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011-0518

Global services outsourcing:

Critical aspects and future directions

Authors

Martina Gerbl University of Ulster Department of International Business Northland Road Derry BT48 7JL Northern Ireland Email: m.gerbl@ulster.ac.uk Phone: +44 (0)28 71375764

Prof. Ronan McIvor University of Ulster Department of International Business Northland Road Derry BT48 7JL Northern Ireland Email: r.mcivor@ulster.ac.uk Phone: +44 (0)28 71375275

Prof. Paul Humphreys University of Ulster Department of Management Shore Road Newtownabbey BT37 0QB Northern Ireland Email: pk.humphreys@ulster.ac.uk Phone: +44 (0)28 90368410

POMS 20th Annual Conference

Orlando, Florida U.S.A.

May 1 – May 4, 2009

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ABSTRACT

Services outsourcing has gained increasing importance in today’s global economy. Tradition-

ally, operations literature has focused on manufacturing outsourcing. Services outsourcing has

become increasingly complex and contrasts with manufacturing. This paper highlights the im-

portance of operations management to the rapidly developing area of services outsourcing, and

identifies important research areas for operations management scholars. Research is lacking in

service design principles and outsourcing. Many service classification frameworks cannot fully

explain global services outsourcing. Research is required to develop frameworks that consider

the motives for location choice in services outsourcing, which will involve identifying the key

influencing factors on offshore-nearshore-domestic services outsourcing arrangements. A fur-

ther important area is the theories employed to understand global outsourcing. It is argued that

theories from economics, strategy, and organizational behaviour should be linked with opera-

tions management concepts such as business improvement, service design, location choice, and

operations strategy to better explain outsourcing.

INTRODUCTION

Historically, companies were vertically integrated organisations, aiming to control channels of

both supply and distribution (Hannagan, 2005). Goods were manufactured from raw materials

and then transported to self-owned retail outlets. Outsourcing in the form of subcontracting

manufacturing work began as early as the 1800s, however documented instances of its use first

appeared in the 1950s (Walters et al., 2006). Accompanied by the reduction of trade barriers,

labour-intensive, low-skilled manufacturing positions were the first to be offshored in the

1980s. The outsourcing of services started with functions such as specialised legal work, fol-

lowed by information technology (IT) outsourcing. Similar to manufacturing outsourcing, his-

torically most firms had built their own service processes for processes that were either critical

or not critical to the company’s strategy. These processes were generally performed by

employees within the company. De-coupling of processes and thus outsourcing to other coun-

tries was allowed by the changing view of service processes from idiosyncratic to standardised

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(Metters et al., 2008). Outsourcing of service processes began to gain currency as a means of

achieving rapid benefits. Business developments such as - amongst others - the advances in

international information and communication technologies (ICTs) transformed the response

time and the type of work that could be done offshore. The physical transport of documents

overseas - involving considerable time delays - was replaced by electronically transmitted data,

thus reducing both transportation costs and response times (Metters et al., 2008). Foreign gov-

ernments aimed to improve the telecommunications infrastructure to enable stable electronic

transmission. Starting with fairly low level work that entailed for example process and contact

centres (transactional outsourcing), much of the service (as well as manufacturing) arena has

taken on increasing levels of complexity in design and execution (transformational outsourc-

ing) (Youngdahl et al., 2008). This shift from transactional to transformational outsourcing is

the result of the increased experience with offshoring that many outsourcing companies have.

Furthermore, service providers (as well as vendors) in offshore countries have steadily im-

proved their quality through the continuous qualification of employees or the employment of

skilled employees.

Service businesses differ from manufacturing businesses in several ways. Karmarkar et al.

(1995) identified key distinguishing issues such as the intangibility of service output, the lack

of inventories, the difficulty of portability, and the complexity in definition and measurement.

Haynes (1990) continues that production and consumption may occur simultaneously, site se-

lection may be dictated by customer location, and that quality is a function of customer percep-

tion at delivery. Fitzsimmons et al. (2006) also argue that services often involve joint produc-

tion between the buyer and the supplier.

This paper highlights the importance of operations management to the rapidly developing area

of services outsourcing and identifies six important research areas for operations management

scholars. The discussed research areas include service classification frameworks, service opera-

tions management, global outsourcing, project management of (international) outsourcing ar-

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rangements, performance measurement & productivity, and theory application. For each sec-

tion a brief literature review and important areas for future research will be discussed.

SERVICE CLASSIFICATION FRAMEWORKS

Due to the differences between services and manufacturing businesses, service organisations

need business models that more accurately account for the effects of service system designs

and the roles of customer and service provider choices in the service delivery process. The de-

velopment of a positioning matrix or framework for services is an important contribution to

management literature. Many authors have attempted to develop classification schemes, posi-

tioning matrices, or frameworks for services. However none of these concepts is truly satisfac-

tory for services organisations and more suited for manufacturing companies. The most influ-

ential theories will be discussed briefly to provide an overview of the current state of literature.

Hayes and Wheelwright (1979) developed a widely accepted product process matrix that de-

scribes product process choices in manufacturing industries. The proposed matrix is drawn on

the concept of the ‘process life cycle’ that suggests that a production process in the manufac-

ture of a product passes through several stages similar to products and markets. It analyses the

interaction of product life cycle stages as well as process life cycle stages. The horizontal axis

describes the product life cycle stage ranging from low to high volume/ standardisation. The

vertical axis analyses the process life cycle stage ranging from jumbled flow to continuous

flow processes. The emphasis of both low-volume products and jumbled flow processes is on

flexibility and quality, moving to reliability, predictability, and cost emphasis for high volume

products and continuous flow processes. The authors propose that the product mix determines

the choice of process type. According to the matrix, companies act economically when they

stay on the diagonal of the matrix because product and process characteristics are well

matched. When organisations move too far away from the diagonal, they become more vulner-

able as they are increasingly different from competitors. Whereas Hayes and Wheelwright’s

product process matrix is valuable for manufacturing companies it has some major shortcom-

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ings for service businesses. The relationship between volume and process is not appropriate in

some service businesses. In service operations volume increases can be made without any

changes in the service process, which contrasts to manufacturing operations. Furthermore

measuring volume in service organisations is more difficult than in manufacturing companies

and also less meaningful due to the heterogenic and intangible nature of services. More prob-

lems can emerge as on the product axis of the product process matrix volume and customisa-

tion are combined. Also, mature ICTs allow companies to offer highly customised services

without having jumbled flow processes. The authors propose that technology tends to be more

prevalent in high volume products with continuous flow processes.

Chase (1981) developed the customer contact approach to services. This theory holds that ‘a

service system’s potential operating efficiency is a function of the degree to which the cus-

tomer is in direct contact with the service facility relative to the total service creation time for

that customer’. Chase proposes that the potential facility efficiency (ratio of output to input) is

a function which is determined by customer contact time in relation to service creation time.

Services with a relatively high customer contact time are perceived as being limited in their

efficiency because people bring uncertainty to the service creation process. The customer con-

tact approach has the shortcoming that the customer contact time does not completely capture

the nature of a service. As Schmenner (1986) points out, the theory identifies a functional rela-

tionship between efficiency, contact time, and service creation time but does not consider cus-

tomer effectiveness on an individual basis with factors other than time. Another point is that

Chase’s approach neglects the fact that customers can actively take part in the production of

services (joint production), which implicates that the presence of the customer does not always

lead to lower operating efficiency. Also, Chase does not discuss the influence of technology on

high contact systems such as automatic teller machines, which are an example of a high contact

system where management has high control and thus the operating efficiency is not limited.

Moreover, low contact systems can also have a low operating efficiency when there are uncer-

tainties in terms of task volumes etc.

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Maister and Lovelock (1982) propose a matrix, which positions organisations along the two

dimensions of customer contact and customisation (see Figure 1).

Figure 1 Maister and Lovelock matrix (1982)

The horizontal axis analyses customer contact from ‘back-room’ to ‘front-room’. The vertical

axis is described by the extent of customisation. Maister and Lovelock suggest 4 positions in

the matrix: factory, mass service, job shop, and professional service. Although the authors are

generalising their findings, which are drawn from facilitator industries, they generally suggest

that in these industries success lies in standardisation of customer contact and moving proc-

esses back-room that do not require customer contact. Maister and Lovelock suggest that tech-

nology will be applied at all levels in a company as through the impact of the computer ‘the

expertise of the individual is converted into the expertise of the firm’. A major limitation of the

Maister and Lovelock matrix is that the authors only applied it to facilitator industries, thus an

application to other service organisations is restricted.

Schmenner (1986) refined the previously described Maister and Lovelock matrix. The hori-

zontal axis describes consumer interaction and service customisation and thus combines the

degree to which the consumer interacts with the service process and the extent to which the

service is customised for the consumer. The vertical axis captures labour intensity of the ser-

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vice process. It is defined as ‘the ratio of the labour cost incurred to the value of the plant and

equipment’. The matrix includes 4 positions, which are named on the basis of Maister and

Lovelock’s matrix (see Figure 2).

Figure 2 Schmenner matrix (1986)

Schmenner discusses management challenges for the segments of his matrix. Services with a

relatively low degree of labour intensity demand for careful choice of plant and equipment. For

services that contain a high degree of labour intensity managing and controlling the workforce

is a major challenge. The attention to physical surroundings as well as an attempt to make ser-

vices appear ‘warm’ is a mission for services that have a low degree of interaction and cus-

tomisation. Services with a high degree of interaction and customisation face the difficulty of

higher costs and more talented labour. Schmenner argues that service processes are moving

‘toward the diagonal that runs from the service factory to the professional service firm’. Or-

ganisations already placed on the diagonal are moving upwards (from professional service to

service factory). He suggests that the diagonal positions are attractive due to better control and

also lower costs. Potential problems with Schmenner’s matrix arise as the horizontal axis com-

bines the degree of consumer interaction and customisation of the process. This joint measure

only has value when both components are either high or low. When there is a combination of

high consumer interaction and low customisation (or vice versa) the joint measure cannot cap-

ture this difference. Another difficulty is the dimension of labour intensity, as information and

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automation have replaced labour in some industries. Another shortcoming of the matrix is that

there are no reasons offered why services are moving up the diagonal towards service factories.

This argument is only evident for services that aim for cost efficiency and standardisation.

Youngdahl and Ramaswamy (2008) discuss a matrix around the dimensions of knowledge

embeddedness and service contact. The horizontal axis captures the level of customer contact

that is required in the process, reaching from low contact (back-office) to high contact (front-

office). The vertical axis refers to the knowledge embeddedness in the process reaching from

low (transaction services) to high (solutions). Youngdahl and Ramaswamy emphasise that

knowledge embeddedness is closely related to the skills needed to execute a process and is

often closely linked to the process itself. Knowledge can be either tacit, i.e. hardly captured in

repeatable routines, codified, and transferred, or explicit, i.e. easily transferred. The knowledge

embeddedness of a service provider determines whether the company offers simple transaction

processing or solutions. The authors continue that the level of customer contact will influence

whether the service provider has to be ‘empathetic’ with respect to language, non-verbal com-

munication, and culture. A shortcoming of Youngdahl and Ramaswamy’s matrix arises around

the vertical axis knowledge embeddedness. It remains unclear in what respect this dimension

differs from a vendor’s skills. Furthermore, the argument that the knowledge embeddedness of

a service provider determines the service offering is misleading. Tacit knowledge can only be

learned by a vendor once the process has been outsourced to the service provider. Thus, a ven-

dor’s skills have more importance than its knowledge embeddedness when selecting a vendor.

The recognition of especially non-verbal elements in customer contact is very important, espe-

cially in an offshoring context.

Table 1 provides an overview of the service classification models discussed along with the

limitations of each.

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Model

Author Criteria / horizontal axis Vertical axis

Implications Limitations

Hayes and Wheelwright (1979)

Product life cycle stage (low high vol-ume/standardisation)

Process life cycle stage (jumbled flow con-tinuous flow)

Product mix determines process choice.

Services do not necessarily have a relationship between volume and process.

Model ignores the impact of tech-nology on process choice/flexibility.

Chase (1981)

Potential facility efficiency: a function determined by customer contact time in relation to service crea-tion time Pure services Mixed services Quasi-manufacturing services

(high low customer contact)

Services with relatively high cus-tomer contact are limited in their efficiency as people bring uncer-tainty to the service creation proc-ess.

Customer effectiveness is not only determined by time.

Model ignores that customers can actively take part in the production of services.

Maister and Lovelock (1982)

Customer contact (back room front room)

Extent of customisation (low high)

Move processes back-room that do not require customer contact.

Matrix is drawn from facilitator indus-tries. Authors do not generalise their findings for other types of services.

Schmenner (1986)

Degree of interaction and customisation (low; high)

Degree of labour inten-sity (low; high)

Each matrix segment has distinc-tive management challenges in-cluding plant and equipment choice and management of talented labour.

Combination of degree of interac-tion and customisation in one di-mension is problematic.

No explanation why service move towards service factories.

Youngdahl and Ramas-wamy (2008)

Level of customer con-tact: Low (back-office) High (front-office)

Knowledge embedded-ness:

Low (transaction ser-vices)

High (solutions)

Knowledge embeddedness of ser-vice provider determines the ser-vice offering.

Tacit knowledge can only be learned once the process is handed over to the service provider. Thus a vendor’s skills determine the service offering.

Table 1 Comparison of selected service classification models

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The previously discussed models generally aid in classifying services; however most of these

models are dated and do not take account of recent technological developments. Whereas re-

search on manufacturing outsourcing is more mature, academics are increasingly concerned

with services outsourcing as the direct applicability of manufacturing frameworks for services

has been criticised (Javalgi et al., 2007; Grönroos, 1999). Balakrishnan et al. (2008) state that

existing theories do not provide fully satisfactory explanation for the rapid growth in the out-

sourcing of business processes.

The following questions are important areas for future research in developing service classifi-

cation models.

What factors are significant in services/business process outsourcing and moreover offshor-

ing?

How does customer contact influence efficiency?

What are the categories of service technologies and their impact?

What is the impact of technology on process flexibility?

Is a service positioning matrix defined by industry?

SERVICE OPERATIONS MANAGEMENT

Much of the coverage of outsourcing in the operations literature has focused on manufacturing.

However, because services differ significantly from manufactured goods, some operations is-

sues such as line balancing or stock control have little relevance in services. Instead, core is-

sues that are of concern for services operations management scholars are service quality, ser-

vice design, location choice, and operations strategy. As operations management concepts are

increasingly market oriented and thus do not only support but contribute to competitive advan-

tage (Hayes et al., 1984), they are an important tool to better explain services outsourcing.

Service operations management has been characterised by a number of eras. After a realisation

of the differences between physical goods and services, conceptual frameworks were devel-

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oped and tested (Brown et al., 1994). Most recently, researchers have been concerned with the

development of frameworks and the application of tools to improve service management

(Johnston, 2005). Literature reflects that there is a lack of academic research on service process

re-engineering and service process design respectively (Hill et al., 2002). Further research is

required at the operational level.

Can theories from economics, strategy, and organisational behaviour be linked with opera-

tions management concepts such as business improvement, service design, location choice,

and operations strategy to better explain outsourcing?

What process design should a service/business process have in order to be successfully

offshored?

Which criteria influence the disaggregating of service/business processes?

What are the issues involved in separating front and back office processes?

GLOBAL OUTSOURCING

Governance model

Outsourcing activities can generally be classified through the relationship between the out-

sourcing company and the service provider. Generally outsourcing can take place to an affili-

ated firm (internal outsourcing, captive outsourcing) which means that the outsourcing com-

pany establishes an independent organisational unit (usually a subsidiary) to perform services

for the outsourcing company (parent). Another classification can be made by investigating

what customers the subsidiary has. If the only customer is the parent, this arrangement is often

called captive outsourcing. Outsourcing can also take place to a non-affiliated firm (external

outsourcing) which means that the services are performed by an external, independent com-

pany (service provider or vendor). Furthermore, there are other forms describing the outsourc-

ing company-vendor relationship such as joint ventures. When companies make a choice re-

garding their organisational form, factors such as control and quality (internal outsourcing) as

well as scale economies and gains from specialisation that external vendors offer, are taken into

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account. The choice is strongly influenced by the operational and structural risks of the out-

sourcing process (Aron et al., 2005).

Location choice

When (internal or external) outsourcing, companies can choose, to stay in the country in which

they are based (also called local or onshore outsourcing). Other choices are nearshore, which

refers to sourcing work to a foreign, lower-wage country that is relatively close in distance,

time zone, culture, or language. Alternatively, offshoring refers to outsourcing to a distant

country, where there can be significant cultural or language differences. The location choice is

strongly influenced by the operational and structural risk of outsourcing the process and is

often made by evaluating costs. Much of the research conducted in the field of global outsourc-

ing has been on cost considerations and macroeconomic impacts such as influence on jobs and

a nation’s economy (Ellram et al., 2008). However, the decision to local, nearshore, or offshore

outsource is likely to be driven by factors that transcend cost considerations alone (McIvor et

al., 2008). As Mithas et al. (2006) state, information intensity and physical presence affect the

outsourcing potential. Codifiability, standardisability and modularisability influence how easy

processes can be (globally) disaggregated and thus how easy process parts can be performed

near- or offshore. Codifiability describes how easy an activity can be specified in written in-

structions. Standardisability refers to the extent to which an activity can be performed using a

set of consistent and repeatable, standardised processes. Modularisability describes whether an

activity can be separated into components, which can be performed by independently working

people. The impact of technology on offshoring also led to the assumption that common inter-

actions such as communication or coordination could easily be resolved no matter how far the

distance is. However, research in areas such as distributed organisation of work shows that dis-

tance is an important influencing factor (Carmel et al., 2007). Kiesler et al. (2002) found that

proximity is critical to the development of social relationships and group interaction. The dis-

tance between an outsourcing company and its vendor influences the success of the outsourc-

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ing arrangement in subtle ways. Thus, for many companies nearshoring as opposed to offshor-

ing is a much more viable alternative.

Relevant to service delivery is whether geographically dispersed people with differing cultural

backgrounds are working together, which is the case in near- or offshoring arrangements. Is-

sues such as culture, language, regulatory issues, data protection, geographical distance and

related time zone differences have a higher importance for near- or offshoring arrangements

than local outsourcing. It is important that these issues are managed effectively in order to en-

sure appropriate service quality.

Differences in culture also referred to as ‘cultural distance’ relate to underlying values that

are difficult to observe (Stringfellow et al., 2008). However, conflicts may arise due to cul-

tural differences, thus negatively affecting offshore relationships. Therefore, it is useful to

consider underlying dimensions of culture, which have been studied by a number of re-

searchers (e.g. Straub et al., 2002; Stringfellow et al., 2008).

Language is an important issue in offshoring relationships. It assures reliable and clear

communication between the near-/offshoring company and its service provider including

its customers vice versa. When the service provider has customer contact with a customer

not speaking the same (mother) language, this dimension also affects the customer’s per-

ceived service quality. Language distance is a barrier to communication due to the fact that

sender and receiver do not share a common mother tongue (Stringfellow et al., 2008).

However not only the verbal communication but also speaking rate, intonation and inten-

sity, convey direct, subtle, or implied meanings and feelings along with the verbal message

(Myers et al., 1988).

Regulatory issues play a lower role in services near-/offshoring than in manufacturing

near-/offshoring. Whereas physical goods are subject to import duties, for example, in in-

formation services the duty applied rests on the physical good sent (e.g. magnetic tape) and

not on the actual value of information. The General Agreement on Tariffs and Trade

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(GATT) did not cover international trade in services (Metters et al., 2008).

Data protection is an important issue in outsourcing and moreover near-/offshoring ar-

rangements as outsourcing companies fear they cannot guarantee confidentiality when

work is handled by distant service providers. Moreover, the service provider itself may fur-

ther outsource processes to other providers (Karabulut et al., 2007). In a services outsourc-

ing or near-/offshoring scenario, the outsourcing company transfers data to a service pro-

vider and thus relinquishes direct control of the way in which data is processed and pro-

tected. Data protection is necessary in mainly two areas. Firstly, the transmission from the

outsourcing company’s host to the vendor’s internal network. Secondly, the processing of

the outsourcing company’s data during the vendor’s control. This includes the storage on

data within the vendor’s administrative control (Karabulut et al., 2007). Laws regarding

data protection and the protection of intellectual property differ significantly from Western

to (Far) Eastern countries. These differences have to be taken into consideration when an

outsourcing company enters an offshoring arrangement.

The geographical distance and related time zone differences also have to be evaluated

when considering near-/offshoring. On the one hand relatively big time zone differences

can have advantages such as 24/7 service provision for end customers. On the other hand

however, there can be problems regarding direct, real-time communication between out-

sourcing company and service provider including its customers. Especially offshore out-

sourcing has experienced significant growth and is expected to grow even faster until 2011.

Youngdahl et al. (2008) state that much of the service (as well as manufacturing) arena has

taken on increasing levels of complexity in design and execution (transformational out-

sourcing).

The following questions are important areas for future research in global outsourcing.

What characteristics influence the decision to outsource locally, nearshore, or offshore?

Is there a direct link between ease of disaggregation (codifiability, standardisability, modu-

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larisability) and nearshore and offshore outsourcing options?

Is the size of the outsourcing company and whether the company is multinational influenc-

ing the level of global outsourcing?

Is the size of the outsourcing company influencing its choice whether to internally or exter-

nally outsource?

What factors besides cost advantages accelerate the trend towards services outsourcing and

how important are these?

Is there an optimum mix between offshore, nearshore and onshore services?

What importance has data protection in the decision to local, nearshore, or offshore out-

source?

What is the impact of culture on service performance in global outsourcing arrangements?

How does the ‘buyer country context’ (culture and other factors such as influence of trade

unions/agreements) impact on the decision to outsource locally, nearshore, or offshore?

PROJECT MANAGEMENT OF (INTERNATIONAL) OUTSOURCING ARRANGEMENTS

Outsourcing and the globalisation of markets has made it necessary to integrate global manage-

rial and business processes in organisations (Nohria et al., 1997). This integration is mainly

achieved by people working in different geographical sites in a given project (Hamlin, 1994).

Outsourcing can be seen as a project that includes professionals from multiple organisations.

Moreover, both near- and offshoring involves geographically dispersed people working inter-

dependently with shared purpose across space, time, and organisational boundaries. This new

organisational form, which is enabled by modern ICTs, is often referred to as ‘virtual organisa-

tion’ or ‘workgroup’ (Sakthivel, 2005). Virtual projects such as near- and offshoring arrange-

ments pose new challenges to project management that are higher than in a ‘face-to-face envi-

ronment’. In virtual projects the project manager has a greater role in coordinating, communi-

cating, facilitating the group process, and ensuring participation of all members (Bal et al.,

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2000). In a near- or offshoring project, the different approaches to project management in dif-

ferent nations/cultures have to be considered. Also, different industries show different maturity

of project management (Cooke-Davies et al., 2003).

The following questions are important areas for future research in this area.

How do organisations provide leadership in outsourcing?

How should the work of global virtual teams including offshore service providers be coor-

dinated?

How does culture influence the management of operations in different countries?

How can data be protected in (international) outsourcing arrangements?

How should knowledge transfer between buyer and vendor be co-ordinated and managed?

PERFORMANCE MEASUREMENT & PRODUCTIVITY

Almost 50% of businesses that have shifted processes offshore failed to generate the financial

benefits they expected to (Aron et al., 2005). Most companies are convinced that it is easy to

offshore service processes – easier than with sourcing manufactured components. Processes are

often analysed in isolation and interdependencies with other processes are not fully examined

(Aron et al., 2005). Service processes cannot be easily standardised, thus performance man-

agement is often more complex in business services than in manufacturing processes (McIvor

et al., 2008). When work is codified and processes measured using metrics, there are generally

four categories (Aron et al., 2005): transparent processes (metrics available to measure process

quality and work can be codified), codifiable processes (some ability to measure process qual-

ity and most work can be codified), opaque processes (work can be codified but process quality

cannot be measured), and noncodifiable processes (work cannot be codified). Aron et al.

(2005) continue ‘what a firm doesn’t measure, it can’t offshore well’.

The following questions are important areas for future research in performance measurement &

productivity of (international) outsourcing arrangements.

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How can difficulties in measuring performance be overcome?

In what situations are historical performance measures and targets appropriate and in what

situations are externally based targets more appropriate?

How can service productivity be measured?

How does service productivity relate to service quality?

THEORY APPLICATION

Outsourcing research is dominated by the theories transaction cost theory (TCE) and resource-

based view (RBV). Whereas these theories are one of the most influential ones in relation to

outsourcing, a major limitation of TCE and RBV is that these theories are largely based on

economic rationale (McIvor, 2009). Traditional theories have some major shortcomings for

services/business process outsourcing (Balakrishnan, 2008; Levy et al., 2005; Mol et al.,

2004). However, besides TCE and RBV there are also other important theories, which have

implications for sourcing such as the resource dependence theory and network theory.

Transaction cost theory specifies the conditions under which an organisation should man-

age economic exchange internally (within its boundaries) or externally (i.e. outsourcing)

(Coase, 1937; Willamson, 1987). TCE holds that transaction-specific investment with re-

gard to the economic exchange should determine whether it should be managed internally

or externally (McIvor, 2009). TCE advises to keep processes that are highly specific in-

house, as the market transaction costs for communication and agreement are too high to

make outsourcing a viable alternative. Asset specificity is regarded as the most critical

variable influencing transaction costs; other factors are uncertainty and frequency.

Resource-based view views an organisation as a bundle of assets and resources that can

create competitive advantage, assuming the resources are employed in distinctive ways

(Peteraf, 1993; Barney, 1991). Superior performance achieved internally in an organisation

relative to competitors would explain why these activities are performed internally and not

outsourced (McIvor, 2009). Prahalad and Hamel’s (1994) core competence theory has

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evolved from the RBV. It states that activities, which are considered as ‘core’ and thus de-

liver competitive advantage, should not be outsourced (Gottschalk et al., 2005).

In some instances the prescriptions of TCE and RBV/core competence theory can be contradic-

tionary (McIvor, 2009). Transaction cost theory advises to keep processes that are highly spe-

cific in-house and to outsource processes with low asset specificity. Core competence theory

(Prahalad and Hamel, 1990) advises not to outsource processes that are regarded as core to an

organisation.

Resource dependence theory states that the acquisition and maintenance of resources is of

crucial importance for organisations (Pfeffer et al., 1978). Companies that do not have re-

sources in-house have to establish relationships with external partners. The decision to de-

velop resources in-house or buying resources externally depends on how important the ac-

tivity is for the company. Activities that are not critical and can be performed by many pro-

viders can be outsourced. If an activity is critical and there are only few providers, external

sourcing should be avoided as the supplier would have excessive power (Shook et al.,

2009).

Network theory focuses on inter-company relationships and how these relationships influ-

ence a company’s behaviour and outcomes (Thorelli, 1986). Whereas network theory does

not inform the choice of when to perform resources internally or buy externally, it gives in-

sights on how a company’s ability to manage its supply chain can influence performance.

Centrality is a key concept in network theory (Shook et al., 2009); high centrality equals

status (Gulati et al., 2000). Hult et al. (2006) continue that centrality also offers the poten-

tial to enhance speed, quality, cost, and flexibility in supply chains. This means that if an

outsourcing company is central in its service provider’s network the outsourcing company

is likely to enjoy e.g. privileged response times or prices.

Organisational politics involves the strategies that individuals employ to obtain and use

power to influence organizational goals to further their own interests and ambitions

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(McIvor, 2005). This contrasts significantly with the rational model of management deci-

sion making, in which it is assumed that managers will agree on the strategic objectives of

the organisation and the strategies that should be pursued to lead to their achievement

(McIvor, 2009).

The following questions are important areas for future research in the application of theories.

How can existing theories be combined in order to enhance the understanding of global

services outsourcing?

What theories from economics, strategy, and organisational behaviour can be employed?

How can theories be linked with operations management concepts in order to provide more

useful insights into global services outsourcing?

CONCLUSION

This paper discussed the importance of operations management to services outsourcing and

identified six important research areas including key research issues as summarised in

Table 2.

Fieldwork on these issues is currently being undertaken. German companies who have either

locally, nearshore or offshore outsourced are used as case studies in order to get insights on e.g.

location choices and the management of (international) outsourcing arrangements.

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Research area Key research issues

Service classification frameworks

Factors influencing services outsourcing and offshoring Impact of customer contact Categories of service technologies and their impact Service positioning matrix

Service operations management

Theories from economics, strategy, and organisational behav-iour linked with operations management concepts

Process design of service processes to be successfully off-shored

Criteria influencing the disaggregation of service processes Issues involved in separating front and back office processes

Global outsourcing

Characteristics influencing the decision to outsource locally, nearshore, or offshore

Relationship between ease of disaggregation and nearshore or offshore outsourcing

Influence of size of outsourcing company on the level of global outsourcing

Factors besides cost advantages accelerating the trends to-wards services outsourcing

Optimum mix between offshore, nearshore and onshore ser-vices

Importance of data protection in the decision to local, near-shore, or offshore outsource

Impact of culture on service performance Impact of ‘buyer country context’

Project management of (international)

outsourcing arrangements

Leadership in outsourcing Coordination of global virtual teams including offshore ser-vice providers

Influence of culture on the management of operations in dif-ferent countries

Data protection in (international) outsourcing arrangements Management of knowledge transfer between buyer and ven-dor

Performance measurement &

productivity

Difficulties in measuring performance Historical performance measures vs. externally based targets Measurement of service productivity Relationship between service productivity and service quality

Theory application

Combination of existing theories to enhance the understand-ing of global services outsourcing

Employment of theories from economics, strategy, and or-ganisational behaviour

Theories linked with operations management concepts

Table 2 Research areas including summarised key research issues

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