Sourcing strategy based on task characteristics view: a. comparative case study of Japanese companies. software development in China

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1 Sourcing strategy based on task characteristics view: a comparative case study of Japanese companies software development in China Mizuki Kobayashi [email protected] Manufacturing Management Research Center, The University of Tokyo Abstract This study discusses the sourcing strategy from task characteristics view based on the fieldwork in software development outsourcing in China. Present studies state the tendency of non-core tasks outsourced to low-cost countries. However, due to the existence of many low cost countries and countries with many local software parks inside (India and China), we need a focuses on tasks characteristics for insightful view. This study defined tasks characteristics and found some companies are able to develop complex tasks, while others only develop simple tasks. This paper suggests clients outsource the complex tasks and the simple tasks according to suppliers capability. Keywords: software development sourcing, task characteristics, supplier capability Introduction The purpose of this study is to discuss sourcing strategy from task characteristics view based on the field research in software development outsourcing industry. Software industry parks in emergent countries are characterized the places with large and less expensive IT human resources (Saxenian, 2007). In China, from the northern 1

2 area to the southern area, and from the coast area to the interior area, many cities have established software industry parks with similar infrastructures. If based on a general idea that outsourcing non-core work to low-cost country, previous researches have not necessarily provided sufficient view on what is the possible outsourcing strategy for multinational corporations because they are facing much more complex situation to make an outsourcing desicion (Luo et. al. 2010). Besides previous studies point out the importance of task attributes impact on location/partner choice and the degree of integration between the client and the supplier (Graf and Mudambi, 2005; Hätönen, 2009; Luo et. al, 2012), however, task characteristics for software development remains less known. This study will focus on task characteristics to study possible outsourcing strategy of multinational companies, which considers outsourcing what to whom. The paper is conduct based on fieldwork in China in 2009, and from 2012 to The structure of this paper is as follows. Next section is literature review; the research design is described afterwards; then findings of the investigation are summarized; and conclusion is at the last section. Previous studies on IT outsourcing Nowadays, China and India are two large IT outsourcing countries. Software industry parks in those countries are characterized as places with low-cost and a large amount of IT human resource (Saxenian, 2007). It has been point out that American and European companies tend to outsource the work to companies in India, while Japanese companies tend to outsource the work to the companies in China (Umezawa, 2007; Liu et. al, 2011). In this area, some topics are well discussed, such as partners selection from transaction cost theory perspective (Whitten et. al, 2010), and factors of outsourcing projects success, failure, and risk (Bruce et. al, 1995; Heeks et. al, 2002). Even though IT work is considered to be easily codified and separated, topics such as the necessity of knowledge transfer, and IT task attributes and process integration start to attract researchers attention (Rottman, 2006; Luo et. al, 2012). However, if based on a general idea that non-core work outsourced to low-cost country, present literature is lack insightful view for companies outsourcing strategy (Luo et.al, 2010; Liu et. al, 2011). For example, many cities have established software industry parks with similar infrastructure from the northern area to the southern area, and from the coasts area to the interior area in China. Given this situation, firstly, it can assume that suppliers capabilities are very different. Secondly, if the final product is toward the local market, it is too rough to only outsource non-core work, because some difficult design work need to be localized. Thirdly, most previous researches do not specified software development, but consider IT tasks with a broad range: data entry, 2

3 software development, and other back-office tasks. However, software development, specially embedded software development requires certain engineers with technical, product and business knowledge (Rottman, 2006; Kobayashi, 2014), while other back-office tasks may not need the human resource with strict knowledge requirement. It is much more a complicated situation for multinational to consider outsourcing what to whom today. With regard to Japanese companies, it goes without saying that the expansion of Japanese companies in overseas and their management system transfer has become an important research topic that has been discussed internationally (Liker et al., 1999; Dyer and Nobeoka, 2000). For example, when Japanese automobile companies entered the USA market, Japanese suppliers tended to locate close to the auto companies to realize Just-In-Time delivery and joint development (Kenny and Florida, 1993). In conjunction with the expansion of these companies into the USA, research has conducted on many auto and electric machinery companies with the aim of answering: To what extent have Japanese companies adapted locally, and Japanese management systems have been applied to local operation? (Abo et al., 1991; Liker et al., 1999). Compared to electric machinery companies, auto companies have a strong tendency to apply Japanese management systems locally (Abo, et al., 1991), while auto companies local suppliers training effort has also been addressed in this stream of research (Dyer and Nobeoka, 2000). In recent years, not only the auto industry, but also in fields such as LCD televisions, mobile phones, and hard disk drive industry, Japanese companies in many different fields operate in overseas (Shintaku and Amano, 2009). However, compared with hardware industry, little theoretical discussion on Japanese companies strategy in overseas in software development outsourcing field. To sum up, firstly, despite the important focus on IT task attributes and knowledge (Luo et. al, 2012), previous researches have not specified what exactly software development task attributes are. Secondly, previous research had little discussion outsourcing strategy when multinationals facing multiple situations, such as suppliers capability differences, and so on. Specially, we have little knowledge about the case of multinationals that eager to transfer the management system from home country to the local operation including supplier training, such as Japanese companies. Research design This research adopts case study approach (Eisenhardt, 1989). The case study with multiple samples is an appropriate method to investigate details of the objects toward framework building. The primary data is from semi-structured interviews with total eleven companies in 3

4 the coastal regions of China (Dalian, Shanghai, Xiamen, and Fuzhou) in August of 2009, August of 2012, July and August of 2013 and in September 2014 (See Table.1). Secondary data is publicly disclosed materials and other research. The interview items were created in the following three categories. The first was the outsourcing environment for software development in the location where the company expanded; the second was the basic information on the company s products and systems created locally and its China strategy; and the third comprised the actual conditions for the division of labor with local suppliers. The interviews lasted from one to two and a half hours, with between one and three respondents interviewed As Umezawa (2007) points out that Japanese companies tend to outsource work to China, it is appropriate to choose the companies in China. This study concentrates on software development process, while most present discussion base on a broad categoryinformation technology. In this study, it divides whole software development tasks into upper tasks and lower tasks. Fact-finding The division of labor in the international software development process When looking at the division of labor for international software development, this research focuses on the division of labor in the software development process itself. The V-shaped model, shown in Figure 1, has been adopted by many Japanese companies. To specify task characteristics based on the interview data, this paper defines the complex tasks generally referring system requirement process and software basic design process, and the simple tasks referring the rest process. In the case of the complex tasks, the engineers are required not only have partial knowledge of the software technology, but to also have comprehensive knowledge of the software modules integration and customer requirements. In the case of the simple tasks, it is sufficient for engineers to have only the technological knowledge necessary to develop the tasks they are responsible for. (see figure 1). Figure 1- General software development process 4

5 The Dalian software outsourcing industry Sales from the software industry in Dalian City totaled 200 million Chinese Yuan, currently, Dalian City has around 1,200 software development and IT-related companies, with approximately 120,000 employees or about 2.7% of the working population in the city as a whole. Foreign affiliates constitute around 40% of all companies and many foreign-affiliated and Chinese companies have moved their development centers into the city. The software park is particularly toward business offshore development for Japanese companies, emphasizing an abundant local supply of labor. According to Cho and Kawabata (2012), around 27% of the total number of students in all the universities in the area major in software. In addition, around 50% of the universities have established major programs in the Japanese language, and within China, the city is known for having an abundance of software engineers who speak Japanese. In addition, university s software programs play an important role in providing companies with specialist employees. Moreover, a number of major Chinese software development companies are also established and grown in this area. Besides, those major Chinese software development companies are able to respond and match the development styles and business practices of Japanese companies (Kobayashi, 2012). It is thought that the rich volume of IT human resource with Japanese skills and those major local software companies attracting other multinational corporations to the area such as NEC, GE, and Toshiba (Cho and Kawabata, 2002). Japanese companies software development in Dalian As refer to Table 1, the Japanese subsidiaries J1 and J2 that have expanded to Dalian outsource the complex tasks to local companies C1 and C2. Japanese subsidiary J3 that received the complex tasks from its headquarters in Japan, and local company C3 that directly received the complex tasks from Japanese clients in Japan. 5

6 The Shanghai software outsourcing industry Shanghai is one of China s leading cities in terms of population and commercial scale. Since it is attractive as a large consumer market, not only domestic Chinese companies but also many foreign multinational corporations have expanded there, and located R&D facilities in this international city. According to Kondo (2009), although in terms of total numbers, there are more people learning Japanese in Shanghai than in Dalian, as a percentage of the total local population, there is a higher percentage of Japanese speakers in Dalian than in Shanghai. Moreover, a characteristic of Shanghai is relatively high turnover rate in software industry. Shanghai software development companies are able to undertake the upstream processes for Japanese companies, but a major problem for the outsourcing of such software development is the lack of teamwork and operational knowledge on the relevant products. Japanese companies division of labor for software development in Shanghai As refer to Table 1, One Japanese subsidiary J4 has been located in Shanghai for more than ten years, and developed embedded software. J4 has mainly received the tasks from headquarters in Japan, and is able to develop complex tasks. However, this company evaluated highly a Dalian software development company, the ability of its engineers in terms of their Japanese skill, their acquisition of embedded software and product knowledge, and their ability to respond to Japanese companies, so it established a development center in Dalian (J2) in The company mainly conducts software development internally at its Shanghai base; however, it has also pass many development projects from the headquarters to this local company (C2) in Dalian. The software outsourcing industry in Fujian Province (Xiamen and Fuzhou) Xiamen and Fuzhou are cities in Fujian Province in the southern part of China. In this region, there is a lot of investment in manufacturing industries, such as electronics, machinery, textiles, and rubber, as well as real estate and retail, mainly by companies from Hong Kong, Macau, and Taiwan. Its main industries encompass auto parts manufacturing, electric machinery, and electronic parts including telecommunication equipment (Jin and Iwata, 2012). Following the launch of Chinese governmental policies in the 1990s to stimulate the information industry, local governments in Beijing, Shanghai, Shenzhen, and elsewhere, constructed software parks, one after another, and concentrated on promoting high-tech industries (Cho and Kawabata, 2012). There are several thousand IT companies in these cities, with many manufacturers, BPO operations companies, and animation and video companies. However, compared with the northern cities of China, there are hardly any companies exclusively undertaking the development of embedded software, and the 6

7 total number of software development companies is extremely small. The training of software personnel is still in the development stage compared to the central software parks in Beijing and Dalian, and there is a shortage of software engineers in this area (Li, 2007). The division of labor for software development for Japanese companies in Fujian province (Xiamen and Fuzhou) As refer to Table 1, In Xiamen and Fuzhou, whether collaborating with a local company, J5 and C4, or operating an offshore center base, J6 and J7, the range of tasks being developed is narrower than in the two cities previously referenced. C4 or J7 is only able to develop simple tasks. Many tasks are not outsourced to local companies. Instead, the tendency is to conduct development in-house as much as possible. Table 1-Summary of interviewed companies Company Nationality Location Industry Final Customer Complex In China product or supplier software market tasks to local suppliers (or with customer) J1 Japan Dalian Automobile China Customer J2 Japan Dalian OA Global Supplier for machine JP and J4 J3 Japan Dalian Automobile Japan Supplier for JP J4 Japan Shanghai OA Global Supplier for machine JP J5 Japan Xiamen Automobile China Customer J6 Japan Xiamen Motor Japan Supplier for JP J7 Japan Fuzhou IT Japan Supplier for JP C1 China Dalian IT - Supplier for J1 C2 China Dalian IT - Supplier for J2 and JP 7

8 C3 China Dalian IT - Supplier for Japanese clients C4 China Xiamen IT - Supplier for J5 Note1: JP meaning headquarters in Japan. Note2: the presentation will show each company s division of labor chart. Discussion Many software industry parks with so-called similar conditions have established in China. Given this situation, firstly, location choice and supplier choice can be assumed much more complicated. There is need to investigate content of those similar software parks and carefully think of suppliers capability differences. Secondly, most previous studies do not specified software development, but consider IT tasks with a broad range: data entry, software development, and other back-office tasks. However, software development, specially embedded software development generally requires complex knowledge for engineers (Kobayashi, 2014), while other back-office tasks may not need the human resource with strict engineering knowledge requirement. It is pointed out what outsourced is a key factor to make location or partner choices, therefore, leads successful outsourcing projects (Graf and Mudambi, 2005; Hätönen, 2009), but outsourcing contents of software development remains unknown. This study complements previous research s pitfalls and offers a practical view. At a broad level, software parks are not all same even within one country. From Japanese companies side, the software development outsourcing situation in some cities, such as Dalian in this case, is relatively favored because it has a large amount of IT human resource who can speak Japanese as well, and local companies embedded software development level well evaluated. This study specified software development tasks, found out the detail of division of labor in each interviewed company, and descripted local software industry background. When the factor for outsourcing is not merely the low-cost, but adding much more factors together, such as, suppliers capability differences, and local software parks differences, task characteristics view would be a reasonable perspective to solve supplier/location choice issue, and lead companies to implement appropriate management (e.g. supplier training plan). Outsourcing complex/simple tasks should be according to suppliers differences even in one country. However, identical sample sizes could not be collect in each city due to the reason that only a few companies in Xiamen and Fuzhou are software development companies 8

9 based interviews with companies and universities. Future research shall collect enough samples. Also, the management within suppliers, such as how to deal with the global customers with different business practices, should be investigated in the future. Conclusion This study is conduct based on the interviews of eleven companies regarding software development outsourcing in China. When multinationals face software parks differences in the same country, local suppliers capability differences, and other factors together, this study provides a task characteristics view to consider outsourcing strategy. Acknowledgments The people interviewed at the companies, universities, and other organizations generously donated their valuable time. Unfortunately, due to reasons of confidentiality it is not possible to include their names and affiliations. However, I would like to take this opportunity to express my sincere thanks to all of them. In addition, I wish to thank the Kobayashi Setsutaro Fund. I also wish to express my gratitude to the professors at the Graduate School of Economics, The University of Tokyo, who were kind enough to offer their comments and advice on this paper. Reference Abo, T., Itagaki, H., Kamiyama, K., Kwamura, K. and Kumon, H. (1991) America ni ikiru nihontekiseisan shisutemu. Tokyo, Japan: Toyokeizaishinposya, (in Japanese). Bruce, M, Leverick, F., Littler, D. and Wilson, D. (1995) Success factors for collaborative product development: a study of suppliers of information and communication technology. R&D Management Vol. 25, No. 1, pp Dairenshi Joho Sangyokyoku & Dairenshi Sofutouea Kyokai (Eds.). (2012). Dairenshi sofutouea joho sabisugyou hakusho 2012 [Annual report of Dalian software and information service industry 2012]. Dalian, China: JETRO Dalian Office (in Japanese). Dyer, J. H., and Nobeoka, K. (2000). Creating and managing a high performance knowledge sharing network: the Toyota case. Strategic Management Journal, Vol. 21, No. 3, pp Graf, M., and Mudambi, S. M. (2005). The outsourcing of IT-enabled business processes: A conceptual model of the location decision. Journal of International Management, Vol. 11, No. 2, pp Hätönen, J. (2009). Making the locational choice: A case approach to the development of a theory of offshore outsourcing and internationalization. Journal of International Management, Vol. 15, No. 1, pp Heeks, R., Krishna, S. Nicholson, B. and Sahay, S. (2001) Synching or sinking: global software outsourcing relationships. IEEE Software, March/April, pp Jin, X and Iwata, K. (2012) Amoishi Keizai to kigyodoukou. Ritsumeikan Keizaigaku, Vol. 60, No. 60, 9

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