Breaking the outsourcing path: Backsourcing process and outsourcing lock-in

The objective of this paper is to develop research on backsourcing, which consists in recalling outsourced activities back in-house. We focus on the processes that firms follow to backsource these activities, particularly when they are locked into outsourcing. We refer to path dependence and path creation concepts to conduct this research. Using a case study methodology, we analyze the process related to the backsourcing of information technology activities in a telecommunications company. This paper highlights the negative effects of the need to control outsourced activities as it maintains outsourcing lock-in. Organizational crises and the perception of backsourcing as a success are two elements that enable significant mindful deviations from outsourcing practices and the development of a backsourcing path. The decision to backsource and its implementation can be facilitated by past successful integration experiences, internal productive capabilities, and capabilities to control activities. Changes in power relations within the firm can sustain the development of a backsourcing path. Our research contributes to research on organizational path breaking by studying the backsourcing process as an outsourcing path breaker. This paper complements studies on organizational practices such as outsourcing and backsourcing and their interplay.     

Six Sigma to reduce claims processing errors in a healthcare payer firm

Abstract

As a continuous improvement practice, Six Sigma has been accepted globally across the service industry. In the past decade, the application and success of Six Sigma in healthcare services has been remarkable. Despite the fact that several papers on Six Sigma have appeared in the erstwhile literature related to healthcare operations, there is a dearth of field studies highlighting the application of Six Sigma in healthcare outsourced firms, in specific to healthcare payers that engage in a non-clinical setup. The aim of this paper is to explore the role of Six Sigma within the healthcare payer outsourced firms, where error-free delivery becomes critical. The article contributes to the literature of Six Sigma in healthcare outsourcing highlighting how ‘Six Sigma as a methodology’ could help reduce claims adjudication errors in a healthcare payer firm. The Six Sigma DMAIC project case study presented as part of the paper delivered a saving of USD 0.53 million and is a classic example of how Six Sigma can bring bottom-line impact to healthcare outsourced organizations. Managerial implications and lessons learned are discussed alongside the concluding notes.     

Build-operate-transfer Outsourcing Contracts in Services – Boon or Bane to Emerging Market Vendor Firms?

Build-operate-transfer (BOT) contracting has been widely used in the engineering and construction industry and has recently spread into the service industry domains. Notably, service provider firms from emerging markets, India in particular, are now offering BOT outsourcing contracts in which the client firms are allotted call options, i.e. the right, but not the obligation, to transfer pre-specified assets from the service provider. As such, BOT outsourcing contracts seems to be an interesting contractual novelty that combines the advantages of outsourced and captive offshoring operations. In this paper we investigate under which circumstances a BOT outsourcing contract (i.e. a contract where the client firm exercises its call option) is beneficial, or the opposite, to the emerging market vendor firm. Whether BOT outsourcing contracts are boon or bane to an emerging market vendor basically hinges, we submit, on its internal diffusion of client-specific knowledge and capabilities prior to the execution of the call option.     

How Governance Misalignment and Outsourcing Capability Impact Performance

Notwithstanding the popularity of outsourcing as a business strategy, the performance benefits realized through outsourcing efforts are observed to be mixed in practice. This leads to important unresolved questions regarding why some firms are able to derive substantial value from their outsourcing initiatives while other firms are left disappointed. This study joins an emerging literature integrating transaction cost economics and capabilities‐based perspectives to develop a deeper understanding of the drivers of outsourcing performance. I develop a theoretical model that examines the independent and joint influence of governance misalignment (i.e., deviation from transaction cost's predicted mode of governance) and a firm's outsourcing capability on the performance of outsourced processes. I test the theoretical model using a dataset of 172 outsourced and 156 in‐house processes. The finding that governance misalignment corresponds to inferior process performance supports transaction cost's discriminating alignment hypothesis. Interestingly, I also find that a retained technical expertise (TE) and outsourcing knowledge management routines (OKMR; both contributors to a firm's outsourcing capability) positively influence outsourcing performance both directly and via their relationship with governance misalignment. While a retained technical expertise and outsourcing knowledge management routines each positively influence outsourcing performance, they do so in distinctive ways. These findings have important managerial implications and make a significant theoretical contribution. Specifically, this study demonstrates that the notion of a governance misalignment is firm‐specific, conditional on the governance capabilities of the organization. This insight underscores the value of integrating transaction cost logic with capabilities‐based perspectives.     

When outsourcing fragments: customer creativity and technological transmutations

One of the most fundamental decisions made in firms is about what functions or activities the firm should perform within its own hierarchy, and which of these it should rely on the market to perform. Outsourcing is ‘an agreement in which one company contracts out a part of their existing internal activity to another company’. However, this article contends that outsourcing has changed, and is changing in ways that make the application of neat, legal and technically correct definitions hard to use, and even harder to apply in strategy. Under the new outsourcing paradigm, technology is not a passive ‘substance’, rather it is an active ‘force’. We aim to look at the ways in which technologies are re-shaped and transmuted by consumers. Through this analysis, we add the consumer activity to the conventional definition of outsourcing. We focus on one of the most highly anticipated and influential new products of 2007 – the Apple iPhone.     

外包联盟中核心技术投入的激励机制研究

发包方如何设置有效的契约来激励接包方进行知识共享和核心技术的投入是外包联盟成功的关键。基于多任务委托代理模型,引入外包联盟的整体绩效作为绩效测量,进而将接包方的收益与绩效挂钩,激励接包方投入核心技术。通过分析,发现核心技术成本的临界值随着核心技术的贡献率的增大而降低,随着绩效测量误差的增大而增大。绩效测量误差还会负向影响接包方的激励系数以及发包方和接包方的效用。     

The relationship between training outsourcing and employee commitment to organization

In many countries, the human resource practice of training outsourcing has emerged as one of the fastest growing segments of the broader business process outsourcing industry. In spite of the growing popularity in professional practice, training outsourcing continues to be subjected to critical review and ongoing debate with most attention focused on the decision to ‘outsource’ or ‘not to outsource’. However, there exists a shortage of research on training outsourcing as a human resource development (HRD) practice and the potential relationships with desired organizational outcomes including employee commitment. This exploratory international study extends previous research that has examined the relationship between training and organizational commitment by focusing exclusively on outsourced training. Data were collected from information technology firms in two countries: India and the United States. Results showed positive relationships between specific measures of employee perceptions of quality, usefulness and supervisor support for outsourced training with organizational commitment. Recommendations are made for future research as well as for professional practice to guide HRD practitioners involved in the rapidly growing global practice of training outsourcing.     

Outsourcing Functions to Economic Development Corporations: Exploring the Perceptions of Officials in Ontario, Canada

In some communities in the Province of Ontario, Canada, economic development functions have been outsourced from departments within the city structure to external organizations such as economic development corporations (EDCs). This study takes an in-depth look at the activities of EDCs, with a focus on the rationale for outsourcing, EDCs’ policies and strategies, cooperative efforts, and the challenges EDCs face. The paper is based on extensive interviews with 21 CEOs/presidents of these corporations. The findings indicate that EDCs are typically private–public partnerships that exist at local and regional levels, that this approach is part of a comprehensive strategy to deal with the changing field of economic development and the uncertain global economy.     

When outsourcing is not an option: International relocation of investment bank research — Or isn't it?

Outsourcing is high on the agenda of firms seeking to cut costs. Based on an enhanced value-chain concept we develop a model that determines the conditions under which outsourcing and offshoring are not expedient. The model allows for an integrated analysis of horizontal and vertical links to actors within and outside the firm. Equity and country research in investment banks and their outsourcing potential are used as case studies. We draw mainly on qualitative evidence from interviews with investment bank analysts, as well as data on locations of research units of foreign investment banks in India. The option of outsourcing certain stages of business processes and offshoring parts of the value chain within firms to low-wage locations depends crucially on how processes are ‘embedded’ in relation to other departments within and to corresponding actors outside the firm. Our analysis shows that there is little, if any, scope for outsourcing but some potential for low-level research activities to be offshored to low-cost regions.     

Revenue Management in Business Services

A significant portion of the services industry is focused on providing services (medical, legal, financial, personal, and travel) to individuals. However, studies have shown that a less visible but rapidly growing segment of the service sector comprises firms that provide business functions to other businesses. The sector covers tasks such as payroll processing, procurement, and information systems management, as well as business consulting, technical support, call center operations, and software development. Firms may choose to purchase, rather than perform, these business functions to reduce costs, to mitigate risk, or simply to focus on their processes that provide marketplace differentiation. Transferring a business function from within a firm to an outside supplier is often called “outsourcing”; when the supplier provides the service from a lower‐cost country, it is called “offshoring.” The risks and benefits of outsourcing to the firm purchasing a business service have been studied in some detail by both academics and consultants. In this paper, we outline revenue management issues faced by business service providers and describe some new opportunities for the use of analytic methods in the service science sector.     

Does Outsourcing Really Improve Firm Performance? Empirical Evidence and Research Agenda

The phenomenon of outsourcing has spawned a rich body of scholarly work in the last two decades. Yet, the answer to one important question has remained elusive: Does outsourcing really improve firm performance? Addressing this question is important as firms across nations continue to embark on the practice of outsourcing to save operating costs and remain competitive. Scholars, practitioners and policy‐makers need to understand whether and how outsourcing benefits the firm. However, no comprehensive review of empirical evidence has been published so far that can address this question. This study reviews 57 empirical research articles that investigated the outsourcing–firm performance relationship in 47 peer‐reviewed scholarly journals over a 20‐year time‐span (1996–2015). The articles differ widely in research scope, context, level of analysis, data source, time‐span, industry sector, extent of outsourcing and measure of performance. The findings suggest that outsourcing can produce positive, negative, mixed, moderated or no significant impact on the firm. This study also provides useful directions for future research on outsourcing and firm performance.     

Decisions to Outsource Information Systems Functions: Testing a Strategy-Theoretic Discrepancy Model

In recent years, the decision to outsource information systems (IS) functions has become a viable strategic alternative in managing the increasingly complex IS functions. In this study, the IS outsourcing phenomenon is conceptualized as a strategic decision in the organization. Drawing on resource-based theories, resource dependence theories, and other theories of strategic management, a discrepancy model of this decision is developed. Relationships between a number of strategy-theoretic factors and the IS outsourcing decision are hypothesized. These factors include IS resource performance discrepancies manifested in the form of gaps in information quality, IS support quality, IS cost effectiveness and financial performance, as well as the strategic orientation of the firm. Results of the study indicate that, while cost consideration and the firm's financial performance are not associated with the IS outsourcing decision, difficulties in providing good information outputs and IS support services are associated with the decision. Overall, the findings suggest that the current trend toward outsourcing represents a continuing evolution of the IS function as it attempts to fulfill its traditional mission of providing high quality information resource to the firm. When the performance of the delivered resource begins to slip in the current environment of rising expectation and technological complexity, outsourcing may become a strategic response of necessity. The paper concludes with a discussion of the implications of the results for practicing managers and suggestions for future research.     

Benchmarking and Monitoring International Warehouse Operations in Europe

We report on a cross‐sectional and longitudinal comparison of European distribution centers in the Netherlands. European distribution centers are responsible for the distribution of a manufacturer's (mostly Asian or American) products over customers in a large part of Europe, the Middle East, and Africa, often with strict service‐level agreements. In total, 65 physical warehouses, containing 140 European, Asian, and American European distribution center operations, in combination with different outsourcing relations (own‐account, dedicated outsourced, and public outsourced), were benchmarked in 2000 and monitored over the period 2000–2004. We conclude that both in 2000 and 2004, European warehouses are more efficient than Asian and American warehouses, and outsourced operations (particularly public warehouses) are more efficient than own‐account operations. Over the period 2000–2004, efficiency appears to have declined substantially; the most distinct differences are to be found among public outsourced warehouses and, because many European distribution center warehouse operations of European origin are run by public service providers, among European warehouses. This decline in efficiency also led to a decline in productivity, in spite of the fact that overall the available technology has improved. We conjecture potential causes for this decline.     

Outsourcing Decisions and Managerial Incentives*

An agency model is presented in which outsourcing strictly dominates in-house production. We argue that firms outsource in order to improve managerial incentives. Conditions are established under which the firm is strictly better off with outsourcing. The benefit of outsourcing, however, is constrained by the trade-off between the incremental coordination costs of outsourcing and the improved incentive structure. The optimal contract is also shown to be a function of whether or not the firm is publicly held. For a publicly held firm, the contract is constant. For a privately held supplier, the contract is likely to be of a cost-sharing type. These findings offer preliminary incentive explanations for commonly observed outsourcing practices.     

Sourcing Information Security Operations: The Role of Risk Interdependency and Competitive Externality in Outsourcing Decisions

Firms are increasingly outsourcing information security operations to managed security service providers (MSSPs). Cost reduction and quality (security) improvement are often mentioned as motives for outsourcing information security, and these are also the frequently cited reasons for outsourcing traditional information technology (IT) functions, such as software development and maintenance. In this study, we present a different explanation—one based on interdependent risks and competitive externalities associated with IT security—for firms' decisions to outsource security. We show that in the absence of competitive externalities and interdependent risks, a firm will outsource security if and only if the MSSP offers a quality advantage over in‐house operations, which is consistent with the conventional explanation for security outsourcing. However, when security risks are interdependent and breaches impose competitive externalities, although firms still have stronger incentive to outsource security if the MSSP offers a higher quality in terms of preventing breaches than in‐house management, a quality advantage of MSSP over in‐house management is neither a prerequisite for a firm to outsource security nor a guarantee that a firm will. In addition to MSSP quality, the type of externality (positive or negative), the degree of externality, whether outsourcing increases or decreases risk interdependency, and the breach characteristics determine firms' sourcing decisions. When security breaches impose a positive externality, the incentive to outsource is enhanced if the MSSP decreases the risk interdependency and diminished if the MSSP increases this interdependency. A negative externality has the opposite effect on firms' incentives to outsource. A high demand spillover to a competitor, together with a high loss in industry demand because of a security breach, enhances these incentives to outsource security operations when the externality is negative. Finally, we extend our base model in several dimensions and show that our main results regarding the impact of interdependent risks and competitive externalities on sourcing decisions are robust and generalizable to different specifications.     

Outsourcing to a Powerful Contract Manufacturer: The Effect of Learning‐by‐Doing

The contract manufacturing industry has grown rapidly in recent years as firms have increasingly outsourced production to reduce costs. This growth has created powerful contract manufacturers (CMs) in several industries. Achieving a competitive cost position is often a primary motive for outsourcing. Outsourcing influences both the original equipment manufacturer's (OEM) and the CM's production levels, and, therefore, through learning‐by‐doing renders future costs dependent on past outsourcing decisions. As such, outsourcing should not be viewed as a static decision that, once made, is not revisited. We address these considerations by analyzing a two‐period game between an OEM and a powerful CM wherein both firms can reduce their production costs through learning‐by‐doing. We find that partial outsourcing, wherein the OEM simultaneously outsources and produces in‐house, can be an optimal strategy. Also, we find that the OEM's outsourcing strategy may be dynamic—i.e., change from period to period. In addition, we find both that the OEM may engage in production for leverage (i.e., produce internally when at a cost disadvantage) and that the CM may engage in low balling. These and other findings in this paper demonstrate the importance of considering learning, the power of the CM, and future periods when making outsourcing decisions.     

Impact of Customer Traffic and Service Process Outsourcing Levels on e‐Retailer Operational Performance

Many service firms deliver services via a mix of internally developed and delivered (i.e., insourced) and externally developed and delivered (i.e., outsourced) service processes. Service process outsourcing is especially common in e‐retailing. Portions of e‐retail customer ordering processes and delivery processes can be digitized and contracted to third‐party vendors. Via outsourcing, service systems change from dyadic to triadic. Prior research examines consumer perceptions of dyadic (consumer to e‐retailer) outcomes, but little research considers service co‐delivery with outsourcing partners (i.e., triadic systems). Literature also does not focus on joint associations of service process outsourcing and customer traffic with e‐retailer operations. We analyze several years of data on North American e‐retailers. We first examine factors associated with e‐retailer outsourcing levels, for front‐end and back‐end service processes. We observe customer traffic is positively associated with future outsourcing. We then examine how outsourcing moderates associations between contemporaneous customer traffic and e‐retailer operational performance, as measured by numbers of processed orders, website response times, and customer satisfaction. Results suggest outsourcing levels are associated with operational outcomes, yet surprisingly, high outsourcing and high traffic jointly may not benefit e‐retailers.     

The outsourcing of primary activities: theoretical analysis and propositions

There is a considerable literature comparing the virtues of markets and hierarchies as alternative governance structures for economic transactions. But governance decisions are not simple dichotomous choices, and there has been increasing recent interest in the ‘swollen middle’ of hybrid organisational forms that combine market and hierarchical elements. One such hybrid is outsourcing, which has become a topic of considerable contemporary interest both in business circles and within the academic literature. The main contribution of this paper has been to combine the insights of resource dependency theory, the resource-based view of the firm, and transaction cost economics to provide both an explanation for the outsourcing of primary activities and a set of testable propositions about firms’ propensities of outsource.