Portfolio of controls in outsourcing relationships for global new product development

Due to increasing globalization and technological discontinuities, firms strive to develop new product capabilities and flexibilities by engaging in outsourcing activities and adopting modular systems. However, these strategies contain risks of opportunistic expropriation of tacit knowledge and costs related to monitoring sourcing partners who are geographically and culturally distant. This study examines the antecedents of control mechanisms through which firms manage the risks and costs associated with outsourcing relationships in global technology-intensive markets. Modularity in design is hypothesized as a moderator of model relationships because it can serve as a substitute for formal or informal controls in a “controls portfolio”.     

The role of relational capabilities in the organization of international sourcing activities: A literature review

Multinational companies (MNCs) establish subsidiaries in various countries, spreading the value chain internationally and fostering the involvement of external partners. The global supply network has become a major source of the total value generated by MNCs, which are pushed to develop “relational capabilities” to interact with their suppliers. The main objective of this article is to assess the current understanding in the academic literature of the intra-organisational dimension of relational capabilities, focussing on the adoption of internal mechanisms supporting international sourcing activities. A total of 47 articles are identified and assessed. The literature review shows that thus far fragmented and in some areas limited research has been conducted on the development of relational capabilities by MNCs within international sourcing activities. Research efforts have been placed mainly on the examination of organisational units active in international sourcing and on control and management processes, while less attention has been paid to knowledge management solutions.     

Sourcing decisions of project tasks with exponential completion times: Impact on operating profits

When managing a project, a firm must evaluate multiple strategic factors and operational issues before deciding which tasks to keep in-house and which to outsource. We focus on one operational aspect of this evaluation process by examining the impact of different sourcing decisions of project tasks with exponential completion times on operating profits. As an initial attempt, we present two stylized models that capture two simplest types of projects: (a) a project with two “parallel” tasks that can be performed simultaneously and (b) a project with two “serial” tasks that must be performed sequentially. For each model, we determine the optimal operating profit for the case when the firm outsources zero task, one task, or two tasks. These operating profits can be informative for making sourcing decisions of different project tasks.     

Sourcing strategies of U.S. service companies: a modified transaction–cost analysis

Global procurement of services has been receiving an increasing amount of managerial attention in recent years. Service firms seem to have begun sourcing part of their service activities from abroad in much the same way as manufacturing firms have sourced components and finished goods in the past 30 years. However, little is known about the nature of service sourcing strategy. In this study, we employ a modified transaction–cost analysis to examine empirically the locational (domestic vs. global sourcing) and the ownership (internal vs. external sourcing) aspects of service sourcing strategy. In addition, performance implications on both the locational and ownership aspects of service sourcing are investigated. The results show that, similar to components and finished goods procurement, supplementary services are sourced globally, either internally or externally. Furthermore, the relationship between asset specificity and internal sourcing of supplementary services is moderated by the level of inseparability and transaction frequency. Finally, internal sourcing and foreign sourcing of supplementary services are negatively related to a service’s market performance. Copyright © 1999 John Wiley & Sons, Ltd.     

The supplier's side of outsourcing: Taking over activities and blurring organizational boundaries

Since most of the literature on outsourcing focuses only to the buying (outsourcing) company, this paper aims to highlight the supplier's side from a relational perspective. The paper stresses the importance of business relationships between suppliers of outsourced activities and their customers. The paper's purpose is specified in two research questions: (1) how is value created within outsourcing and (2) how does the supplier interact with the outsourcing company? Our method relies on an in-depth qualitative case study of Logoplaste, a Portuguese packaging company which supplies large consumer goods manufacturers through complex outsourcing activities. Our analysis identifies three key dimensions of outsourcing relationships: (1) value co-creation via inter-firm coordination (as opposed to unilateral externalization of activities); (2) mutual dependence between supplier and customer due to the supplier's taking over activities; and (3) the blurring of organizational boundaries because of mutual dependence. These dimensions manifest themselves, even though in different degrees, after the initiation of any outsourcing relationship: these variables are new to the literature on outsourcing, which focuses on the ex ante dimensions that influence the customer's pre-relational choices such as “make or buy” and relationship type.     

Adding value in global B2B supply chains: Strategic directions and the role of the Internet as a driver of competitive advantage

The Internet increases the likelihood of “disintermediation” in global B2B supply chains. At the same time, opportunities for intermediaries to generate incremental value for other channel members are opened up. The discussion highlights three such strategic directions — “information rich”, “relational exchange” and “joint-learning” — with the focus on the role played by the Internet in the implementation of these strategies. Particular attention is also given to the experience of a leading Hong Kong intermediary to illustrate the alignment of the Internet with each of these strategies for enhancing the competitive position of intermediaries in global supply chains.     

The hidden costs of outsourcing: evidence from patent data

Drawing on patent data for approximately 500 firms over 20 years, we advance recent theory on firm boundaries and test these propositions for the first time. We first provide evidence for the existence of knowledge complementarities between vertically related activities in a firm's value chain by showing that firms face increasing (decreasing) performance in conducting downstream activities (i.e., patent litigation) the less (more) they outsource related upstream activities (i.e., patent filing). We then propose and empirically demonstrate that vertical integration benefits through learning differ from vertical outsourcing costs through forgetting. We show that firms can partly offset these hidden outsourcing costs by sourcing similar upstream products from internal and external suppliers. Copyright © 2010 John Wiley & Sons, Ltd.     

Outsourcing, performance, and the role of e-commerce: A dynamic perspective

In a highly competitive global environment, many manufacturers respond by setting up outsourcing relations for components and finished products with lower-cost producers on a contractual OEM (original equipment manufacture) basis. In the last decade, we have witnessed a spectacular growth in outsourcing activities led primarily by U.S. and Japanese companies, although their approaches to outsourcing strategy and supplier relations are different. However, outsourcing strategy is not without drawbacks. We offer a dynamic perspective of outsourcing strategy and its performance implications, in which we argue that there is an optimal degree of outsourcing. The outsourcing-performance relationship takes on an inverted-U shape, implying that as firms deviate further from their optimal degree of outsourcing, by either insourcing or outsourcing too much, their performance will suffer disproportionately. We then discuss how e-commerce affects where the optimal point of any particular firm is located, hence explicitly linking developments in e-commerce to changing outsourcing levels. We provide implications for the practice and study of outsourcing and e-commerce.     

Improving logistics outsourcing through increasing buyer-provider interaction

Logistics outsourcing has been at the top of the management agenda during recent decades. Through this approach companies have been able to improve logistics performance. However, several studies point out severe problems with outcome and it is even claimed that in some cases “logistics outsourcing has become a source of corporate failure and disappointment” [Boyson, S., Corsi, T., Dresner, M. and Rabinovich, E. (1999). Managing effective third-party logistics relationships: What does it take? Journal of Business Logistics, 20 (1), 73-100.]. Previous research shows that many companies have taken outsourced functions back in-house. The aim of this paper is to explore the reasons behind the problems in logistics outsourcing. Our analysis is based on an extensive literature survey. This examination indicates that outsourcing decisions require a holistic perspective. We apply the industrial network model [Håkansson, H. and Snehota, I. (1995). Developing relationships in business networks. Routledge, London.] for the analysis of potential consequences of logistics outsourcing. The main conclusion of the paper is that increasing interaction between buyer and provider would be beneficial to the outcome of outsourcing.     

Uncovering the hidden costs of offshoring: The interplay of complexity,organizational design,and experience

This study investigates estimation errors due to hidden costs—the costs of implementation that are neglected in strategic decision‐making processes—in the context of services offshoring. Based on data from the Offshoring Research Network, we find that decision makers are more likely to make cost‐estimation errors given increasing configuration and task complexity in captive offshoring and offshore outsourcing, respectively. Moreover, we show that experience and a strong orientation toward organizational design in the offshoring strategy reduce the cost‐estimation errors that follow from complexity. Our findings contribute to research on the effectiveness of sourcing and global strategies by stressing the importance of organizational design and experience in dealing with increasing complexity. Copyright © 2012 John Wiley & Sons, Ltd.     

Leveraging supplier capabilities: The role of locus of capability deployment

This study adds to the resource‐based view by studying how client firms may gain performance benefits from supplier IT capabilities in market‐based arrangements where the supplier's IT capabilities are readily available to multiple client firms. I argue that the locus of supplier capability deployment, i.e. whether supplier capabilities are deployed at the client (in‐sourcing) or supplier (outsourcing), has implications for client firm performance. The findings show that in‐sourcing leads to complementary effects between supplier IT capabilities and client operational capabilities. In contrast, clients with weaker operational capabilities benefit from outsourcing the respective activity to the supplier, and may even be able to reduce their capability disadvantage through outsourcing. The data on 964 U.S. credit unions contracting with 22 technology solution providers is archival. Copyright © 2012 John Wiley & Sons, Ltd.     

Temporality of resource adjustments in business networks during severe economic recession

Business cycles are not a new phenomenon. Firms have in the past found ways to, more or less successfully, adjust their resources to such cyclical changes. However, the combination of a global crisis in financial markets and a severe down turn in demand on globally interdependent markets in the “real” economy is unprecedented which suggests that established business practices to handle cyclical variations are challenged. In this article we focus on temporal aspects of resource adjustments, taking into account also network interdependencies in contemporary markets. We develop a conceptual framework towards understanding how business actors construct temporality of resource adjustment activities. We relate temporal orientation of actors to temporal profiles of activities, seeing them as both influenced by actors' network orientation.     

The changing rationale for governance choices: Early vs. late adopters of global services sourcing

Research Summary: This article studies how the logic of firm governance choices varies as a function of the time of adoption of particular sourcing practices. Using data on the diffusion of global business services sourcing as a management practice from early experiments in the 1980s through 2011, we show that the extent to which governance choices are affected by process commoditization, availability of external service capabilities, and past governance choices depends on whether firms are early or late adopters. Findings inform research on governance choice dynamics specifically in highly diverse and evolving firm populations. Managerial Summary: This article considers how firms have chosen delivery models in global services sourcing decisions over time. Based on comprehensive data, we make two major observations. First, we find that firms that began with global services sourcing early, invested mainly in their internal sourcing capacity, while outsourcing only simple tasks to external providers, whereas firms that started later invested more in their capability to outsource various services to increasingly sophisticated suppliers. Second, we find that initial investments in internal or external sourcing capabilities have a strong effect on future choices of delivery models. This explains why, even today, firms vary greatly in how they implement global sourcing decisions, and it suggests that newcomers should learn from their own peer group rather than from highly experienced firms.     

Global Outsourcing Relationships and Innovation: A Conceptual Framework and Research Propositions

Increasing globalization and the rapid growth of information technologies, including the Internet, have resulted in drastic changes in international activities of companies. Once limited to manufactured goods, currently, global outsourcing encompasses a wide variety of knowledge‐based services, such as accounting, financial services, taxation, customer service, information technology, engineering drawings, human resources, research and development (R&D), data processing, and sales. The domain of outsourcing knowledge‐based services is the focus of this paper. Moving beyond the inevitability of global outsourcing, this research takes the perspective of the outsourcer and focuses on managing its transition to providers in the context of innovation. In addition to delivering projected cost benefits to outsourcers, effective transition management can facilitate the generation of innovations. This research attempts to extend the current academic research on global outsourcing in three ways: (1) It offers a framework for understanding the transition process in outsourcing and its relationship to innovation; (2) it takes a broader perspective of outsourcing, including globalization, knowledge‐based services, and core activities of the firm; and (3) using a parsimonious set of theoretical concepts based on control theory, it develops several research propositions to clarify the linkages between variables. Based on our theorizing, outsourcing top management should ask two questions when planning outsourcing of knowledge‐based services to generate innovations in a globalized world. These two questions are: (1) How close is the task to our core competence? And (2) how much tacit knowledge is involved in doing the outsourced task? Next, managers must identify global providers and then spend considerable thought in operational execution of the transition of the task for that is the only time that both complete teams will work together. For tasks that are close to core competence, rigid‐explicit behavioral controls should be put in place; however, for tasks that have high tacit knowledge content, high norms‐based relational control would be more effective. These different types of controls would lead to different innovation outcomes. Rigid‐explicit behavioral controls would produce incremental innovation while relational norms‐based controls would encourage radical innovation.     

A Taxonomy of Sourcing Strategic Types for MNCs Operating in China

This paper presents a taxonomic study of sourcing strategy types and their relationships to subsidiary profitability. Using the taxonomic approach, this study identifies five sourcing strategy types based on the decision rules of direction and volume of sourcing activities, namely market access, offshore platform, offshore manufacturing, local sourcing, and complex sourcing. We validated these sourcing types by linking them to a set of business and investment strategic factors. Based on a sample of 319 foreign subsidiaries in China, the results confirm the taxonomy of sourcing types indicating that sourcing strategy types indeed vary along the strategic factors including wage rates, R&D intensity, subsidiary size, capital commitment, ownership control and partner type.     

Drivers of Outsourced Innovation: An Exploratory Study*

The outsourcing of innovation has been on the rise for years, but research in this area lags behind industry practice. Interviews with managers and a theory base grounded in transaction cost analysis are used to guide the development of an exploratory model that details potential drivers of the outsourcing of innovation activities. Using industry‐level data, the proposed model is partially tested using two distinct regression analyses that reveal significant effects both contemporaneously and persisting over time. Several of the proposed drivers of outsourced innovation are shown to be significant, including exploratory research performed and profit margin. The finding that exploratory research performed is significantly related to the outsourcing of innovation activities represents a significant contribution to the innovation and organizational learning literatures. As well, finding a relationship between margins and organizational sourcing fills a gap in the business to business marketing literature. Managerial implications are drawn for both managers of the innovation process in traditional firms and those in firms wishing to garner outsourced innovation contracts. The drivers found to be significant in this study should allow for better resource planning from innovation managers in traditional firms as well as better targeting of perspective clients from firms seeking contract innovation business.     

Telecommunications companies: One meeting with any competitor is enough to violate the EU's competition laws and result in fines

This commentary's purpose is to review how Telfort, T-Mobile, Vodafone, and others discovered that one “meeting” of any type with any telecommunications competitor could result in fines up to 10 percent of total “turnover” under EU competition law Regulation no. 1/2003, Article 23(2)(a), and to provide planning tips on how to eliminate the potential for those adverse consequences. While competition laws do not apply solely to the telecommunications industry, they do seem to affect it disproportionately. Telecommunications companies have global reach, and some of the most stringent competition law exists in Europe. Thus, all should review the most recent telecommunications ruling from the European Court of Justice, T-Mobile Netherlands BV v. Raad van bestuur van der Nederlandse Mededingingsautoriteit C-8/08 (2009). ¹ The ruling deals with whether the one meeting was “concerted activity” in violation of Article 81(1) EC.     

Balancing vertical integration and strategic outsourcing: effects on product portfolio,product success,and firm performance

Most prior research has focused on vertical integration or strategic outsourcing in isolation to examine their effects on important performance outcomes. In contrast, we focus on the simultaneous pursuit of vertical integration and strategic outsourcing. Our baseline proposition is that balancing vertical integration and strategic outsourcing in the pursuit of taper integration enriches a firm's product portfolio and product success, and in turn contributes to competitive advantage and thus to overall firm performance. We derive a set of detailed hypotheses, and test them on a unique and fine‐grained panel of longitudinal data documenting over 3,500 product introductions in the global microcomputer industry. The results provide strong support for the notion that carefully balancing vertical integration and strategic outsourcing when organizing for innovation helps firms to achieve superior performance. Copyright © 2006 John Wiley & Sons, Ltd.     

Early supplier integration: the dual role of purchasing in new product development

Interest in early supplier integration in new product development (NPD) has increased as an open innovation approach has become more common in firms. To support supplier integration, the purchasing function of a firm can assume a new ‘dual’ role: contributing to NPD while also managing overall costs. Previous research has offered few insights into how the purchasing function should best be organised so that it will fulfil this dual role. This paper reports on the results of a consortial benchmarking study in which an industry–academic consortium visited and analysed six best‐practice firms. The findings describe how innovative firms organise their purchasing function, distinguishing between ‘advanced sourcing’ and ‘life‐cycle sourcing’ units. The results include the tools that these firms use, such as regular innovation meetings with suppliers and technology roadmaps linking firm strategy, innovation strategy and sourcing strategies. The paper also recommends that researchers shift from a narrow focus on a single project to a broader consideration of supplier and organisational issues in NPD.     

A framework for offshoring marketing processes in business-to-business marketing relationships

Outsourcing has been a prominent aspect of business strategies in the last three decades. Outsourcing of manufacturing processes is now complemented with outsourcing of various marketing process as well. More importantly, outsourcing to foreign locations — offshoring — has increased for marketing processes in recent years. In this context, the present paper develops a model that identifies the types of marketing interactions and processes that can be offshored in business-to-business markets. We suggest that the decision to offshore marketing processes and interactions depend upon the interaction process that is preferred and the importance of interaction process itself. Marketing interactions that are not critically important and/or those that can be performed through technology can be easily offshored. However, other marketing processes need to be examined in depth before being offshored. Implications for research and practice in the area of offshoring, as well as in the broader area of outsourcing, are also highlighted.