Trust Facilitating Good Software Outsourcing Relat

Ita Richardson, Per Runeson, Richard Messnarz (eds), Software Process Improvement and Innovation, Lectures Notes in Computer Science (LNCS) 4257, Proceedings of the 13th European Conference EuroSPI 2006, 11-13 October, Joensuu, Finland, Springer Verlag Berlin Heidelberg, ISBN-10 3-540-476945-4, pp. 171-182

Trust Facilitating Good

Software Outsourcing Relationships

Kerstin V. Siakas, Dimitri Maoutsidis, Errikos Siakas

Alexander Technological Educational Institute of Thessaloniki,

Department of Informatics, P.O. Box 141, GR-57400 Thessaloniki, Greece

{siaka@it.teithe.gr, dimao@it.teithe.gr, serik@mailbox.gr}

Abstract.Offshore outsourcing a n d teams working across national borders

have become a fact. Management experiences difficulties when applying

traditional management approaches, because of the increased complexity of

global organizations and global partnerships and their dependency on people

with different underlying norms, values and beliefs. Cultural sensitivity is a

core issue. Trust, an issue embedded in culture, is utmost important for global

organizations and global outsourcing partnerships. In this paper we investigate

the phenomenon of trust by analyzing the characteristics, their interconnection

and identification in the software outsourcing context. Our findings reveal the

importance of trust in software outsourcing relationships and the recognition

that trust is culture bound and therefore prompts for special caution and cultural

awareness. The advantages gained in outsourcing relationships which could

demonstrate trust between partners were improved communication, efficiency

and output of Information Systems (IS) development projects, as well as

mitigation of opportunistic behavior.

Keywords: Trust, Outsourcing, Global Organizations

1 Introduction, Motivation and Perspectives

Since the Industrial Revolution companies have struggled with how to exploit their competitive advantage in order to increase profit and extend their markets. In today’s rapidly changing and highly competitive global environment organisations face more challenges than ever. The evolution of the internet has endorsed organisations to establish business partnerships beyond geographical boundaries. Organisations increasingly delegate Information Technology (IT) intensive business activities, such as resource demanding operational tasks and projects, as well as critical strategic business processes to external service providers outside the home country.

The countries involved as customers / clients are mainly North America and Europe with Japan following [1]. The prevailing software service supplier is India, dominating 80–90 percentage of the total offshore development revenue worldwide [2]. Other software service provider countries are shown in table 1, classified by status in the global market.Table 1: Outsourcing Software Service Provider Countries [1]

Leaders India

Challengers Canada, China, Czech Republic, Hungary, Ireland, Israel,

Mexico, Northern Ireland, Philippines, Poland,

Russia, South Africa

Up Comers Belarus, Brazil, Caribbean, Egypt, Estonia, Latvia,

Lithuania, New Zealand, Singapore, Ukraine, Venezuela Beginners Bangladesh, Cuba, Ghana, Korea, Malaysia, Mauritius,

Nepal, Senegal, Sri Lanka, Taiwan, Thailand, Vietnam Offshore outsourcing can decrease some costs, but it usually adds expenses, such as partner (service provider / customer) selection and the cost of transitioning work to outsourcing service providers. Additionally outsourcing creates challenges in cross-cultural management including communication, cultural differences and a lack of common internal processes [3].

According to a survey [4] including 101 IT professionals, the benefits of offshore outsourcing were considered as following:

·Lower cost (78%);

·Increased IT department productivity (44%);

·Reduced project timeline (37%);

·Competitive advantage (30%);

·Internal customer satisfaction (20%).

On the other hand the challenges of offshore outsourcing were:

·Managing communication (67%);

·Cultural differences (51%);

·Lack of internal processes for specifying work (40%);

·Lack of internal customer management skills (32%);

The most striking findings from the above survey are cultural differences (51%) and management of communication (67%), which both are important success factors in outsourcing relationships. In outsourcing relationships, which usually include virtual collaboration and virtual teams, the main difference found between collated teams and virtual teams was within communications and trust [5]. Our interpretation of these findings is that communication in virtual teams is much harder due to constraints such as language, time and distance and this in turn leads to inadequate communication and subsequently to difficulties in building trust.

2 Why is Trust so Important in Outsourcing Relationships?

Globalisation expanding worldwide beyond domestic boundaries is a business fact, which is creating an interconnected world economy, in which companies do their business and compete with each other anywhere in the world, regardless of national boundaries [6]. Saee [7] states that globalisation has been beneficial to nearly all countries around the world. However, globalisation does not imply homogeneity of cultures [8]; diverse cultures dependency on people with different underlying norms,values and beliefs either favour or suppress different behaviours and cultural values [9]. Organisations are dependent on people with different work values norms and attitudes and therefore cultural awareness in global organisations and outsourcing relationships is of utmost importance for improving and sustaining competitive advantage.

All IT outsourcing relationships contain elements of cooperative agreement and requirements of increasingly complex systems [10]. In order to effectively manage an outsourcing contract in today's dynamic business environment, both the service provider and the client must value and nurture the relationship. Recent research undertaken by the Warwick Business School in the UK regarding 1200 outsourcing contracts around the world, has found that outsourcing relationship can be either power- or trust-based and that relationships based on mutual trust rather than punitive service level agreements and penalties, benefit from a 'trust dividend' worth as much as 40% of the contract's total value [11]. Real trust has to be nurtured and comes from planning, structures, processes and measurement. Good relationships are strategic assets and demand on-going management investment and attention. Ignoring the value of outsourcing relationships will have a huge impact on return on investment and the potential added business value gained from outsourcing. Only management can ensure that the mechanisms, people and incentives are in place to build the desired relationship and create an environment in which to foster the trust relationship. Trust also mitigates perception of opportunistic behaviour between outsourcing partners and thus enhances knowledge, resource and asset transfer [12].

Challenges for managers of distributed organisations and outsourcing relationships are enquired to build trust though communication instead of controlling [13]. Integrity, the ability to build trust and keep promises [14], has to be cultivated. In order to build trust and shared commitment personal contact time is needed [5]. Trust contributes to the ability of team members to collaborate [15], which in turn leads to easier adaptation of complexity and change [16, 17].

However, trust is culturally embedded and since offshore outsourcing involves different national cultures we need to understand differences in cultures and to have cultural awareness in order to build trust. Cooperation between outsourcing partners and project team looms as an important factor for success. Trust is important for cooperation and the slightest cultural misunderstanding can create serious cultural damage [18]. Outsourcing companies are reluctant to transfer key knowledge to outsourcing providers, because of the risk of the providers becoming competitors in the future. Organisations may also have trade secrets or vital customer information they want to protect. Some organisations have chosen to open subsidiaries, and thus transferring the organisational culture into the local company (e.g. Siemens and Bosch in India and China), whilst other organisations try to find the balance between the portion of outsourcing, the context of outsourcing for the creation of added business value. In all these case trust is an important factor and will be a facilitator for increasing outsourcing relationships both in depth and breadth.

In the literature there is agreement that trust will develop only when there is some kind of risk and interdependence between partners [19]. When contractual hazards are high (easy to switch to another client) management of outsourcing relationships become increasingly based on trust, because every future contingency can not be known at the time the contract is signed [20] and trust develops over the course of arelationship. Frequent direct contact through face-to-face meetings is a key factor to developing trust between the client and the service provider [21].

Hofstede [22] provided strong evidence that national cultural differences shape organisational behaviour at a local level, and that differences in national and regional cultures affect work values. He argued that culture is a collection of characteristics possessed by people who have been conditioned by similar socialisation practices, educational procedures and life experiences. Krishna et al. [23] affirm that major differences in norms and values cannot be harmonised since they derive from deep-rooted differences in cultural background, education and working life. In offshore outsourcing relationships there is a customer / client and a service provider both from a different national culture. Companies / customers may also have multiple sourcing relationships in different countries and service providers may have their own service providers. This is a very complex relationship and may involve many different countries with different cultural values. The recognition of differences in national cultures can be beneficial for progress in a variety of ways [24].

The organisation culture, in the form of assumptions, beliefs, attitudes and values are shared by existing members and taught to new members of the organisation. By promoting a strong organisational culture within global organisations, without disproving and demolishing local converging values and attitudes, success is more likely to occur. Organisational culture affects directly individual behaviour by imposing guidelines and expectations for the members of the organisation. One of the key issues for managers in global organisations is integration across geographic distance and cultural diversity [25].

Organisational culture is mainly created and maintained in existing frameworks by the founders and the leaders of an organisation through their value system [26, 27]. Three of the most important sources of organisational cultures are according to Brown [28]:

·societal or national cultures within which an organisation is physically situated;

·the vision, management style and personality of the founder and other dominant leaders of the organisation;

·the type of business an organisation conducts and the nature of its business environment.

The challenges globalisation offers, originates from social, economical, legal, political and technological differences between nations, together with cultural differences regarding work values, attitudes and preferences both of employees and customers. Shared stakeholder values are considered to be important for the success of organisations that work in a global context [22, 27, 29]. Management of global organisations that can take account of the cultural context of their endeavours experiences better success. Even though the very act to deliberately create trust can lead to mistrust, results from previous studies indicate that certain social mechanisms can be used to create an environment in which trust can gain a foothold and flourish [30, 31]. Evidence shows that from a cultural point of view Eastern cultures compared to Western view trust as an important factor in any transactions and therefore choose to have longer-term relationships built on basis of trust with the client. Contracts are considered less important and are viewed with scepticism [32].Regarding IT outsourcing there seems to be relative high awareness of cultural issues in the literature, which seems to propose:

·Recognition of the fact that cross-cultural training is needed both in advance and continuously [33];

·Use of ‘cultural bridging staff’ (people rooted in the country of the sourcing service provider as well as in the country of the client) for informal sharing of experiences [23];

·Use of common systems, common processes and common compatible technologies [34];

·Recognition of the importance of the communication language [33];

·Use of trust-building mechanism [34].

All the above cultural issues are important for understanding and building trust in different cultural settings. In the following section we investigate the phenomenon of trust in more detail by unfolding the characteristics of trust.

3 The Notion of Trust

The notion of trust has been studied by a number of disciplines, each emphasizing different aspects: “researchers in different disciplines have viewed trust along different dimensions” [35]. Economists tend to view trust as calculative, psychologists emphasize the personal attributes and sociologists stress the institutional properties [19]. In this paper, ideas from all these three disciplines are drawn upon because aspects from economics, sociology, and psychology are seen to be relevant in software outsourcing relationships. All disciplines seem to agree that trust is a complex phenomenon with many meanings, difficult to identify, and no widely acknowledged definition of the term exists [1] and that the notion of trust generally is associated with one party having confidence in another and an implication of alignment between relevant value systems [15, 31].

Building a successful relationship with stakeholders in global outsourcing relationships, where engagements often span several years, is a critical success factor [36, 37, 38, 39]. This refers in particular to the global outsourcing partners, such as the client and the service provider, but is also important to all other suppliers and partners involved in the sourcing relationship. By managing expectations and effectively responding to stakeholder needs both the client and the service provider establishes trust with its stakeholders and help to sustain long term relationships and to avoid internal resistance.

Handy [40] points on seven principles of trust to be kept in mind:

·Trust is not blind, which means that it is unwise to trust people whom you do not know well;

·Trust needs boundaries and confidence in someone’s competence and commitment to common goal;

·Trust demands learning. Every individual has to be capable of self renewal;

·Trust is tough. When trust proves misplaced people have to go;

·Trust needs bonding. The team must adhere to the organisational vision and mission;·Trust needs touch. A shared commitment requires personal contact to make it real;

·Trust requires leaders. Trust-based organisations hardly have to be managed, but they do need a multiplicity of leaders.

In outsourcing relationships self-management in the distant location is needed in order to get high performance. Self-management can only be realised in an environment where the leader displays trust through delegation. On the other hand the team members must trust that the leader is committed to support collaboration and manage the team boundaries [5].

As people from different countries and organisations work together on project teams and outsourcing relationships there will be a technology transfer through personal and business interests which will also will create a closer relationship and enhance trust levels [18]. Trust within organisations exist on three levels [41, 42], namely deterrence-based trust (when both parties can be trusted to keep their word, based on intuition), knowledge-based trust (is based on predictability of the other party developed through knowledge of the other party) [1, 19, 42] and identification-based trust (when one party has fully internalised the other’s performance [42]. The longer the outsourcing relationship the better will the outsourcing partners know each others advantages and disadvantages and thus the predictability rises together with trust or eventually distrust. The three levels are believed to be linked in a sequential iteration in that one level enables trust on the next level along with the evolvement and maturity of the relationship [41].

In order to relate the attributes of trust to the software outsourcing context, some factors about trust are considered important. The attributes are discussed below and in the end the attributes are evaluated.

4 The Complexity of Trust

Because companies involved in outsourcing are geographically dispersed, a risk factor stems from lack of information about what the distant partner is doing. In software outsourcing relationships establishing trust is suggested to have several advantages, such as mitigating opportunistic behaviour, improving communication, facilitating knowledge transfer [12], improving efficiency and output quality of Information Systems (IS) development projects [34].

In software outsourcing relationships trust is important within and between organisations, and is different in these two settings [19]. Trust within the organisation refers to differences in trust at the individual, group, and institutional level [19]. Trust has been found to differ regarding which organisational level is studied [1]. The setting within organisations is influenced by the organisational culture. The setting between dispersed organisations is influenced by the national cultures in which the organisations (client / service provider) are situated. This paper looks at trust in both these settings (organisational and national environment) and will consider trust at different levels too.

Trust has not only to do with relationships between humans, but also concerns systems. While trust in humans stems from interaction, trust in abstract systems puts

its faith in the correctness of principles [43]. Both personal and system related trust is addressed in this paper. Trust has been found to change over time. Usually, three phases are identified: building, stability, and dissolution [19].

Trust is not a button switch but it exists in varying levels. The degree of trust in a relationship may vary not only over time, but as well between different relationships. Trust exaggerations (over- or under-investments in trust) are undesirable behaviours both from a strategic and a moral point of view [16]. Because it is possible to trust little or more, trust is considered to have a dynamic nature [19]. Trust cannot be present in every aspect of a relationship, because some of motives of the partner can be trusted and some may be questionable [44]. Especially in offshore outsourcing relationships trust cannot be present in every aspect; a sceptical approach is required. Since cultural awareness is difficult to create, we need to be cautious and critical to our feelings of trust; independent of if they are based on intuition or on knowledge. We also have to stress here that trust has to be present in both parties. The trustor must trust the trustee and vice versa, it is a mutual relationship.

Finally, trust depends on social conditioning. In the World Value Survey (WVS) [45], undertaken 1990-1993 across 43 societies covering around 60000 respondents that completed a questionnaire with more than 360 questions. The responses to the question: Generally speaking, would you say that most people can be trusted or that you can't be too careful in dealing with people? showed variances from 7% in Brazil, can be trusted, to 66% in Sweden.

5 Attributes of Trust

In order to understand trust its characteristics have to be analysed. These characteristics can be identified by studying relevant literature. Imsland [1] proposes seven identifiable attributes of trust, namely predictability, competence, structure, calculation, goodwill, knowledge and betrayal, which we will analyse in more detail below. A discussion of the attributes will help to provide a better understanding of trust, and their interconnection for identification and visibility.

Predictability: The expectation of something from someone else is essential for the existence of trust. Giddens [43] stresses the notion of trust as faith in predictability. Trust is more likely to be established if an ability to predict another person's or organization's behaviour exists. Predictability is achieved through monitoring and influencing the behaviour of the partner. In the beginning of an outsourcing relationship the partners know little or nothing about each other. They look for indications that will enable them to build trust. Finding more information about the future partner, such as studying web-pages, tracing history and reputation, as well as observing how the organisation works (preferable over a period of time) will help in determining the organisation's way of functioning. Control mechanisms can be introduced to make the behaviour predictable. There is evidence that predictability is considered to be an important trust-building mechanism [34]. However, trust is not necessarily present when predictability is present, but as a general rule, trust is difficult to build if one cannot predict behaviour [46].Competence means having the ability to efficiently perform something that the partner requires [44]. It also includes capacity to learn new tasks and technologies [34]. Competence is especially important in the IT outsourcing context. One key argument for an organisation to outsource can be the lack of competence within its own organisation [47]. A client that has chosen a service provider with good competence reputation will feel more confident about the outcome of the project. However, competence trust on its own does not ensure trust on all levels.

Structure is a way of formal control of the procedures used to achieve something. Examples of structures can be written contracts, reporting mechanisms, and rules for response time on written messages [12]. Also, the use of standards, such as ISO 9001:2000 [48] and Capability Maturity Models, such as CMMI (Capability Maturity Model Integrated) [49, 50] and the eSourcing Capability Maturity Model eSCM –SP for Service Providers [37, 38, 39] and eSCM-CL for Client Organisations [36] are considered structural attributes [1]. In particular the practices of these frameworks are well adaptable for any virtual organisation as the high capability level of outsourcing cooperation of service clients and providers implement a real knowledge based virtual organisation [51].

Considering predictability as an attribute of trust, and structure as a way of achieving this, structure also has flaws, in respect to trust. Very tight structural control harms performance, because much time has to be spent on reporting and providing feedback to the controller [19]. Hofstede [22] found that Power Distance is a basic cultural dimension related to power and control and Uncertainty Avoidance another cultural dimension related to the degree societies want to create structures and rules to protect them against ambiguous situations. The studies of these two dimensions in depth will enable the client organisation to understand the degree of structures suitable to be implemented in another country. Siakas and Hyvarinen [52] have developed an on-line self-assessment tool that finds the fit between national and organisational culture. The tool is based on Hofstede’s two dimensions, namely Power Distance and Uncertainty Avoidance, and from the results the client will get an indication about if more or less structures are desirable in a certain country context.

Calculation:The idea of calculation refers to the ability to predict whether the trustee is capable to accomplish the requirements successfully [19]. If calculations show that there is a risk factor of the trustee not being able to fulfil the requirements, there is no reason for the relationship to begin. The company also has to compare the potential risks with the possible advantages of the relationship. A distinction between objective and subjective risk is valuable [53]. Objective risk is based upon the objectively calculated consequences of different alternatives when making a decision. Subjective risk is the decision makers’ estimate of objective risk. Every decision has both an objective and a subjective risk, but because of complexity and lack of information, only subjective risk is possible to determine.

Goodwill is trust based on intuition. In every new relationship people use their intuition and experience to figure out if someone is trustworthy. It can be about any characteristics of someone, whether personal characteristics like honesty and benevolence, or more general attributes like competence and predictability [44]. Even if trust in organizations, as opposed to trust in individuals, concerns faith in the correctness of principles more than interaction [43], such trust is also dependent on a general goodwill between the organizations.Knowledge about the partner(s) in a relationship is seen to be important when building trust. The most important outcome of such interaction is predictability. It is important to notice that gaining rich knowledge about the partner is difficult to achieve, and emerges only after longer-term interaction [19]. However, Hertzum [53] identifies four ways of building knowledge-based trust: first-hand experience, reputation, surface attributes (visible artefact, such as language, symbols, heroes, behaviour patterns, rules and procedures), as well as stereotypes. The two last ones, surface attributes and stereotypes are actually manifestations of cultures [25] and thus training of outsourcing partners in each others cultures would make an important input for understanding cultural differences and improving cultural awareness, which also will be an important factor for building trust. Regarding reputation Lander et al.

[34] undertook a case study with four primary stakeholder groups, namely upper management, project team members, users and employees of the client. Upper-level management considered that reputation was an important determinant for trust regarding selection of client and for employing team members into the projects, while project team members and users were less focused on reputations since they assume that upper-level management has exercised due diligence in this regard. Clients did know little or anything of the service provider’s reputation and thus had not reporting anything about its importance in creation of trust.

Since members of software outsourcing projects are dispersed geographically, these four ways of building trust (first-hand-experience, reputation, surface attributes and stereotypes) must be supported by bringing together key personnel [1]. We extend by stating that face-to-face meetings and the use of ‘cultural bridging staff’ (people rooted in the country of the sourcing service provider as well as in the country of the client) improves communication, cultural understanding and knowledge about each other, thus slowly facilitating creation and sustaining a trust relationship.

Betrayal: In every relationship exists a risk factor, of someone acting opportunistically and by so doing breaking the trust that has been built. This is called betrayal, and is defined as “a voluntary violation of mutually known pivotal expectations of the trustor by the trusted party (trustee), which has the potential to threaten the well-being of the trustor” [55]. Examples of betrayal are theft, lying, braking of contract and promises. In research regarding trust building mechanisms Lander et al. [34] found that senior management and team members at the outsourcing provider reported that the fulfilment of promises is crucial to the development of trust, whilst the client did not share this view. For the client, fulfilment of promises is an artefact of a contractual relationship. This result indicates that it would be valuable if outsourcing partners appreciate what the other party value in trust-building processes and in project related actions in order to find a mutual ground of commitment.

Each one of these seven attributes has its own important role in the software outsourcing context. Some characteristics of the above attributes may be similar and this brings the conclusion that the attributes of trust are interconnected together up to a point and partially overlapping. If some of the above attributes exist up to a certain degree that implies essentially that all of the attributes are present [1]. If for example competence is present in a company, there will also be predictability, calculation and knowledge based on the competence. Thus you can also have goodwill and not expect betrayal.6 Conclusion

Globalisation today is a reality having created numerous of challenges for managers worldwide. Increased and improved capabilities of ICT facilitate continuous expansion of globalisation today’s IT outsourcing activities have shifted to involve much greater range and depth of services than in the past and an increasing number of IT functions are transferred to IT service providers. Outsourcing and virtual collaborations prompt for cultural sensitivity, flexibility and adaptability, together with high awareness of risks and dangers due to cultural differences. Globalisation is a competitive advantage if handled in a right manner.

In this paper the emphasis was on trust, which was analysed in relation to the software outsourcing context. Trust was found to be a complex phenomenon and a critical success factor. Trust is slowly built through communication and experience of attitudes and behaviours of stakeholders. Advantages of trust in outsourcing relationships was found to be improved communication, efficiency and output of IS development projects as well as the mitigation of opportunistic behaviour. References

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Author CVs

Kerstin V. Siakas

Kerstin Siakas is an Assistant Professor in the department of Informatics at the Alexander Technological Educational Institute of Thessaloniki, Greece.

Her teaching includes Management Information Systems, Software Quality Management and Project Management. She is engaged in research in Information Systems Engineering, Multidisciplinary Approaches of Software Engineering, Knowledge Management and Software Quality Management.

She has a particular interest in human and cultural approaches. She has an extensive industrial experience (since 1975) in software development on different levels from many European countries and mainly from multinational organisations. She has a number of academic and industrial project partners in many countries and she has published around 50 papers related to her research.

Dimtri Maoutsidis

Dimitris Maoutsidis is a student at the department of Informatics at the Alexander Technological Educational Institute of Thessaloniki. He is engaged in research in Multidisciplinary Information Systems Engineering and soft issues in Global Outsourcing.

Errikos Siakas

Errikos Siakas has graduated in 2003 as a Software Engineer from the department of Informatics at the Alexander Technological Educational Institute of Thessaloniki. He is teaching computing to children in the secondary schools and simultaneously he is engaged in research in Multidisciplinary Information Systems Engineering. His particular research interest is in Agile Software Development and Global Outsourcing.