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Abstract
The question of whether outsourcing is a good or bad organizational practice has traditionally come down to whether the positive financial impact of outsourcing overcomes the potential organizational liabilities. The theoretical model proposed in this thesis argues that such thinking underestimates the positive organizational benefits that arise from outsourcing by giving inadequate consideration to impacts that outsourcing has on the innovation cycle of outsourcing providers.
This research adds to our understanding of outsourcing decision-making in three important ways. First, the thesis presents how innovation benefits can arise from outsourcing and proposes four potential innovation benefits from outsourcing – the motivation for creativity, innovation scale, innovation scope and complementarity of capability. The central hypotheses argue that these beneficial factors should increase the likelihood of a decision to outsource an activity. Second, this research extends our understanding of outsourcing by examining the moderating effect of value appropriation on the decision to outsource. Third, the thesis provides a rigorous empirical utility theoretical approach – best-worst scaling and discrete choice modeling – to understanding managerial preferences and the components of outsourcing decision making.
The findings reveal that a significant segment of managers do indeed look beyond cost in choosing to outsource, focusing instead to concentrate broadly on a supplier’s commitment to innovation, complementarity of capabilities and the ability of an outsourcing contract to appropriate value created in a relationship. This implies that the managerial application of outsourcing is not restricted to a short-term solution for cost savings, but can potentially be thought of, and used as, a strategic mechanism to drive innovation in organizations. Some benefits may not be immediately obvious (e.g., a supplier’s motivation for innovation) and require more awareness from managers. Together, the theory and empirics provide insight into outsourcing decision-making and the opportunities for extending outsourcing as a strategic mechanism to drive innovation more broadly.