Offshore Outsourcing – Communications of the ACM

Offshore outsourcing has become a popular trend recently because it offers companies potential benefits, such as a qualified work force at an inexpensive cost and continuous operation. The top six potential locations for offshoring services—based on financial attractiveness, worker skills and availability, and business environment—are reportedly all Asian countries, namely, India, China, Malaysia, Philippines, Singapore, and Thailand [1]. The average programming cost in Asia, for instance, is 512 times lower than in the West and is expected to remain at least four times lower in 2015 [3].

Although international outsourcing seems very promising, there are several serious risks; prominent among them are the impact of cross-cultural factors. In this column, we focus on one of the risks, namely, the mum effect (or code of silence), which has not received much attention in the context of offshoring. The mum effect occurs when one or more stakeholders who have information indicating a project is failing decide to remain silent and let the project continue [4].

In the past, the mum effect has been attributed as the cause of failure of some multimillion-dollar software projects. A classic case is the CONFIRM project, which resulted in a $125 million disaster [5]. It was later found that the management team deliberately covered up major technical and performance problems and the auditors who discovered it failed to speak out. Since offshoring is a recent phenomenon, reports of such major failures from the mum effect have not surfaced yet. Here, we investigate whether cultural differences between Asia and the West can increase the risk of the mum effect.

Hofstede’s Cultural Analysis

Hofstede conducted one of the most comprehensive analyses of cultural differences. His data is from a survey of employees of IBM subsidiaries in over 50 countries [2]. He developed five measures of cultural differences:

Power Distance Index (PDI), a measure of the power inequity between people;
Individualism (IDV), a measure of the strength of ties between people;
Uncertainty Avoidance (UAI), the level of tolerance of uncertainties in life;
Long-Term Orientation (LTO), a measure of the perceived value of long-term commitments; and
Masculinity (MAS), a measure of the clarity of social gender roles.

These five aspects are measured on a scale from 0100 (with a few countries evaluated after the measures were finalized, producing values higher than 100). Although some have criticized Hofstede’s analysis, for instance, on the grounds that employees of IBM subsidiaries are not a representative sample of the population, it provides the most comprehensive information to date. Many of Hofstede’s observations have been supported by subsequent articles (for example, see [6]).

The table here shows Hofstede’s values for six of the top offshoring destinations and two of the project source countries. We can observe significant differences in PDI, IDV, and LTO values between the source and destination countries; however, except for odd exceptions, values for MAS and UAI are similar for both sets. Analyzing a larger group, the figure shows the average for Western countries (U.S., Canada, Australia, New Zealand, and Western Europe) and countries in South and South East Asia. The differences follow the same pattern as described previously. Compared to the West, Asian countries have higher power-distance indexes, lower levels of individualism (that is, higher levels of collectivism), and higher long-term orientation.

A Model for the Mum Effect

Keil and Robey [4] have identified the primary cause of the mum effect as the fear of being punished, including loss of employment. We extend this concept to include two more primary factors, namely team solidarity and communication gap to form a 3D model for the mum effect. Tan et al. [6] studied the impact of organizational climate and information asymmetry on the mum effect. They argue that fear of consequences is related to organizational climate, whereas information asymmetry can result in bad news being kept hidden. With respect to our model, organizational climate would include both a fear of consequences and of team solidarity. The communication gap, on the other hand, would result in information asymmetry.

Team solidarity is generally considered good since it makes the team cohesive with less rivalry and intra-group problems. However, solidarity could result in group members becoming protective of each other and thus potentially increasing the probability of the mum effect. This is because any adverse comment by a member to the external world could be considered a “betrayal” of the team by other members. A team, in this context, could be a small group or the company as a whole.

Various factors can create communication gaps in organizations. Examples are when there is no easy channel to express concerns or when employees feel their views are not valued or taken seriously. The greater the communication gap, the lesser the opportunities to get the message out and therefore the higher the risk of the mum effect.

Various factors can create communication gaps in organizations. Examples are when there is no easy channel to express concerns or when employees feel their views are not valued or taken seriously.

Cultural Influence on the Mum Effect

Higher values of PDI indicate an increased fear of consequences and communication gap. In fact, two of the three survey questions used by Hofstede for measuring PDI were related to employees’ fear of disagreeing with their bosses and the latter’s autocratic behavior [2]. In high-power-distance countries, subordinates could be very reluctant to freely express their opinions. For instance, criticizing the views of a higher-power person could be perceived as rude in Asian cultures. On team solidarity, power distance has an inverse effect since the smaller the power distance between members of a team the easier it is for them to bond.

Individualism (IDV) could also inversely affect solidarity. Since highly individualistic members are more willing to pursue their personal objectives, they tend to have weak teamworking relationships. Individualism could reduce communication gaps, since individualistic people could speak out if they see a selfish benefit for themselves in doing so. In a cross-cultural study conducted by Tan et al. [6], it was found that individualism increased the impact of organizational culture on the willingness to report bad news. The study results suggest the behavior of people in individualistic societies was more influenced by their assessment of the immediate consequences of their behavior. Conversely, low individualism amplified the impact of information asymmetry on the mum effect; as mentioned previously, information asymmetry could occur from gaps in communication.

Long-term orientation (LTO) appears to have a direct effect on solidarity because those who wish to build relations wouldn’t want to burn bridges. It also has a direct relationship to fear of consequences, since cultures with long-term orientation fear the consequence of breaking their long-term plans by actions that do not fit into the plan. For instance, in a company that provides permanent employment (which is common in Asia), an employee who intends to retire from that company will be reluctant to jeopardize that situation by speaking out against the company. This also means the relationship between the communication gap and LTO is a direct one.

These observations indicate that based on cultural considerations (higher PDI, lower IDV, and higher LTO), the risk of the mum effect is higher in Asia than in the West. However, it is interesting to note there have not been reports of failure of offshored projects related to the mum effect. It is worth investigating what procedures and processes are in place in offshore companies to counter the cultural effects.