan	54	46	95	92	80
Taiwan	58	17	45	69	87
Zambia	64	27	41	52	25
India	77	48	56	40	61
China	80	20	66	40	118
Philippines	94	32	64	44	19
Chile	63	23	28	86	(this dimension was only studied in 23 countries)
Power distance: Refers to the comfort level of power differences among society members. A lower score shows greater equality among levels of society, such as New Zealand.
Individualism/collectivism: A high ranking here, such as the United States, means there is more concern for the individualistic aspects of society as opposed to collectivism. Countries with high scores on individualism means the people tend to be more self-reliant.
Masculinity/femininity: A lower score may indicate lower levels of differentiation between genders. A lower score, such as Chile, may also indicate a more openly nurturing society.
Uncertainty avoidance: Refers to the tolerance for uncertainty. A high score, such as Japan’s, means there is lower tolerance for uncertainty, so rules, laws, policies, and regulations are implemented.
Long/short term orientation: Refers to thrift and perseverance, overcoming obstacles with time (long-term orientation), such as China, versus tradition, social obligations.

Culture refers to the socially accepted ways of life within a society. Some of these components might include language, norms, values, rituals, and material culture such as art, music, and tools used in that culture. Language is perhaps one of the most obvious parts of culture. Often language can define a culture and of course is necessary to be able to do business. HRM considerations for language might include something as simple as what language (the home country or host country) will documents be sent in? Is there a standard language the company should use within its communications?

Fortune 500 Focus

For anyone who has traveled, seeing a McDonald’s overseas is common, owing to the need to expand markets. McDonald’s is perhaps one of the best examples of using cultural sensitivity in setting up its operations despite criticism for aggressive globalization. Since food is usually a large part of culture, McDonald’s knew that when globalizing, it had to take culture into consideration to be successful. For example, when McDonald’s decided to enter the Indian market in 2009, it knew it needed a vegetarian product. After several hundred versions, local McDonald’s executives finally decided on the McSpicy Paneer as the main menu item. The spicy Paneer is made from curd cheese and reflects the values and norms of the culture (Lubin, 2011).

In Japan, McDonald’s developed the Teriyaki Burger and started selling green tea ice cream. When McDonald’s first started competing in Japan, there really was no competition at all, but not for the reason you might think. Japanese people looked at McDonald’s as a snack rather than a meal because of their cultural values. Japanese people believe that meals should be shared, which can be difficult with McDonald’s food. Second, the meal did not consist of rice, and a real Japanese meal includes rice—a part of the national identity (Ohnuki-Tierney, 1997) and values. Most recently, McDonald’s introduced the McBaguette in France to align with French cultural values (Rappanport, 2011). The McBaguettes will be produced in France and come with a variety of jams, a traditional French breakfast. Just like in product development, HRM must understand the differences between cultures to create the best HRM systems that work for the individual culture.

Norms are shared expectations about what is considered correct and normal behavior. Norms allow a society to predict the expected behavior and be able to act in this manner. For many companies operating in the United States, a norm might be to dress down for work, no suit required. But if doing business overseas, that country’s norm might be to wear a suit. Not understanding the norms of a culture can offend potential clients, customers, and colleagues.

Values, another part of culture, classify things as good or bad within a society. Values can evoke strong emotional feelings from a person or a society. For example, burning of the American flag results in strong emotions because values (love of country and the symbols that represent it) are a key component of how people view themselves, and how a culture views society. In April 2011, a pastor in Florida burned a holy book, the Koran, which sparked outrage from the Muslim community all over the world. This is an example of a strongly held value that when challenged can result in community rage (Drury, 2011).

Rituals are scripted ways of interacting that usually result in a specific series of events. Consider a wedding in the United States, for example. The basic wedding rituals (first dance, cutting of cake, speech from best man and bridesmaid) are practiced throughout society. Besides the more formalized rituals within a society, such as weddings or funerals, daily rituals, such as asking someone “How are you?” (when you really don’t want to know the answer) are part of culture, too. Even bonding rituals such as how business cards are exchanged and the amount of eye contact given in a social situation can all be rituals as well.

The material items a culture holds important, such as artwork, technology, and architecture, can be considered material culture. Material culture can range from symbolic items, such as a crucifix, or everyday items, such as a Crockpot or juicer. Understanding the material importance of certain items to a country can result in a better understanding of culture overall.

Cultural Differences

This funny commercial notes examples of cultural differences.

Human Resource Recall

Which component of culture do you think is the most important in HRM? Why?

Key Takeaways

• Offshoring is when a business relocates or moves part of its operations to a country different from the one it currently operates in.
• Outsourcing is when a company contracts with another company to do some work for another. This can occur domestically or in an offshoring situation.
• Domestic market means that a product is sold only within the country that the business operates in.
• An international market means that an organization is selling products in other countries, while a multinational one means that not only are products being sold in a country, but operations are set up and run in a country other than where the business began.
• The goal of any HRM strategy is to be transnational, which consists of three components. First, the transnational scope involves the ability to make decisions on a global level rather than a domestic one. Transnational representation means that managers from all countries in which the business operates are involved in business decisions. Finally, a transnational process means that the organization can involve a variety of perspectives, rather than only a domestic one.
• Part of understanding HRM internationally is to understand culture. Hofstede developed five dimensions of culture. First, there is the individualism-collectivism aspect, which refers to the tendency of a country to focus on individuals versus the good of the group.
• The second Hofstede dimension is power distance, that is, how willing people are to accept unequal distributions of power.
• The third is uncertainty avoidance, which means how willing the culture is to accept not knowing future outcomes.
• A masculine-feminine dimension refers to the acceptance of traditional male and female characteristics.
• Finally, Hofstede focused on a country’s long-term orientation versus short-term orientation in decision making.
• Other aspects of culture include norms, values, rituals, and material culture. Norms are the generally accepted way of doing things, and values are those things the culture finds important. Every country has its own set of rituals for ceremonies but also for everyday interactions. Material culture refers to the material goods, such as art, the culture finds important.
• Other HRM aspects to consider when entering a foreign market are the economics, the law, and the level of education and skill level of the human capital in that country.

Exercise

1. Visit http://www.geert-hofstede.com/ and view the cultural dimensions of three countries. Then write a paragraph comparing and contrasting all three.

¹“Global Remuneration Professional,” WorldatWork Society of Certified Professionals, accessed August 10, 2010, www.worldatworksociety.org/society/certification/html/certification-grp.jsp.

²“Labor Laws and Policy,” The Real Costa Rica, accessed April 29, 2011, http://www.therealcostarica.com/costa_rica_business/costa_rica_labor_law.html.

References

Adler, N. J. and Susan Bartholomew, “Managing Globally Competent People,” Executive 6, no. 3 (1992): 52–65.

Beechler, S., Vladimir Pucik, John Stephan, and Nigel Campbell, “The Transnational Challenge: Performance and Expatriate Presence in the Overseas Affiliates of Japanese MNCs,” in Japanese Firms in Transition: Responding to the Globalization Challenge, Advances in International Management, vol. 17, ed. Tom Roehl and Allan Bird (Bingley, UK: Emerald Group, 2004), 215–42.

Drury, S., “Violent Protests Over Koran Burning Spread,” ABC News, April 4, 2011, accessed April 27, 2011, http://www.abc.net.au/worldtoday/content/2011/s3181541.htm.

Hofstede, G., Cultural Dimensions website, accessed April 29, 2011, http://www.geert-hofstede.com/.

Ohnuki-Tierney, E., “McDonald’s in Japan: Changing Manners and Etiquette,” in Golden Arches East: McDonald’s in East Asia, ed. J. L. Watson (Stanford, CA: Stanford University Press, 1997), 161-82.

Pudelko, M. and Anne-Wil Harzing, “Country-of-Origin, Localization, or Dominance Effect? An Empirical Investigation of HRM Practices in Foreign Subsidiaries,” Human Resource Management 46, no. 4 (2007): 535–59.

Rappanport, S., “McDonalds Introduces France to the McBaguette,” Business Insider Europe, July 29, 2011, accessed August 12, 2011, http://www.businessinsider.com/mcbaguette-mcdonalds-france-2011-7.