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1 ABSTRACT
This paper investigates the strategic considerations involved when outsourcing d
ecisions are made, by critically reviewing the key tenets of resource based view
(Penrose 1959, Wernerfeld; 1984, Barney, 1991) and the related dynamic capabili
ties view (Teece, 1997). It investigates IT functions as the unit of analysis,
to understand how decision makers considerations during the boundary decision pro
cess and explores the factors that contribute to the competitive capabilities of
a firm (Prahalad and Hammel, 1990; Barney, 1994).
IT outsourcing decisions have traditionally been based on transaction based tene
ts and primarily motivated by cost advantage. The recent adoption of more strate
gic paradigms is connected to more competency related thinking such as the adapt
ation of disruptive technology shifts or dynamic capabilities emerging markets (
Baden-Fuller et al. 2000). Firms sometimes need to buy-in capabilities to stay i
n the competitive contest, because the essential technologies required to fulfil
l customer needs are fluid and subject to rapid iterative changes and it has bec
ome unfeasible to possess highly developed resource and capabilities in all capa
cities.
Scholars have established a relationship between outsourcing and cost economies
from the selection of more ef?cient governance mechanisms (e.g. Cachon and Harke
r, 2002; Walker and Weber, 1984). However, there is insufficient focus and unde
rstanding of the role that internal and external capabilities play in strategic
IT outsourcing decisions. The paper suggests that strategic IT outsourcing creat
es value within ?rms IT supply chains beyond those achieved through cost economie
s and identified three primary key drivers to outsource IT, (1) unclear economic
value of their IT function (Brynjolfsson, 1993; Brynjolfsson and Hitt, 1998), (
2) a generic shift of corporate strategy towards core business (Prahalad and Ham
mel, 1994) and (3) to address disruptive technologies (Christensen and Raynor, 2
003; Christensen, 1997).
1 INTRODUCTION
1.1 INTRODUCTION
1.2 BACKGROUND
Porter (1996) defines strategy as the creation of a unique and valuable competit
ive position. Unless IT components hold core-competencies, offering long-term co
mpetitive advantage, they could be outsourced (Quinn and Hilmer, 1994). Yet, out
sourced IT competencies must be capable to support the strategic intent of the f
irm, for example, allow rapid market entry of new innovations and support change
s in business processes. Management has a central role in fitting human and tech
nological resources into the activities of an organization, with the objective o
f achieving the best possible outcome (Porter, 1996). According to the resource
based view (RBV) of strategy, organizations need to identify core internal capab
ilities (Barney, 1991) and complement those with external resources and capabili
ties (Aldrich, 1976).
The pervasive impact of business computing has made information technologies (IT
) an indispensable part of business operations and has become a key enabler of c
ompetitive success. However, in fast-evolving business and technology environmen
ts, it is not feasible for a given organization to develop all IT capabilities a
nd resources that are needed. Firms actively seek complimentary IT capabilities
using external partnerships in factor markets (Barney and Hesterly, 2008), to ob
tain IT services needed for achieving business objectives such as lower costs, b
etter IT performance, improved services and innovation. IT outsourcing has conti
nuously evolved since the landmark IT outsourcing decision by Eastman Kodak more
than two decades ago (Lacity and Hirscheim, 1994), moving from a sole economic
focus towards the inclusion of strategic management objectives (Barney and Hest
erly , 2008; Conner and Prahalad, 1992).
IT outsourcing decisions are essentially strategic, stating an attempt to improv
e a firms competitive position, either by improving a firms cost base or alternati
vely augmenting or differentiating their competitive capabilities (see Porter, 1
984). Various Authors (McIvor, 2008; Barney, 1991; Baden-Fuller et al. 2000, Pra
halad and Hammel, 1980) advocate a shift away from economic towards resource bas
ed deliberations, when making organizational boundary decisions.
Transaction costs economics strongly influenced some of the approaches proposed
in the in evaluating boundary decision (Williamson 1985, Vining and Globerman 19
99), where many of the quantitative models have placed considerable emphasis on
evaluating the costs associated with the decision, which involves attempting to
measure all the important costs associated with the two alternatives: make or bu
y (Gambino 1990, Ellis 1992).
Outsourcing frameworks in the IT operations area tend to focus on the costs impl
ications of the outsourcing decision. Early approaches on outsourcing in a manuf
acturing context, the make-or-buy decision, were principally concerned with appl
ying quantitative models to evaluate the decision (Higgins 1955).
Establishing ?rm boundaries requires understanding of more than how internally-
and externally-sourced production activities affect performance and competitive
advantage (Araujo et al., 2003). It also requires an understanding of the bridgi
ng function that IT outsourcing performs in linking ?rms IT activities with facto
r markets (McEvily and Zaheer, 1999). Accordingly, this study argues that a more
complete understanding of the organization of economic activity requires a grea
ter sensitivity to the interdependence of IT capabilities, business activities,
dynamic abilities and their relationship to competitive advantage that emerge fr
om boundary decisions.
1.3 FRAMEWORK AND THEORY
One of the key issues in strategic management has been to understand sustained c
ompetitive advantage (SCA) and unravel the way it can be systematically created
(Powell, 2001). The resource-based view of the firm (RBV) (Wernerfeld, 1974; Bar
ney 1984) has become one of the most widely accepted theoretical perspectives fo
r understanding the origins of competitive advantage and superior firm performan
ce (Powell, 2001; Priem and Butler, 2001; Rouse and Daellenbach, 2002; Bingham a
nd Eisenhardt, 2007). However, the usefulness of the RBV as a theoretical framew
ork has remained a subject of debate (Barney, 2001; Hoopes, Madsen, & Walker, 20
03; Priem & Butler, 2001a, 2001b; Williamson, 1999), due to the inherent difficu
lties in operationalizing the key tenets of the theory.
Despite being conceptually strong, the RBV has little value as an analytical too
l to solve practical business problems (Priem and Butler, 2001; Newbert, 2007).
The theory offers a compelling logic that may be readily understood and accepte
d, but there is little evidence that it has been applied in practice. Further, i
ts empirical support has been weak: for example, a review of 55 empirical tests
of the RBV suggests that little more than half (53%) of tests support the RBV an
d that the degree of support varies considerably with the independent variable u
sed (Newbert, 2007). Armstrong and Shimizu, (2007) and Newbert, (2007) establis
hed that empirical RBV research has generated only modest support, implying othe
r factors must be considered when explaining SCA. The key explanation for these
inconclusive results has been attributed to the inherent difficulties of operati
onalizing RBV variables and a clear logical treatment of its key propositions (N
othnagel, 2008).
Most empirical studies on the RBV have primarily adopted a variance approach wit
h a set of resources and capabilities as independent variables and enterprise pe
rformance as the dependent variable. The usage of aggregate dependent variables
(i.e. stock performance) is subject to being obscured by multiple causes (Conner
, 1991). Although, much research using the RBV has focused on an aggregated depe
ndent variable, namely, firm performance, this may not be the best way to test t
he RBV (Ray et al., 2004). Independent RBV variables, resources and capabilities
, do not occur in static isolation, rather in bundles which are difficult to ide
ntify, define and to measure (Penrose, 1959; Wernerfeld, 1984).
Such research applies a black-box approach towards the processes by which resource
s and capabilities are deployed. Exploring this black-box requires the set of em
pirical research methods to be extended towards the process-based approaches (e
.g., Groen, Wakkee, & De Weerd-Nederhof, 2008; Van de Ven, 2007; Van de Ven & P
olley, 1992). Only by combining various approaches will we be able to understand
which resources and capabilities are sources of SCA and how some firms are able
to perform better than others (Holcomb, Holmes Jr., & Connelly, 2009; Mahoney,
1995).
Most prior research over-emphases on the ownership of individual resources, and
only insufficiently acknowledges the importance of bundling resources and of the
human involvement in assembling, orchestrating and creating bundles of value. S
cholars have not sufficiently captured the essence of competitive advantage, ne
ither statically nor dynamically. The sheer possession of resources and capabili
ties is insufficient, and must be deployed in a way so that SCA can be attained
(Makadok, 2001b; Peteraf & Barney, 2003). The absence of deployment capabilities i
n form of activities causes the RBV to fall short as a full explanation for SCA.

Ray et al. (2004) proposed examining the effectiveness of business processes as
a way to test the RBV logic and suggests a process-oriented approach to overcome
these confounding problems. The locus of impact, that is, the business process
(i.e. activities), should be the primary level of analysis, to overcome these pr
oblems when studying business values within the RBV. (Subramaniam & Shaw, 2002).

The paper contributes to the discourse and criticism in RBV based research, by o
ffering alternative means to observe latent or tacit resources and capabilities.
Accordingly, it argues that the notion of activities as the commonplace occurren
ce of resource bundles makes resources and capabilities relatively easy to compre
hend, identify and measure; and may possibly offer new insights and perspectives
on the validity of the resource based theory. ?
The phenomenon of IT outsourcing has become an accepted business practice and is
now a key strategic decision that attracts large interest from practitioners an
d organizational scholars (Aubert, Rivard and Party, 2004; Barthelemy and Geyer,
2005). Although there is a rich body of knowledge on IT outsourcing, much of it
has viewed IT outsourcing as means to achieve economic benefits in isolation an
d outsourcing decisions are rarely taken from a thorough strategic perspective (
Willcocks, XXX).
Many firms adopt a short-term viewpoint that is primarily motivated by the searc
h for short-term benefits, where outsourcing is seen as a governance-choice that
concentrates on the need to delivery of IT services more cheaply than could be
done in-house. Decision makers are frequently not realizing their indented value
from their outsourcing initiatives, because they failed to balanced their predo
minantly economic decision paradigms with a more strategic perspective (Lacity a
nd Willcocks, 2001; Zhu, Hsu and Lillie, 2001).
Outsourcing providers and client organizations are under increasing pressure to
exhibit the value of their outsourcing efforts, by focusing on intangible factor
s (i.e. relationships, complementarity, knowledge transfer between firms), which
has been suggested as the best way to meet this challenge (Teece, 1997). Despit
e these efforts, there are still unaddressed weaknesses, given that intangible f
actors cannot be easily incorporated into supply contracts.
Not all work is suitable to outsource, depending on the nature and characteristi
cs of the business activities in question. If practitioners were to focus solely
on profit maximization, by applying purely economic imperatives, they may draw
attention away from strategic concerns, such as competitive advantage, organizat
ional knowledge and other competency deliberations.
IT outsourcing research has strongly focused on transaction cost economies, resu
lting from more ef?cient governance mechanisms to consider value that is created
. As technological uncertainty increases, internal economies of specialization d
eteriorate in relation to the external economies of specialized ?rms (Teece, 198
0). Accordingly, conventional IT management effort such as improving service qua
lity, controlling IT costs, rationalizing applications and IT infrastructure, an
d adopting best operational practices will no longer suf?ce for long-run competi
tive success. Nor do traditional scale economies in IT operations always have th
e differentiating power they may once have had. More than scale and scope advant
age are needed.
As such, strategic IT outsourcing needs to not only provide scale economies duri
ng periods of technological uncertainty, but may also act as a coping strategy h
elping to deal with risk. From this perspective, strategic IT outsourcing provid
es more predictable and orderly patterns of exchange within and between ?rms whe
n ?rms leverage the specialized capabilities that IT outsourcing relationships p
rovide. In this way, firms may accrue value beyond the cost economies available
when selecting governance mechanisms.
The study relies on both transaction (TCT) and resource-based logics (RBV, DCV,
KBV) to explain the emergence of strategic IT outsourcing arrangement in which ?
rms rely on factor markets to provide specialized capabilities that supplement e
xisting capabilities used in IT service provisioning. It aims to offer a more co
ncise explanation of strategic IT outsourcing that extends transaction-based log
ics and considers value created when ?rms more effectively leverage the speciali
zed capabilities that IT outsourcing relationships provide.
The study augments transaction-based arguments with resource-based perspectives
to sharpen the focus on conditions that might favor the use of external speciali
zed capabilities. An important peculiarity introduced in this study is how ?rms u
nderstand their internal capabilities and those of factor markets affect their d
ecision to strategically outsource.
The study seeks to explain how a dynamic capabilities view better informs the disc
ourse about the IT outsourcing choices that ?rms make. Success in a fast evolvin
g technology environment requires the creation of new systems, services and proc
esses; and may include the evolvement of new organizational forms and business m
odels, driven by an intensely entrepreneurial genre of management (Malter, 2011)
, constantly refining the evolutionary and entrepreneurial ?tness of the enterpri
se (Teece, 2009, p. 58). Factor markets that provide specialized capabilities eme
rge as disruptive industry conditions promote and intensify the partitioning and
fragmentation of production.
There is an increasing range of conceptual elaboration about dynamic capabilitie
s but empirical support is limited, which equally applies to the static RBV. Newbe
rt (2007) noted that the theoretical work did not start until Teece et al. (1997
) and development is still in progress. There may also be a lack of evidence, be
cause capabilities have been poorly specified, and hence researchers may not kno
w what to look for. Lastly, there may be little empirical research, because it i
s a concept which has thus far proven largely resistant to observation and measur
ement (Kraatz and Zajac 2001, p. 653). As such, the study answers Ambrosini and
Bowman, (2009) call for more fine-grained case studies of firms who have sustain
ed advantage in dynamic environments.
1.4 OUTSOURCING DECISION FRAMEWORKS IN LITERATURE
This this section reviews the theoretic concepts that have been applied to analy
se the outsourcing phenomenon, focusing on those that provide the rationale for
this research such as TCE and RBV commonly used in outsourcing research. Transac
tion Cost Economics
Outsourcing decision frameworks are most often approached with theoretical start
ing points taken from transaction cost economics (TCE) or the resource-based vie
w (RBV), either singularly or combined (Busi and McIvor, 2008). These two perspe
ctives have two contrasting points of departure for outsourcing (McIvor 2008). W
hile TCE considers economic rationales for companies to organise some transactio
ns in either in-house or external governance (Williamson, 1979, 1985), the RBV a
rgues that ?rms speci?c assets are heterogeneous, meaning they become competitive
by focusing on resources that are rare, highly valuable for customers, and impe
rfectly imitable (Barney, 1991; Grant, 1991; Peteraf, 1993). Using TCE in outsou
rcing frameworks highlights the make-or-buy question from a cost perspective.
The key deciding factors in these frameworks are capability positioning as well
the question of what is core and what is non-core (see Table 2). Supplier-relate
d risks are mainly considered from an opportunistic behavioural perspective (cf.
Holcomb and Hitt, 2007; McIvor, 2008, 2011). Based on this view, the outsourcin
g decision appears to be a rather linear process with an in or out outcome.
According to TCE, decision makers should choose a governance structure that resu
lt in the least amount of production and transaction costs. According to William
son (1991, 2008), three dimensions de?ne a transaction: (1)asset speci?city, whi
ch is the degree to which an asset can be redeployed to alternative uses without
a decreased productive value; (2) uncertainty of the transactionthat is, the fre
quency of disturbance; and (3) the frequency with which the transactions occur.
Williamson (2008) asserts that, of these three factors, asset speci?city holds t
he most explanatory value because it creates dependency for both parties.
When asset speci?city is high, hierarchy is preferable. If a transaction has low
asset speci?city, these transactions could be governed by a market or hybrid. H
ybrid agreement is preferable in cases of medium asset speci?city, but only when
the uncertainty is relatively low. If transaction uncertainty is high, the degr
ee of asset speci?city will decide which of the two polar modes is preferable (W
illiamson, 1991, 2008).
Holcomb and Hitt (2007) suggested that considering cost motives alone (TCE) limi
ts outsourcing analysis. Instead, they suggested a theoretical outsourcing model
in which TCA arguments are complemented by RBV in terms of gaining access to sp
ecialised capabilities, which should help ?rms ensure value beyond ef?cient cost
mechanisms. McIvor is one of the most diligent publishers in the outsourcing ar
ea and has developed his decision frameworks since the mid- 1990s. His latest pu
blications (2008, 2009, 2011) have moved away from a more linear model to create
a 2 2 matrix framework that combines two RBV dimensions (contribution to compet
itive advantage and relative capability position) with a supplier opportunism di
mension from TCA. Adding supplier opportunism to the framework is not new. For e
xample, Quinn and Hilmer (1994) referred to TCA and suggested the need to consid
er the strategic vulnerability that could arise when outsourcing (for example, h
aving a weak supplier, and loss of control of the supplier).
TCE is widely regarded as a classic contribution to the study of organisations, e
conomics, and law and, in particular, to sourcing decisions (Aubert and Weber, 20
01 p. 4). It uses transaction costs as the subject by which to analyse the cost be
tween internalizing and externalizing business activities.
Transactions are described as the exchange of goods or service between economica
l actors across organisation, inside and/or outside the organization (see Cheon
et al., 1995 based on Williamson, 1981). Thus, in TCE the cost (or financial ris
ks) for buying a service or good (using the market) is compared with the cost (o
r financial risks) of producing within the firms hierarchy. TCE acknowledges tha
t the market is imperfect. As a consequence, using the market will always lead t
o a certain amount of conflict. TCE explicate this by two behavioral assumptions
; (1) bounded rationality and (2) opportunism.
A significant literature of criticism towards transaction cost theory and its un
derlying assumptions has been established. The enthusiasm for the transaction co
st theory has almost been matched by the strength of its criticism (Heide and Jo
hn, 1992). Arguably, TCE reduces the firm to nothing more than a governance stru
cture in which the key strategic decision is to assess the relative efficacy of
alternative means of contracting amongst potential suppliers of goods and servic
es--both internal and external. TCE implies a reliance on sunk costs as the defi
ning criteria for asset specificity. If firms must react quickly and responsivel
y to changing technologies and competitive market pressures, the decision about
whether to undertake transactions in-house or externally cannot be tied to a vie
w of asset specificity that is based on the sunk costs of past transactions (Cox
, 1996). This implies relationship between transaction costs and asset specifici
ty leads to the conclusion that firms could become inflexible in changing struct
ures, operating procedures and loose agility in reacting to market forces and co
mpetitive conditions. Hui and Beath (2002) postulate that there is an over appli
cation on TCE in outsourcing research and transaction costs have not added to th
e understanding of why outsourcing decisions are made. TCE does not consider cap
abilities or resource constraints and only contributes a single dimension of pro
fit maximization towards the outsourcing decision.
2 THE RESOURCE BASED VIEW OF THE FIRM
In her book, Penrose (1959) argued that a firm should be understood, first, as a
n administrative framework that links and coordinates activities of numerous ind
ividuals and groups; and second, as a bundle of productive resources. According
to Penrose (1959), the growth of the firm is limited by the number of productive
opportunities that exist as a function of the bundles of productive resources c
ontrolled by the firm; where the administrative framework of activities is used
to control these resources. In a similar notion, Wernerfelt (1984) supposed that
the portfolio of product market positions that a firm takes is reflected in the
portfolio of resources it possesses or controls.
The basic premise is that firm heterogeneity does not simply occur, but is an es
sential condition for firms to be competitive (Porter, 1985; Wernerfeld, 1984).
It is firmly grounded in early economic models of monopolistic competition (Cham
berlin, 1933) and its focus on firm heterogeneity departs from neoclassical micr
oeconomics and Bain/Mason industrial organization which characterize the behavio
r of the representative firm (Hill and Deeds, 1996).
The RBV challenges the neoclassical microeconomic model of perfect competition.
In perfect competition there are no profits and all firms are identical. The RBV e
xplains why firms differ; that is, what aspects of the perfect competition model
most plausibly do not apply. Different firms possess different (heterogeneous)
resources and are (somehow) capable of maintaining these valuable differences (B
arney 1991; Foss 1997). As a consequence, according to the RBV, successful firms
are able to earn rents.
Mahoney, (1992b) holds that resource-based theory includes a set of related theo
ries such as the resource-based view (Rumelt, 1984; Wernerfelt, 1984), capabilit
ies and competence-based theory (Eisenhardt & Martin, 2000), commitment and firs
t mover advantage (Ghemawat, 1991; Lieberman & Montgomery, 1998), dynamic capabi
lities theory (Teece, 1997) and knowledge-based theory (Madhok, 1996; Spender, 1
996), and argues that the resource-based view effectively sustains the conversat
ion within strategic management and between strategic management and branches of
economics.
Although there have been incremental improvements by various scholars, there has
been little conclusive empirical validation of the key tenets of this theory, d
espite numerous attempts (Newbert, 2007). The key reason for these inconclusive
results has been the inherent difficulties of operationalizing the variables of
the RBV and a clear logical treatment of its tenets.
2.1 RBV AND COMPETITIVE ADVANTAGE
Sustained competitive advantage is understood as the level of superior performan
ce which firms achieve when formulating and executing value chain-enhancing stra
tegies that are not pursued by competitors at the same time (Barney. 1991). Port
er (1980) defines sustainable competitive advantage as a deliberate set of activ
ities to deliver a unique mix of value and positioning over time. Porter further
proposes three generic strategies of cost advantage, product differentiation an
d market focus to characterize the strategic position, where cost leadership cou
ld be argued as presenting a differentiation strategy by itself.
The competitive advantage of a firm is determined by its managerial and organiza
tional processes, which are shaped by the firm's asset positions and the evoluti
onary paths it has adopted or inherited, meaning the current technology and inte
llectual property, customer base, possible increasing returns and strategic alte
rnatives available for the firm. If and how the competitive advantage erodes ove
r time depends on the stability of market demand and the ease of internal replic
ability and outside imitability (Teece, Pisano and Shuen 1991).
2.2 GAPS IN RESOURCE BASED THEORY
Given that the RBV is one of the most widely accepted theories of strategic mana
gement (Powell, 1999; Priem and Butler, 2001), it is surprising that empirical s
upport for this theory is only marginally. Newbert (2007) in his review of empir
ical RBV literature finds that little more than half (53%) of tests support the
key tenets of the RBV. Furthermore, the degree of support varies with the indepe
ndent variables chosen. Most prior research attempts to single out a static reso
urce or capability and test a relationship with an aggregate construct, such as
firm performance or competitive advantage, as the dependent variable. Contrasts
between TCE and RBV
2.3 RESOURCE BASED CONSIDERATIONS
The use of the RBV in outsourcing frameworks raises the question of what should
be considered a core competency and kept in-house (for example, Quinn and Hilmer
, 1994). Other peripheral activities can be outsourced in order to lower costs a
nd access world-class innovation capabilities (for example, Quinn, 2000; Baloh e
t al., 2008). The RBV is especially helpful for understanding the link between o
utsourcing, resource allocation, and the resulting performance (McIvor, 2009). F
rom a resource-based perspective, the organisation is more than a portfolio of p
roducts; it is also a portfolio of different competencies (Wernerfelt, 1984; Ham
el and Heene, 1994; Long and Vickers-Koch, 1995; Javidan, 1998). The RBV stresse
s that ?rms are fundamentally heterogeneous in terms of their internal resources
(Peteraf, 1993). Only resources with the characteristics of heterogeneity and i
mmobility (that is, a low degree of transferability between ?rms) can offer a ba
sis for sustaining competitive advantage (Barney, 1991).
According to the RBV, an analysis of a ?rm's competitive advantage potential sho
uld begin by identifying its internal strengths (Barney, 1991). A ?rm should de?
ne its businesses based on the strength of its own resources, rather than trying
only to establish strong positions in attractive industries. Therefore, the RBV
on strategy represents the inside-out perspective because it focuses on the compe
titive advantage and returns a ?rm can generate, by having unique skills and res
ources (McIvor, 2005).
Accordingly, what the ?rm can accomplish in the market is more important than th
e markets in which it operates. This approach can be compared with the Porterian
market-based view, which starts an analysis by considering the attractiveness o
f the industry and competitiveness in the speci?c market (see, for example, Port
er, 1981, 1998).
According to Barney (1991),a competitive advantage can only be sustained by reso
urces that are (1) valuable for customers in contexts in which the ?rm operates,
(2) rare compared to those of competitors, (3) dif?cult to imitate, and (4) hav
e no equivalent substitutes available. In line with Barney's(1991)view on develo
ping unique resources, Prahalad and Hamel stated that a core competence must (1)
provide access to markets, (2) provide customer value, and (3) be dif? cult for
competitors to imitate.
From an outsourcing perspective, RBV is often connected with a core competence a
pproach and the question of which resources should be prioritised and which shou
ld be kept in-house.
2.4 COMBINED THEORY APPROACH
Each of the theories discussed above (insert cross reference) explain some aspec
ts of the outsourcing phenomena and each is capable to solve a different problem
. In this section the study will analyze the two theoretical approaches are mos
t widely applied with regards to the determination of boundary decisions and pro
pose an integrated model for determining organizational boundaries through outso
urcing in IT management, the TCE and RBV. There are many respects in which the
competence and transaction cost perspectives are congruent: both are bounded rat
ionality constructions, and both maintain that organization matters. They deal w
ith partly overlapping phenomena, often in complementary ways (Williams, 1999).
Transaction cost economics informs the generic decision to make or-buy while the
competency approach brings in particulars (Williams, 1999). On one hand TCE det
ermines the economic feasibility such as capital appropriation (sunk cost) and e
ffort involved when changing organizational boundaries, while the RBV considers
the strategic implications of such a decision.
2.5 COMPLEMENTARY TIME PERSPECTIVE
The recommendations of transaction cost economics and the core competencies appr
oach of the RBV have strong similarities. In many ways, the approaches complemen
t each other perfectly. The requirements for strategic IT resources being non-im
itable and non-substitutable are fulfilled in particular if they are firm-specifi
c (Dierickx et al., 1989). Hence, there is a direct link between asset specificit
y from TCE and the concept of rare (thus specific) resources from the RBV (Dibbe
rn, Gttler & Heinzl, 2001). On the one hand, TCE is a short-term (i.e focus on pr
esent context), cost focused approach, while RBV takes long-term strategic objec
tives into consideration. Thus the more short term operative cost aspects of TCE
and long-term strategic aspects may be brought together with the more long term
strategic perspectives (e.g. importance and contribution) of an activity.
2.6 ASSET SPECIFICITY AND RARITY
The RBV works on the assumption that the firm must possess unique resources that
enable it to achieve competitive advantage. Resource based logic claims to expl
ain why firms are different. In some cases, firms may have lower costs of logistic
s and transacting for production inputs in comparison to their competitors (e.g.
, Dell). Other firms may have unique abilities to learn and apply that learning
to the development of new technologies (e.g., IBM). Indeed, firms may possess en
during uniqueness for a wide variety of reasons. This uniqueness can be seen in
TCE terms of specificity (Williamson 1991) or scarcity in the external market or
, in RBV terms, rarity.
According to the logic of TCE, when activities based on specific (TCE) or rare (
RBV) capabilities are outsourced, the firms performance can be negatively affecte
d, since the risk of opportunist behavior increases, and the contracting parties
have incentives to appropriate rents by using post-contractual power or the thr
eat of terminating the contract (Klein et al., 1978).
From the RBVs point of view, outsourcing decisions depend on the extent to which
a given activity permits the exploitation of different knowledge, capabilities a
nd routines within the organization to appropriate rents. The greater the access
to a set of valuable routines and processes and specific skills, the greater th
e likelihood of influencing competitive advantage and the lower the cost of thei
r perpetual evolution will be (Ray et al., 2004). In other words, when both theo
ries look at specific or rare resources, the RBV is concerned with strategic mat
ters while TCE has a pure cost focus, together however, they provide a much more
complete assessment then when each are considered in isolation.
Figure 2:Outsourcing framework for IT activities
using RBV and TCE Adopted from Langlois (1992) and (Dibbern J., Guttler W. et al
. 2001).
Figure 2 graphs a curve ?C as the normalized per-unit cost premium the firm must
pay for the output of a particular activity if it integrates into that activity
, measured relative to the per-unit cost it would incur by obtaining the output
on contract from a distinct firm. Whenever this premium is negative, there is a
cost advantage to internal organization and to X as human asset specificity. 0A
implies a cost advantage of the market and AA1 lower in-house costs of the firm
and based on TCE price mechanism A would be the point of delimitation between m
arket and hierarchy, and A1 01 represents non-tradable core competencies which m
ust be integrated at all cost, indicating that TCE do not apply to outsourcing d
ecision making when core competencies are involved, regarding of cost economics
Thus, when an activity to be outsourced comprises of idiosyncratic (rare, hetero
genic distributed) resources, the development and governance of an external serv
ice provider may be very costly. In that case, both perspectives, RBV and TCE, d
etermine the organizational boundaries (i.e. outsourcing versus internalization)
, depending on the possession of specialized assets, equipment or routines, and
specific skills (Conner 1991), although they differ in their approaches.
Barney and Clarke (2007) hold that both theories emphasize the importance of tra
nsaction specific investments as independent variables that explain different in
dependent variables. From the resource based view, transaction specific or firmsp
ecific investments can be thought of as resources that have the most likely pote
ntial to generate economic rents (Barney, 2001a). From a TCE perspective, transa
ction specific investments create opportunistic problems that must be created th
rough governance choices. Teece (1980) holds that resources based theories and t
ransaction cost theories constitute a theory of corporate diversification.
As firms increase idiosyncrasies in form of knowledge and human resource specifi
city, they create organizing principles in form of shared language, routines and k
now-how that enhance internal coordination (Kogut and Zander 1992). Asset speci
ficity and higher organizing principles present with complementary aspects in that
hierarchies have the advantage of authoritarian control (fiat) and the higher p
ropensity to curb opportunism and moral hazard.
In summary, asset specificity is closely related to strategic importance and has
complementary properties when viewed from different theoretical perspectives. T
he same attributes that causes a product, service or activity to be costly to cop
y, difficult to imitate, un-substitutable or hold causal ambiguity also causes market f
rictions in form of uncertainty, bounded rationality and be prone to opportunistic be
havior. Thus asset specificity, if it includes intangible specificities such as h
uman capital, knowledge or culture, possess properties that are similar to the r
esources and capabilies that contribute to competitive advantage and it can be a
rgued that industrial economics and strategic management pursue similar phenomen
a, although from different theoretical platforms.
3 CHAPTER 5: RESEARCH DESIGN
This section describes the qualitative methodology design applied for conducting
semi-structured interviews to investigate the motivational paradigms and strate
gic outcomes associated with outsourcing decisions. Methodology
The research design included a single, exploratory, in-depth pilot case study fo
llowed by a more explanatory, cross case analysis of ten informants who have no
association to each other. Limitations and issues identified in the exploratory
pilot case study provided valuable insights into the structure, topology and flo
w of the case study protocol. Multiple case studies were employed in this resea
rch with the primary goal being to investigate the role of competitive advantage
in outsourcing decisions and confirming factors and conditions identified in a
preceding quantitative survey and from the literature review.
Figure 11: Case study work flow
The choice for multiple cases is appropriate given Yins (1993) argument that mult
iple-case studies should follow a replication, not sampling logic. This means th
at two or more cases should be included within the same study precisely because
the investigator predicts that similar results (replication) will be found. If s
uch replication are indeed found in cases, more confidence can be given to overa
ll results. The development of consistent findings, over multiple cases, can the
n be considered a robust finding.
Multi-case studies are applied to mitigate the risks of relying on a single case
and allow literal or theoretical replication and cross-case comparison. Yin (20
03) points out that in the perspective of statistical generalization each case i
s a single sampling point, and therefore a single case is insufficient for stati
stical generalization (Yin 2003). Yin (1994, p. 50) suggests that more replicatio
ns give greater certainty, but that in some situations, for example where rival
theories that are very different are being tested, fewer replications may be adv
isable. Eisenhardt (1989) suggests that between four and ten cases are desirable
for theory building using case study research.
A semi-structured interview method, as described by Gall, Gall and Borg (2003) h
as been selected for this study. According to Gall et. al. (2003), the semi-stru
ctured interview method reduces researcher bias within a study, particularly whe
n the interviewing process involves multiple participants. It is structured in t
erms of the sequence and wording of the questions, where participants are always
asked identical questions, although the questions are worded in a way so that r
esponses are open-ended. This approach is likely the most popular form of interv
iewing used in research studies because of the nature of the open ended question
s, allowing participants to fully express their viewpoint and experiences.
Although the data provided by participants are rich and thick, it may be a more
cumbersome process to sift through narrative responses in order to fully and acc
urately reflect an overall perspective of all interview responses through the co
ding process. According to Gall et.al. (2003), the method reduces researcher bia
s within a study, particularly when the interviewing process involves many parti
cipants. Hence, it can be quite challenging for researchers to extract similar c
odes or themes from the interview transcripts as they would from less open-ended
responses.
Research on Resource based theory have been mostly based on case studies (Newber
t, 2008). Given the scarcity of extant literature associated with the focal rese
arch topic, an empirical study may bene?t from the employment of the case study
methodology (Hitt et al., 1998; Brownell and Eisenhardt, 1989).
The data was collected via face to face interviews with six experts in the field
of IT outsourcing mostly in Australia, seeking insights for governance mode sel
ection for IT activities, when boundary decisions are made.
Following, the questionnaire was assembled into a pilot interview protocol and i
teratively tested with two subject matter experts to provide the researcher with
some experience with the interview flows and informant behavior during the inte
rview process. The protocol was subsequently modified based on this experience.

The finalised interview protocol was employed to govern the flow, ensuring that
all key areas (or themes) are covered (Robson, 2002) and was used as a checklist
during and at the end of the interview to ensure that all topics or themes have
been addressed adequately.
The fieldwork was in form of interviewing, using semi-structured questions with
participating informants. Purposive sampling was used in this research as a samp
ling strategy selected based on the knowledge of a population and the purpose of
the study. Informants were selected on the basis of the researchers individual j
udgment where on the ground that they could provide the necessary information ne
eded for the research. Selected Informants from the writers professional network
, working as a practitioner and consultant in the field of IT management and str
ategy.
Ten experts were selected as informants for interviews, based on their extensive
experience in the field under study and potential ability to provide much insig
htful information. All Informants were involved with IT outsourcing practices of
their company as consultants, managers or senior executives, each holding a min
imum of two years' experience in that position and overall experience as managem
ent practitioners of more than six years. They had significant experience within
large companies in the field of outsourcing, and were able to provide insights
about outsourcing practices and decision making of mostly Australian firms. In a
ddition, it was expected that they had larger variety of insights and experience
s than multiple individuals working for a single firm.
For confidentiality reasons, the names of the Informants withheld. Equally, name
s of firms used in the case were given anonymous identifiers (i.e., BigMed, Larg
eTV, etc.). As well as interviewing and observing, the fieldwork included analys
is of documentary sources for each firm. Documents were collected from the inter
net, individual record, company reports, company newsletter and other printed t
hat were made available for the purpose of the research.
Purposive sampling was used in this research as a sampling method. The names of
respondents were initially determined by the management of each organization bas
ed on their roles, job responsibilities, position and involvement in the subject
studied. However, respondents were also selected on the basis of the researchers
individual judgment where permitted on the ground that they could provide the n
ecessary information needed for the research. Most of the fieldwork involved int
erviewing, using semi-structured questions, with respondents from the participat
ing organizations.
As well as interviewing and observing, the fieldwork included analysis of docume
ntary sources in each organization. Documents were collected from the organizati
ons intra net, individual record, company reports, company newsletter and other p
rinted that were made available for the purpose of the research.
The choice of semi-structured rather than structured interview was employed beca
use it offers sufficient flexibility to approach different respondents different
ly while still covering the same areas of data collection. The interviews were r
ecorded to secure an accurate account of the conversations and avoid loosing dat
a since not everything can be written down during interview. And every USB memor
y stick was numbered and labeled with name of Informant in order to avoid compli
cation.
4 CROSS CASE ANALYSIS
The analysis of transcripts involved a thorough review of the contents in order
to identify common themes and was coded in NINIVO and summarized in form of six
interview summaries (below). To detect patterns or logics of interview data, the
interview data were aligned to the categories based on the interview topics in
the case protocol. The interpretation of the transcripts, was iterative, and inc
luded two stages. The first stage related to obtain an understanding of each tra
nscript. The second stage was to identify emerging themes from amongst a number
of narratives, involving a search for emerging themes, first within an intervie
w and then across a series of interviews. This process began with a careful rea
ding of the transcripts, where noteworthy phrases or sentences were captured in
NIVIVO. All data collected during the field work in this study was organized in
NVIVO, where all relevant documents were added to the data store. Passages that
seemed conceptually linked were then combined and descriptions of the theme or
pattern were developed, also known as open coding (Strauss and Corbin, 1990). As
more interviews are conducted categories are identified with supporting concepts
, supported by data within the transcripts. Subsequently, the transcripts were
re-read to identify further evidence that supports or challenges the emerging t
hemes. This second pass triggered the identification of new themes, or a reclas
sification of existing themes
4.1 OUTSOURCING AS AN ECONOMIC TRANSACTION AND VALUE FUNCTION
Outsourcing is a function of the unclear value delivered by IT (Brynjolfsson and
Hitt, 1998). BigBrand, BigTelco and LargeTV had no firm basis for evaluating th
e make or buy decision other than cost, where senior executives viewed IT as an
overhead an essential cost but one to be minimized nevertheless. Organizations o
ften base their decision to outsource on the particular set of circumstances they
face (Watjatrakul, 2005 p.390), such as adverse economic conditions as it was th
e case at LargeTV, BigTelco, BigMed and to some extend at BigMedia. Lonsdale an
d Cox (1997) have found that many firms make outsourcing decisions primarily on
the basis of reducing headcount and costs. The reason for this trend appears to
be the cost disadvantages associated with a make'' strategy, owing to rapid chang
es in the market and the lack of flexibility that characterises in-house product
ion (Hayes and Abernathy, 1980).
In this broader context, outsourcing is the result of a complex change in the co
st boundaries facing firms when they choose between inside and outside productio
n. Whether an activity can be performed well internally depends on an organizati
on's internal resource endowment and these resources are measured against busine
ss related valuation metrics, which are often finance related. In the cases of
BigBrand, BigTelco, LargeTV and BigMed, it was found that if an activity is perc
eived as only providing a negligible (if any) competitive advantage to an organi
zation, it is more likely to be outsourced outright and managed through a third-
party relationship capability.
4.2 IT OUTSOURCING USING RESOURCE BASED REASONING
The make-or-buy decision within LargeTV, BigBrand and BigTelco were pursued as a
n accounting or financial exercise, at least at the inception of these initiativ
es. Although financial analysis and to choose the lowest cost exchange remained
important, the imperatives and potential risks of outsourcing core capabilities
became apparent in the later phases of the decision process.The prominence of IT
outsourcing is largely a consequence of a shift in business strategy. Many comp
anies have abandoned their diversification strategies in the new millennium once
pursued to mediate risk to return back to a corporate focus on core competencie
s (Gottfredson, Puryear and Phillips, 2005). Senior executives at BigBrand, Larg
eTV, BigMed and BigTelco have come to believe that the most important sustainabl
e competitive advantage is strategic focus by concentrating on what an organizat
ion does better than anyone else while outsourcing the rest (Dibbern, Goles, Hir
schheim and Jayatilaka, 2004).
As a result of this focus strategy (Kroes and Ghosh, 2010), IT came under scruti
ny. Decision makers at LargeTV, BigMed and BigBrand viewed the entire centralize
d IT function as a non-core activity, and believed that IT vendors possess econo
mies of scale and technical expertise to provide IT services more efficiently th
an internal IT departments. They did however acknowledge the need to maintain u
nique IT capabilities associated for the direct enablement and support of their
firms ability to compete in their respective markets (Bharadwaj, 2000).
The study identified capabilities that were clearly considered as unique competi
tive advantages that were deemed essential for the firms sustainable competitive
position in their competitive environment. BigMeds L&W (logistics and warehousin
g) and ICE (isolated computing environments), LargeTVs broadcasting function, Big
Telcos BigMedia and BigBrands dynamic management capabilities and StartUps end-user
support functions were deemed as non-tradeable (Dibbern et al, 2004), even in a
dverse economic conditions. In the cases of BigTV and BigMed, where extreme cost
cutting and head count reduction were the primary motivation to outsource as pa
rt of an enterprise-wide survival strategy, these core related IT functions were
retained. These capabilities were considered fundamental to a company's long- t
erm strategic position as they underpinned their ability to compete and therefor
e must be retained and developed (Collis, 1991).
4.3 FOCUS ON DYNAMIC CAPABILITIES
A key findings of the paper is the high importance of dynamic capabilities and t
heir contribution towards competitive advantage (Wade and Hulland, 2004). Dynami
c capabilities are typically applied by an organization to secure advantages ove
r its competitors (Teece et al., 1997) and can be placed into two categories: in
ternal and external (Day, 1994; Hulland et al., 2007; Goh et al.,2007). In all c
ases studies, the retained competencies of the core IT function were associated
with dynamic capabilities.
Internal dynamic (Inside-out) capabilities tend to be internally focused (e.g. t
echnology development and cost controls) and represent the ability to execute wi
thin enterprises, including the capabilities for managing internal relationships
(Hulland, Wade et al. 2007). According to Valorinta (2011) the alignment betwee
n information technology and business functions is a vital enabler for effective
use of IT and organizational performance in general. Organizations that have al
igned their IT capabilities with strategic plans and organizational processes ho
ld enhanced abilities to leverage new information technologies, optimize IT spen
ding, and achieve competitive advantage (Reference, XXX).
BigMed, BigTelco and BigBrand retained their internal dynamic capability in mana
ging internal relationships, IT planning and governance to enhance the capabilit
ies of intra-?rm operations. They were applied to enhance of internal controls c
apabilities, strengthening cooperation performance between the departments. Thes
e dynamic capabilities were expected to improve the business alignment of their
system, management of internal relationships, IS Planning, management skill, and
IT experience (Kraaijenbrink, Spender and Groen, 2009).
In the case of LargeTV, the significance of internal dynamic capabilities was ig
nored and the firm experienced severe difficulties in coordinating, controlling
the IT functions and their alignment with business requirements, hence subsequen
tly had to adjust their outsourcing arrangement at a later stage. Previous stud
ies propose factors such as strategic ?tness that argue the alignment between IT
and business strategy can enhance ?rm performance (Li and Ye, 1999; Palmer and
Markus, 2000; Weill, 1992).
In contrast, external dynamic (outside-in) capabilities are externally oriented
and focus on the ability to adapt to an external environment. This includes the
ability to work with external partners (such as upstream and downstream supplier
s and manufacturers) for cooperation and information sharing and the capacity of
addressing market and customer needs promptly. They enable ?rms to manage custo
mer relationships and to work with suppliers and partners by supporting collabor
ative product development (Bharadwaj, 2000; Feeny and Willcocks, 1998) and are m
ainly concerned with partnership management, market response and organizational
agility (Hulland, Wade et al. 2007).
The retained external dynamic capabilities at BigMedia held a pivotal strategic
importance for the firms sustained viability and focused on the ability to adapt
to a volatile external environment. In particular the ability to work with exter
nal partners for market cooperation, often including revenue sharing models and
the capacity co-create customer needs became the foremost purpose of the IT func
tion. These capabilities empowered media firms to establish eco-systems essenti
al for collaborative product development (Bharadwaj, 2000; Feeny and Willcocks,
1998).
BigTelcos key outsourcing motivation was a reaction to major changes in their ext
ernal competitive landscape and the resulting retained IT organization had the c
entral purpose of addressing the rapid changes of its external environment (Wade
and Hulland ,2004; Hulland et al. 2007). Similarly, one of BigBrands motivation
to outsource was to obtain the capabilities to engage consumer and to establish
new marketing channels using digital business methods (Bharadwaj et al., 2013).
The findings correlate with most cited strategic business benefits of outsourcin
g in the extant literature include ?exibility (Wade and Hulland, 2004; Lee and C
hoi, 2003), agility (Sambamurthy et al., 2003), quick response (Palmer and Marku
s, 2000) and strategic ?tness (Chan, Huff et al., 2003).
4.4 DECISION MAKING AND UNIT OF ANALYSIS
The study found that outsourcing is a choice that lies in the corporate policy a
rea, not just business or technology strategy, as it modifies the firms boundarie
s as a legal entity and generally involves top management decision makers. In th
e cases of BigTelco, BigMed, LargeTV and BigBrand, the outsourcing decisions inv
olved several divisions and the decision makers where business executives such a
s CFOs or CEOs (not CIOs) who pursued company-wide resource allocation policies,
asset management practices and marketing strategies.
The outsourcing initiatives were primarily initiated by business executives from
outside the IT department, including CFOs, CEOs and board members, often withou
t the involvement of the CIO. The CIOs of BigBrand, BigMed and Large TV who were
reluctant to outsource, had either been fired or had their jobs marginalized wh
en their IT functions have failed to demonstrate value for money (Lacity & Hirsc
hheim, 1993).
LargeTV did not use a structured process based on strategy and ended up with a p
osition where short-term decisions were made without consideration to the long-t
erm strategic impact to the enterprise. In fact, many companies have no basis fo
r making make or buy decisions: decisions are rarely taken with a strategic app
roach but rather with a short-term perspective and by default (McIvor, 2000).
4.5 LEGACY SYSTEMS
Traditionally BigMed, BigBrand, BigTelco and LargeTV leveraged proprietary techn
ologies that their competitors lacked to gain a competitive edge. Legacy applic
ations were often highly customized and featured high complexity, with only a li
mited available resource pool at premium cost. Despite the general agreement am
ong researchers that legacy related knowledge and skills may be a source of comp
etitive advantage, some argue that the advantage is not sustainable because of h
igh resource mobility (Mata et al., 1995), while others argue that sustainabilit
y may stem from resource complexity, causal ambiguity, context dependence, and r
eliance on time consuming educational activities (Dehning & Stratopoulos, 2003),
drawing on configurational theory to establish the importance of congruence amo
ng IT capabilities.
Over the past decade, firms began to replace or supplement proprietary business
software with packaged, web-based, and outsourced technologies. This shift essen
tially represents a disintegration of capabilities to take advantage of market b
ased innovation and favourable total cost of ownership (TCO), as development eff
orts can be shared with a wider market. This has resulted in a reduction in the
potential advantage that organizations can expect to gain from internally develo
ped technology (Sena and Sena, 2012). At the same time, these systems may still
contain valuable data and business rules that firms need to leverage, rather tha
n rebuilding from scratch.
These rigidities in form of aging information systems may even represent serious
competitive disadvantage, because theyre unable to evolve technological, regulat
ory or adapt business needs. In the cases of BigBrand, BigTelco and LargeTV, the
uniqueness of software and their associated capabilities signified negative com
petitive value, especially if they did not contribute to revenue generation or e
nhance or augment enterprise business capabilities or efficiencies when compared
with industry competitors. Users may be squandering valuable time and introduci
ng inconsistencies by entering data into multiple systems that dont communicate w
ith each other or have limited use for analytical purposes.
In todays complex and competitive business environment, legacy systems pose a ser
ious challenge to the competitive advantage of companies. Legacy systems make it
hard for companies to reduce the cost of ownership by decreasing technical comp
lexity and standardizing interfacing requirements with other applications. Firm
s find it particularly difficult to find developers who can provide break-fix s
upport and remain agile by adding new business features and functionality to rem
ain competitive at competitive cost. The commitment to resources resulting from
speci?c investment should be clearly differentiated from commitments evolving wh
en practicing capabilities. This differentiation accordingly implies a separatio
n of resource-based inertia and capability-based rigidity (Gilbert, 2005).
5 DISCUSSION
Although companies outsource IT for many reasons (Willcocks and Fitzgerald, 1994
), the study identified three primary key drivers to outsource IT, (1) unclear e
conomic value of their IT function (Brynjolfsson, 1993; Brynjolfsson and Hitt, 1
998), (2) a generic shift of corporate strategy towards core business (Prahalad
and Hammel, 1994) and (3) to address the risks and threads associated with disru
ptive technologies (Christensen and Raynor, 2003; Christensen, 1997).
Outsourcing decisions are driven by multiple variables, are rather the product o
f interactions of those factors and are not made according to the independent be
haviour of these variables. Several factors are at work simultaneously that are
likely to increase outsourcing:
* Economic adverse conditions,
* Rapid technological change and the search for flexibility to adapt to disrupti
ve technologies,
* Greater emphasis on core corporate competencies, and
* Globalisation.
Firms can outsource a significant portion of the IT environment and still retain
aspects such as critical R&D support (BidMed) or vertical capabilities (LargeT
V) that are viewed as strategic. A number of firms in this study have outsourced
the majority of their IT operations, yet retained components deemed as being st
rategically important and serving as a sustainable differentiator. If outsourcin
g parts of the IT organisation is cheaper than undertaking it internally, it is
a clear case for outsourcing provided it does not compromise the firms core compe
tencies. This enables organizations to not only make efficiency gains but also a
llows them to focus more clearly on those activities that it can better perform
in-house (Hendry, 1995).
This capabilities perspective suggests that organizations retain those activitie
s for which they have superior capabilities, ensuring ef?cient production (Espin
o-Rodrguez and Padrn-Robaina, 2006). Alternately, ?rms outsource those activities
for which they lack capabilities.
Senior executives often consider the IT function a commodity service as best man
aged by a large supplier and disintegrated activities that are not perceived to
provide primary core value to the organization. If executives do not see a strat
egic role for IT, then IT outsourcing is often viewed as a means of conserving m
anagerial effort thus allowing them to focus on areas with greater strategic pot
ential (Sena and Sena, 2011, 2012). In other words, rather than spend time and r
esources building an internal computing infrastructure, many senior executives b
elieve that effort should be concentrated on the effective use of technology and
whatever other targeted functionality IT can generate to improve managements res
ponsiveness to market changes (Teng, Cheon et al., 1995).
There is overwhelming consensus in the literature about the existence of technolo
gical reasons for IT outsourcing (Loh and Venkatraman, 1992; Arnett and Jones, 1
994; Grover, Cheon et al., 1994; Lacity, Hirschheim et al., 1994; McFarlan and
Nolan, 1995; Palvia, 1995; Teng, Cheon et al., 1995; Slaughter and Ang, 1996).
Due to rapid technological advances, a firms IT department may lack or at least
lag behind in IT capabilities such as the analytics, social networking or mobilit
y, as found in the BigBrand, StartUp and BigMedia cases. IT outsourcing, in this
cases was used to create or augment an IT capabilities without substantial capi
tal investments.
Technology that realized competitive advantages at the outset, may degrade into
strategic and economic disadvantages over time. This is clearly shown in several
of the case studies (BigTelco, BigBrand, BigMedia and LargeTV), where outmoded
legacy systems posed a serious challenge to the competitive advantage of compani
es. Despite endowing significant competitive advantages in the past, legacy syst
ems make it hard for companies to reduce the cost of ownership by simplifying te
chnical complexity and standardizing interfacing requirements with other applica
tions. In addition, firms find it particularly difficult to find developers who
can provide break-fix support for aging technology and remain agile by adding ne
w business features and functionality to remain competitive at sustainable costs
.
A positive effect of valuable IT resource and capabilities may depend on dynamic
capabilities, such as resource complementarity and social competencies. Resourc
e complementary argues that the integration of different complementary resources
, outside the IT department, can generate synergies that can lead to improved en
terprise performance (Wade and Hulland, 2004; Melville et al., 2004; Karimi et a
l., 2007; Zhu, 2004). Dynamic capabilities are becoming stewards of business agi
lity and change, and promote IT organizations to serve as the primary engine for
implementing these changes (Ptak, et.al, 2010). For CEOs this means generating
strategies to use their IT organizations as key enablers of business differentia
tion.
Prahalad and Hamel (1990) argue that the real sources of competitive advantage a
re to be found in management's ability to consolidate corporate-wide technologie
s and production skills into competencies that empower businesses units to adapt
rapidly to changing business opportunities. In most of the case studies, the re
tained capabilities of centralized IT departments were almost exclusively concer
ned with dynamic capabilities. This requires social capabilities in form of inte
rpersonal and management skills of IT personnel to interact with and manage othe
rs; and the knowledge of IT organizations about the overall business environment
and specific organizational context.
Technological innovations in the macro environment can be a driver of a firm's d
ecision to outsource an activity that was previously performed in-house. In cert
ain industries outsourcing may often by the only viable business model, either f
or all firms or for a subgroup of firms. Case in point is the practice of the me
dia and entertainment industry. The transition from linear value chain thinking
towards collaborative value network thinking renders ?rm boundaries increasingly
permeable, fuzzy and short lived (Dyer & Singh, 1998; Nenonen & Storbacka, 2010
). Market actors can be viewed as open systems, effectively depending on the reso
urces of others to survive (Vargo, Maglio and Akaka, 2008, p. 149). Whether an ac
tivity adds to a firms's competitive advantage, must be measured in the marketpl
ace (Sena and Sena, 2011).
A particularly interesting development is the decreased importance of ownership
or possession of resources (Storbacka, Frow and Nenonen, 2012). Speci?cally, acc
ess to resources is becoming more important than ownership. A typical illustrati
on is the increased interest in business models that transform products to servic
es. Examples of these are, for instance, software as service (SaaS) a software busi
ness model in which the software is hosted centrally and accessed by client comp
anies using a web browser, and charged by utilization (i.e. transactions). When t
he locus of technological innovation shifts from users to vendors, as it has wit
h software, it becomes ever harder for companies to distinguish themselves (Carr
2004, p. 48).
This model is also applied in consumer markets, with a proliferation of business
models where consumers pay a monthly fee to acquire access to various resources
, such as music (e.g. Spotify). Prahalad and Ramaswamy (2000) describe the evolu
tion of customers from passive audiences to active players. Firms do not exist in or
der to distribute value along a value chain, but rather to support customers in
their value-creating processes (Gronroos, 2000; Storbacka and Lehtinen, 2001). T
hus, customers are not to be viewed as extensions of ?rms production processes. R
ather, ?rms need to be viewed as extensions of customers value-creating processes
(Korkman, Storbacka, & Harald, 2010).
New information technologies and methodologies are adopted, while old ones are d
ismantled or upgraded. The emergence and subsequent ubiquity of digital technolo
gies such as smart phones, mobile-commerce, social media, phone apps, tablet com
puting, business analytics, big data, location based services and cloud-based co
mputing (Jaska, Johnson, Nalla, Reddy, & Tadisina, 2010) requires firms to focus
on the development of external capabilities. Corporate IT departments at BigMed
ia and BigBrand were struggling with choosing which of these technologies to ado
pt and how to adopt them both effectively and efficiently (Giles, 2011; Hinchcli
ffe, 2011).
In the digital economy the CEO must realize that IT is the foundation for doing
business. Companies are discovering that how they manage IT is crucial to their
competitiveness. IT determines whether the companys dealings with customers and
suppliers are efficient, scalable and timing.
Product and process lifecycles are steadily growing shorter, thereby forcing fir
ms to develop almost continuous streams of innovation (Fine, 1998; Loudon, 2001;
Piachaud, 2000). But at the same time, it is becoming increasingly difficult f
or any one company to support an IT development agenda single-handedly. Many fi
rms have accordingly turned to their supply networks as a source of current prac
tices and innovation. Perrons and Platts (2005) provide evidence that it is of
advantage for companies to rely to some degree on their supply network for new i
deas.
TCE and RBV help explain why make or buy takes place, but also help decision mak
ers understand what to outsource and what not to the so-called what question (Wasner
, 1999). External environment, competitive advantage, capability and the total c
ost picture are some of the factors that the two theories bring forward as impor
tant considerations before making the decision (Jennings, 2002; McIvor, 2000). T
hese factors effect on their contribution to the decisions are crucial considera
tions.
6 CHAPTER 6: CONCLUSION
The research conducted semi-structured interviews with practitioners, purposely
selected for their advanced expertise in outsourcing, either as decision makers
or facilitators in IT service procurement decisions. Although, ten interviews we
re conducted, only six were deemed suitable, where four interviews were discarde
d for reasons that (1) the informants were either not in possession of pertinent
information (depth or breath) and (2) the scope of the case was not sufficientl
y topical.
Qualitative analysis observed several themes that are directly influence IT sour
cing decisions:
Primary focus on transactional cost savings
Secondary focus on core capabilities
Systems of competitive disadvantage
Dynamic Capabilities
Disruptive Technologies
6.1 FOCUS ON TRANSACTIONAL COST SAVINGS
The most important consideration when firms think about outsourcing are the fina
ncial benefits that the firms could attain. Outsourcing "firms benefit from cost
savings, strategic "fitness, improved management effectiveness, technology upgr
ade, and the service quality of IS. Senior executives consider IT as a commodity
service that is best managed by a large supplier and to disintegrate activities
that are not perceived to provide primary core value, in form of differentiatio
n, to the organization. If executives do not see a strategic role for IT, then I
T outsourcing is often viewed as a means of conserving managerial effort thus al
lowing them to focus on areas with greater strategic potential (Sena and Sena, 2
011, 2012). In other words, rather than spend time and resources building an int
ernal computing capability, many senior executives believe that effort should be
concentrated on the effective use of technology and whatever other targeted fun
ctionality IT can generate to improve managements responsiveness to market change
s (Teng, Cheon et al., 1995).
6.2 SYSTEMS OF COMPETITIVE DISADVANTAGE (LEGACY SYSTEMS)
Uncompetitive IT systems are the result of overreliance on previously achieved c
ompetitive advantages for too long. When a firm's management diminishes its impr
ovement efforts, technological innovations and advancements obsolete its competi
tive advantage. Technology that helped to realize competitive advantages at the
outset may degrade into strategic and economic disadvantages, yet even core rigid
ities (Leonard-Barton, 1992) over time. Despite upholding significant competitive
advantage in the past, legacy systems make it hard for companies to reduce the
cost of ownership by simplifying technical complexity and standardizing interfac
ing requirements of other, more modern, applications and systems. This is clea
rly shown in the majority of the case studies (BigTelco, BigBrand, BigMedia and
LargeTV), where outmoded (legacy) systems posed a serious challenge to the compe
titive advantage of companies. In addition, firms find it particularly difficult
to find resources who can provide maintain (i.e. break-fix) and support aging t
echnology and remain agile by adding new business features and functionality to
remain competitive at sustainable costs.
6.3 DYNAMIC CAPABILITIES
In most of the case studies, the retained capabilities of centralized IT departm
ents were almost exclusively concerned with dynamic capabilities. Most cases dis
played an emphasis on collaborative capabilities of the retained IT functions, o
ften in form of interpersonal and managerial skills and the knowledge of IT orga
nizations about the overall business environment and specific organizational con
text. Prahalad and Hamel (1990) argue that the real sources of competitive advan
tage are to be found in management's ability to consolidate corporate-wide techn
ologies and production skills into competencies that empower businesses units to
adapt rapidly to changing business opportunities.
The study concludes that positive effect on the competitiveness of IT resources
and capabilities may depend on the availability of dynamic capabilities that fac
ilitate resource complementarity and social competencies. Resource complementary
argues that the integration or combination of technology with other resources,
often outside the IT department, generate synergies that can lead to improved en
terprise performance (Wade and Hulland, 2004; Melville et al., 2004; Karimi et a
l., 2007; Zhu, 2004). Dynamic capabilities are agents of business agility and ch
ange, and promote IT organizations to serve as the primary engine for implementi
ng these changes (Ptak, et.al, 2010). For CEOs this means generating strategies
to use their IT organizations as key enablers of business differentiation.
6.4 DISRUPTIVE TECHNOLOGIES
New information technologies and methodologies are perpetually adopted, while ol
d ones are dismantled or upgraded. Due to rapid technological advances, IT depar
tment may lack or at least lag behind in IT capabilities such as analytics, social
networking or mobility, as found in the BigBrand, StartUp and BigMedia cases. T
he emergence and subsequent ubiquity of digital technologies such as smart phone
s, mobile-commerce, social media, phone apps, tablet computing, business analyti
cs, big data, location based services and cloud-based computing requires firms t
o focus on the access to external capabilities (Jaska, Johnson, Nalla, Reddy, &
Tadisina, 2010).
There is overwhelming consensus in the literature about the existence of technolo
gical reasons for IT outsourcing (Loh and Venkatraman, 1992; Arnett and Jones, 19
94; Grover, Cheon et al., 1994; Lacity, Hirschheim et al., 1994; McFarlan and N
olan, 1995; Palvia, 1995; Teng, Cheon et al., 1995; Slaughter and Ang, 1996). C
orporate IT departments at BigMedia and BigBrand were struggling with choosing w
hich of these technologies to adopt and how to adopt them both effectively and e
fficiently (Giles, 2011; Hinchcliffe, 2011). IT outsourcing, in these cases may
be used to create or augment an IT capabilities without substantial capital and
intellectual investments.
6.5 ECOSYSTEMS
Whether an activity adds to a firms competitive advantage, must be measured in th
e marketplace (Sena and Sena, 2011). Technological innovations in the macro envi
ronment can be a driver of a firm's decision to outsource an activity that was p
reviously performed in-house. In certain industries, outsourcing may often by th
e only viable business model, either for all firms or for a subgroup of firms. C
ase in point is the practice of the media and entertainment industry. The transi
tion from linear value chain thinking towards collaborative value network thinki
ng renders ?rm boundaries increasingly permeable, fuzzy and short lived (Dyer &
Singh, 1998; Nenonen & Storbacka, 2010). Market actors can be viewed as open sys
tems, effectively depending on the resources of others to survive (Vargo, Maglio a
nd Akaka, 2008, p. 149).
A particularly interesting development is the decreased importance of ownership
or possession of resources (Storbacka, Frow and Nenonen, 2012). Speci?cally, acc
ess to resources is becoming more important than ownership. A typical illustrati
on is the increased interest in business models that transform products to servic
es. Examples of these are, for instance, Software as a Service (SaaS) a software bu
siness model in which the software is hosted centrally and accessed by client co
mpanies using a web browser, and charged by utilization (i.e. transactions). When
the locus of technological innovation shifts from users to vendors, as it has w
ith software, it becomes ever harder for companies to distinguish themselves (Ca
rr 2004, p. 48).
This model is also applied in consumer markets, with a proliferation of business
models where consumers pay a monthly fee to acquire access to various resources
, such as music (e.g. Spotify). Prahalad and Ramaswamy (2000) describe the evolu
tion of customers from passive audiences to active players. Firms do not exist in or
der to distribute value along a value chain, but rather to support customers in
their value-creating processes (Gronroos, 2000; Storbacka and Lehtinen, 2001). T
hus, customers are not to be viewed as extensions of ?rms production processes. R
ather, ?rms need to be viewed as extensions of customers value-creating processes
(Korkman, Storbacka, & Harald, 2010).
6.6 TCR & RBV COMBINATION
A combination of theoretical lenses of TCE and RBV not only help to explain why
make or buy takes place, but also help decision makers understand what to outsou
rce and what not to the so-called what question (Wasner, 1999). External environment
, competitive advantage, capability and the total cost picture are some of the f
actors that the two theories bring forward as important considerations before ma
king the decision (Jennings, 2002; McIvor, 2000). These factors effect on their
contribution to the decisions are crucial Managerial implications and contributi
ons
Gaining an appreciation of the sources of value, and how resources and capabilit
ies combine in valuable ways, has obvious significance to managers. The RBV sug
gests that the role of senior managers within an organisation is to leverage val
uable corporate resources and accumulate, develop, and protect such resources to
be competitive in the future marketplace (Prahalad & Hamel, 1990; Tyler & Steen
sma, 1995; Tyler, 2001). Therefore, to be able to identify what are valuable or
ganisational resources and capabilities, and how they are connected, becomes cri
tical to senior managers successfully completing their role.
This researcher echoes comments from other researchers (such as Tyler (2001)) wh
o encourage outsourcing decision makers and executives to understand their organ
isational resources and capabilities. This is an important task for managers be
cause it is widely noted that a firm is not able to effectively outsource organ
isational processes and practices which they do not understand (e.g., Teece et a
l., 1997; Tyler, 2001). Furthermore, if managers and executives do not have an
appreciation of where they are currently at, it is difficult to make plans for t
he future of the organisation and compare the two,
In the digital economy the CEO must realize that IT is the foundation for doing
business and companies are discovering that the way they manage IT is crucial to
their competitiveness. IT determines whether the companys dealings with custome
rs and suppliers are efficient, scalable and timely. Product and process lifecyc
les are steadily growing shorter, thereby forcing firms to develop almost contin
uous streams of innovation (Fine, 1998; Loudon, 2001; Piachaud, 2000). But at t
he same time, it is becoming increasingly difficult for any one company to suppo
rt an IT development agenda single-handedly. Many firms have accordingly turned
to their supply networks as a source of current practices and innovation. Perr
ons and Platts (2005) provide evidence that it is of advantage for companies to
rely to some degree on their supply network for new ideas.
The RBV sees the firm as a whole, comparing the resources available internally t
o those available in the market, seeking the few firm resources that lead to a l
ong-term competitive advantage. In addition, RBV leads to a resource-by-resource
analysis of internal performance compared to the market or to other firms while
seeking the best form of governance for a given activity or functional unit. TC
E analyses transaction by transaction, seeking the governance structure that min
imizes transaction costs and thereby increasing the efficiency of the firm in th
e short term. A recommendation of this research is to combine both theories rev
ealing that outsourcing activities by firms should be decided in two stages.
First, at the strategic level, firms must clearly decide which functional IT uni
ts should be performed internally, and by implication, which activities may be
subject to outsourcing, in line with the policies that Porter (1985) and Grant (
2005) advocate. At this strategic level, firms are studied as a whole to identif
y which activities are associated with those core competencies that must be per
formed internally (Prahalad and Hammel, 1990; Quinn and Hilmer, 1994). This f
irst stage is based on the RBV theory.
After firms strategically determine non-tradeable activities that must remain in
tegrated, they may proceed to the second stage of analysis, transaction by tran
saction, to determine which activities are economically feasible to be outsourc
ed. At this stage, firms must compare the strengths and weaknesses of their ski
lls with those available in the marketplace, outsourcing those activities in wh
ich the firm holds disadvantages (Poppo and Zenger, 1998; Mayer and Salomon, 200
6). Further, they must verify whether outsourcing can result in a loss or tran
sfer of strategic knowledge, weakening of related core competencies (Teece, 198
6; Liebeskind, 1996). If so, these activities should be retained. Finally, they
must compare the transaction costs arising from idiosyncratic investments and t
he uncertainties related to outsourcing with internal costs. If the outsourcing
costs are higher than internal costs, the activity should not be outsourced (W
illiamson, 1985; Amaral, Billington and Tsay, 2006; Ellram; Tate and Billington,
2008). This second stage combines RBV and TCE theories.
Both, the qualitative and quantitative results make important contributions to m
anagerial practice and may provide a platform for developing IT sourcing strateg
ies with a stronger emphasis on strategic objectives, in addition to the convent
ional economic imperatives. An implication of this research is that decision pa
radigms must take both, the competitive and economic circumstances of firms as
well as the external frame conditions of their respective industries into consi
deration.
6.7 LIMITATIONS OF THE RESEARCH
The quantitative research used cross-sectional data, hence studied the relations
hips between variables at a given point in time. All the variables are measured
based on the perceptions of the respondents at the time of responding to the sur
vey. Therefore, causality between the variables cannot be established in this st
udy. Time studies need to be made in this context. Kern & Willcocks (2000, 2001,
2002) evaluation of IT outsourcing in a series of case studies shows that the IT
relationship changes over time. Hence it is important to understand the impact
of IT outsourcing decisions over time as well.
Recommendations for further research
The unit of analysis of the conceptional model developed in the quantitative res
earch of this study was too granular to be applied at the operative process leve
l. Although the construct was able to identify competitive value of IT activitie
s to some extend, it did not correlate boundary related properties as advocated
by the resource based theorem. Quantitative analysis attributed this observatio
n to decision makers the bounded rationality of operational processes and confirm
ed that functional units are the unit of analysis in boundary decisions. Decisio
n makers applied functional units, which are more aggregated unit of analysis,
consisting of several activities, to assess competitive value at a functional le
vel in the decision process. The conceptional model may be reapplied, by aggrega
ting the unit of analysis to a higher level of functional capabilities such as I
T Service Operation, IT Service Delivery, IT Service Transition or IT Service De
velopment. This approach may hold the propensity to assess IT bundles on their s
trategic value on a more aggregated level to guide practitioner in boundary deci
sions.
APPENDIX 3: CASE INTERVIEW PROTOCOL
1