The Behavioral Consequences of Outsourcing: Looking through the Lens of Paradox

Abstract

Outsourcing has become common practice over the last ten years (Hoecht & Trott, 2006), and firms have embraced it for a variety of reasons, including cost reduction (Hormozi, Hostetler, & Middleton, 2003; Kakumanu & Portano va, 2006), conversion of fixed to variable (Alexander & Young, 1996), access to advanced expertise and technology (Harland, Knight, Lamming, & Walker, 2005; Hormozi, et al., 2003; Kakabadse & Kakabadse, 2002; Quinn, 2000), flexibility (Jennings, 2002), and the ability to focus on core competencies (Quinn & Hilmer, 1994). However, there are downsides to outsourcing. These include the risk of overdependence on a supplier (Adler, 2003; Barthelemy & Geyer, 2004), information leakage (Hoecht & Trott, 2006; Jennings, 2002; Kakumanu & Portanova, 2006; Mahnke, 2001), failure to estimate hidden properly (Barthelemy, 2001; Tadelis, 2007), and loss of competitive capability (Adler, 2003; Barwise & Meehan, 2005; Willcocks & Feeny, 2006).The implications of outsourcing have been considered using a number of competing theoretical perspectives, most namely transaction cost economics and the resource-based view of the firm. The transaction cost perspective offers a clear set of guidelines that the firm can use to determine when and how to outsource, especially because an organization is shaped by transaction cost economizing considerations (Williamson, 1985, p. xii). Transaction cost theory can even anticipate the impact of ex post misalignments, at least to the extent that the difference between rather than the absolute magnitude of transactions costs (Williamson, 1985, pp. 21-22) can accurately be assessed. As a result, this orientation makes it convenient to model the consequences of outsourcing as a set of economic trade-offs and styles of contracting (Williamson, 2008). The resource-based view offers insights into ways in which a firm's distinctive capabilities and resources relative to those of its rivals can become the basis for competitive advantage if matched appropriately to environmental opportunities (Peteraf, 1993). As a result, numerous researchers have discussed the role of core competency in determining which functions should and should not be outsourced (Jennings, 2002; Mclvor, 2003; Quinn & Hilmer, 1994). Hence, the resource-based view has been an important perspective from which to assess the outsourcing decision process (Espino-Rodriguez & Padron-Robaina, 2006; Holcomb & Hitt, 2007).The efficacy of using these two approaches is less clear when it comes to understanding the behavioral and organizational requirements which follow from the outsourcing decision, however. A stream of research has shown that outsourcing increases the operational expethency of the firm, either by transferring activities to external providers (Bailey, Masson, & Raeside, 2002; Greaver, 1999; McCarthy & Anagnostou, 2004; Quelin & Duhamel, 2003; Sharpe, 1997) or through the utilization of third party capabilities (Gilley & Rasheed, 2000; Lei & Hitt, 1995; Mol, Van Tulder, & Beije, 2005; Quinn & Hilmer, 1994). While it may be possible to assess the cost implications and benefits of a decision that reduces the size of the firm, it is less clear that transaction cost economics can readily categorize the extent of the behavioral and organizational changes that will occur in this now-smaller firm, especially given that researchers have suggested that outsourcing actually increases - rather than reduces - organizational complexity, and effort (Barthelemy, 2001; Harland, et al., 2005; Rothaermel, Hitt, & Jobe, 2006). Similarly,' the resource-based view helps define the capabilities that a firm might use to gain advantage, but efforts to explain how firms develop such capabilities have been minimal (e.g., Helfat & Peteraf, 2003). Moreover, the causal ambiguity and path-dependent elements of the resource-based view make it difficult for managers to consciously build or create capabilities (Lado, Boyd, Wright, & Kroll, 2006). …