Offshoring has become a major strategic tool for many firms. In 2019, the global market size of outsourced services was valued at more than 92 billion U.S. dollars. As organisations offshore, a key challenge for legal requirement for many industries such as accounting is the disclosure of offshoring to customers. Managing how to disclose these offshoring practices can be a difficult task. For instance, some research has found that customers have negative perceptions of offshoring so disclosure can have a negative impact on the organisation while other research has found that clearly communicated disclosure statements can enhance credibility.
Should you take the risk of non-disclosure?
In a joint project with Prof Rebekah Russell-Bennett from QUT and Dr Rory Mulcahy from the University of the Sunshine Coast, we wanted to find out how the disclosure versus non-disclosure of offshoring accounting services would affect the client-provider relationship. Specifically, our goal was to understand the mechanisms through which disclosure affects attitudinal loyalty to the organisation and negative word of mouth about the organisation.
Our research, published earlier this year in the Industrial Marketing Management, identified two key mechanisms; negative emotional responses known as the hostility triad (anger, contempt, and disgust), and perceived betrayal. This leads to two major insights about disclosing offshoring practices.
Non-disclosure can backfire
First, our findings demonstrate that non-disclosure―concealment or hiding information in the Terms & Conditions (T&C) so customers are unaware―of offshoring clients’ accounting work leads to significantly higher levels of negative emotions, which in turn leads to negative word of mouth and reduced loyalty. These negative emotions of anger, contempt, and disgust are elicited by the violation of a perceived moral code. So disclosure will help mitigate these negative emotional reactions.
It’s a double whammy
Second, we identify an important new mechanism of perceived betrayal. Clients are not just angry, they also feel betrayed. That means, clients feel that essential business norms have been deliberately violated in the context of their relationship. Why does this matter? Our results suggest that betrayal functions as a double whammy. In other words, offshoring clients’ accounting work not only causes a direct negative impact on the client-provider relationship, but it also causes an indirect effect through feelings of betrayal.
So what does this all mean?
Our research leads to the conclusion that active disclosure is an essential business strategy that needs to be done in the context of offshoring clients’ accounting work. It is not sufficient to bury disclosure in a long contract, at the end of a letter or deep within the terms & conditions, and hope that their customers don’t notice it. Organisations need to go beyond a compliance-with-the-regulations mind-set and be more open and active about disclosure. Non-disclosure (perceived or actual) can severely hurt the future of the business relationship. We suggest the following practical implications for businesses that pursue offshoring business-to-business (B2B) services.
- Be proactive: In the past, service providers may have been reluctant to openly communicate offshoring practices to clients, as they were concerned that clients would have negative reactions. However, the results show that service providers can be more confident in their communication. Being proactive will open opportunities to frame the disclosure process by highlighting positive changes that will result from offshoring clients’ work potentially resulting in a more trusting relationship.
- Practice emotional intelligence: Emotions play a pivotal role in B2B client-provider relationships, more than what businesses realise. Service providers should address the emotional concerns of their clients, not just the functional benefits or efficiencies of offshoring. The emotional concerns of discovering undisclosed offshoring practices are significant and will cause undesired outcomes such as sense of betrayal, reduced loyalty and enhanced negative word of mouth. Relying on the ‘it was in the T&C’s section, didn’t you see it?’ argument will not help. If customers are unaware, they are unaware.
As service providers continue look to find alternative ways to create greater efficiencies in service delivery, we suggest adopting a strategic approach to maintaining relationships; acceptance of the role of customer emotions on business decisions, and, open and trustworthy communication.
For a visual summary of this research please view the following Microsoft Sway Story:
Dr Sven Tuzovic is Senior Lecturer (US Associate Professor) in Marketing at QUT Business School in Brisbane, Australia.