Setting the outsourcing research agenda: the top-10 most urgent outsourcing areas

The Authors

Marco Busi, Carisma RCT Ltd, Dingwall, UK

Ronan McIvor, University of Ulster, Londonderry, UK

Abstract

Purpose – To close the inaugural volume of Strategic Outsourcing, an International Journal (SOIJ), this paper's objective is to suggest a research agenda for outsourcing related studies, aiming to identify a limited number of key and most urgent research areas in need of scientifically valid research.

Design/methodology/approach – The authors draw on their personal experience and knowledge as well as the content of the first volume of SOIJ, to identify key seminal studies in the field, observe gaps in current knowledge, and provide suggestions for future research.

Findings – The major outcome of the paper is our suggestion for the top-10 most urgent outsourcing research areas. Also interesting are the other three top-10s we propose: the top-10 theories underpinning current outsourcing research; the top-10 research areas investigated by past research on outsourcing; and the top-10 research questions that have emerged this year.

Research limitations/implications – Considering the methodology we chose for this article, we are aware, and indeed so should you be, that this research is biased and subjective by our own admission. Hence its categorisation as a viewpoint. Nonetheless, considering the large amount of information we have used and the very narrow focus we have kept in identifying only the most urgent gaps, we believe the article has relevant implications in terms of clarifying a short-term roadmap for research in the field.

Practical implications – From a practical perspective, as with all research agendas, the longer-term implications are much more important and visible than the shorter-term ones. The extremely fast pace at which outsourcing practice develops, coupled with the slower pace at which theoretical formulation and education move, are leaving outsourcing practitioners short of the proper “tools of trade”. A clear and focused research agenda can help generate knowledge supporting a drastic reduction in the confusion surrounding this practice and hence increase practitioners’ ability to develop the proper skills, learn from and apply validated theories and, in turn, more successfully manage their outsourced operations or contracts.

Originality/value – That outsourcing related research is going to increase over the next few years, is undisputed. The key question is how we can maximise current and future efforts to shorten the development time. Being part of the editorial team of SOIJ puts us in the privileged position to have visibility over most current research being undertaken in the field of outsourcing. Complementing this with our own experience as researchers and practitioners in the field, we can provide relevant suggestions to those researchers who share an interest in developing this field into a fully-fledged scientific discipline.

Article Type:

Viewpoint

Keyword(s):

Research; Outsourcing.

Journal:

Strategic Outsourcing: An International Journal

Volume:

Number:

Year:

2008

pp:

185-197

Copyright ©

Emerald Group Publishing Limited

ISSN:

1753-8297

Introduction

At the time of writing this viewpoint, a search in Google of the keyword “outsourcing” returned roughly 55 million pages. Searching for “supply chain management” (which as we all know represents one of the fastest developing disciplines of the past century) returned only 12 million. At the same time, searching for the same keywords on the ISI Web of Knowledge returned 3,598 articles containing “outsourcing” and eight articles short of exactly double the amount of those containing “supply chain management”.

Even though many could argue that there is no rigorous methodology behind the results presented above, not many could argue against the fact that the internet and the world wide web can be considered a digital representation of trends in the real world; that Google is the most widely used search engine to date; and that ISI Web of Knowledge is amongst the most comprehensive and respected databases of scientific articles available.

Hence, while not scientifically sound, these results provide a valuable insight into the interest that outsourcing has generated in the “real” world as opposed to that which has generated in the scientific world, and the consequent balance (or, in this case: imbalance) between research-led and industry-led contribution to theory development in this area.

More precisely, these data tell us, or better yet, confirm three things:

That the generation of knowledge related to outsourcing is dominated by specialised publications, blogs and outsourcing suppliers’ so called white papers. Although, the majority of Internet sources are of dubious validity and usually present an idealised and practitioners’, sectors’ and suppliers’ biased view of outsourcing.
That scientific generation of knowledge specific to outsourcing is still at an embryonic stage compared to more mature disciplines.
That science is lagging behind practice, hence indicating little potential for knowledge transfer from science and education to industry, and a high risk of current theories lacking relevance for today's and future challenges.

No wonder a large number of stakeholders, puzzled by the growing scope of services provided and the equally growing collection of dedicated jargon, are left to proceed with pretty much a trial and error approach. With an increasing number of outsourcing deals failing to deliver the promised benefits, we have become well familiar with the impact of such confusion on business performance.

As one of the key objectives of Strategic Outsourcing, an International Journal (SOIJ) is “to foster and lead the international debate” in the field (Busi, 2008, p. 5), it seems logical to conclude the first volume reflecting on this twelve-month experience and providing “research leads” for the short term.

We are certain that outsourcing research will increase over the next few decades, mirroring with some delay what in industry seems to be an unstoppable trend (Lacity et al., 2008; Edgell et al., 2008). When we set out to write this editorial though, we did not aim to report on a thorough and systematic literature review. Nor did we want to define a ten-year research roadmap since, considering the fast changing nature of this area, that would be out of date most probably in a year time. On the contrary, we had a much more specific objective, that is, we aimed to identify ten of the most urgent research areas that we feel should lead research and publishing efforts in the short term.

Hence, in this editorial we review research gaps within present knowledge relating to outsourcing of manage, operate and support processes (as defined by Hronec, 1993; Andersen and Fagerhaug, 2002) and suggest a research agenda for the near future to improve understanding of this increasingly active research field.

We do so drawing on our personal experience, a brief review of the latest publications in the field, as well as the content of the first volume of SOIJ, complemented by our knowledge of the 60 circa articles submitted to SOIJ so far that have not managed to reach publication. Considering the methodology we chose for this article, we are aware, and so should you be, that our views are biased and subjective. Hence our decisions to categorise it as a viewpoint, according to Emerald's definition, i.e. “[viewpoints include] any paper, where content is dependent on the author's opinion and interpretation” (www.emeraldinsight.com). Nonetheless, considering the large amount of information we are basing our view on and the narrow focus we have kept in defining our objectives, we believe the article has relevant implications in terms of clarifying a short-term roadmap for research in the field.

The origin: theoretical underpinning of current outsourcing research

It is difficult, if not impossible, to agree on the origin of outsourcing as a practice and/or a scientific concept. Some researchers, mostly from a manufacturing and supply chain management background, would arguably see it as nothing more than an evolution of older research on “make-or-buy”. Others, most commonly from a service operations management background, would see it as a revolutionary trend started few years ago. Spending much time about such categorisation would be an academic exercise holding little relevance for practice or future research.

We hence limit ourselves to observing that one of the theories most often referred to in relation to outsourcing is the Transaction Costs Theory (Coase, 1937; Williamson, 1975, 1985) and hence argue that the knowledge roots of outsourcing stretch back to almost 70 years ago.

During these 70 years, several theories have been developed in various disciplines, which are frequently, if not constantly referred to, summarised and discussed in today's published research on outsourcing. There would be no point to add here one more summary and extensive list of references to the several hundreds already existing. Although, it could prove useful to both practitioners and researchers interested to dig deeper in the theoretical pillars of today's outsourcing knowledge, to simply provide a “top-10” list of the ten theories which we have come across most frequently (with a reference to related seminal work):

Transaction cost theory (Coase, 1937; Williamson, 1975, 1985).
Resource-based view (Penrose, 1959; Richardson, 1972).
Principal agent theory (Ross, 1973; Jensen and Meckling, 1976).
Vertical integration theory (Bain, 1968; Grossman and Hart, 1986).
Strategic management (Quinn and Hillmer, 1994).
Evolutionary economics (Nelson and Winter, 1982; Mahnke, 2001).
Relationship market/view (Berry, 1983; Sommer, 2003).
Industrial economics (Porter, 1980).
Strategic alignment theory (Henderson and Venkatraman, 1990).
Core competence theory (Prahalad and Hamel, 1990).

It appears obvious that the second half of the twentieth century has seen a buoyant time for science and theory generation in general. However, it is only in the past decade that the scientific world has slowly started to wake up to the relentless development of the outsourcing market and practice in industry, and followed suit with more intense research targeting specifically this area.

The worrying observation is that, even though the amount of information available and the number of published papers have increased, we must admit that the end of last century and the beginning of the twenty-first century have seen a marked decline in the amount and significance of theory formulation. With specific reference to outsourcing, there seems to be an agreement regarding the general lack of theory reported in scientific literature (Hartman et al., 2008; McIvor, 2000).

The past: what have we learned so far?

We have to accept the fact that the field lacks any ground breaking theory. Nonetheless, a lot of research activities have been reported from individuals or groups worldwide who have started to take an academic interest in outsourcing. The question is: what have we learned so far?

A major classification we can apply to current research on outsourcing is that of process focus, i.e. production related (namely production and logistics) vs non-production related, or support processes (information systems (IS), accounting, human resources, etc). Research on outsourcing of production and logistics is more matured, with several studies focusing on the “make-or-buy” strategic question, on third party logistics and the more advanced fourth party logistics, vendor managed inventory, etc. However, thanks to recent trade agreements and continuous developments of information and communication technologies, outsourcing of business services (i.e. services provided by businesses to other businesses) has grown as organisations have transferred responsibility for entire functions such as human resources, finance, information technology, and R&D services to both local and offshore service providers. The same trend is observable in literature, with an increasing number of studies and academic activities related to service outsourcing.

As a matter of fact, in the past four years alone we have seen a steep increase in the number of education programmes being delivered with a focus on outsourcing of business services, the number of conferences being organised on the topic, and the number of papers being presented in well established and traditionally production-orientated conferences (such as the annual conference of the Production and Operations Management Society).

An alternative way to try to organise current knowledge of outsourcing, as suggested by Weimer and Seuring (2008), is to look at it from the point of view of the key research questions (RQs) that seem to have been investigated in the past few years: why should a company outsource? What should be outsourced? How should the outsourcing relationship contract be managed? And what are the main success factors with outsourcing? (see also De Boer et al., 2006; Jiang et al., 2006; Harland et al., 2008).

Or, attempting to be even more specific, we could draw from our experience another top-10 list of the most recurrent RQs to date, providing only a few and most recent references which well summarise the current thinking for each RQ:

Global network design (Hartman et al., 2008).
Outsourcing frameworks – including process models – (Cullen et al., 2005; McIvor et al., 2008a, b).
Outsourcing decision making (De Boer et al., 2006).
Managing outsourcing – including critical success factors – (Embleton and Wright, 1998; Hale, 2006; Simmonds and Gibson, 2008).
International procurement – procurement location choices – (Tomiura, 2007).
Supplier/vendor selection (Wagner and Friedl, 2007; Wadhwa and Ravindran, 2007).
Implications on organisational design – including outsourcing organisational models – (Gottfredson et al., 2005; Sako, 2006; Simmonds and Gibson, 2008).
Risks of outsourcing (Power et al., 2004).
Economic casts and benefits (including advantages and disadvantages and reasons for outsourcing) (Lankford and Parsa, 1999; Burnes and Anastasiadis, 2003; Harland et al., 2008).
Effects on business/operational performance (Jiang et al., 2006; Han et al., 2008).

As for research methodology, much of the research on outsourcing to date has been dominated by survey or case study methodologies. For example, many outsourcing decision-making frameworks presented in the literature have been developed through analysing the outsourcing experiences of companies, rather than applying theoretical frameworks in a practical setting.

Is this a warning signal that researchers are taking more of a reporter or a story teller role, describing what happens in the real world, rather than providing innovative thinking and thought leadership to shape the future not only of the outsourcing discipline but of practice as well?

The present: what are the emerging themes?

As the first journal solely dedicated to publishing outsourcing research, SOIJ and its first volume represent the largest single collection of the latest cross-disciplinary research being published on outsourcing. With the present third issue, we have published 18 articles in a year, reporting on research spanning from Danish manufacturing to American printing industry, from IT outsourcing to call centres, etc.

Comparing the content of this volume with the body of knowledge existing outside SOIJ, we can identify some new RQs arising, which we suspect will spring a whole new stream of research interest and activities:

How do organisations provide leadership in outsourcing? (Lacity et al., 2008)
What are the strengths, weaknesses, opportunities and threats typical of emerging outsourcing models, e.g. shared services? (Janssen and Joha, 2008)
What are the links between outsourcing and organisational innovativeness and what are the inherent risks? (Baloh et al., 2008)
How do various industries respond to offshoring? (Rothenberg et al., 2008)
How can we protect data security in offshoring contracts? (Burns, 2008)
What is the impact of environmental policies and more generally corporate social responsibility requirements on outsourcing decision making? (Brown, 2008)
How do you design and manage knowledge transfer and organisational learning associated with moving activities, processes and people from one organisation to another (Madsen et al., 2008)
How does offshoring impact the organisation, industry and local economy in the developing country? (Hansen et al., 2008)
How does the outsourcing decision making change over time, and how can organisations manage such change? (Moses and Åhlström, 2008)
What is the impact of current political and economic events, most notably the decline the of USD (Edgell et al., 2008), the rise in oil and gas prices and lack of skilled labour in western economies, on outsourcing developments?

We are observing a shift of researchers’ focus from structuring observations of individual cases to proposing innovative thinking. As a matter of fact, we have entered a new era for outsourcing related research that will lead to a proliferation of published work, new theories and education content.

The future: what do we need to know about outsourcing but never (yet) dared to ask?

It appears clear that the field lacks an outsourcing body of theories, and it should be our role as researchers and scientists to create one. The question is how do we go about doing so? We try to answer this question by suggesting a number of research areas and methods that would benefit the field and that we would like to see emerging in the near future.

Research topics

The world – in particular the western part – is witnessing a servicization of industries and economies. Companies which have traditionally put manufacturing excellence at the core of their competitiveness are being forced by external factors to re-examine their core competencies. As a consequence, it is not unusual to see manufacturing companies traditionally operating as original equipment manufacturers shifting their focus on providing services around the product, rather than manufacturing the product itself, hence outsourcing manufacturing of the entire finished product to third-party or contract manufacturers (Busi and Ball, 2007).

It is so that industrial economies are transforming into service economies. According to Jordan (2007), “such global giant as AIG, Citigroup, and HSBC (all ranked in top five of Forbes’ Global 2000) rely on services exclusively, while GE (number 2) has managed to transform its primary emphasis from manufacturing to services – even in sectors where it still makes products” (Jordan, 2007). Equally, we are witnessing a similar shift of focus, or rather a development, in operations management research and literature, where “service management” and “service operations management” are coming strongly to the fore of research agendas and in both published material and international debates at academic conferences around the world. However, 38 different meanings of the word “service” can be found in the Oxford English Dictionary (Jordan, 2007), and the “business services” section 73 of the Standard Industrial Classification (SIC) two-digit codes counts 78 main categories and 473 sub-categories of services codified. More research is required to understand the impact of such a broad playing field on theory formulation and codification of knowledge.

Much of the emphasis on global outsourcing has been on the economic costs and benefits such as job losses, tax incentives and lower prices for consumers. As the trend towards services outsourcing accelerates, this phenomenon is driven by factors that transcend cost considerations alone. In addition, much of the academic literature on services outsourcing has focus on IS outsourcing. However, services outsourcing is impacting upon every organisational function and a range of issues are relevant to both outsourcing theory and practice. Further research is required on service operations management, covering issues such as service design, disaggregating processes, managing offshore service providers and business process redesign, which have all become important elements of managing outsourcing arrangements.

Furthermore, much of the literature on service outsourcing focuses on the strategic implications, examining issues such as motives and outcomes. Further research is required at the operational and management level. Implementing and managing outsourcing arrangements encompasses a range of techniques including business improvement, change management, knowledge management, and performance management. Further insights into the implications of applying these techniques in practice would enhance our understanding of outsourcing.

Also, there is much debate in both the popular media and academic literature on the amount and types of jobs in developed economies, both in manufacturing and service industries, at risk of outsourcing to foreign locations. Factors such as labour costs, the impact of information technology and more accessible air and road transport, and low skilled vs high skilled jobs are introduced to explain the types of jobs at risk from global outsourcing. However, much of the debate in this area fails to explain fully which jobs are being impacted. For example, the distinction between low skilled and high skilled jobs has also been used as a means of classifying which jobs are being outsourced, the assumption being that lower skilled jobs are at a higher risk than lower skilled jobs. However, in reality, higher skilled jobs such as research and development and management consultancy are increasingly being outsourced to foreign locations, whilst lower skilled jobs such as hairdressing and cleaning are still being performed locally. Labour intensity, the level of service customisation, the level of customer contact, and the need for physical contact are all important influences on the mobility of service jobs (Stratman, 2008). Although companies will focus efforts on outsourcing highly labour intensive processes, the need for both high customer contact and customisation in the service delivery process will stymie such efforts.

All the same, impact of environmental policies and corporate social responsibility requirements will impose limitations on the extent of manufacturing that companies will be able to outsource to distant location such as China and India. This is an important area that requires further investigation. Scholars from the operations management, service design domains and geographical economics can enhance our understanding of the mobility of jobs.

Nevertheless, outsourcing is posing considerable challenges to the role of functions such as HR, procurement and finance and accounting. Where functions are viewed at corporate level as providing standard and transaction-oriented services, they become targets for corporate outsourcing efforts. Multi-divisional organisations have been increasingly outsourcing standard HR activities such as job posting, payroll processing, training administration, and employee record keeping to global shared services providers. Further research is required in order to examine the impact of these developments on these functions. For example, is outsourcing enhancing the strategic value or leading to the “hollowing out” of these functions? How do organisations make decisions on which functional activities are suitable for outsourcing? What are the operational implications of transferring responsibility for these activities to external service providers? How can combinations of various outsourcing models (e.g. multi-sourcing) be employed to achieve performance transformation for these functional activities?

Indeed, performance management in services outsourcing is another area which requires further research. As organisations outsource larger and more complex processes, performance management has become increasingly challenging for organisations. In particular, performance management is often more complex in business services compared with that of manufacturing. Whereas many manufacturing processes can be standardised and modularised, it is more difficult to standardise service processes (not least for the wide variety of services existing, as discussed earlier), which increases the difficulties of developing effective performance measures for use in outsourcing arrangements. Services lack the tangible attributes of physical products and include many attributes that are difficult to specify in measurable terms, which often leads to the incomplete specification of both requirements and service levels (Aron and Singh, 2005). This makes it difficult to make meaningful comparisons across organisations and understand the causes of variances in process performance. Organisations struggle to identify what should be measured and how to normalise data across different organisational contexts. Even when organisations know what to measure, they fail to achieve accuracy, as performance data is not defined or collected consistently.

Closely related to this, is the issue of service level agreements (SLAs). More research is required to understand the role of such legal contracts on the dynamics of the outsourcing relationships, their impact at the strategic and operational level and indeed their impact on jobs migration with local economies as well as outside into foreign ones. Not least, the role played by trust in the development of both the scope and depth of outsourcing relationships (i.e. from transactional to transformational outsourcing) is an interesting and urgent topic in need of more research.

Finally, as suggested by Hansen et al. (2008) and Harland et al. (2008), there is a gap in current research concerning a more holistic study of outsourcing, its risks, benefits, challenges and opportunities – including economic and social factors – and more research is needed into observing and theoretising implications at different systems levels, namely at the macro- (i.e. national), meso- (i.e. sector) and micro- (i.e. firm) level.

Research methods

We have started this article observing that knowledge generation is skewed towards a practitioners’ perspective. Also, we have noticed that observations of, information and data about outsourcing are mainly available on traditional internet sources such as blogs and white papers. Concluding that there still is a general lack of theory generation activities reported in literature.

We need more researchers to apply theoretical frameworks in an organisation via action research methods at the operations level on a longitudinal basis, as this would enhance our understanding of the challenges of outsourcing implementation and management.

There is further potential for theory development through combining theories such as transaction cost economics (TCE), the resource-based view, resource dependency theory, agency theory, alliance theory, social exchange theory, power/political theory and organisation behaviour theory.

In addition, some of these theories are important to contemporary techniques employed in outsourcing arrangements including process re-design, workflow mapping, knowledge codification, and project management. For example, TCE is particularly relevant to process re-design in the outsourcing process. Understanding process idiosyncrasies and internal interdependencies are important considerations when outsourcing complex processes. TCE provides a powerful theoretical framework for understanding how such idiosyncrasies and interdependencies create opportunism potential. Often, organisations outsource entire processes to a single supplier, which include both standard and highly specific elements.

Combining the logic of TCE with business process re-design enables an organisation to identify standard processes where cost savings can be expected in outsourcing arrangements (McIvor, 2008a, b). Where appropriate, business process analysis can also be employed to understand processes and reduce both costs and asset specificity in outsourcing.

Last, Jiang's call for more empirical research two years ago (Jiang et al., 2006) is still valid: “The anecdotal accounts of outsourcing effects raise some fundamental questions for empirical research. [… ] finding evidence of the results of outsourcing is critical. In particular, research considering the context surrounding and outsourcing decision's results is likely to be essential and useful to corporate outsourcing management” (Jiang et al., 2006).

Conclusions

Outsourcing is here to stay and will continue to grow. There is no doubt about it. While practice is moving at an extremely fast pace, theory is lagging behind. However, things are about to change as more and more research is being conducted in the field.

With this article we wanted to provide an eagle-eye view of past, current and future research in the field, aiming to provide guidance as to what we know and what we still do not know about it. It should be very clear by now that we feel very strongly about the need for more activities aimed at developing theories, rather than simply reporting industry stories. At the same time, we have pointed out that there are not enough empirical studies looking at providing some hard measures about these business transformation activities.

We conclude our article by providing the very last of our suggested top-10s, where we identify research priorities as the need to understand:

The impact of servicization and consequent outsourcing of services (on-shore and off-shore) on theory formulation and codification of knowledge.
Important elements of managing outsourcing arrangements such as service design, disaggregating processes, managing offshore service providers and business process redesign.
The implications of applying techniques well known in the operations management field such as business improvement, change management, knowledge management and performance management.
The implications of outsourcing and off-shoring on jobs mobility.
The impact of environmental policies and corporate social responsibility requirements on outsourcing and off-shoring decisions.
The impact of increasing functional and transformational outsourcing on corporate functions’ performance and profitability.
How to overcome performance measurement and management challenges inherent in the nature of service outsourcing.
The role of legal contracts and SLAs on the development and dynamics of outsourcing relationships, their impact at the strategic and operational level and their impact on jobs migration.
The role played by trust in the development of both the scope and depth of outsourcing relationships (i.e. from transactional to transformational outsourcing).
The risks, benefits, challenges and opportunities at a national, industry/sector and firm/individual level.

Note from the editors

In line with SOIJ's mission to foster and lead the international debate on Strategic Outsourcing, we would invite and welcome letters to the editor, articles and viewpoints with comments and feedback on the content of this article and the research agenda suggested.

References

Andersen, B., Fagerhaug, T. (2002), Performance Measurement Explained: Designing And Implementing Your State-Of-The-Art System, ASQ Press, Milwaukee, WI, .