This article was downloaded by: [Simon Fraser University]On: 29 January 2013, At: 09:47Publisher: Taylor & FrancisInforma ...
Production Planning & ControlVol. 24, Nos. 4–5, April–May 2013, 277–283Understanding outsourcing contexts through informat...
capability fit, is the matching of a buyer’s needs with asupplier’s offerings. The alliance strategy literature(e.g., Nied...
of technology employed (Kietzmann 2009); manage-ment style; and the size of firm. As many of the papersin the special issu...
of capability fit and information asymmetry, and theapproach and the core contribution each article makesto research and/o...
Notes on contributorsProfessor Ian McCarthy is the CanadaResearch Chair in Technology andOperations Management at theBeedi...
Leonard-Barton, D., 1992. Core capabilities and corerigidities: a paradox in managing new product develop-ment. Strategic ...
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Understanding outsourcing contexts through information asymmetry and capability fit


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Outsourcing is a strategic activity that has long been central to operations management research and practice. Yet, there are still many outsourcing management challenges that remain. In this article, we explore two of the outsourcing challenges that motivated this special issue and are central to the 10 articles included. To do this, we develop a theoretical model that examines how variations in capability fit and information asymmetry combine to present firms with four different outsourcing contexts. We then explain how each of the articles included in this special issue relate to our theoretical model and explore several avenues for future research.

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Understanding outsourcing contexts through information asymmetry and capability fit

  1. 1. This article was downloaded by: [Simon Fraser University]On: 29 January 2013, At: 09:47Publisher: Taylor & FrancisInforma Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House,37-41 Mortimer Street, London W1T 3JH, UKProduction Planning & Control: The Management ofOperationsPublication details, including instructions for authors and subscription information: outsourcing contexts throughinformation asymmetry and capability fitIan P. McCarthya, Bruno S. Silvestreb& Jan H. KietzmannaaBeedie School of Business, Simon Fraser University, 500 Granville Street, Vancouver, BC,V6C 1W6, CanadabFaculty of Business and Economics, University of Winnipeg, 515 Portage Avenue, Winnipeg,MB, R3B 2E9, CanadaVersion of record first published: 18 Jan 2012.To cite this article: Ian P. McCarthy , Bruno S. Silvestre & Jan H. Kietzmann (2013): Understanding outsourcing contextsthrough information asymmetry and capability fit, Production Planning & Control: The Management of Operations, 24:4-5,277-283To link to this article: SCROLL DOWN FOR ARTICLEFull terms and conditions of use: article may be used for research, teaching, and private study purposes. Any substantial or systematicreproduction, redistribution, reselling, loan, sub-licensing, systematic supply, or distribution in any form toanyone is expressly forbidden.The publisher does not give any warranty express or implied or make any representation that the contentswill be complete or accurate or up to date. The accuracy of any instructions, formulae, and drug doses shouldbe independently verified with primary sources. The publisher shall not be liable for any loss, actions, claims,proceedings, demand, or costs or damages whatsoever or howsoever caused arising directly or indirectly inconnection with or arising out of the use of this material.
  2. 2. Production Planning & ControlVol. 24, Nos. 4–5, April–May 2013, 277–283Understanding outsourcing contexts through information asymmetry and capability fitIan P. McCarthya*, Bruno S. Silvestreband Jan H. KietzmannaaBeedie School of Business, Simon Fraser University, 500 Granville Street, Vancouver, BC, V6C 1W6, Canada;bFaculty of Business and Economics, University of Winnipeg, 515 Portage Avenue, Winnipeg, MB, R3B 2E9, Canada(Final version received 8 November 2011)Outsourcing is a strategic activity that has long been central to operations management research and practice.Yet, there are still many outsourcing management challenges that remain. In this article, we explore two of theoutsourcing challenges that motivated this special issue and are central to the 10 articles included. To do this, wedevelop a theoretical model that examines how variations in capability fit and information asymmetry combineto present firms with four different outsourcing contexts. We then explain how each of the articles included in thisspecial issue relate to our theoretical model and explore several avenues for future research.Keywords: outsourcing; information asymmetry; capabilities; typology; operations management; operationsstrategy1. IntroductionOver the past two decades, outsourcing, defined as ‘anagreement in which one company contracts out a partof their existing internal activity to another company’(McCarthy and Anagnostou 2004, p. 68), has becomean important business practice and an enduringresearch theme. No longer do business leaders obsesswith creating large organisations that try to undertakeall value adding activities and own as much of thesupply chain as possible. To be competitive, firms nowtend to recognise and favour the potential value insourcing capabilities from the market place. Suchcapabilities provide operational benefits such asproduction efficiency, enhanced product and servicequality, better process responsiveness and dependabil-ity, and greater product variety and process variation.Furthermore, outsourcing benefits can often bestrategic in nature, including gaining novel technolo-gies, accessing local knowledge and markets andacquiring government suasion.Accompanying this growing consideration of out-sourcing, there has been an extensive range of studiesby economic, public policy, innovation and operationsmanagement scholars. These examine why firmsoutsource (e.g., Hitt and Ireland 1985, Quinn 1999,Que´ lin and Duhamel 2003, Holcomb and Hitt 2007),how outsourcing alters the boundary and value oforganisations and industries (e.g., McCarthy andAnagnostou 2004), how outsourcing helps firmsto develop new products and innovate(Handfield et al. 1999, Silvestre and Dalcol 2009), thecapabilities needed to outsource effectively (e.g.,Milgrom and Roberts 1990, Levina and Ross 2003,Oh and Rhee 2008), the process of selecting suppliers(e.g., Choi and Hartley 1996, De Boer et al. 2001,Everaert et al. 2007, Huang and Keskar 2007) andcollaborating with them (e.g., Liker et al. 1996, Richand Hines 1997, Takeishi 2001).Although this prior research has made manyvaluable contributions, there are still several importantoutsourcing issues that require research attention.In our call for this special issue, we highlighted theneed to better understand how to design, control andmeasure outsourcing practices. Based on the papersincluded in this special issue, we suggest that there aretwo interrelated challenges that combine to describefour different contexts faced by firms undertakingoutsourcing. The first challenge relates to informationasymmetry between the two parties in an outsourcingagreement. Information asymmetry is when the partiesinvolved in an outsourcing agreement do not haveequal access to the same amount or quality ofinformation. This makes an outsourcing transactionimbalanced and inefficient for at least one of theparties involved. Information asymmetry not onlydamages the outsourcing relationship in the long-run,but also disturbs the performance of the whole supplychain (Corbett et al. 2004). The second challenge,*Corresponding author. Email: ian_mccarthy@sfu.caISSN 0953–7287 print/ISSN 1366–5871 onlineß 2013 Her Majesty the Queen in Right of Canada[SimonFraserUniversity]at09:4729January2013
  3. 3. capability fit, is the matching of a buyer’s needs with asupplier’s offerings. The alliance strategy literature(e.g., Niederkofler 1991, Douma et al. 2000) andsupply chain literature (Stock et al. 2000, Zsidisin 2003,Taps and Steger-Jensen 2007) suggest that an appro-priate fit between the capabilities of two firms will yieldbetter performance than when misfits occur. This isbecause outsourcing involves a buyer acquiring fromsuppliers bundles of resources and skills (i.e., capabil-ities) that are critical to the buyer’s performance; andthus, the stronger the capability fit, the better theresulting outsourcing performance for both parties.In the remainder of this introductory article, wediscuss these two outsourcing challenges in greaterdetail and explain how variations in them combine toproduce four different outsourcing contexts for firms.We propose the concept of ‘outsourcing context’ as away to describe the interplay between these twooutsourcing challenges and to signal the implicationsof the context for firms. We then introduce the articlesin this special issue and highlight how they focus on thechallenges and contexts in our model. We conclude bysuggesting several opportunities for future research.2. The modelAn important benefit of conceptualising differentoutsourcing contexts in terms of key challenges is thepotential this provides for the examination of the com-plexity involved and for the evaluation of the implica-tions for firms. To that end, we now introduce the twochallenges and the resulting contexts.2.1. Information asymmetryA frequent issue faced by the firms embarking on anoutsourcing agreement is the lack of perfectinformation they have about each other’s needs andofferings. This is known as information asymmetry.The information deficiency can be in a number ofareas, including incomplete price and cost informationfor the products and services; limited or unreliabledemand information for the products or services; andundisclosed strategic and innovation plans thatmight affect outsourcing performance. Informationasymmetry is common because such information isoften kept confidential to avoid competitors learningof it; but more typically buyers and suppliers avoiddisclosure when possible in order to extract maximumfinancial benefits from the relationship in theshort-term.Prior research on information asymmetry in out-sourcing has examined how this challenge impacts theoutsourcing agreement (i.e., the contract) and theoutsourcing outcome (see Zhou and Ren 2010).For instance, Hasija et al. (2007) show that whenfirms face high levels of information asymmetry, theagreements that are established are lengthier and morecomplex, so as to help mitigate the risks associatedwith uncertainty and ambiguity. Akan et al. (2011)examine the contracts in call centre outsourcing,focusing on information asymmetry in terms ofdemand for the call centre service. They find that thenature of the contract significantly varies when thebuyer issues the contract versus when the supplierissues a quote or tender for the contract. This leads to asignificant distortion in the respective capacity plan-ning models for both parties. Also, Ren and Zhang(2009), also studying call centres, examine how con-tracts vary when the buyer does not know the vendor’scapacity cost or quality cost. While these two costs areoften correlated in this industry, they find that thegreater the information asymmetry, the greater thecorrelation.From such prior research, we put forward that highinformation asymmetry is associated with twodetrimental behaviours. First, suppliers tend to‘blind’ buyers by concealing operational informationsuch as costs and demand forecasts. Second, buyerstend to ‘squeeze’ suppliers to try to extract operationalbenefits that are often unrealistic and unsustainable.Both these behaviours escalate the contract designcosts and outsourcing delivery costs, damaging theperformance of both firms and the supply chain in thelong term. In contrast, low information asymmetrybenefits from ‘enlightening’ and ‘developing’ behav-iours, where both parties are more inclined to trusteach other, communicate more openly and coordinateand collaborate for mutual benefits.2.2. Capability fitThe concept of fit is central to organisational contin-gency theory (Hofer 1975), in which, it is assumed thatthere is no one best way to design and operate anorganisation – it depends! Firms should strive to fit oralign with the conditions of the industrial context inwhich they are operating. These industry conditionscan vary in terms of munificence or abundance ofresources (Castrogiovanni 1991), the velocity or therate and direction of industry change (Eisenhardt 1989,McCarthy et al. 2010); and the complexity or hetero-geneity of the environment (Aldrich 1979). The fitbetween an organisation and its environment can alsobe based on different elements or features of theorganisation including: organisational structure; type278 I.P. McCarthy et al.Downloadedby[SimonFraserUniversity]at09:4729January2013
  4. 4. of technology employed (Kietzmann 2009); manage-ment style; and the size of firm. As many of the papersin the special issue consider such conditions, in thisarticle, we develop a contingency-based framework toreview them and highlight this. Specifically, onedimension of our framework is the degree of fit(or the alignment) between the capability need andcapability offering. As we now explain this affects bothfirms’ performance in the outsourcing relationship.Capabilities are derived from how firms combine,organise and work their resources to produce offerings.If the capabilities provide an offering that isdifferentiating and competitive, they are referred toas core capabilities (Leonard-Barton 1992); distinctivecompetences (Hitt and Ireland 1985), or core compe-tencies (Hayes et al. 1988, Prahalad and Hamel 1990).In terms of operations, the advantage offered bycapabilities can be prompted and measured using anumber of interrelated operational drivers including:speed, dependability, quality, cost, flexibility andinnovation (see McCarthy 2004). In our model, wesuggest that capability fit is central to the performanceof an outsourcing arrangement because the matchingof reciprocal needs and offerings is essential to bothparties achieving their outsourcing objectives. Whenthere is a low capability fit (i.e., a misfit), anoutsourcing arrangement will more likely to beineffective (i.e., it was the wrong thing to do);inefficient (i.e., it does not work well) and unsustain-able (i.e., it will not work out in the long-run).In contrast, a high capability fit between two firmswill more likely to be effective, efficient andsustainable.We propose the concept of an ‘outsourcing con-text’, as a way to describe how variations in informa-tion asymmetry and capability fit combine to affectoutsourcing. Although both these challenges of out-sourcing continuously vary, we use combinations ofhigh or low information asymmetry and high or lowcapability fit, so that our model is both parsimoniousand bounded. The result is a typology (Figure 1) withfour distinct outsourcing contexts – opaque, symbiotic,discordant and inconsistent – and associated implica-tions for firms.3. The work in this special issueIn this section, we summarise the articles that appear inthis special issue and show how they focus on theoutsourcing challenges defined in our theoreticalmodel. To do this, we present a table (Table 1) thatshows what aspect of outsourcing each article focuseson, how this focus relates to the outsourcing challengesFigure 1. Outsourcing contexts: a theoretical model.Production Planning & Control 279Downloadedby[SimonFraserUniversity]at09:4729January2013
  5. 5. Table1.Summaryofthespecialissuearticles.ArticleOutsourcingfocusLevelofinformationasymmetryLevelofcapabilityfitApproachandcontributionPehlivan,Berthon,LeylandandChakrabartiInnovationandtheshapingoftechnologicalevolutionbycreativeconsumersLowHighLooksathowtheiPhonehasbeentransmutedinconsumer-generatedadstoshowhowoutsourcingcanbeopen,informalandpassiveinnature.Lin,PiercyandCampbellOutsourcingofcreativecapabilitiesinthefashionindustryHighHighUsesacasestudytoexamineresource-basedandtransaction-costtensionsincreativeoutsourcing.Findsthatthereisasymbiotic-parasiticrelationshipbetweensmalldesignersandlargebuyers.Kitcher,McCarthy,TurnerandRidgwayUnderstandingandmeasuringtheeffectsofoutsourcingusinganexamplefromtheaerospaceindustryLowHighThedevelopmentandillustrationofatotalfactorproductivityframeworkformeasuringtheeffectsofoutsourcing.ShishankandDekkersTacticaloutsourcingdecisionfordesignandengineeringfunctionsLowHighThedevelopmentofanoutsourcingdecisionframeworkusingaDelphisurveytoidentifyandevaluatetheimportanceofdifferentdecisionsduringthedesignandengineeringphasesofproductdevelopment.Al-Zu’biandTsinopoulosOutsourcingproductdevelopmentusingopeninnovationapproachesandleadusersHighHighEmpiricalstudyofthecostimpactofoutsourcingactivitiestoleadusersrelativetoinhousenewproductdevelopment.WestphalandSohalOutsourcingdecisionmodelsHighHighAreviewandtaxonomyofoutsourcingdecisionmodels.DattaandRoyOutsourcingofhigh-riskandcomplexcapabilitiesHighLowAnagent-basedsimulationmodeltoexploretheimpactsofcontracttypeandincentivemechanismonoutsourcingperformance.PluggeandBouwmanThesupplysideofinformationtechnologyoutsourcingLowHighAnempiricalstudyofthelinkbetweencapabilities,organisationalstructureandoutsourcingperformance.Solakivi,To¨yliandOjalaThemotivesandcostsoflogisticoutsourcingLowHighAnempiricalstudyfindsapositivecorrelationbetweenamountoflogisticoutsourcingandcosts,andthatflexibilityisthecapabilitythatmotivatesmost.Bhattacharya,SinghandBhakooAdyadicviewofoutsourcingmultiplefunctionsHighHighAgencytheoryconceptswereusedtoexplainhowtwopartiesperceiveoutsourcingdif-ferently,butyet,sharesomecommonalitiesaboutoutsourcing.280 I.P. McCarthy et al.Downloadedby[SimonFraserUniversity]at09:4729January2013
  6. 6. of capability fit and information asymmetry, and theapproach and the core contribution each article makesto research and/or practice.4. Opportunities for future researchBased on our theoretical model and the contributionsof the 10 articles that make up this special issue, wesuggest that there are some potentially fruitfulopportunities for future research.First, we support a new, dynamic view of theinterplay between information asymmetry and capa-bility fit, and the associated outsourcing contexts.While all the articles in the special issue can begrounded in these challenges, there remains a dearth ofresearch on how these outsourcing contexts evolve.That is, the challenges and contexts are unlikely toremain fixed over time, because the familiarity andexperience that each party gains about the other shouldimpact the relationship fit and transparency. Thisdynamic offers a number of interesting questions. Forexample, what conditions or mechanisms might drivean outsourcing arrangement to evolve from a dis-cordant context to a symbiotic context, for instance,and vice versa? What are the timescales involved inshifting from one context to another? In practice, is itimportant to focus on and address both outsourcingchallenges simultaneously and can they be tackledsequentially?Second, studies that examine how the characteris-tics of individual managers impact outsourcing arerelatively rare. While some of the papers in this issuefocus on the decision-making frameworks that can beused for outsourcing; the experience, cognitive abilitiesand decision-making approaches of managers arerarely considered by the field. Future research, there-fore, could examine such characteristics and assesstheir impact on the design, control and performance ofoutsourcing agreements. In particular, future studiescould examine how different managerial characteristicsare associated with each of the outsourcing contexts inour model.Third, in terms of capability fit, one operationaldriver not covered by the papers in this special issue isthat of sustainable outsourcing or green outsourcing.As sustainability is an increasingly important issue,and it is causally connected to other capabilities suchas cost and quality (see Garetti and Taisch forth-coming), it will significantly impact the capability fitchallenge. Thus, we suggest that there is need toundertake survey research that examines what firmsare doing to accommodate or attain a green capabilityvia outsourcing, as well as empirical theory testingresearch that examines the impact of this operationaldriver on the outsourcing context and outsourcingperformance of firms.Fourth, there is a need to close the gap betweenresearch on outsourcing and supply chain manage-ment. Several studies on supply chain managementhave argued that focal firms are increasingly concen-trating on strategies to enhance supply chain efficiencyand/or responsiveness. However, there is an opportu-nity for research that investigates outsourcing contextsin relation to whole supply chain performance. Morespecifically, we endorse further research on how andwhy the outsourcing challenges (information asymme-try and capability fit) affect the ability of supply chainsto achieve the desired level of efficiency (low cost) andresponsiveness (high flexibility).5. ConclusionsIn this article, we explore two of the outsourcingchallenges that impact the design, control and mea-surement of outsourcing practices: information asym-metry – the lack of perfect information they have abouteach other’s needs and offerings; and capability fit –the extent to which suppliers can satisfy buyers needsin terms of resources and skills. We then propose theconcept of ‘outsourcing context’ as a way to clarify theinterplay between these two outsourcing challengesand the resulting implications for firms.All articles included in this special issue break newground in that they further advance our understandingof these challenges and the responses needed forattaining a capability fit and coping with informationasymmetry. They examine these challenges from dif-ferent analytical levels and perspectives (i.e., individ-uals, organisations and industries) and in settings thatrange from the fashion industry to aerospacemanufacturing. The papers in this special issue alsovary in that they employ a range of methodologicaland theoretical approaches. As outsourcing will con-tinue to be important to both managers and research-ers, it is our hope that the research in this special issueand the identified research avenues inform teachingand practice and help guide and motivate futureresearch on the challenges of designing, controllingand measuring outsourcing practices.AcknowledgementsThe editors acknowledge all the authors and reviewers, whohave contributed to this special issue. We are also grateful toStephen Childe for his support and commitment to thisspecial issue.Production Planning & Control 281Downloadedby[SimonFraserUniversity]at09:4729January2013
  7. 7. Notes on contributorsProfessor Ian McCarthy is the CanadaResearch Chair in Technology andOperations Management at theBeedie School of Business at SimonFraser University. He received hisMSc and PhD from the University ofSheffield, and prior to joining SimonFraser University, he was a facultymember at the Universities ofWarwick and Sheffield. Focusing on technology-based firms,Professor McCarthy is well known for his work on how firmsshould be designed and managed, in terms of theiroperations, so as to succeed in different industries. He usescomplex systems theory, evolutionary theory and classifica-tion methods to identify and map the different operationaldesigns that firms must adopt. In particular, he is interestedin how firms differ in their new product developmentprocesses, R&D management control systems, outsourcingpractices and collaborative networks.Dr Bruno Silvestre is an assistantprofessor in the Faculty of Businessand Economics at the University ofWinnipeg, Canada. He received hisPhD from the Catholic University ofRio de Janeiro, Brazil. Prior to joiningUniversity of Winnipeg, Dr Silvestreworked as a Research Associate at theUniversity of Sussex in UK andSimon Fraser University in Canada. He also lectured forsome top Brazilian Business and Engineering Schools. DrSilvestre has 12 years of managerial experience in the energyindustry. More recently, he worked as a New BusinessDevelopment Executive at ELETROBRAS, the majorBrazilian National Utility. Prior to that, Dr Silvestreworked for the German company B. Braun Melsungenand a research park and firm incubator coordinating anumber of technology-based start-up projects. Hisresearch interests are associated with the technology andinnovation management and supply chain managementareas.Jan Kietzmann is an assistant profes-sor at the Beedie School of Business atSimon Fraser University. He receivedhis PhD in 2007 from the LondonSchool of Economics. In hisInnovation and Information Systemsresearch, Jan focuses on emergingmobile technologies and how theinformation flows they enable impactsupply chains, how they affect relationships between firmsand consumers in particular, and how they shape society ingeneral. In his empirical work, Jan has worked with smalland large firms in Europe and North America to study theirmanagement of technological innovation and product devel-opment processes. Jan uses Activity Theory, Community-Based Theories and Contingency Theory, among others, todevelop analytical models for academia and practical frame-works for a managerial audience.ReferencesAkan, M., Ata, B., and Lariviere, M.A., 2011. Asymmetricinformation and economies-of-scale in service contracting.Manufacturing and Service Operations Management, 13 (1),58–72.Aldrich, H., 1979. Organizations and environments.Englewood Cliffs, NJ: Prentice-Hall.Castrogiovanni, G.J., 1991. Environmental munificence: atheoretical assessment. 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