Concepts that are relevant to outsourcing are found across strategic management literature. This is extensive and its implications and relevance this research is only summarised here to set background for more detailed discussion of literature on the practice of outsourcing in sections 2.5.2 and 2.5.3.
Outsourcing is relevant to theories of the firm. It can be seen as a means of redefining the boundary of the firm by shifting related transactions to vendors that can manage these cost effectively (Coase, 1937). Contextual variety introduces risk to this
88
process; in absence of a universally applicable service model, client and vendor are unlikely to be capable of agreeing a contract that covers all outcomes hence either can behave opportunistically at the other’s expense (Williamson, 1985). The risk of such opportunism is high in IT management where technological and contextual uncertainty invariably exists (Holcomb and Hitt, 2007). Here investment made in specific
knowledge and technology might yield poor returns if the wrong direction is taken, leading to the potential for opportunism or conflict between client and vendor over which party should make such investments (Conner and Prahalad, 1996). Long lasting relationships can also result in opportunistic shirking of the vendor from providing service to a client that no longer holds the knowledge or skills needed to manage the relationship (Handley and Benton, 2012). Opportunism can be contained not only by putting appropriate contractual agreements and governance processes in place (Williamson, 1985) but also through the network of social relationships that builds around a prolonged or repeated series of transactions (Granovetter, 1985, Lioliou and Zimmermann, 2015). To have strategic control over a long lasting client and vendor relationship in a context of shifting service demands and changing technological capability, a combination of contractual and relationship based governance methods is needed (Poppo and Zenger, 2002).
A second theory of the firm concerns possession of resources and competencies. IT can be seen as a strategic resource of an organisation and competence in its
management a means of gaining sustained competitive advantage (Barney, 1991, Penrose, 1959, Wernerfelt, 1984). As IT has developed intimacy with organisations’ operational and innovation results (Peppard, 2007), achieving such competence has become an important success factor. The development of IT outsourcing has
established a market in which this competence can theoretically be acquired (Barney, 1986). However, if true competitive advantage is to be achieved, the problem of the contextual variety and causal ambiguity that are inherent to IT management needed also to be addressed (Ward, 2012). To provide unique competence that could be core to an organisation’s success (Prahalad and Hamel, 1990) a generic IT outsourcing service would be insufficient. It must be combined with other resources either within the client organisation (Dierickx and Cool, 1989) or within networks of organisations over which the client has some sort of control (Mathews, 2003, Riemer and Klein, 2008). This in turn raises questions about how transactions that include valuable
89
knowledge should best be organised and established in enduring and appropriate outsourcing contracts that restrict opportunism (Conner and Prahalad, 1996). Strategic use of outsourcing might therefore call on the client firm to identify and
isolate its own value creating processes, then choose a series of potential vendors that have the required competences to perform these at the core of their own activities (Quinn et al., 1990b). These can then be combined with the client’s own core
competence to optimise resource use and competitiveness for all (Quinn and Hilmer, 1994) each organisation gaining simplification, scale efficiency and a focus on
knowledge creation in its specialist area. Here again, dynamically changing contexts can be problematic. An organisation might be mistaken in identifying its own core competence or may choose to focus on a competence area that becomes irrelevant. This risk was recognised by Prahalad and Hamel in their original paper on the topic; ‘too many companies have unwittingly surrendered core competencies when they cut internal investment in what they mistakenly thought were just “cost centers” in favor of outside suppliers’ (Prahalad and Hamel, 1990 p.84). However, evidence shows that organisations of all types have increasingly looked outside their own boundaries for research input (Chesbrough and Crowther, 2006). In the context of IT outsourcing, the risk of competence loss materialises when the client loses detailed knowledge about its IT applications over time, increasingly restricting its ability to manage any
outsourcing enclaves that support this (Handley and Benton, 2012).
Changes in operating context may therefore call on an organisation using outsourcing both to protect its core knowledge and to adapt this over time. This means it must possess particular capabilities for change that can be applied to IT in general and outsourcing in particular. These ‘dynamic capabilities’ have been defined as the organisation’s ‘ability to integrate, build, and reconfigure internal and external
competences to address rapidly changing environments’ (Teece et al., 1997, p.516) or ‘the organizational and strategic routines by which firms achieve new resource
configurations as markets emerge, collide, split, evolve and die’ (Eisenhardt and
Martin, 2000, p.1107). Possession of the right dynamic capabilities seems essential for long term success with IT outsourcing in any but the most stable contexts. Three specific components of dynamic capability are adaptive capacity, absorptive capacity and innovative capability (Wang and Ahmed, 2007). These reflect the ability to
90
organisational innovation. Such dynamic capabilities can readily be applied to transition towards outsourcing and to the subsequent management of outsourcing enclaves.
In summary therefore, as a strategic initiative, transition to the use of IT outsourcing enclaves represents a change in the boundaries of the organisation. This requires a change in internal governance methods and the development of relational or social management skills. The choice of enclaves calls for careful analysis of vendor competence in relation to those competences that can best be retained in the client organisation. As outsourcing will be implemented in an inevitably changing context, the client organisation must have the dynamic capabilities to react to this by adapting its configuration of outsourcing enclaves, absorbing new knowledge and grasping opportunities for innovation. The next section of this chapter will build on this broad theoretical background with a more detailed examination of literature relating to IT outsourcing as a practice.