Role of Social Capital in Global Sourcing

Decision makers often rationalize offshore outsourcing by comparing hourly rates for domestic and offshore workers. This approach is dangerous because it assumes domestic and offshore workers are equivalent “factors of production.” Once engaged in offshore outsourcing, senior executives are often disappointed. Many complain that offshore suppliers do not understand their business, deliver late, and produce poor quality work. In reality, the problems are not caused primarily by the supplier — they are primarily caused by the client’s naïve focus on only costs and failure to invest properly in the relationship. Social capital is simply the idea that knowledge and resources are exchanged, work gets done, and value is created through social relationships. Practitioners should invest the right amount of social capital to ensure that they get best overall value from offshore outsourcing. Among the 24 U.S. client firms studied, U.S. Manufacturing leveraged social capital the best. Its social capital investment yielded the most strategic results from offshore outsourcing. U.S. manufacturing’s suppliers helped to build innovative products faster and cheaper than in-house provision alone. However, before achieving a strategic advantage with offshore outsourcing, U.S. manufacturing failed in its initial offshore initiatives because managers only focused on costs and ignored the social dimensions of outsourcing. After diagnosing the causes of its initial failures, U.S. manufacturing remedied the supplier relationships by investing the right amount of social capital.