HELSINKI UNIVERSITY OF TECHNOLOGY
Faculty of Engineering and Architecture
Department of Engineering Design and Production
Janne M. Korhonen
A practical decision framework for sourcing product development
services
Thesis submitted in partial fulfilment of requirements for the degree of Master of
Science in Technology
Espoo, 10 March 2009
Supervisor: Professor Kalevi Ekman
Instructor: Roope Takala, M.Sc. (Tech.)

HELSINKI UNIVERSITY OF TECHNOLOGY ABSTRACT OF THE MASTER'S THESIS
Author: Janne M. Korhonen
Title of the thesis: A practical decision framework for sourcing product
development services
Number of pages: 222 + 37
Date: 10.3.2009
Faculty: Faculty of Engineering and Architecture
Department: Department of Engineering Design and Production
Professorship: Kon-41 Machine Design
Supervisor: Professor Kalevi Ekman
Instructor: Roope Takala, M.Sc. (Tech.)
In recent years, firms have increasingly sourced some or all of their product development functions
from outside specialists. Although the phenomenon is well documented, research in the theoretical
aspects of new product development (NPD) sourcing has been limited. Existing sourcing
frameworks and decision models are based on studies of functions such as manufacturing, logistics
and back-office services. This approach has biased the sourcing decision frameworks towards arms-
length contracts and cost focus, which are rarely the key drivers in NPD outsourcing. At the same
time, it has ignored or downplayed the importance of interpersonal issues. As a result, there is a
distinct lack of management toolkits for deciding how to properly outsource NPD-related functions.
This study combines three research streams (outsourcing decision-making, new product
development, and selection of service providers) and develops answers to two primary research
questions, namely 1) what features make a product so essential to the firm that its development
cannot be outsourced, and 2) how to determine what parts of the NPD process could be outsourced
to a specific service provider?
The research method is primarily conceptual, with emphasis on literary review from a wide range of
sources. The results emphasize he importance of trust and relationships in NPD outsourcing. A
systematic approach to sourcing is seen as a prerequisite to successful outsourcing. The study
identifies three basic strategies followed by firms outsourcing their NPD services, and develops
practical checklists to aid outsourcing decision-making. A framework that allows analysis of
sourcing decisions is also produced, and practical implications discussed.
The study also reports results from an industry survey featuring 60 respondents. The findings
suggest that NPD outsourcing in Finland follows pan-European NPD outsourcing practices.
Keywords: make or buy, outsourcing, product development, product strategy, design management,
decision model, trust, best practices
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TEKNILLINEN KORKEAKOULU DIPLOMITYÖN TIIVISTELMÄ
Tekijä: Janne M. Korhonen
Työn nimi: Käytännöllinen päätöksentekomalli tuotekehityspalvelujen
ulkoistamiseen
Sivumäärä: 222 + 37
Päivämäärä: 10.3.2009
Tiedekunta: Insinööritieteiden ja arkkitehtuurin tiedekunta
Laitos: Koneenrakennustekniikan laitos
Professuuri: Kon-41 Koneensuunnittelu
Työn valvoja: Professori Kalevi Ekman
Työn ohjaaja: Diplomi-insinööri Roope Takala
Kuluneina vuosina yritykset ovat enenevässä määrin hankkineet tuotekehitysosaamista ulkopuo-
lisilta spesialisteilta, ulkoistaen tuotekehityksensä kokonaan tai osittain. Vaikkakin ilmiö on hyvin
dokumentoitu, on sen teoreettista taustaa tutkittu vain vähän. Olemassaolevat ulkoistamismallit ja
päätöksenteon apuvälineet perustuvat suurelta osin valmistuksen ja logistiikan kaltaisten yrityksen
funktioiden tutkimukseen. Näiden tulosten soveltamista tuotekehityksen ulkoistamiseen rajoittaa se,
että ko. tapauksissa ulkoistamisella pyritään usein pääasiassa kustannussäästöihin. Lisäksi aikai-
sempi tutkimus jättää usein henkilökohtaisten suhteiden merkityksen vähemmälle huomiolle. Näistä
syistä olemassaolevat ulkoistamismallit sopivat heikosti tuotekehityksen ulkoistamiseen, mutta
kirjallisuudessa ei ole myöskään selkeitä “työkalupakkeja” liikkeenjohdon päätöksenteon tueksi.
Tämä diplomityö yhdistää kolmen tutkimussuunnan (ulkoistamisen päätöksenteko, tuotekehitys, ja
palveluntarjoajien valinta) löydöksiä ja kehittää vastauksia kahteen pääasialliseen tutkimus-
kysymykseen: 1) milloin tuoteominaisuus on niin tärkeä yrityksen kilpailukyvylle, ettei sen
suunnittelua tule missään tapauksessa ulkoistaa, ja 2) kuinka päättää mitä tuotekehitysprosessin osia
voidaan ulkoistaa tietylle palveluntarjoajalle?
Tutkimusmetodi on pääasiassa konseptuaalisen teorian kehittämistä laajaan kirjallisuuskatsaukseen
perustuen. Tutkimuksen tulokset korostavat luottamuksen ja henkilökohtaisten suhteiden merkitystä
tuotekehityksen ulkoistamisessa. Systemaattinen lähestymistapa nähdään vaatimuksena
onnistuneelle ulkoistamiselle. Yhtenä tuloksena tunnistetaan kolme perusstrategiaa, joita tuote-
kehitystään ulkoistavat yritykset seuraavat. Tutkimuksen tuloksia pyritään jalkauttamaan yrityksiin
kehittämällä käytännöllisiä tarkistuslistoja ja toimintamalleja, joiden avulla tuotekehityksen ulkois-
tamista voidaan tarkastella järkiperäisesti. Lisäksi tutkimuksessa tarkastellaan löydösten käytännön
merkityksiä eri toimijoiden kannalta.
Työssä raportoidaan myös tulokset 60 teollisuusyritystä käsittävästä kyselytutkimuksesta.
Tutkimuksen tulokset antavat syytä olettaa, että tuotekehityksen ulkoistaminen Suomessa noudat-
telee yleisesti ottaen Euroopassa vallalla olevia käytäntöjä.
Avainsanat: osta/tee-päätöksenteko, ulkoistaminen, tuotekehitys, tuotestrategia, design management,
päätöksentekomallit, luottamus, parhaat käytännöt
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4

Foreword
This thesis has been very much a learning process and very little just a task to be
completed before graduation. Having to combine research and writing with the
demands of starting up and working in a design agency – both something that the
author hadn’t done before – is now, in retrospect, something that the author doesn’t
recommend for the faint of heart, but it has definitely been an experience.
However, all the hard work has been worth it. The subject, which surfaced when the
author was working for TKK’s FutureLab of Product Design in late 2007, has been
a fascinating yet understudied one; the process, where around 900 hours of research
and writing were interspersed between long periods of subconscious thinking and –
sometimes – even actually doing outsourced innovation has been very fruitful in
depth of thought and insights into the subject. In the humble opinion of this author,
the lengthy gestation period has greatly improved the thesis and how it is presented.
At this point, thanks are in order. In addition to interviewees who generously
donated their time for answering questions from the author, special mention is in
order for the partners of Seos, our interdisciplinary design agency, for giving the
author their support and allowing the author some time to work on the thesis. Both
the advisor of the thesis, Roope Takala from Nokia Oyj, and the supervisor,
professor Kalevi Ekman at TKK, deserve the author’s gratitude for enduring the
process and giving helpful advice when it was most needed. Sincere apologies for
not being able to complete the work sooner: hopefully the result is worth the wait.
Finally, to Jaana, who kept me fed during the process.
In Helsinki, 10.3.2009
5

Table of contents
Foreword............................................................................................................................................. 5
Table of contents ............................................................................................................................... 6
List of figures...................................................................................................................................... 9
List of tables......................................................................................................................................10
List of diagrams................................................................................................................................11
List of abbreviations ........................................................................................................................12
1. Introduction..............................................................................................................................13
1.1. The need for a framework..............................................................................................16
1.2. Research questions...........................................................................................................18
1.3. The purpose and the outline of the thesis ...................................................................19
1.4. Research methodology ....................................................................................................21
1.5. Definitions ........................................................................................................................25
1.5.1. Outsourcing...................................................................................................................25
1.5.2. Offshoring .....................................................................................................................26
1.5.3. Product...........................................................................................................................26
1.5.4. Product development...................................................................................................27
1.5.5. Product development outsourcing.............................................................................27
1.5.6. Client ..............................................................................................................................28
1.5.7. Provider..........................................................................................................................28
1.5.8. Original Equipment Manufacturer (OEM) ..............................................................28
1.5.9. Original Design Manufacturer (ODM) .....................................................................29
1.5.10. Independent Design Team (IDT)............................................................................29
2. NPD outsourcing in theory....................................................................................................30
2.1. A brief history of outsourcing........................................................................................32
2.2. NPD outsourcing as a phenomenon ............................................................................35
2.3. Theory base: outsourcing and outsourced innovation...............................................39
2.4. Key research streams and positioning of the study ....................................................43
2.5. Strategic management......................................................................................................46
2.5.1. Make or buy decision-making.....................................................................................46
2.5.2. Outsourcing core competencies.................................................................................49
2.5.3. New product development .........................................................................................50
2.5.4. Modularity and design rules ........................................................................................51
2.6. Business to business services .........................................................................................57
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2.6.1. Design management .....................................................................................................58
2.6.2. Selection and evaluation of service providers...........................................................63
2.7. Network theories..............................................................................................................67
2.7.1. Social capital...................................................................................................................68
2.7.2. Institutions .....................................................................................................................70
2.7.3. Trust and relationships.................................................................................................72
3. Outsourcing as a process ........................................................................................................75
3.1. Introduction ......................................................................................................................75
3.2. Motives for outsourcing (why?) .....................................................................................78
3.2.1. Motives for NPD outsourcing....................................................................................81
3.3. Risks in NPD outsourcing (why not?) ..........................................................................85
3.4. Assessment ........................................................................................................................89
3.4.1. Identifying the objectives: three basic strategies ......................................................92
3.4.2. Determining process modularity ................................................................................96
3.4.3. Identifying the key value-added competences....................................................... 100
3.4.4. Assessment of implications of decision.................................................................. 107
3.5. Selection and negotiation ............................................................................................. 111
3.5.1. Information search and preliminary evaluation .................................................... 113
3.5.2. Request for proposals................................................................................................ 117
3.5.3. Shortlisting .................................................................................................................. 121
3.5.4. Selection and negotiation of relationship............................................................... 127
3.6. Execution and relationship management .................................................................. 135
3.6.1. Project transfer ........................................................................................................... 135
3.6.2. Project management .................................................................................................. 137
3.7. Lessons learned.............................................................................................................. 143
3.7.1. Renewal or termination of contract ........................................................................ 144
3.8. Master checklists for NPD outsourcing .................................................................... 146
4. Empirical survey .................................................................................................................... 154
4.1. Hypotheses ..................................................................................................................... 155
4.2. Survey design.................................................................................................................. 158
4.3. Operationalization of variables ................................................................................... 159
4.4. Survey execution and response rate............................................................................ 163
4.5. Results of the study....................................................................................................... 164
4.5.1. Background data ........................................................................................................ 167
4.5.2. Reliability and validity................................................................................................ 171
4.5.3. Hypothesis 1 ............................................................................................................... 172
4.5.4. Hypothesis 2 ............................................................................................................... 173
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4.5.5. Hypothesis 3................................................................................................................175
4.5.6. Hypothesis 4................................................................................................................178
4.5.7. Conclusions about hypotheses .................................................................................180
4.6. Other findings ................................................................................................................181
4.6.1. Differences in product development process ........................................................181
4.6.2. Obstacles to outsourcing NPD ................................................................................184
4.6.3. Reasons for outsourcing NPD .................................................................................186
4.6.4. Previous outsourcing and NPD outsourcing.........................................................187
4.7. Limits of generalization.................................................................................................191
5. Discussion and practical implications.................................................................................192
5.1. Impact on products and brands...................................................................................194
5.2. Impact on organizations ...............................................................................................196
5.3. Impact on business strategies.......................................................................................197
5.3.1. Offensive flexibility: shaping the marketplace .......................................................198
5.3.2. Opportunistic flexibility: real options approach ....................................................199
5.3.3. Defensive flexibility: contractors and crises ...........................................................200
5.4. Links to Open Innovation and crowdsourcing.........................................................202
5.5. Implications for service providers...............................................................................205
6. Conclusions.............................................................................................................................206
6.1. Directions for further research ....................................................................................207
7. References ...............................................................................................................................209
8. Appendices..............................................................................................................................223
8.1. Appendix A: Semi-structured interview protocol.....................................................223
8.2. Appendix B: Overview of outsourcing decision models .........................................225
8.3. Appendix C: The economics perspective...................................................................230
8.4. Appendix D: Baldridge criteria for core competences.............................................233
8.5. Appendix E: Discovery-driven planning....................................................................235
8.6. Appendix F: Bidder due diligence checklist...............................................................239
8.7. Appendix G: Key questions for a lean organization ................................................241
8.8. Appendix H: Empirical survey questionnaire............................................................247
8.9. Appendix I: E-mail invitation for the survey.............................................................259
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List of figures
Figure 1. Sony Ericsson Xperia smartphone - designed and built by HTC...................... 36
Figure 2. The positioning of the study, key theoretical areas, and research gaps............. 45
Figure 3. Four different cases of integration and internalization........................................ 55
Figure 4. Social capital and firm innovation........................................................................... 69
Figure 5. Losing competitiveness through outsourcing ....................................................... 88
Figure 6. How core competences create value. ................................................................... 101
Figure 7. Outsourcing options: make, buy or ally ...............................................................128
Figure 8. Outsourcing trade-off: flexibility need vs. control need.................................... 131
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List of tables
Table 1. Different types of outsourcing in terms of motives...............................................31
Table 2. Primary theoretical foundations for outsourcing. ..................................................42
Table 3. Primary research streams in outsourcing research. ................................................44
Table 4. Approaches used for selecting service providers....................................................66
Table 5. Motives for outsourcing .............................................................................................80
Table 6.. Primary motives for outsourcing NPD and their rationales................................84
Table 7. Activities modular enough to be considered for outsourcing at Widgets Ltd...99
Table 8. Preliminary division of core and non-core activities at Widgets Ltd................ 106
Table 9. Spotting strategic skills............................................................................................. 108
Table 10. Providers identified by Widget Ltd...................................................................... 116
Table 11. 'Hard' qualifications................................................................................................ 123
Table 12. 'Soft' qualifications. ................................................................................................ 124
Table 13. 'Pros' and 'Cons' of short-term versus long-term relationships in NPD....... 133
Table 14. Examples of measures of NPD quality, time, and cost.................................... 141
Table 15. Checklist for preliminary activities....................................................................... 147
Table 16. Checklist for identifying the objectives............................................................... 147
Table 17. Checklist for determining process modularity. .................................................. 147
Table 18. Checklist for identifying key competences. ........................................................ 148
Table 19. Checklist for assessing the strategic implications. ............................................. 148
Table 20. Checklist for information search and preliminary evaluation.......................... 149
Table 21. Checklist for request for proposals...................................................................... 150
Table 22. Checklist for shortlisting ....................................................................................... 150
Table 23. Checklist for selection and negotiation of relationship. ................................... 151
Table 24. Checklist for project transfer................................................................................ 152
Table 25. Checklist for project management....................................................................... 152
Table 26. Checklist for lessons learned. ............................................................................... 153
Table 27. Key figures of survey respondent firms/SBUs.................................................. 167
Table 28. Top three obstacles to outsourcing NPD. ......................................................... 184
Table 29. Five criteria for successful user innovation........................................................ 204
Table 30. Benefits and assumptions...................................................................................... 238
Table 31. Assumptions grouped with milestones form a task list.................................... 238
Table 32. Core competences checklist.................................................................................. 241
Table 33. Existing partnerships checklist............................................................................. 242
Table 34. Searching for new partners checklist................................................................... 242
Table 35. Negotiating a partnership deal checklist ............................................................. 243
Table 36. Implementing a partnership checklist ................................................................. 244
Table 37. Outsourcing partnerships checklist ..................................................................... 245
Table 38. Management disciplines for partnerships and outsourcing checklist............. 246
Table 39. Partnership culture checklist................................................................................. 246
Table 40. Technology enablers checklist.............................................................................. 246
10

List of diagrams
Diagram 1. Classification of respondents by category........................................................165
Diagram 2. Extent of NPD outsourcing. .............................................................................166
Diagram 3. Firm/SBU personnel. .........................................................................................168
Diagram 4. Firm/SBU turnover, in millions €. ................................................................... 169
Diagram 5. Firms by field of business. .................................................................................170
Diagram 6. The effect of client-provider relationship on NPD outsourcing. ................173
Diagram 7. The effect of key technology maturity on NPD outsourcing.......................175
Diagram 8. The effect of firm size to NPD outsourcing...................................................177
Diagram 9. The effect of product life cycle to NPD outsourcing.................................... 179
Diagram 10. Different product development approaches.................................................183
Diagram 11. What of the following are obstacles to NPD outsourcing?........................185
Diagram 12. Reasons for outsourcing NPD........................................................................ 187
Diagram 13. The extent of previous outsourcing initiatives..............................................188
Diagram 14. Previous NPD outsourcing experience..........................................................189
Diagram 15. Why firms aren’t outsourcing NPD any longer............................................190
11

List of abbreviations
AEI: Abductive Explanatory Inferentialism
CEO: Chief Executive Officer
GT: Grounded Theory
IDT: Independent Design Team
NDA: Non-disclosure agreement
NPD: New product development
ODM: Original Design Manufacturer
OEM: Original Equipment Manufacturer
RFP: Request for Proposals
SBU: Strategic Business Unit
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1. Introduction
New product development – the ability to identify the needs of customers and
quickly create products that meet these needs at low cost - is widely recognized to
be the mainstay of economic success of manufacturing firms (e.g. Hart, 1993; Wang
and Ahmed, 2004; Ulrich & Eppinger, 2008). Without effective new product
development, practically every firm will struggle and eventually fail in today’s heavily
competed markets. To make matters worse, in most cases product development is a
continuous race against time, budget, technology constraints, changing trends,
shortening product lifetimes and, ultimately, competitors. Nevertheless, product
innovation is the lifeblood of great companies. When conducted effectively, it
blunts competitive pressures, raises internal growth potential and adds an aura of
excellence (Teresko, 2008a) that helps to bring about a virtuous circle of continuous
improvement.
In recent years, increasing complexity has made product development far more
expensive. At the same time, decreasing product lifetime has made rapid product
development even more important than it used to be. Competitive advantages are
fleeting and short-lived, and creating new competitive advantages necessitate more
and more effective new product development.
However, simply pouring more money into same product development processes as
before faces the law of diminishing returns. Furthermore, many large companies
have outgrown their internal ability to innovate fast enough to sustain investor-
pleasing growth rates: a 70-billion euro firm seeking a 10% yearly growth needs to
invent ways to make seven billion Euros more in what is already a competitive market
(Huston and Nabil, 2006). New approaches are needed. In many cases, this means
that firms sharing mutual interests - and sometimes even competitors - must learn
to cooperate and network with each other, with other firms in the market, and with
the customers that are ultimately buying their products.
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More than perhaps any other function, new product development has traditionally
been shrouded in secrecy. New product development is intimately tied with the key
technologies and the strategy of the firm, and few firms want to share their secrets.
Nevertheless, the challenges outlined above, as well as opportunities awaiting
innovative companies, have spurred several firms to try out new and more open
approaches to both new and traditional problems.
What we have, as a result, is a dizzying variety of options available for product
managers and CEOs in an uncertain, rapidly developing environment. From
‘traditional’ product development outsourcing - using consultants for tasks such as
mechanical engineering or industrial design - to novel, Internet-enabled approaches
such as Open Innovation (Chesbrough, 2003) and crowdsourcing (Howe, 2006), the
range in both choice of partners and variety of options has exploded. The practice is
collectively known as the ‘extended enterprise’ (Jagdev and Browne, 1998; Dyer,
2000). Firms across the globe and across the industries have entered short and long-
term arrangements with other firms to acquire some aspects of product
development they have deemed important for the firm’s long-term success.
What is missing, on the other hand, are guidelines for choosing the right option.
Outsourcing manufacturing and infrastructure functions, and related decision-
making, have been discussed at length (for example, see Walker, 1988; Venkatesan,
1992; Quinn, 1994; Cánez et al. 2000; Jennings, 2002; Kakabadse and Kakabadse,
2002; Kumar and Eickhoff, 2005; Brannemo, 2006). Outsourcing has also been
criticized for being dangerous to long-term innovativeness of the firm (for example,
Tisdale, 1994; Chesbrough and Teece, 1996) and for being a product of
management fads, internal politics and political ideologies (Hendry, 1995). Different
approaches to ‘internal’ new product development processes have been
comprehensively covered by a variety of authors (for just some examples, see
Brown and Eisenhardt, 1995; Cooper, 2001; Ulrich and Eppinger, 2008).
Researchers have also been active in trying to find the economic and managerial
rationale for outsourcing innovation-related activities (some prominent examples
14

include Quinn, 2000; Chesbrough, 2003 and 2006; Hoetker, 2005; Love and Roper,
2005). Some of the drivers for outsourced product development have been
identified (Calantone and Stanko, 2007) and even the make-or-buy decision in
product development has been discussed, at least to some extent (Morin, 1999;
Barragan et al. 2003). However, despite the fact that companies consider sourcing
decisions as complex and tend to lack models supporting the decision process
(Brannemo, 2006), so far there have been no studies that provide firms interested in
outsourcing their product development tasks a prescriptive framework for dealing
with issues such as what to outsource and to whom. Although providing a
comprehensive framework for such a wide-ranging issue is beyond the scope of this
thesis, this study attempts to partially rectify the situation by developing a prescriptive
framework for choosing what to outsource, and to whom.
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1.1. The need for a framework
This lack of knowledge has implications beyond product managers and product
development teams. Any outsourcing decision should be viewed as a strategic
decision that has potential long-term implications, but outsourcing product
development, an activity central to the economic success and continuity of the firm,
should be treated with extreme caution. Therefore, even a sketch of an unified
framework on which to base the product development outsourcing decision-making
should be useful to general managers, product and line managers, and product
development teams. As Kakabadse and Kakabadse (2003, 61) conclude,
‘…unless top management has a clear view for both the strategic pathways to pursue and the
contribution of outsourcing in determining the shape and nature of their organization,
outsourcing may well be transactionally competently handled, but still not achieve the desired
outcomes.’
Although firms that routinely outsource product development often have their own
frameworks and procedures, to date no general model has been published. As
especially smaller firms may lack the resources to develop such models, this study
should be especially helpful to managers in smaller companies and business units
that are considering their options, but do not know how to proceed. Furthermore,
without a careful consideration of the future needs of the firm, outsourcing critical
functions piece by piece - ‘outsourcing creep’ - can spell disaster in the long term.
This is a real danger, given the fact that today many manufacturers have expanded
their businesses by providing design services for their clients (Schweber, 2003). This
can make it all too easy for stressed managers to make decisions with potentially
disastrous consequences for the long-term competitiveness of the firm.
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The absence of a structured framework affects suppliers of product development
services, too. Without knowledge of the factors that should be considered when a
client outsources a product development task, providers and their clients, run the
risk of committing mistakes that can have serious consequences to the success of
the project. Ultimately, this means reduced client satisfaction and damage to the
provider’s reputation and prospects of repeat business.
Of course, having - and using - a framework does not eliminate the risk.
Frameworks can only help the involved parties avoid some most common mistakes.
A framework can also help stimulate the thinking about the entire process, and raise
awareness about importance of involving different functional areas of the firm in
the outsourcing decision. As Ulrich and Eppinger (2008, 7) note, structured
methods 1) make the decision process explicit and allow everyone on the team
understand the decision rationale, reducing the possibility of moving forward with
unsupported decisions (again, helping to avoid the ‘outsourcing creep’), 2) act as a
‘checklist’ of the key steps, and 3) are largely self-documenting for future reference,
evaluation and education. In fact, previous research has found structure and
documentation being virtual prerequisites for successful decision-making in
production outsourcing projects (Cánez et al., 2000).
Of these, of particular importance is the role a structured process has in the
continuous development of the firm. Without a documented process, development
efforts grind to a halt. Even some hypothesis and a process is usually better than
none, and the process described in this thesis should serve as a basis for more
detailed framework which can then be customized to fit the specific needs of a firm.
17

1.2. Research questions
The research questions of this thesis can be stated as follows:
To produce a decision-making aid and guidelines for outsourcing product development
activities to external product development consultancies, especially
1) How to determine what functions or products could be outsourced to a specific
service provider?
2) What features make a product or a function so essential to the firm that know-
how to develop it must be kept within the company and cannot be outsourced?
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1.3. The purpose and the outline of the thesis
Focusing on core competencies while outsourcing the peripheral functions is
becoming more and more important, not to mention attractive, to firms in
hypercompetitive markets. However, as stated in the Introduction, increased
outsourcing may easily backfire. In particular, valuable competencies can be lost. On
the other hand, equally valuable opportunities may be lost if the firm hesitates to
make a decision. In new product development (NPD) settings, the choice is often
between starting a project with external help, or drastically reducing its scope to fit it
into busy schedules of internal NPD staff. Unprepared, both decisions can be
harmful to the firm. But how to make sense of the subject? How to build a ‘mental
model’ of NPD outsourcing, when existing research on NPD outsourcing is
fragmentary and limited? What’s more, due to interdisciplinary nature of the
phenomenon (see e.g. Hoetker, 2005; Hätönen, 2008), simply re-using old
outsourcing frameworks may easily result to misleading conclusions. A framework
based on one discipline – say, cost-minimizing, transactional outsourcing of easily
standardized component parts of the final product1 – is not just inadequate for
NPD outsourcing; at worst, it can be outright harmful to the firm.
This thesis tries to address the issue of NPD outsourcing based on most relevant
disciplines and help managers build a mental model of what NPD outsourcing is
about. Developing this mental model requires some background in phenomena
related to the subject, such as social capital. As a result, this thesis should be treated
more as a literature review and a sketch on the subject rather than a definitive study.
It is hoped by the author that this review helps firms struggling with the question of
outsourcing their core competencies to make some sense of the subject – at least as
far as new product development is concerned.
1 That is, the ‘traditional’ view of outsourcing as utilized in manufacturing industries.
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The outline of the thesis is as follows: after a discussion of research methodology
and defining the terms used, the historical context of the thesis is briefly sketched
out by short histories of outsourcing in general and outsourced innovation in
particular. These, in turn, build foundations for short treatise on theories
underpinning outsourcing research. Research streams used in the thesis are
identified and briefly outlined. The arguments from theory are then introduced.
The thesis also includes an empirical research on NPD outsourcing in Finnish
export business. The study aims to map the extent of phenomenon, as well as
highlighting challenges inherent in the field. A number of hypotheses are developed
from foreign literature, and are tested against empirical data.
Finally, the thesis includes a brief discussion on phenomena. Practical implications
are identified and presented. Discussion is based on literature review, empirical
research, and semi-structured interviews with various managers and other personnel
with experience in NPD outsourcing.
20

1.4. Research methodology
A challenge that both inspired and shaped this thesis was lack of available data on
the new product development outsourcing. Although prominent authors (e.g. Hagel
and Singer, 1999; Quinn, 2000; Rifkin, 2000; Friedman, 2005) have been declaring
the 2000s as the age when even core competences can and should be considered for
outsourcing, the phenomenon of outsourcing new product development is still far
from widespread. In addition, several journalists and researchers (e.g. Engardio et al.,
2005; Carson, 2007; Calantone and Stanko, 2007) have noted that even firms that
practice NPD outsourcing are often reluctant to talk openly about the subject. Both
of these difficulties were encountered during the research. Nevertheless, the
growing strategic importance of the subject became very clear from nearly every
interview of NPD professionals conducted by the author. Since the subject was
considered important but hard data – especially from Finnish firms – was difficult
to come by, the research relied heavily on literature, secondary data, and semi-
structured interviews and other discussions with professionals from various fields.
As outsourcing and new product development are in themselves broad subject
areas, understanding a phenomena as complex as NPD outsourcing by using a
single theoretical framework or only through qualitative or quantitative studies and
surveys would almost certainly lead to an oversimplified analysis. As stated above,
several authors (e.g. Hoetker, 2005; Hätönen, 2008) argue for an interdisciplinary
approach to the phenomenon. As a result, the research approach used in this thesis
is a generation of theory from various forms of data and various theoretical
backgrounds. The author recognizes that this approach results to a relatively lengthy
thesis; however, it is felt that the breadth is necessary for explaining the outsourcing
phenomenon. The data has been primarily qualitative, but quantitative data (e.g.
Holopainen and Järvinen, 2006) has also been used where appropriate. Of special
importance have been in-depth interviews of NPD professionals from companies A
21

and B2, whose comments helped to shape especially the final revision of this text.
The insights from the interviews are attributed in the text as Firm A interviews
(2008) or Firm B interviews (2008), respectively. These interviews were conducted
according to semi-structured interview protocol outlined by Bryman and Bell (2007,
474) and detailed in Appendix A. In addition, a survey of 60 Finnish export-oriented
firms was conducted as a preliminary to the study to determine the extent of the
phenomena in Finland. This study, its methodology, and results are detailed in
Chapter 4.
Although this thesis has been structured according to a standard theory-hypothesis-
test model, in reality the research has gone iteratively back and forth as new data,
literature, and ideas have emerged. Of course, this is what most researchers do
anyway: it is simple common sense to retrospectively formulate new hypotheses to
fit the data during the research process. Where this thesis differs is that hypotheses
were deliberately formed late in the research process, instead of picking a hypothesis
based on limited research and trying to prove or disprove it in some manner. The
latter is an example of ‘hypothetico-deductive orthodoxy’ (Haig, 1995) that may
cause researchers to be perhaps too concerned about empirical adequacy and
testability of their theories (Haig, 1995). In Master’s theses read by the author in
preparation to this research, this has sometimes led to low-content, underdeveloped
theories being prematurely tested with empirical methods. It is the opinion of
philosophers of science Thagard (1992) and Haig (1995), and also of this author,
that in social sciences - business research included – the focus should be on
establishing theory’s explanatory coherence. Explanatory coherence means, in short, that
theories developed should have more explanatory breath than previous theories, be
as simple as possible in terms of special assumptions made, and be supported by
analogies to theories that scientists already find credible (Thagard, 1992; Haig,
1995).
2 The names and details of participating companies and the interviewees have been obscured for
reasons of confidentiality.
22

The research approach of this thesis resembles, but does not entirely follow, so-
called ‘grounded theory’ methodology (Glaser and Strauss, 1967; Glaser, 1978;
Strauss, 1987; Strauss and Corbin, 1990; Glaser, 1992). Grounded theory (GT)
contradicts the traditional model of research, where the researcher chooses a
theoretical framework, and only then applies the model to the studied phenomenon.
The research principle behind GT is neither inductive nor deductive, but combines
both in a way of abductive reasoning (Glaser, 1998; see also Kantorovich, 1993).
This leads to an iterative research practice where data sampling, data analysis and
theory development are not seen as distinct and separate, but as steps to be repeated
until one can describe and explain the phenomenon that is to be researched, and
new data does not change the emerging theory anymore. As the goal in grounded
theory is to generate concepts that explain people’s actions regardless of time and
place, instead of accurately describing the events or ‘proving’ a hypothesis, it is
particularly suitable for generating aforementioned ‘mental models’ and frameworks
to help decision-makers do better decisions.
Where this thesis differs from ‘pure’ grounded theory approaches is in details and
some practices of research. Grounded theory expects the researcher to start with as
few preconceptions as possible (Glaser, 1992) and, for example, start with research,
not with literature review. Grounded theory also demands more systematic coding
of research data than was actually practiced during this research, although given this
text’s highly iterative creation process3 the end results might not have been very
different.
Nevertheless, simply because the author came into contact with grounded theory
methodology only late in his research, this study cannot be said to follow the
‘textbook’ grounded theory approach, and fits better with a more general account of
scientific method called ‘abductive explanatory inferentialism’ or AEI (Haig, 1995).
This means that the theory is generated heuristically, or abductively (Kantorovich,
3
11 substantial revisions with a total of nearly 850 pages, some 250 pages of notes, and nearly 500
references.
23

1993), and is appraised in terms of what philosophers have come to call inference to
the best explanation (Haig, 1995), i.e. whether the theory provides a better explanation
of the evidence than its rivals. Thus, it is a hope of the author that this study be
evaluated on its explanatory coherence, rather than methodological purity.
24

1.5. Definitions
Evolution of practice and theory over the last decades has caused researchers,
managers and trade press to use often inconsistent and sometimes contradictory
terms for many activities that fall under the outsourcing paradigm. For this reason,
this section seeks to define the important terms used in the study. Most of the
terminology follows current practice in electronics industry (see Schweber, 2003),
with some additions from general outsourcing research (e.g. Gilley and Rasheed,
2000).
1.5.1. Outsourcing
Generally, past studies about outsourcing have defined outsourcing so broadly that
it can include virtually any good or service that an organization procures from
outside firms (Gilley and Rasheed, 2000, 764). A narrow definition of outsourcing
covers only situations where the ownership of an activity is transferred by divesting
previously internal functions or processes4.
However, for reasons of clarity and simplicity this thesis uses a broader definition
that also includes other long-term contracts that seek to buy capabilities that the
firm needs, even if the firm didn’t originally produce that capability5. Therefore,
activities that are considered as outsourcing in this thesis include capability sourcing
(e.g. Godfredsson et al., 2005) and strategic procurement (Venkatesan, 1992).
A prudent choice is to use definitions that fit the phenomena under study. As this
thesis deals mostly with outsourced R&D services, with the exception of cases where
the NPD service provider also manufactures the final products (so-called Original
4 ‘Outsourcing through substitution’ (Gilley and Rasheed, 2000, 764).
5 ‘Outsourcing through abstention’ (Gilley and Rasheed, 2000, 765).
25

Design Manufacturing), definition of the word ‘outsourcing’ used in this thesis is
purchasing any capabilities, activities, processes or functions from outside the company as a part of
the new product development process.
1.5.2. Offshoring
An important differentiation is between outsourcing and offshoring, i.e. transferring
jobs to low-cost countries in order to take advantage of cheaper labour (so-called
labour arbitrage). Outsourcing may involve offshoring, but offshoring can also take
place within the company, without involving any outside suppliers. As location
decision is beyond the scope of this thesis, the text does not explicitly make a
distinction between in- and offshored activities.
1.5.3. Product
A product is something sold by an enterprise to its customers (Ulrich & Eppinger,
2008, 2). Today, this increasingly refers to a mix of physical products, software, and
services - collectively known as the offering - but for reasons of clarity, the word
product is used throughout this text. Although the focus of this text is on engineered,
discrete, and physical products, most of the methods and findings are broadly
applicable to development of services or software (however, for software NPD
outsourcing, see Hätönen, 2008).
26

1.5.4. Product development
Product development is the set of activities beginning with the perception of market
opportunity and ending in the production, sale, delivery (Sheldon, 2004; Ulrich &
Eppinger, 2008, 2) and ultimate re-use or disposal (see McDonough & Baumgard,
2005) of the product. For the purposes of this thesis, product development is defined to
include the following phases (Ulrich & Eppinger, 2008, 9):
1) Planning
2) Concept development
3) System-level design
4) Detail design
5) Testing and refinement
6) Production ramp-up
Reader may note that these phases correspond roughly to the famous and often-
used ‘Stage-Gate™’ model of product development and management (Cooper,
1992). However, since this thesis is more concerned with sourcing the individual
tasks and sub-processes included in a product development process, rather than the
management of the entire process, Ulrich and Eppinger’s generic model is used as a
framework.
1.5.5. Product development outsourcing
Product development outsourcing, or NPD outsourcing, refers to product
development activities performed by an external provider. In practice, product
development outsourcing can be anything from buying ‘turnkey’ designs and
27

manufacturing from external sources, to engaging a consultant to design a particular
component or perform e.g. industrial design for the product.
1.5.6. Client
The word ‘client’ in this thesis refers to a person or organization that is purchasing
product development services, i.e. the customer for those services.
1.5.7. Provider
In this thesis, the term ‘provider’ refers to a person or organization supplying
product development services to a client. ‘Provider’ can also refer to a network of
providers working collaboratively or competitively, as is the case in open innovation
(Chesbrough, 2003) and crowdsourcing (Howe, 2006), respectively. These networks
include, but are not limited to: 1) suppliers, 2) supplier’s suppliers, 3) distributors, 4)
franchisees, 5) other middlemen, 6) customers, 7) customer’s customers, and other
specialized resources such as university professors and consultants (Peters, 1992,
310).
1.5.8. Original Equipment Manufacturer (OEM)
Original Equipment Manufacturer is a term that has, in practice, been used to refer
to very different and even contradictory business practices6. The definition used in
this thesis is that an OEM is a company that gains most of their profit from either
manufacturing its own products or purchasing products or components from
another company and reselling the products or components with the purchasing
6
The term ‘OEM’ is sometimes used to refer to firms that make products for others to brand and
sell; in this thesis, this practice is called Original Design Manufacturing (ODM).
28

company’s name or logo on them. Thus, OEMs are clients for ODMs. Today, many
OEMs are primarily product definers and marketers, leaving manufacturing and
sometimes detailed design to ODMs and contract manufacturers. (Schweber, 2003,
68)
1.5.9. Original Design Manufacturer (ODM)
Original Design Manufacturers are companies that design and build products for
marketing under another company’s brand and usually own the intellectual property
rights of the product, in contrast to simple contract manufacturers who
manufacture products designed by their clients. The clients of ODMs include
Original Equipment Manufacturers (OEMs) and other brand-name organizations
such as large retail chains or mobile telephone operators. It is important to note that
the distinction between ODM and OEM is rather flexible, especially as many
ODMs are in a track for becoming branded OEMs in their own right (see e.g.
Engardio et al., 2005). For the purposes of this thesis, a company is considered an
ODM if most of their profit comes from ODM activities. (Schweber, 2003, 68)
1.5.10. Independent Design Team (IDT)
IDT’s are vendors that provide for-hire design services and are capable of doing
most if not all of the new product development process by themselves. In some
cases, IDTs can have manufacturing capabilities (at least in limited amounts, such as
for trial runs and prototyping) but they expect to make most of their profit from
design rather than manufacturing phase. (Schweber, 2003, 68)
29

2. NPD outsourcing in theory
The world can doubtless never be well known by theory: practice is absolutely necessary: but
surely it is of great use to a young man, before he sets out for that country, full of mazes,
windings, and turnings, to have at least a general map of it, made by some experienced
traveller.
Lord Chesterfield (1694-1773), a British statesman.
This first part of the thesis aims to explain the theoretical and historical background
for outsourcing phenomenon. To a large extent, the theoretical position of this
thesis falls between several different but – to some extent – overlapping research
traditions. This is largely because the complex and extensive nature of outsourcing
phenomenon encourages the adoption of a highly interdisciplinary perspective (see
also Hätönen, 2008, 35-37; and Hoetker, 2005). In fact, it could be argued that
outsourcing, and particularly innovation outsourcing, cannot be fully understood
from just one theoretical position alone. Understanding outsourcing requires also an
understanding of historical developments that have made outsourcing first an
attractive option for cutting costs, and later a viable way of acquiring competencies
and transforming the organization in the ‘age of access’ (Rifkin, 2000): a world
where ownership of activities matters less than access to world-class competencies.
Both in practice and in theory, outsourcing has proceeded through several distinct
phases. Hätönen (2008, 19 and 69) identified three distinct phases of outsourcing,
which he dubs ‘big bang’ of outsourcing (1980s to early 1990s, with focus on cost
cutting), ‘bandwagon’ (early 1990s to early 2000s; focus on cost cutting and capability
enhancement) and ‘barrierless organization’ (from the early 2000s onwards; focus on
organizational transformation). These phases are summarized in Table 1.
30

Table 1. Different types of outsourcing in terms of motives. Adapted from
Hätönen (2008, 19 and 69)
Type Definition Examples of motives Emerged
Transactional Outsourcing aimed directly Reduce costs Big bang:
outsourcing at cutting and reducing Cost discipline/control 1980s-early
operational costs Lower operational costs 1990s
Resource-seeking Outsourcing primarily aimed Aim to achieve and acquire best Bandwagon:
outsourcing at acquiring resources practices early 1990s to
and/or capabilities that are Improve service quality early 2000s
unavailable, inadequate or Access to new technology and
insufficient internally skills
Lack of expertise in-house
Access to a flexible workforce
Transformational Outsourcing aimed at Focus on core Barrierless
outsourcing transforming the competencies/activities organization:
organization into a more Improve business from the early
dynamic, efficient, and more focus/internal reorganization 2000s
focused economic unit Flexibility onwards
Free up internal resources
Accelerate projects
In the following sections, these historical and theoretical developments are briefly
outlined. First, a brief history of outsourcing in general is presented, followed by a
discussion of history of innovation outsourcing. After this introduction, theory base
underpinning outsourcing and innovation outsourcing research is reviewed and
examined. Theories and research streams used in this thesis are also selected and
outlined.
31

2.1. A brief history of outsourcing
There are very few new things under the sun. In practice, outsourcing traces its
roots to Roman tax collectors who were sold rights for collecting taxes (Kakabadse
and Kakabadse, 2000), and outsourcing as a theoretical phenomena has been around
at least since the publication of Adam Smith’s famous thesis Wealth of the Nations
(1776), where Smith argued that the specialization of labour would bring benefits to
all. In the early 1900’s, both industrial practice and management theory argued for
vertically integrated and self-sufficient firms in a belief that size and vertical
integration were an advantage to a firm (Greaver, 1998, 77). This was challenged
during the 1950’s when outsourcing was first suggested as a corporate strategy
(Quinn and Hilmer, 1994).
Since the late 1960’s, as the average size of industrial firms has decreased,
outsourcing has been rising in importance. The importance of outsourcing has risen
dramatically after the communications revolution of early 1990’s provided
companies with ways to communicate even with far-flung suppliers and made
outsourcing a viable strategy not just for cutting costs, but also for seeking value-
adding skills, competences, and knowledge outside the organization (e.g. Quinn and
Hilmer, 1994; Kakabadse & Kakabadse, 2000; Kakabadse & Kakabadse, 2005). This
‘strategic outsourcing’ (e.g. Quinn and Hilmer, 1994; Alexander, 1996a) involved
more strategic functions and encouraged firms to build closer relationships with
their vendors as arms-length, cost-minimizing approaches to relationship
management became insufficient.
Increased knowledge and practice in outsourcing led organizations to outsource
many activities traditionally carried out in-house. By the end of the 1990s,
outsourcing had become a standard operating procedure in nearly all industries
(Hätönen, 2008, 18). Because standard operating procedures cannot provide
competitive differentiation, during the 1990s outsourcing moved on from focusing
primarily from divesting the peripheral, non-core activities of the business - such as
32

cleaning, catering and site security - in order to focus on ‘core’ businesses (Prahalad
& Hamel, 1990; Kakabadse & Kakabadse, 2005) towards more critical areas such as
design, manufacture, marketing, distribution and information systems (e.g. Jennings,
1997; Quélin and Duhamel, 2003, Gottfredson et al., 2005; Carson, 2007).
Outsourcing previously internal activities is possible, because in an increasingly
integrated world economy, there is no longer such a need to ensure reliable
suppliers of raw materials such as iron and oil. In addition, uncertainties due to
limited communications capabilities have diminished and communication in general
has become ubiquitous; and, perhaps most importantly, brainpower, not raw
material, is the source of most value added (Peters, 1992, 305). As the pace of
change in every business is accelerating, business leaders have noted that leveraging
the skills, contacts, and expertise of a network enables firms to grow much faster
than they would by just internal growth and competency development (von Ghygzy
et al., 2002). This, in turn, has attracted investors who have come to reward focus
and innovation over size and diversity (Greaver, 1998, 77). The end result has been
an explosion of outsourcing across industries as diverse as aerospace, automobiles,
chemicals, computers, electronics, energy systems, financial services, healthcare,
software, and telecommunications (e.g. Quinn, 2000; Dahan and Hauser, 2002;
Carson, 2007). As a result, our current hypercompetitive economic system could be
referred to as an outsourcing economy, given the increased focus on core organizational
activities and the simultaneous leveraging of assets not controlled by the firm
(Hätönen, 2008, 15).
Formally, the discussion about outsourcing is a discussion about vertical integration of
the firm. As scholars such as Hayes et al. (2005) have noted, the advice on what
actually is the optimum vertical integration strategy has been changing with the
times. For example, Hayes et al. (2005, 116) note that
‘In the mid-1980s, BusinessWeek, for example, warned from dire consequences that would
result from extensive outsourcing and even coined the pejorative term ‘hollow corporations’ to
33

describe companies that possessed no manufacturing capabilities of their own. But in a more
recent article the same magazine trumpeted the virtues of outsourcing and argued, ‘The effect
on innovation could be huge…’’
In fact, it was BusinessWeek’s Pete Engardio who first coined the term
‘transformational outsourcing,’ (Engardio, 2006) referring to strategies that aim to create
radically new business models that can change the game in a firm’s industry. In this
view, the future competitive edge is seen to lie in flexibility achieved through a tight
operational focus and the leveraging of external core competences outside of this
focus area (e.g. Quinn, 1999). As rapid change across industries makes core
competences only temporal, coping in the new economy requires firms to
constantly refine and modify their existing pools of knowledge, skills, and resources.
Fine et al. (2002) even suggest that a firm’s real value-creating competency, and
perhaps the only sustainable one, might be its ability to continuously restructure its
value chain. This leads to outsourcing more and more critical and knowledge-
intensive business components, often in close cooperation with the provider
(Hätönen, 2008, 19).
The key management challenges lie in recognizing the key competence areas,
creating a flexible organization that focuses on value-creating competences, finding
providers to provide the value to the rest of the operations, and managing the
resulting global network of providers (Hätönen, 2008, 16-19). In parallel with the
new challenges, this industrial fragmentation also offers firms various opportunities.
34

2.2. NPD outsourcing as a phenomenon
Today, the focus of outsourcing activities has moved from ‘simple’ activities
upwards in the value chain, towards more knowledge-intensive activities (e.g.
Jennings, 1997; Quinn, 2000; Chesbrough, 2003; Quelin and Duhamel, 2003;
Brannemo, 2006; Salminen, 2008; Hätönen, 2008). Even though manufacturing
firms have long outsourced much of actual manufacturing of their products or
components, most have insisted that all the important research and development
work would remain in-house. As common wisdom and anecdotal evidence point
out that ability to develop new products can be accidentally lost by ‘hollowing out’
the firm through outsourcing all production (Tisdale, 1994; Chesbrough and Teece,
1996; Hayes et al., 2005), outsourcing product development deliberately has been
viewed with some suspicion.
Nevertheless, considerable empirical evidence exists of the value of utilizing external
resources for promoting new product development (e.g. Freeman, 1991; Karlsson,
1997; Koschatzky, 1998; Oerlemans et al., 1998; Love and Roper, 1999, Hätönen,
2008), and the use of outside consultants for product development has, for years,
been routine in many if not most firms. Beginning with industrial design
outsourcing in the 1980s and 1990s, the increasing complexity of products and their
shorter life-cycles demanded expertise from a range of different sources, while the
use of technology (i.e. CAD/CAM, embedded systems, etc.) in the design process
facilitated a change in practice that increased the opportunities for changing
organizational forms (Bruce and Morris, 1998). In short time, outsourcing has
dramatically altered new product development in various industries where product
development has come to be viewed fundamentally as a function dispersed across
collaborating firms (Quinn, 2000; Dahan and Hauser, 2002). This decomposition of
production activities from each other and from design (Ulrich and Ellison, 2005;
Carson, 2007) has created market opportunities for several large and small firms,
causing a shift towards buyers’ markets where firms of all sizes in nearly all
35

industries can capitalize on their external sources of knowledge and capabilities
(Hätönen, 2008, 16).
With services ranging from specialist expertise provided by design and engineering
consultancies to so-called original design manufacturers (ODMs) who market
complete, manufacturing-ready and rebrandable designs, these providers are playing
an increasingly important part in the global economy. For example, in 2005,
estimated 70% of PDAs, 65% of notebook PCs and MP3 players, 30% of digital
cameras and 20% of mobile phones were designed either completely or at least
significantly by ODMs and sold under other, better-known brand names (Engardio
and Einhorn, 2005). Examples from less high-technology industries such as Procter
and Gamble7 suggest that a trend towards greater outsourcing is not confined to
high-tech consumer electronics.
Figure 1. Sony Ericsson Xperia smartphone - designed and built by HTC. (Photo
credit: Sony Ericsson)
7 Procter and Gamble’s ‘Connect and Develop’ Open Innovation initiative aims to source 50% of
its new products from outside the company; see e.g. Nambisan (2007).
36

As technologies mature, the borderline between mission-critical and commodity
R&D is sliding year by year. As a result, NPD outsourcing has been steadily on rise
for the last two decades (Roberts, 1995; Duga and Studt, 2005; National Science
Foundation, 2005). Firms are increasingly turning to their providers for complete
turn-key solutions, as even co-design with help from outside specialists is becoming
too difficult, expensive, or slow. For their part, providers are hungry to expand the
scale and scope of their services, so that parts suppliers build up capabilities in
design, and (more rarely) design firms claim stakes in manufacturing. In other cases,
firms turn to outsiders for big ideas, and then turn those concepts into actual
products8. The fine line between NPD services and other business services is
further blurred by developments where brand-building agencies have employed
product designers and even engineers to help them build entire customer
experiences for their clients, from establishing the brand identity to delivering
products that follow and enhance that identity (e.g. Alviani, 2008; Merholz et al.,
2008).
When all goes well, these developments have resulted to impressive increases of
productivity. Through adroit use of outsourcing and new information technologies,
firms have been able to reduce their time to market for new innovations by as much
as 60 to 90 %, decrease their investments by similar amounts, and radically increase
the value added from innovation (Quinn, 1994, 2000; Narula, 2001; Harland et al.,
2005). It is no wonder that, according to a preliminary investigation by Calantone
and Stanko (2007), there appears to be consensus among researchers and managers
that outsourcing of innovation-related activities is here to stay, and that it could
conceivably become extremely important in the future. However, firms still need to
guard some sustainable competitive advantage, whether it’s control over the latest
technologies, the look and feel of new products, or the customer relationship
(Engardio and Einhorn, 2005) or risk being surpassed in the marketplace.
8
For one example, see Helm (2007).
37

In practical terms, NPD outsourcing happens on two levels. Firms either purchase
specialist expertise needed for a certain task from outside providers acting as
consultants to the NPD process9, or they define the required product features and
completely or nearly completely outsource the actual design work. Whether and
how much firms work with these independent design teams or original design
manufacturers during the process depends on the nature of the project and the
firm’s strategy. Some product definers are actively involved in the externalized
design process, while others prefer a hands-off approach. A borderline case that can
also be counted as NPD outsourcing is when firms create designs themselves but
work collaboratively with outsourced manufacturer to refine the design’s
manufacturability. As contract manufacturers are eager to capture a greater share of
the value in NPD process, this has increased to a point where most manufacturers
offer some kind of manufacturing ramp-up or design services.
9 Examples include market research, industrial design, mechanical engineering etc.
38

2.3. Theory base: outsourcing and outsourced innovation
Research on using markets to conduct transactions previously conducted in-house
dates back to 1970’s (e.g. Williamson, 1975), with the first mention of the concept
‘outsourcing’ occurring in the mid-1980s10. Initially, research focus was on
transaction cost economics (Williamson, 1975; Coase, 1937), which suggest that
transactions should be organized within a firm when the cost of doing this was
lower than the cost of using the market. Since then, research has expanded to other
fields and become interdisciplinary in nature (Hoetker, 2005). Hui and Beath (2001)
analyzed 143 studies on outsourcing and identified four main theoretical bases
underpinning outsourcing research:
1) Transaction cost economics,
2) Other economic theories such as agency theory and production cost economics,
3) The resource-based view of the firm, and
4) Social-exchange/trust/relationship theories.
Research on outsourced innovation, in contrast, remained for long a province of
historians of technology. Before the 1980s and the rise of computer start-ups and
specialized design agencies, typical examples of outsourced innovation were 19th
century independent inventors who sold their inventions to burgeoning industries
of the time (Howells, 1999). As a research concept, outsourcing NPD activities
became under discussion after the initial wave of transactional outsourcing (see
Nyström, 1985). However, research in outsourced innovation really took off only in
the late 1990s.
Of particular importance to the topic was the publication of articles and books on
open innovation (Chesbrough, 2003, 2006). The idea behind open innovation is that in
10 According to Hätönen (2008, 39), the concept was first used by Pastin and Harrison (1987).
39

a world of widely distributed knowledge, firms cannot rely entirely on their own
research, but should instead buy or license innovations from other firms while
simultaneously using outsiders to help commercialize innovations that are
developed in-house but don’t fit the firm’s business model. The similarities to
historical examples discussed above (Howells, 1999) are readily apparent, although
Chesbrough (2003) goes beyond simple licensing of external inventions by stating
that firms should also out-license technologies they don’t see as attractive to
commercialize by themselves. More recently, crowdsourcing, or outsourcing design
problems to the public rather than to another organization (Howe, 2006; Tapscott
and Williams, 2006) has attracted both attention and criticism in the business press.
Again, this practice has deep historical roots in various prizes awarded for solving
some particularly important problem, for example the 1714 ‘longitude prize’ offered by
the British government to anyone who could solve the problem of time-keeping at
sea. Such practices have continued to the present day; some prominent examples are
DARPA Grand Challenges and Ansari X-Prizes, both intended to stimulate
innovation by giving inventors an incentive to develop radical new solutions.
Compared to other types of outsourcing, the relative lack of research on NPD
outsourcing is partly due to the problem lamented in several of the studies about
NPD outsourcing: the difficulty of getting hard data on the phenomena due to
NPD’s sensitive role and the importance of confidential personal relationships (e.g.
Engardio et al., 2005; Carson, 2007; Calantone and Stanko, 2007). Some data exists
in form of industry surveys and benchmarking studies (e.g. Roberts, 1995; Love and
Roper, 1999, 2004; Sobrero and Roberts, 2001; Howley, 2002; Duga and Studt,
2005; National Science Foundation, 2005; Holopainen and Järvinen, 2006, among
others), and an abundance of less academic accounts such as trade press articles,
case studies and books on NPD outsourcing can be found (e.g. Engardio et al.,
2005; Huston and Sakkab, 2006; Tapscott and Williams, 2006; Helms, 2007; Alviani,
2008; Brown, 2008; Neumeier, 2008). The latter often include ‘how-to’ guides about
best practices when outsourcing NPD activities.
40

Nevertheless, research literature has approached R&D sourcing and innovation
outsourcing from a variety of theoretical bases, including knowledge flows (e.g.
Tarun et al, 1998), location and industry clusters (e.g. Koschatzky, 1998), transaction
cost economics (e.g. Love and Roper, 1999; Ulrich and Ellison, 2005; Calantone and
Stanko, 2007) industry networks (e.g. Powell, 1998; Hagel and Singer, 1999; Zirpoli
and Caputo, 2002; Baloh et al., 2008), Calantone and Stanko, 2007), resource-based
view of the firm (e.g. Quinn, 2000), and intellectual property rights (e.g. Love and
Roper, 2004; Hoecht and Trott, 2006). Outsourcing industrial design – often a
precursor for more comprehensive NPD outsourcing – has also been discussed at
length (e.g. Bruce and Morris, 1998; Best, 2006). One of the latest additions to
literature discusses outsourced innovation in terms of real options (Vanhaverbeke et
al., 2008), or small, initial investments that help firms deal with uncertainties by
buying ‘options’ to new ideas or technologies, thus increasing their flexibility11.
Hoetker (2005), discussing the problems of identifying a manufacturer for
technically innovative components, identified three relevant research bases for
analyzing component development and manufacturing relationships. These are
1) Transaction cost economics (e.g. Williamson, 1975),
2) Firm capabilities (e.g. Barney, 1991; Winter, 1987).
3) Inter-firm relationships (e.g. Gulati, 1995; Uzzi, 1996)
In summary, Table 2 presents main theoretical foundations for outsourcing
research. As can be seen from the Table, this thesis is based primarily on the
resource-based view of the firm and on social exchange/trust/inter-firm
relationship theories. As NPD outsourcing is only rarely about cutting the costs,
transaction costs and other economic theories are not as relevant to the thesis as
they would be in more transactional outsourcing.
11
For an overview of real options approach and how it helps firms increase their flexibility and
cope with uncertainty, see e.g. Kogut and Kulatilaka (2003).
41

Table 2. Primary theoretical foundations for outsourcing and innovation outsourcing.
Research bases for Research bases for R&D Research bases
outsourcing (Hui and relationships (Hoetker, 2005; primarily used in this
Beath, 2001) Hoecht and Trott, 2006) thesis
1. Transaction cost economics
2. Other economic theories
1. Transaction cost economics 1. The resource-based
(agency theory, production cost
2. The resource-based view of the view of the firm (firm
economics)
firm (firm capabilities) capabilities)
3. The resource-based view of
3. Social exchange/trust/relationship 2. Social exchange/trust/
the firm
theories relationship theories
4. Social
4. Intellectual property rights
exchange/trust/relationship
theories
42

2.4. Key research streams and positioning of the study
Both Hätönen (2008) and Hoetker (2005) argue that to understand the trade-offs
involved in outsourcing decisions, multiple viewpoints and multiple theories should
be integrated. Hätönen (2008, 43) went on to identify four discipline-based research
streams on outsourcing in general (Table 3). However, in contrast with Hätönen’s
work on software NPD outsourcing in small firms, this thesis deals primarily with
discrete, engineered goods and their design and development. Additionally, this
thesis does not cover the location decision (in-shore or off-shore) and therefore
lacks the explicit international business aspect.
On the other hand, this thesis argues that the role of relationships and relationship
management, specific features of service businesses, and the role social capital plays
in the process have been undervalued by previous research. Therefore, relevant
research streams for this thesis include strategic management, service businesses,
and social capital, including institutions12. In addition, the author argues that research
on external design services can provide insights into the practice and future of NPD
outsourcing. (Table 3)
12As defined by Akerlof (1970) and Holmström (1985); i.e. mechanisms and organizations that
provide clients with more complete information in regard to services purchased.
43

Table 3. Primary research streams in outsourcing research, and those used in this
thesis.
Research streams on Primary research
Key theoretical areas used in this
outsourcing streams used in
thesis and an example of sources
(Hätönen, 2008, 43) this thesis
1. Make-or-buy decision making (e.g. de
Boer, 2006)
1. Strategic management
2. Outsourcing core competencies (e.g.
2. Supply chains
1. Strategic Gottfredson et al., 2005)
3. International business
management 3. New product development (e.g. Ulrich and
4. Information systems
Eppinger, 2008)
/technology
4. Modularity (e.g. Baldwin and Clark, 1997)
and design rules (Ulrich and Ellison, 2005)
1. Selection and evaluation of service
providers (e.g. Gallouj, 1997)
2. Service business
2. Design management (e.g. Bruce and
Morris, 1998)
1. Trust/relationship and innovation (e.g. Mu
3. Social capital et al., 2008)
2. Institutions (e.g. Holmström, 1985)
The positioning of the study and its key theoretical areas are introduced graphically
in Figure 2. The primary research streams and theoretical areas used in this thesis
are introduced briefly in the following sections.
44

Figure 2. The positioning of the study, key theoretical areas, and research gaps to
be addressed.
45

2.5. Strategic management
According to Hätönen (2008, 44), the literature on strategic management is largely
focused on the resource base, the core competencies and the boundaries of the
firm. Where outsourcing is concerned, the main focus in the literature is the
rationale and incentives behind the actions leading to outsourcing. Strategic
management literature used to see outsourcing as a tool for either trimming the cost
base (transactional outsourcing) or acquiring resources that were insufficient or not
internally available (resource-seeking outsourcing), but as increased competition and
falling interaction costs have caused companies to outsource more critical functions
and processes, the focus in strategic management literature has shifted to the
creation of superior customer value (see, for example, Merholz et al., 2008).
As a strategy, outsourcing is typically used either to outsource only a part of an
integrated function while retaining responsibility for coordinating the function, or as
a ‘turnkey’ or total outsourcing, where the client outsources an entire function to an
external provider (van Weele, 2000, 54-55).13
2.5.1. Make or buy decision-making
In strategic management literature, outsourcing or make-or-buy decision has been
approached from different perspectives such as economics, purchasing, operations
research, accounting and strategic management (Cánez et al., 2000). Despite their
outward differences, most outsourcing decision-making frameworks basically
13
According to Willcocks and Choi (1995), total outsourcing generally refers to a situation in which
more than 80 percent of the function or process is outsourced. In NPD practice, the client
commonly undertakes product concepting and gives the resulting specifications to the total service
provider, who then performs detailed design and engineering for the product.
46

consist of a limited number of steps and share common aspects.14 The outsourcing
process itself will be discussed in more detail in Section 3.
The discussion about what actually causes firms to start the outsourcing process,
beyond vague references to trends and market forces, is not present in all of the
studies. Although some studies seem to make the implicit assumption that firms are
always on a lookout for a ‘better deal,’ Cánez et al. (2000; see also de Boer et al.,
2006) note that usually only ‘trigger’ events, such as changes in economic
conditions, cause firms to re-evaluate their policies. Unless such events occur, firms
only rarely start costly search and evaluation processes. Triggers also serve as bases
for performance measures for the success of outsourcing initiative. For instance, if
the trigger is cost reduction, cost saving is logically the key performance measure.
An important addition from de Boer et al. (2006) is that the resulting search includes
both cognitive (i.e. cost analysis and other analytical tools) and experiential (‘trying
before buying’) evaluation, and continues only until the quality and/or quantity of
information exceeds a threshold level, when a tentative solution is determined and
evaluated.
The primary contribution of de Boer et al. (2006) was to take explicitly into account
concepts of bounded rationality and satisficing. Current strategic management theory
recognizes (see e.g. Mintzberg et al., 1998) that most decision processes stop after
first ‘good enough’ solutions are identified (satisficing) and the decision-maker is
expected to work under conditions of bounded rationality, where all the information
is not available, and the decision-maker cannot know whether s/he knows everything.
Bounded rationality also allows for the fact that decision-makers are usually
14
The frameworks reviewed for this study were from Walker (1988), Venkatesan (1992), Welch
and Nayak (1992), Quinn and Hilmer (1994), Apte and Mason (1995), Bruce and Morris (1998),
Lonsdale et al. (1998), Greaver (1998), Vining and Globerman (1999), Sislian and Satir (2000), Fill
and Visser (2000), Cánez et al. (2000), Chiesa et al. (2000), McIvor (2000), Probert et al. (2000),
Milgate (2001), Jennings (2002), Kakabadse and Kakabadse (2002), Momme and Hvolby (2002),
Offodile and Abdel-Malek (2002), Eklund (2004), Kumar and Eickhoff (2005), de Boer et al. (2006),
and Hätönen (2008). For a reader interested in a more detailed description, Appendix B contains
brief summaries of several more prominent frameworks.
47

operating under time pressure: even if they had resources to conduct an exhaustive
search, most often they simply do not have time to do so.
However, the most obvious problem with simply re-using existing outsourcing
frameworks in this thesis is that most frameworks have been developed by
researchers using data from manufacturing, logistics, and IT outsourcing.15 The
need to support these functions in the most efficient way, and the resulting arms-
length models, tend to bias the existing outsourcing frameworks towards cost
optimization and leave the purchasing process to hands of lower-level procurement
professionals (Laios and Moschuris, 1999; Barragan et al., 2003).
In a summary, these arms-length, adversarial approaches are still perfectly adequate
for outsourcing less critical or non-core activities, but it is easy to see how they can
lead the organization to eventually use them, unwittingly perhaps, to more strategic
areas such as product development and thus inadvertently ‘hollow out’ the
corporation. Therefore, the typology of three different outsourcing strategies
(transactional, resource-seeking and transformational; see also Section 2) proposed
by Hätönen (2008) is particularly valuable, since it allows practitioners to mentally
separate cost-minimizing outsourcing from more strategic options.
15Notable exceptions to this include Pisano (1990), who examined R&D sourcing decisions in the
biotechnology industry, and Novak and Eppinger (2001) who studied automotive component
sourcing, as well as contributions from e.g. Chiesa et al. (2000), Barragan et al. (2003), and Ulrich
and Ellison (2005), of which only Barragan et al develop a prescriptive framework. In addition,
Hätönen (2008) studied NPD outsourcing in context of Finnish small and medium software
businesses. Design management research should also be mentioned here, as lessons learned from
design consultancies can be extremely valuable in understanding NPD outsourcing (e.g. Bruce and
Morris, 1998). These contributions will be explored in more detail later in this thesis.
48

2.5.2. Outsourcing core competencies
As outsourcing becomes more strategic and inches towards the organization’s core
competencies, outsourcing decisions become more complicated and require input
from a wider base of stakeholders and experts. In NPD settings, outsourcing
decisions require input from technology, design and marketing functions to
distinguish truly strategic and non-strategic activities (Barragan et al., 2003).
Nevertheless, strategic management literature now recognizes that even outsourcing
core competencies may be possible in certain circumstances (e.g. Gilley and
Rasheed, 2000; Gottfredson et al., 2005). In this transformational outsourcing, new
dynamic core competences are needed. Hätönen (2008, 44) refers to these
competences as strategic restructuring competencies (see also Hagel and Singer, 1999; Fine
et al, 2002). These mean competences that give the firm the ability to continuously
restructure its value chain. This issue is often considered in terms of value-chain
management, but it is also closely connected to core competency analysis: the firm
undertaking transformational outsourcing must know which activities actually
increase customer value or capture value from the network and concentrate on
those activities that provide best return for investment.
Outsourcing also requires many firms to develop another ‘new’ core competency in
managing the geographically dispersed network of providers that results from
outsourcing economic activities (Hätönen, 2008, 45; Kakabadse and Kakabadse,
2002). In the context of new product development, these networks of providers can
either supply individual product development tasks, or they can supply the entire
product development process as total outsourcing (van Weele, 2005, 54-55). In
order to define what these tasks are, a brief overview of product development
management is required.
49

2.5.3. New product development
Literature review finds that the coordination of product development activities has
been a subject of much study. Numerous authors have attempted to develop
generalized models of product development process, but most of the resulting
models differ only in details. Predominant product development models focus on
staged task sequencing (Cooper, 2001), the use of project management and cross-
functional teams, and the development of widely shared product concepts early in
the process (Brown and Eisenhardt, 1995).
All of the models reviewed divide the product development process into distinct
phases or stages, with common elements including a problem-definition stage, a
concept-generation stage, preliminary and detailed design, and concept embodiment
(Seidel, 2007). The actual number of stages differs between four and six (Ulrich and
Eppinger, 2008) but include essentially the same activities.
For example, Ulrich and Eppinger’s generic product development process (Ulrich &
Eppinger, 2008, 14) consists of six phases: 1) planning, 2) concept development, 3)
system-level design, 4) detail design, 5) testing and refinement, and 6) production
ramp-up. Each of these phases includes different responsibilities for organization’s
key functions – marketing, design, manufacturing and other functions, which have a
different technological profile, involve different risks and costs and therefore have
unique risk/reward balances if outsourced (Love and Roper, 2005).
A recurring question in product development literature is whether the product
development should be integrated (so-called concurrent or integrated product
development, e.g. Cagan and Vogel, 2001; Ulrich and Eppinger, 2008) or
disaggregated to separate tasks. Concurrent product development became a
buzzword during the 1990s, when it was seen as a way to faster time-to-market
cycles and better product quality. Today, cross-functional, integrated product
development is widely seen as a virtual requirement for innovative new products
50

(see e.g. Brown, 2008). But this raises a question: if product development needs to be
integrated, either as a process, or with e.g. manufacturing, can it be outsourced at all?
2.5.4. Modularity and design rules
Much of the existing literature tend to address the decision to outsource a single
activity in isolation, instead of considering interactions between two or more
sourcing decisions. In case of NPD outsourcing, this gives a relatively limited view
since, for example, decisions to outsource research or concept design may very well
have implications to detailed design and manufacturing decisions.
How these interactions and interdependences affect the organization is a subject of
much research in modularity (e.g. Ulrich, 1995; Baldwin and Clark, 1997, 2000;
Schilling, 2000; Brusoni and Prencipe, 2001; Fine et al., 2002; Langlois, 2002).
Modularity reflects the degree to which the products and their production processes
are decomposed into smaller subsystems and activities, which may be designed and
managed independently yet function as a whole (Baldwin and Clark, 2000; Brusoni
and Prencipe, 2001; Mikkola, 2006; Hätönen, 2008).
Originally, modularity research arose from product design strategy research as
product modularity (Ulrich, 1995; Baldwin and Clark, 1997). Product modularity refers
to products where interdependencies between different parts and subsystems or
modules are kept to a minimum and where these modules communicate and interact
with each other through standardized interfaces and specifications. The idea is to
decrease the complexity of the system by decomposing its complex tasks into
simpler independent tasks or units that communicate with each other through
standards without compromising the overall performance (Mikkola, 2006).
However, in practice modularity can be at odds with performance, because
51

optimizing product’s ‘global’16 performance characteristics requires holistic view that
is only achieved by having an integrated architecture (Ulrich, 1995). It is also worth
noting that very few products are truly modular or truly integrated, and most
products are instead somewhere along the integrated-modular continuum (Brusoni
and Prencipe, 2001).
Product modularity in itself makes products and their development more amenable
to outsourcing, as subsystems can be designed, managed and produced
independently (Sanchez and Mahoney, 1996; Baldwin and Clark, 1997; Mikkola,
2006). A systems-architecture view required by product modularity also enables a
firm to better identify its area of core competences, and assists in making further
outsourcing decisions (Helander, 2004). Yet by expanding the idea of modularity to
process modularity (e.g. Sanchez and Mahoney, 1996; Baldwin and Clark, 1997; Brusoni
and Prencipe, 2001; Fine et al., 2002; Langlois, 2002) and making the product
development process modular, not just design of individual components but parts
of the entire NPD process can - at least in theory - be outsourced at will.
In theory, process or organizational modularity has significant implications for a
firm’s product design and its underlying organizational process (Brusoni and
Prencipe, 2001). A firm that creates well-defined standard interfaces could also
escape the trap of sub-optimal ‘bad compromise cultures’ (see Hagel and Singer,
1999)17 by allowing individuals working on particular parts of the process to work
autonomously in whatever departmental configuration or organizational culture they
deem most desirable, and still be assured that the components would interact
effectively (Schilling, 2000). Modularity also enhances the management of dispersed
activities and simplifies their coordination (Sanchez and Mahoney, 1996; Schilling,
2000). It also increases the transferability of activities by requiring firms to establish
16 Global performance refers to performance of the entire product as a system, instead of
performance of parts of the system.
17 For example, Hagel and Singer (1999) mention the cultural differences between innovation-
focused organization (one that is focused on new ideas) and production- or process-focused
organization (one that is focused on smooth production). New product development is difficult if
the rest of the organization treats new ideas as threats to smooth running of operations.
52

visible rules covering the design process (Baldwin and Clark, 1997). Modularity
enables parallel design, production and management of activities as output from one
activity is not needed for input to another (Hätönen, 2008), and decreases the
transaction costs arising from the attachment of new activities to existing processes
(Hätönen, 2008).
Modularization in product design could pave the way for a similar process in
organizational design (Ethiraj and Levinthal, 2004). With enough knowledge about
interactions between tasks in the product development process, ‘interfaces’ between
different tasks could be codified and standardized, and tasks decoupled from each
other.18 These tasks could, in turn, be bought from whoever is in a position to do it
best or cheapest.
This de-coupling of design activities is referred to as integration-disintegration question
(Ulrich and Ellison, 2005), meaning whether or not two or more activities should be
consolidated into the same organizational entity. Integration is desirable, if 1) the
quality of precedent activity is difficult to measure and responsibility for both
should be given to the same organization in order to avoid shirking19 without
detection (e.g. Holmström and Milgrom, 1991), or 2) if iterative exchanges of
information and cooperative problem-solving are required between two activities -
say, design and manufacturing (Ulrich and Ellison, 2005).
On the other hand, disintegration is attractive if task quality can be assessed and
interfaces between two tasks can be clearly defined. These interfaces between
different tasks are known as design rules (Ulrich and Ellison, 2005). They can be
thought of as codified standards that are used as a coordination mechanism in the
sense of Galbraith (1974) and Baldwin and Clark (2000). Design rules are possible
to establish when the component or knowledge production processes are stable and
18 However, product and organizational modularity do not necessarily correlate (see Sanchez and
Mahoney, 1996; Brusoni and Prencipe, 2001), even though literature predicts this would be the case
(Brusoni and Prencipe, 2001).
19 In short, shirking means doing less work than agreed.
53

well understood, and the constraints of the process can be expressed (Adler, 1995).
For example, in manufacturing the existence of design rules means that designers
can specify the geometry and material properties of the component in a way that it
can be made without complication on the intended production process (Ulrich and
Ellinger, 2005). It should be noted that informal ‘design rules’ in form of standards
exist also for services; for example, certain market research processes are virtually
standardized and can therefore be disintegrated from other activities (e.g. Hyysalo,
2006).
Design rules need time to become widely known, and new, unusual, and/or poorly
understood processes only rarely have such rules (Ulrich and Ellinger, 2005). If the
process lacks design rules and other standards of behaviour, feasible designs must
be produced through trial and error or through dialogue between process experts
and designers. As the second alternative is often much more likely to produce
satisfactory outcomes, design process is often conducted iteratively with the trial
and refinement of the process, or at a minimum with strong communication
between process experts and component designers (Fine and Whitney, 1996; Ulrich
and Ellison, 2005). Monteverde (1995) calls this kind of interaction between
designers and process experts ‘unstructured technical dialog,’ finding empirical
evidence in the semiconductor industry that its presence is significant motive for
integration of design and production (Ulrich and Ellison, 2005). However,
advantages in information technology have enabled loosely coupled organizational
structures become more common, since information technology allows firms to
access and process more information at a lower cost. This has increased the firm’s
options for development configurations (Schilling, 2005).
Integration and disintegration should not be confused with internalization and
outsourcing. Incentives for integration and outsourcing are completely different.
Two tasks, A and B, can be 1) integrated and internalized (i.e. the client completes
both), 2) disintegrated from each other with A internalized and B outsourced, or 3)
integrated and outsourced (i.e. the provider completes both). A situation may also
54

arise when there are motives to internalize task A that needs to be integrated with
task B, but where task B would benefit from outsourcing. What exactly happens
depends on e.g. relationships between the client and the providers and their specific
capabilities. These four cases are illustrated in Figure 3. (Ulrich and Ellison, 2005)
Figure 3. Four different cases of integration and internalization. Source: Ulrich and
Ellison (2005, 320)
As technologies mature and newer practices in product development become more
widespread, it is likely that more and more tasks that today are considered difficult
or impossible to disintegrate gain design rules and become standardized
commodities. This evolution of industry knowledge base will enable increased
division of labour between firms. Methods used to increase product modularity, e.g.
uncoupling integrated functions within the task and thus bringing the task
modularity to a finer level (Schilling, 2000) can also be used. In combination with
proper networking tools they can be effective at helping the internal NPD staff to
focus on activities with the greatest value-add. For example, division to e.g. concept
design and detailed design may allow the firm to achieve the benefits of internalized
and outsourced activities (Ulrich and Ellison, 2005).
55

In addition, increased knowledge on how abstract processes and needs should be
specified and conducted eases the task of disintegrating and outsourcing these tasks.
Research on how these specifications, often called ‘design briefs,’ should be
prepared has mostly been undertaken within service business research and in
particular within industrial design management research.
56

2.6. Business to business services
Service businesses in general have seen increasing research attention over past two
decades, as the service sector has grown to the point where services are the primary
sources of both value added and new employment in many countries, including
Finland (e.g. Segal-Horn, 2003; Rikama, 2006). In contrast to manufacturing, the
output from services is primarily information, advice, and experiences, rather than
physical goods or objects. Service growth, in turn, has been driven by recent
organizational trends towards de-layering, outsourcing, and downsizing (Segal-Horn,
2003, 475).
Services can be defined as ‘something which can be bought and sold but which you cannot drop
on your foot’ (Gummeson, 1987, 20). In the research literature, the distinctive
characteristics of services, compared to physical goods, are well understood in both
economics and management literature (see e.g. Gallouj, 1997; Kotler and Keller,
2006) and are given only a brief overview here. The most commonly recognized
distinctive characteristics are 1) the intangible, non-material nature of services; 2)
inseparability, or the fact that direct contact between suppliers and clients is required;
the implied participation of the client, i.e. the simultaneous nature of production
and consumption or 3) perishability; and 4) dependence on who provides the services
and where or variability (Gallouj, 1997; Segal-Horn, 2003; Kotler and Keller, 2006,
406-407).
Although the literature on subject of professional and business-to-business services
is vast, for the purposes of this thesis, two research streams are particularly
important. The first is management of services, and in particular design management.
Design management deals with the problems inherent in managing and developing
industrial design businesses. Industrial design has a long history of being an
outsourced part of product development process (Perks et al., 2005) and lessons
57

learned from managing relationships between designers and their clients shed
valuable insights to wider subject of managing outsourced product development.
The second important field of research for this thesis is the selection and evaluation of
service providers, which aims to develop the theory and practice of choosing the right
provider.
2.6.1. Design management
Design management, in general, refers to design-relevant decisions and optimization
of firm’s design-relevant processes. Although design management can be and often
is strategic in nature (e.g. Best, 2006; Bedford et al., 2006; Borja de Mozota, 2006;
Brown, 2008), this thesis is more interested in applications that belong to
operational design management. Examples of operational design management
include selection of external designers and creation of alliances. Therefore, design
management is treated under the research stream of business services, rather than
strategic management.
Design management’s relevancy to this thesis stems from the fact that since the
beginnings of industrial design in the 19th Century, design and designers have been
increasingly involved with new product development. During these years, design has
had three roles in NPD process, evolving from design as a functional specialism to
design as a part of a multifunctional team to design as process leader (Perks et al.,
2005) – a taxonomy neatly spanning the different levels of outsourcing20 identified
by Lacity and Hirscheim (1993).
20
These levels are body shopping, or ‘renting’ an employee; project management outsourcing, where more
decision-making authority is delegated, and total outsourcing, where the provider is responsible for
significant part of the project. In addition, Lacity and Hirscheim (1993, 3) specifically define the use
of outside specialists as outsourcing.
58

In fact, design has traditionally been a professional service that designers have
provided to external clients, making design an early example of outsourced NPD
services. Today, design consultancies, eager to increase their share in product
development projects, are also increasingly taking part in non-design tasks such as
detailed engineering and even production ramp-up. In other firms, thanks to ideas
such as concurrent design, design21 and product development are increasingly
interwoven in many projects, and many practices originally developed in design
consultancies are now in a widespread use in product development in general (see
e.g. Cagan and Vogel, 2001; Engardio et al., 2005; Buxton, 2007; Brown, 2008;
Merholtz et al., 2008; Ulrich and Eppinger, 2008).
This history of helping firms in their NPD tasks from the late 1800s (Perks et al.,
2005) makes design management literature a helpful source of experiences on NPD
outsourcing. However, the field suffers from relative lack of research and much
knowledge exists only within heads of practitioners (see e.g. Hytönen et al., 2004).
Nevertheless, previous literature on design outsourcing has, for example, considered
questions such as client-consultant interaction levels in NPD projects (e.g. Seidel,
2000; Hytönen et al., 2004; Best, 2006), how using external design capabilities add
value to the firm (e.g. Creative Business, 1994; Kristensen, 1998; Hertenstein et al.,
2005; Bedford et al., 2006; Best, 2006; Breen, 2007), design networks (e.g. Verganti,
2006) and how objectives for design should be communicated within the firm and
to external providers (e.g. Ulwick, 2002; Hytönen et al., 2004; Best, 2006; Borja de
Mozota, 2006; Creative Business, 2007). What is particularly interesting for the
purposes of this thesis is how client-provider relationships in NPD projects should
be arranged, as one of the key questions behind outsourcing research concerns the
most appropriate form of relationship22. Another interesting question that has been
discussed in design management literature is the interface between external and
internal design or NPD teams (e.g. Bruce and Morris, 1998). These interfaces are
21
Including industrial design, graphic design, services design, interface design, etc.
22 That is, how the outsourcing is conducted; see Insinga and Werle (2000).
59

directly linked to the earlier discussion of modularity and design rules presented in
Section 2.5.4.
Bruce and Morris (1998) aim to identify best practices to help design managers to
‘get the most out of’ their external design relationships. They note that product
development literature is biased towards the management of in-house expertise, and
that a critical success factor for new product development is effective management
of the different functions - internal or external - involved in this process.
According to Bruce and Morris (1998), product development literature typically
links positive outcomes with a culture of openness, good cross-functional
cooperation and communication, mutual respect and trust, shared values and mutual
goal commitments, and multi-disciplinary teams that work together from inception
to completion of the process. All of these factors are, in one way or other, difficult
to achieve with external designers. Using external designers tends to lead to
formalized processes that reduce openness, building trust takes time and repeated
interactions, and there are doubts concerning how much the external design
professional can be truly regarded and treated as a full team member to the product
development process. As a result, outsourced product development professionals
may make mistakes in moving from the concept to development stages and slow
down the design process (Bruce and Morris, 1998).
In short, external designers suffer from problems in modularity of information and
lack of explicit design rules, and these problems are compounded if there is not
enough trust between the client and the provider. Lack of trust makes discussions
difficult, as the client has to fear for leaks of sensitive information, and the provider
has to fear that the bills are not paid. The strength of an in-house approach to
product development and design is that the product development is integrated into
60

the firm and has trusted relationships with the rest of the firm, and is well aware of
both explicit and tacit23 firm practices.
Finally, Bruce and Morris (1998) identify six factors that influence the choice of
design suppliers:
1) Matching the design capability to the design project as ‘clean sheet of paper’ and
‘improvement’ situations require different types of designers;
2) Matching inter-firm technologies so that the designer is sufficiently aware of the
client’s technological requirements;
3) Matching customer experience with the consultancy’s own insight, i.e. designers
need to understand the client’s customers;
4) Active versus passive experience, or the level of involvement from the external
designer;
5) Dependence, proprietary information, trust and control issues; and,
6) Cost issues.
All these factors can be relevant to wider NPD outsourcing projects. As discussed
above, one of the critical problems when utilizing outsourced design is how the
objectives of the NPD project are communicated to designers. Communicating
technical specifications is relatively easy, but the problem lies in communicating
more demanding, subtle and subjective factors such as ‘look’ and ‘feel’ of products.
This problem of creating effective information interfaces24, called ‘design briefs’ or
‘creative briefs’ in designer parlance, has been tackled mostly in trade press and
through experience (e.g. Best, 2006; Borja de Mozota, 2006; Creative Business, 2007;
see also Block, 1981). In practice, these design briefs are used to help ensure that
the provider always gets the basic creative and positioning information needed when
23 Explicit practices are those that are codified, i.e. rules and regulations; tacit practices are rarely
codified rules of thumb, unspoken restrictions, and experiences learned from previous projects.
24
In sense of modularity; see Section 2.5.4.
61

starting an assignment. Typical questions to be answered in a creative brief include
(Creative Business, 2007):
1) The objectives: what is the purpose of the project?
2) The target audience: Who are the customers? What motivates them?
3) Targeted features: Specifications, components, manufacture; use in everyday
application; differences compared to competitors
4) Targeted user benefits: How the user will be better off? What are the trade-offs?
5) The competition
6) Preferences and constraints for budget, schedule, etc.
7) The single most important point; the primary focus of the product
Source: adapted from Creative Business (2007)
In particular, the last point makes many design briefs different compared to many
other briefings. Reminiscent of several leadership/management theories such as
time-based competition (see e.g. Stalk, 1988; Stalk, 1993; Richards, 2004; Smock,
2007), identifying and communicating this single most important feature of the
product may help the external provider make important decisions about what to do,
and what not to do, when confronted with an ambiguous and perhaps fleeting
opportunity. In addition, clearly identifying the key competitive characteristics of a
product and communicating them is - whether NPD is outsourced or not –
particularly important in a world characterized by hypercompetition and
hyperchoice (e.g. Merholz et al., 2008).
Another way of thinking the problem of communicating what is required from the
designer is to explain how design creates value from the four perspectives of the
Balanced Scorecard25 (Borja de Mozota, 2006, 48). These four perspectives are
1) The customer value perspective
2) The performance value perspective
25
For more information on balanced scorecard method, see e.g. Kaplan and Norton (1992 and
1993).
62

3) The innovation and learning perspective
4) The financial value perspective
Source: Borja de Mozota (2006, 48)
Following Borja de Mozota’s (2006, 47) suggestion that ‘what is not measured cannot be
managed,’ firms should create balanced scorecards for improving the communication
of these different value perspectives to the external provider.
2.6.2. Selection and evaluation of service providers
The selection and evaluation of service providers has also been a subject for much
discussion. In general, purchasing process for services differ from that for
manufacturing activities due to different risks and uncertainties involved. The
questions of selection and evaluation are distinctive in consultancy activities. In a
nutshell, the problem lies in the acute observation by Wittreich (1966) that the client
of any consultancy does not buy a product per se, buying instead ‘the promise of a
reduction of uncertainty for decisions in the field concerned’ (Wittreich, 1966).
Theoretically speaking, provider selection involves considerations about the
economics of quality, agency theory, and the economics of incentives in general.
The specific characteristics26, in particular the intangibility, make defining and
measuring the output of services very difficult. The effects of a provider
intervention can also take time to appear and become visible only in the medium or
long term27. This presents the client with the unique challenge of not being able to
evaluate the provider’s ‘goods’ before purchase but only long after payment for the
services has been made.
26
Intangibility, inseparability, variability, and perishability; see Section 2.6, p. 52.
For example, effects of product design usually become apparent only after the product is on the
27
marketplace, and often take time to become apparent.
63

These variables are accounted in the so-called Nelson-Darby-Karni model of
consumer's search for quality. Following Nelson (1970) and Darby and Karni
(1973), Zeithaml (1981) highlighted three essential groups of product attributes that
apply for both goods and services.
1) Search qualities apply to products the client can analyze and evaluate before
buying.
2) Experience qualities apply to products whose qualities become apparent after
purchase, during consumption.
3) Credence qualities apply to products whose qualities cannot be evaluated by the
client, even after consumption, because the client lacks the necessary knowledge
or capacity.
Any service can be composed of any proportion of each of the above dimensions,
and the perception of qualities varies considerably depending on the clients involved
(Gallouj, 1997). Consulting in general, and product development consulting in
particular, is strong in experience and credence qualities: unless the provider takes
over the entire NPD process for a certain product, the output is often difficult to
isolate or quantify, and therefore difficult to measure. Even if the client has a
relatively precise idea of the type of benefit they are expecting (as would be the case
with large firms and ‘routine’ product development projects), Mitchell (1994) and
Gallouj (1997) note that the client cannot be totally sure of what is being acquired,
even if he has previous experience with the provider. After all, buying a service
always includes an original element; ‘the purchase of a consultancy is almost always a 'new
buy'‘ (Mitchell, 1994).
There is evidence that product R&D with outsiders is credence-intensive service, i.e.
a service that has many credence qualities (e.g. Tapscott and Williams, 2006;
Economist Intelligence Unit, 2008; Lichtentaler and Holger, 2008). Thus, for the
purposes of this thesis, NPD consulting in general can be defined to be a credence-
intensive service, even though it usually has search and experience qualities as well,
64

and some specific services are relatively standardized offerings with mostly search
and experience qualities. Table 4 (p. 66) lists approaches used for selecting service
providers, and presents results from Holopainen and Järvinen’s (2006) study on
how Finnish firms actually select design service providers.
Furthermore, buyers of services in general and of credence-intensive services in
particular suffer from asymmetries in information. Basically, the client cannot know
as much as the provider does about e.g. the quality of the service, the time it will
actually take to accomplish the service, and the fit to the client’s needs, and so forth.
Because of these information asymmetries between the client and the provider, the
market has developed a certain number of responses, such as social capital,
relationships, and institutions. These all fall broadly under the area of network theories.
65

Table 4. Approaches used for selecting service providers, and research on how
Finnish firms actually select design providers. Adapted from Gallouj (1997) and
Holopainen and Järvinen (2006).
How Finnish
Selection criteria
firms actually
General selection General approaches to Finnish clients
gain information
criteria information search actually use when
about design
sourcing design
providers
Consulting the list of Recommendations Personal contacts
Past experience with the consultants already having from other firms (44%)
firm worked for the (39% of respondents) References of
organization Lectures and previous work (41%)
Contacting work seminars (28%) Ability to deliver
colleagues for suggestions Personal contacts complete solutions
Contacting work (25%) (28%)
colleagues for suggestions Direct marketing Knowledge of the
Seeking suggestions among (25%) client’s industry (24%)
similar organizations which Through Internet Quality of the work
Personal contacts and (19%) (19%)
have already used
recommendations from
consultants
trusted sources
Consulting particular
groups who are well
Use in other firms
informed about the
available resources:
chambers of commerce,
universities, etc.
Consulting the
membership lists of
Reputation in general
various professional
associations
Considering the authors of
specialized articles that
Reputation in a specific
have appeared in
area or function
recognized journals or
magazines
Participating in specialized
Length of time the symposiums, meetings or
provider has been in the seminars in order to be
‘community’ aware of the resources that
are available
Interaction, relations, Considering consultants
communication who have approached the
Advertising organization.
Samples of work and Examining the advertising
references of consultants
Price, efficiency
Understanding the needs
and the problems of the
client
66

2.7. Network theories
A traditional way of organizing integration between organizations is through
hierarchies and formal contracts. For example, a firm could either hire a person to
make a part, or it could buy the part from a provider. In the first case, the firm
organizes the employee’s work through a hierarchy. In the second case, as the firm’s
hierarchy does not extend to the provider, the firm and the supplier sign a contract
that specifies explicitly what is to be delivered, and when.
These approaches work well when the firm can either hire a person or can specify
and codify what it needs, such as when buying commodity products. However,
sometimes hiring a person is not possible or strategically sensible, and as tasks
undertaken by the provider become more strategic and ambiguous, the contracts
cannot be made to cover all eventualities. In addition, NPD tasks in particular
require relatively free, wide-bandwidth28 transfer of information, which may be
difficult to codify and even more difficult to regulate with contracts29. In turn,
unless information can be transferred freely enough, practical integration between
tasks and functions may become impossible.
Nevertheless, firms do collaborate with external consultants in solving extremely
sensitive, complex, ambiguous and strategic problems. Outsourcing works in
practice, even where good coordination and integration between the client and the
provider is required. The explanation lies in social capital, institutions, trust and
relationships, and other non-hierarchical mechanisms for organizational
integration30, which reduce coordination costs between partners in outsourcing
relationships. Given low enough coordination costs, practical integration between
different product development tasks (see Section 2.5.3.) can be achieved without a
28 Wide-bandwidth in the sense that large amounts of information need to be transferred in short
time - not in the sense of technology such as computer networks.
29 In fact, overformalization inhibits free flow of information that is necessary for good results in
NPD (see e.g. Carson, 2007).
30 For example, geographic proximity, use of face-to-face meetings, co-locating, joint design teams,
and design reviews (Adler, 1995; Dyer, 1997).
67

need to consolidate these tasks within same legal entity (Adler, 1995; Dyer, 1997). In
fact, several observers have noted (e.g. Rifkin, 2000; Wilenius, 2004; Tapscott and
Williams, 2006) that increased opportunities for non-hierarchical organizational
integration have made networks viable and important alternatives to consolidating
tasks within one legal entity. Currently, much research is devoted to different
business network studies (see e.g. Chesbrough, 2006). The following sections
present an overview of research related to this thesis.
2.7.1. Social capital
Social capital can be defined as ‘the ability of actors to secure benefits by virtue of
membership in social networks’ (Portes, 1998). In general, it refers to common
cultural systems such as social networks, long-term interpersonal relationships,
standards of behaviour, institutions and shared values that allow individuals to
coordinate their activities to attain desired goals, thus enhancing the efficiency of
economy (Ruuskanen, 2001; Kankainen, 2007).
Social capital lowers the barriers and transaction costs for cooperation by building
ties between different firms and functions (e.g. Mu et al., 2008) and helps to
internalize the skills and expertise of partners as acquired knowledge becomes
embedded in the organization (e.g. Kogut and Zander, 1996). Most importantly for
the purposes of this thesis, previous research has strongly suggested that trust31 1)
plays an important role in business collaboration in general (e.g. Ruuskanen, 2003;
Gottfredson et al., 2005; Economist Intelligence Unit, 2007, 2008), 2) is a crucial element
in circumstances where the markets for services cannot completely reduce the
asymmetries of information (Gallouj, 1997), and 3) is a necessary condition for any
knowledge transfer relationship (e.g. Hayek, 1945; Romer, 1990; Tarun et al., 1998;
31 Trust, in turn, is an aspect of social capital.
68

Blomqvist, 2002). Specifically, the higher the trust between parties, the better are the
outcomes of knowledge and technology transfer (Tarun et al., 1998). As Mu et al.
(2008, 88) noted,
‘…social capital provides the basis of trust, which can greatly reduce the transaction cost of
knowledge sharing and enhance the willingness of partners to share knowledge…’. (Mu et
al., 2008, 88)
According to social network theory, firms can leverage their social capital in order
to gain competitive advantage - for example, by gaining access to knowledge (e.g.
Burt, 1997, Ruuskanen, 2003, Kankainen, 2007, Economist Intelligence Unit, 2008; Mu
et al, 2008). The definition of knowledge includes technology, user and market
knowledge – in other words, products of the product development process. Thus,
outsourced product development process is more likely to succeed if there is a
trusting relationship between the provider and the supplier (see Figure 4). Trust is
here defined as inter-organizational trust, which refers to general confidence that the
partner firm is trustworthy, and can deliver what is promised. Components of this
confidence therefore include not just good personal relations but also more formal
‘due diligence’ methods such as good results from various audits and appraisals (see
also Institutions, Section 2.7.4.).
Figure 4. Social capital and firm innovation. Source: Mu et al. (2008, p. 87)
69

It can be suggested that this is the theoretical explanation for empirical findings
such as Holopainen and Järvinen (2006), who discovered that personal relationships
and references are by far more important to clients of professional design services
than features such as price and even quality of the work. In fact, the theory outlined
above suggests such findings.
2.7.2. Institutions
Institutions, as defined by Akerlof (1970), are a series of mechanisms and
organizations that have the role of ensuring that the buyer’s limited information,
and the lack of ability to assess quality, do not threaten to put the market's very
survival in jeopardy. As highlighted by Holmström (1985), institutions such as
certification, contractual guarantees, contingent contracts, various signals of quality
and reputation provide clients with more information on the true quality of the
services concerned, and may even offer the purchaser a form of quality assurance.
In the outsourcing context of this thesis, the most important institutions are
contingent contracts, various signals of quality, and reputation. Certification and
contractual guarantees are rarely if ever used within product development services,
and they are therefore not detailed here. The rest are briefly outlined.
Contingent contracts, or payment by results, is the industry standard in some
forms of product development. It is particularly common in the furniture industry
where designers are typically paid with a fixed sales provision on their products.
However, in other fields it is used far less often. Contingent contracts are useful in
clarifying the provider's relationship with the client and establishing the ‘success
criteria’ for the project. However, success is sometimes difficult to quantify, and
because contingent contracts involve a large degree of risk for the supplier, they are
70

not very popular within the industry. Furthermore, they subject the provider to an
asymmetry of information situation, since it can be very hard for them to verify
whether – for example – the sales figures for a certain product are indeed correct.
Nevertheless, there exists some suggestions that product development consulting
might be heading towards contingent contracts, if the success of firms such as Jump
Associates and Fahrenheit 212 (see Helm, 2007) is of any indication.
Varied signals of quality include all the signals that the provider ‘sends’ to its
clients and outside world that aim to make it’s offering more credible in the eyes of
its clients. In a way, they reduce the asymmetry of information, but only if they are
credible (that is, costly for the provider to send) and have an agreed value in the
eyes of the client (Perrot, 1992, quoted in Gallouj, 1997). Signals for service
consultancies in general include formal qualifications, publications and participation
at conferences, advertising and prestigious location (Gallouj, 1997); for product
development services in particular, success at competitions, appearances at popular
or trade press, and favourable reviews of previous products can be added to the list.
Reputation is an implicit promise that a party to a contract will not act
opportunistically in the case of an unforeseen event (Gallouj, 1997). Thus, the
establishment and maintenance of a good reputation is a very important strategic
asset for firms, particularly within consultancy services (Holmström and Tirole,
1989), because by referring to their reputations, the providers can compensate for
lack of information in the market (De Band, 1995, quoted in Gallouj, 1997).
Numerous authors such as Haynes and Rothe (1974), Stock and Zinszer (1987), and
Dawes et al. (1992) have highlighted the importance of the effects of reputation,
Dawes et al. (1992) noting that the two most important criteria by which service
providers are chosen by clients are the general reputation of the firm and its
reputation in the specific functional area concerned.
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2.7.3. Trust and relationships
One of the most important ways to build up reputation is through mutual trust.
Trust is always important, but it is a crucial element in circumstances where the
markets for services cannot completely reduce the asymmetries of information
(Gallouj, 1997).
The notion of trust as a critical success factor in service relationships was
introduced by Parasuraman et al. (1985), who suggested that customers should be
able to trust their service providers, feel safe in their dealings with the providers, and
be assured that their dealings are confidential. Later studies have offered several
broadly similar conceptualizations and operationalizations of trust in relationships
(e.g. Crosby et al., 1990; Doney and Cannon, 1997; Moorman et al., 1993; see also
Arnott, 2007). Although trust can be either ‘offer-related’ (competence,
customization, reliability, promptness) or ‘person-related’ (similarity, empathy,
politeness) (Coulter and Coulter, 2002), in product development collaborations trust
is typically between individuals. To build trust between organizations is therefore to
build up relationships, and hence trust, between individuals working in those
organizations.
Studies involving professional services (e.g. Gallouj, 1997; Halinen Kaila 1997;
O’Malley and Harris, 1999; Hytönen et al., 2004; Holopainen and Järvinen, 2006;
Lien and Laing, 2007) have further illustrated the critical role of personal
relationships in provider selection. In professional services, the complexity of
services results in a premium placed on relationships as a means of managing the
purchasing process. Although the central role of relationships has been
acknowledged in marketing literature and it is described in detail, few studies of
outsourcing have so far taken it explicitly into account32.
32The argument that traditional transaction cost economics takes relationships into account is often
regarded as incomplete; for details, see Appendix C.
72

To understand the pivotal role trust plays specifically within business services, it
should be first understood that credence-intensive business services often create
information and, more importantly, knowledge, instead of physical products or
tangible outcomes. For example, product development process creates not products
but knowledge about the technology, the users, and the markets. After this
knowledge has been produced, it also needs to be transferred to actors that can
utilize the knowledge and actually design, build and market the products and
services. Thus, the question of outsourcing product development often turns out to
be the question of where the knowledge is produced – inside or outside of the firm –
and whether the client needs it and can acquire it, if it is created outside the firm.
Knowledge acquisition, flow, transfer and application have attracted much attention
over the recent years (e.g. Nonaka, 1994; Grant, 1996; Kogut and Zander, 1996;
Nonaka and Konno, 1998; Deeds, 1999; Hansen, 1999; Gupta and Govindarajan,
2000; Spencer, 2000; Tsai, 2001; Okhuyzen and Eisenhardt, 2002; Borgatti and
Cross, 2003; Reagans and McEvily, 2003; Dyer and Hatch, 2006; Szulanski and
Jensen, 2006; Mu et al., 2008), resulting to a greatly enhanced understanding of how
knowledge is transferred across organizational boundaries. Amongst the various
authors, there seems to be a broad agreement that development of intellectual
capital and innovativeness are positively correlated, and related, with the ease of
knowledge transfer. This, in turn, is facilitated by social capital among the actors in
the inter- and intra-firm networks.
Furthermore, trust plays an important role in determining the control needs for the
activity. As the extended enterprise model attempts to find a middle ground
between completely internalized and completely outsourced activities, it turns the
make or buy question into an examination of the desired level of control over the
activity being considered for outsourcing (Barragan et al., 2003). The more specific
the requirements of the client about, for example, form factors, details and materials
used, the less flexibility is available to the firm. Higher trust in the provider, and very
73

good and detailed understanding of the client’s needs33 means that the client does
not have to exercise tight control over the activities performed. Indeed, trusting the
provider enough is a precondition for outsourcing any given service: if the client
doesn’t trust the provider enough to relinquish control over the activity, it is kept in-
house by default.
Empirical evidence from Miozzo and Grimshaw (2005) and Carson (2007) confirms
that when outsourced NPD tasks are creative in nature – as they often are in new
product development – tight control has adverse effects to end results. Trusting,
long-term relationships with repeated interactions also reduce agency issues inherent in
outsourcing situations (Ulrich and Ellison, 2005). Therefore, as tight control leads to
suboptimal results, and trust required for looser control develops slowly over time,
firms typically increase their outsourcing intensity and expand the provider’s
responsibility over time as the relationship evolves and develops (Morgan, 2003;
Kinnula, 2006; Hätönen, 2008).
33Detailed understanding of client’s needs is usually a by-product of long-term relationship
necessary to develop high trust in the first place (e.g. Bruce and Morris, 1998).
74

3. Outsourcing as a process
3.1. Introduction
As mentioned in the theoretical part of the study, outsourcing has been approached
from different perspectives such as economics, purchasing, operations research,
accounting and strategic management (Cánez et al., 2000). Most frameworks for
decision-making are relatively similar, illustrating a number of steps or phases in the
process. The distinct phases present in most outsourcing studies are listed below.
1) Assessment and approval, assessment consisting of
• Definition of core competences and strategy
• Assessment of integral costs; and
• Analysis of suppliers and competitors
2) Selection and negotiation
3) Execution
4) Relationship management
5) Renewal or termination of contract
Source: adapted from Eklund (2004) and de Boer et al. (2006)
Although most models focus on the planning phase (what should be outsourced)
instead of the whole process34 (see de Boer et al., 2006, 446), a cogent argument can
and should be made for greater emphasis on later phases of the process such as
relationship management and contract renewal. That relationship management is
central to a successful outsourcing shouldn’t be any surprise, and including periodic
contract renewal as well is also an act of common wisdom. After all, as Brannemo
(2006) has pointed out, one-way strategy is very unlikely to lead to an optimum
34 Some exceptions to this include Cánez et al. (2000); Kumar and Eickhoff (2005); and Hätönen
(2008); see also Greaver (1998); Lonsdale et al. (1998); Momme and Hvolby (2002). For a list of
outsourcing frameworks reviewed, see page 47.
75

outcome, and therefore outsourcing decisions should be re-evaluated as time passes.
What is interesting is that relationship management and contract renewal tend to
receive only a cursory treatment in frameworks published in academic journals,
while models based on personal experience (such as Greaver, 1998) tend to stress
their importance.
However, there are also reasons for focusing on the planning phase. Reported
failures in outsourcing projects are often due to outsourcing wrong activities (e.g.
Doig et al., 2001; Fine et al., 2002). The chosen model can also be inappropriate for
the specific outsourcing situation (e.g. Miozzo and Grimshaw, 2005), and very
often, project management failures contribute to poor performance and client
dissatisfaction (e.g. Swoyer, 2004; Best, 2006). Lack of involvement from the upper
management can also be a problem, since long-term, strategic thinking is required
especially in NPD outsourcing, as NPD abilities are directly linked to the innovation
and learning abilities of the firm (e.g. Kakabadse and Kakabadse, 2003).
This section discusses outsourcing, and particularly NPD outsourcing, as a process.
The outsourcing process framework used in this thesis is based on reviewed
frameworks and incorporating their common features. It comprises four main
phases, namely
1) Assessment
2) Selection and negotiation, including
• Information search and preliminary evaluation
• Request for proposals
• Shortlisting
3) Final selection
4) Execution and relationship management, and
5) Lessons learned and termination/renewal of the contract.
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The framework used in this thesis broadly follows the outline of Hätönen’s (2008)
work, but has a somewhat different focus and aims to be more of a practical guide
for outsourcing. In this section, the motives behind outsourcing NPD, as well as
some potential drawbacks, are first briefly explored. Then the process of
outsourcing is described using the abovementioned framework.
Because every firm and every situation is unique, one cannot give definitive answers
to the problems and issues in NPD outsourcing. Instead, this thesis attempts to
broadly cover the process of outsourcing and detail the most common pitfalls and
issues identified in the literature while taking a broad enough view so that the entire
process is exposed. Although the resulting broad scope may be somewhat beyond
the requirements for a Master’s thesis, having a broad rather than deep approach is
necessary. Focusing on a certain part of the process while overlooking others is
almost certain to lead to a failure of the outsourcing initiative (e.g. Hätönen, 2008,
86). For instance, if a firm mislabels its competences and outsources something that
should not be outsourced, even the best vendor selection or partnership
management process cannot save the situation. For this reason, if we are to
understand how firms can outsource successfully, we must look at the entire process
and identify key managerial considerations for each stage.
77

3.2. Motives for outsourcing (why?)
Outsourcing in general is perceived as a way to either increase the value of the firm
by appropriating skills and abilities from someone else, or to stop destroying value
by getting rid of activities that the markets can do better than the firm (Hätönen,
2008). A torrent of studies has attempted to survey the reasons for outsourcing in
general and for outsourcing specific functions in particular. The ‘top five’ lists
circulating at any one time tend to give somewhat different results, which is not
surprising given the differences in populations surveyed. For example, a survey of
CEOs tends to result to different criteria than one aimed at chief financial officers.
Their answers, in turn, differ from those of the chief technological officer (Greaver,
1998, 3).
Nevertheless, the reasons for buying instead of “making” products or services in
general are relatively well established in academic literature. The prevailing wisdom
is that an organization should consider outsourcing when it is believed that a
function can be completed faster, cheaper, or better by an outside organization (e.g.
Kakabadse and Kakabadse, 2000). Some of the reasons given for outsourcing in
general are given in Table 5 (p. 80), grouped under three main motives for
outsourcing identified by Hätönen (2008, 67)35.
However, most studies and authors (e.g. Landis et al., 2005, 5; Heikkilä & Cordon,
2002, 185) agree that one of the main outsourcing drivers is the prospect of freeing
up resources that could be reallocated to the focused activities, and thereby
enhancing core competences. Any organization has limited resources, and those
resources should be concentrated on core competencies. In addition to expenses
35 Other sources for outsourcing motives include Greaver (1998, 4-5), as well as Welch and Nayak
(1992), Lacity and Hirscheim (1993), Quinn and Hilmer (1994), Alexander and Young (1996),
Bruce and Morris (1998), Inkpen (1998), Powell (1998), Bounfour (1999), Hagel and Singer (1999),
Vining and Globerman (1999), Chiesa et al. (2000), Sislian and Satir (2000), Kakabadse and
Kakabadse (2002) and Chesbrough (2003).
78

and personnel, managerial time and focus are important and scarce resources.
Managing non-core activities increases the number of people that have to be
managed and provided with (see e.g. Penrose, 1959 and Kor and Mahoney, 2004).
Non-core competencies take up time, energy, and workspace, all of which cost
money. Most importantly, they cause the management to lose sight of what is really
important: satisfying customers by exploiting the organization’s core competencies
(Greaver, 1998, 70).
79

Type Definition Organizationally- Improvement- Financially-driven Revenue-driven Cost-driven Employee-
80
driven reasons driven reasons reasons reasons reasons driven reasons
Outsourcing N/A Improving risk Reducing investment in N/A Reducing costs through N/A
aimed directly management assets (e.g. space) superior provider
at cutting and Generating cash by performance and
reducing transferring assets to the provider’s lower cost
operational provider structure
outsourcing
costs Reducing risks inherent Turning fixed costs
Transactional
in innovation into variable costs
Outsourcing N/A Improving operational N/A Gaining market access and N/A Access to flexible
aimed primarily performance /e.g. opportunities through the workforce
Table 5. Motives for outsourcing
at acquiring quality, time to market) provider’s network Lack of expertise
resources Acquiring skills and Being closer to primary in-house
and/or technologies markets and their needs
outsourcing
capabilities that Acquiring innovative Accelerating expansion by
are unavailable ideas and knowledge tapping into the provider’s
to the firm Improving credibility capacity, process, and
Resource-seeking
and image by systems
associating with Expanding sales and
superior providers production capacity when
such expansion could not be
financed
Outsourcing Focusing on core Improving N/A Commercially exploiting N/A Freeing internal
aimed at competencies management and existing skills resources
transforming Increasing flexibility control Giving employees a
the organ- Transforming the Bringing in fresh ideas, stronger career path
ization into a organization unhampered by the Increasing energy
outsourcing
more dyna-mic, Increasing existing culture or and commitment in
effici-ent, and product/service value, rigidities of the firm non-core areas of
Transformational
more focu-sed customer satisfaction, Accelerating projects the firm
econo-mic unit and shareholder value

3.2.1. Motives for NPD outsourcing
With few exceptions, NPD outsourcing has always been resource-seeking, rather than
profit-maximizing in nature36 (Firm B interviews, 2008). Few firms have all the
competencies required for increasingly complex products of today, and building
competencies that may be needed once per project may not be cost-effective. As a
result, firms have traditionally outsourced many speciality NPD activities such as
market research and industrial design. Today, NPD outsourcing may also be
transformational37; in recent years, many firms have focused on their core
competencies and core product lines, while outsourcing the design and development
of complementary products to so-called Independent Design Teams38 or IDTs. In
many cases, the provider also handles production and even logistics39, and the client,
known as original equipment manufacturer or OEM40, only handles product
definition or marketing (Schweber, 2003, 68).
As a strategy for new product development, outsourcing not only allows firms to
release resource constraints on firms’ NPD activities by acquiring rare resources
from outside the firm. External linkages may also help in reducing risk, and
accelerating or upgrading the quality of the products developed. Using external
providers may also signal the quality of firms’ activities (Powell, 1998) and even
increase firms’ ability to appropriate the returns from undertaking NPD (Gemser
and Wijnberg, 1995). Global competition during recent years has had direct effects
on product development outsourcing by compelling firms to apply greater cost
discipline and minimize their product-to-market time cycles (Quinn and Hilmer,
36 One of the few profit-maximizing approaches used in practice is off-shoring NPD tasks to
cheaper countries. Especially ‘routine’ tasks such as coding, drafting and testing have been off-
shored to places such as India and Eastern Europe. See e.g. Hätönen (2008) for examples of
software NPD offshoring.
37 Resource-seeking and transformational outsourcing: from Hätönen (2008, 69).
38 See Definition 1.5.10, p. 29
39 In which case it is known as Original Design Manufacturer or ODM; see Definition 1.5.9, p. 29.
40 See Definition 1.5.8. p. 28.
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1994). Outsourcing has been seen as an effective tool for both. Outsourcing is
especially important for complementary products that are not seen as strategically
important by the firm and whose development, by definition, is someone else’s core
competency.
External providers can also be used to augment or temporarily increase the
capabilities of the firm, and potentially help the firm to launch a strategic offensive
aimed at redefining or ‘shaping’ the marketplace and customer’s expectations by
introducing new products faster than the competition (see e.g. Stalk, 1988 and
Richards, 2004). Finally, NPD outsourcing can also be seen as a form of uncertainty
control: by buying, firms can quickly, cheaply and incrementally experiment with
different capabilities, products, technologies or approaches instead of devoting
significant resources for building their own capabilities41.
Building capabilities in general, and product development capabilities in particular,
may be prohibitively expensive and/or time-consuming for a firm to create or
acquire because of path dependencies42, the need for socially complex capabilities43,
and causal ambiguity44 (Barney, 1999). Producing a certain input might also require a
corporate culture that is counterproductive for the rest of the organization45 (Vining
& Globerman, 1999; see also Hagel and Singer, 1999). Since NPD capabilities can
be argued to contain all these characteristics, obtaining NPD capabilities in the form
of market transactions may thus become an attractive alternative to building the
capabilities, even if transaction specific investments and the risk of opportunism are
41 This strategy is also known as real options approach; see e.g. Kogut and Kulatilaka (2003) and
Vanhaverbeke et al. (2008).
42 The need to follow a certain path to create a capability; for example, firms often have to design
simple products before moving on to more complex ones.
43 Effective new product development requires interdisciplinary team play that may be difficult to
encourage and manage.
44 Causal ambiguity refers to uncertainties: firms may not know what factors contribute to
improved NPD capability and how that capability should be built.
45 For example, Hagel and Singer (1999) mention the cultural differences between innovation-
focused organization (one that is focused on new ideas) and production- or process-focused
organization (one that is focused on smooth production). New product development is difficult if
the rest of the organization treats new ideas as threats to smooth running of operations.
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relatively high (Barney, 1999). However, the issues in outsourcing a NPD process
are more complex than those in many other processes, owing to the uncertainty
implicit in R&D contracts and the resulting difficulties in terms of contract
formulation, property rights adherence and contractual compliance (Love and
Roper, 2005).
These issues have divided researchers over the subject, with some (e.g. Rubenstein,
1994; Quinn, 2000) arguing that by accessing resources and talent outside the
organization, outsourcing innovation and NPD can be a major strategic tool, leading
to enormous savings in NPD costs and risks as well as to markedly decreased
product cycle times. Others argue that the benefits of NPD outsourcing have been
overstressed, and that outsourcing NPD activities can be strategically dangerous if
outsourcing is seen as a substitute for the development of long-term internal
capabilities in core areas (e.g. Chesbrough and Teece, 1996).
In practice, most NPD outsourcing situations are grounded on one or more of the
following three motives. The first motive is capacity: the firm has capability to do the
task, but its resources — especially in skilled NPD personnel — are limited and the
firm contracts outside providers to temporarily relieve workloads and speed up the
firm’s NPD projects. The second motive is focus: NPD tasks are outsourced if the
firm doesn’t have the capability to do the tasks, and doesn’t see a strategic rationale
for building the capability. The third motive is stop-gap/learning: the firm doesn’t have
the capability that has suddenly become strategically important, and contracts the
provider to supply the capability while building up internal capabilities, while
learning as much as possible from the external provider46. (Bounfour, 1999; Firm A
interviews, 2008; Firm B interviews, 2008) These motives and some examples of
possible strategic rationales for them are summarized in Table 6 below.
46‘Focus’ and ‘stop-gap/learning’ motives also cover situations where the firm seeks specialist
expertise for some part of the product development process, such as market research, industrial
design, or mechanical engineering.
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Table 6.. Primary motives for outsourcing NPD and their rationales. Sources: Firm
A and B interviews (2008); Bruce and Morris (1998, 57) and Greaver (1998, 4-5);
Stalk (1988), Welch and Nayak (1992), Lacity and Hirscheim (1993), Quinn and
Hilmer (1994), Alexander and Young (1996b), Bruce and Morris (1998), Inkpen
(1998), Powell (1998), Bounfour (1999), Hagel and Singer (1999), Vining and
Globerman (1999), Chiesa et al. (2000), Sislian and Satir (2000), Kakabadse and
Kakabadse (2002), Chesbrough (2003) and Hätönen (2008, 69).
Primary motives for Examples of strategic
Firm situation
outsourcing NPD rationale
Cost savings through off-
shoring routine tasks to
cheaper labour countries
Flexibility
Relieving workloads
Unsuccessful projects are
easier to abort
Acquiring new ideas or
technology
Accessing hard to find
resources
Firm has own capability but
Capacity sourcing lacks capacity
Avoiding fixed costs caused by
hiring new personnel
Reducing time-to-market
‘Shaping’ the marketplace
Developing alternative ‘second
opinion’ to stimulate
innovation and/or put
competitive pressure to
internal NPD teams
Improving credibility and
image by associating with
superior providers
Cost savings through off-
shoring routine tasks to
cheaper labour countries
Lack of expertise in-house
Firm doesn’t have the Access to a talent base that’s
Focus capability and doesn’t see a wider than in internal NPD
need for one Hiring, managing and
motivating skilled specialists
may be difficult due to
different focus in corporate
culture
Solving short-term problems
Responding to sudden changes
in market demands
Firm sees a need for capability
Learning from world-class
Stop-gap/learning but doesn’t have time to
provider
develop one
New learning takes place
during interactions between
different organizations
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3.3. Risks in NPD outsourcing (why not?)
As previously mentioned, outsourcing and NPD outsourcing in particular have
divided researchers and practitioners over the years. For the most part, the criticism
centres on the true costs of outsourcing and on the ‘hollowing out’ effects that
outsourcing may have to the long-term competitiveness of the firm. Detractors of
outsourcing have pointed out that very few outsourcing initiatives have
accomplished their financial objectives (e.g. Bounfour, 1999) and that outsourcing
seemingly mundane but tacitly important functions has resulted to dilution of
competitive advantage (e.g. Chesbrough and Teece, 1996; Hayes et al., 2005). After
all, if the firm buys everything from open markets, what exactly differentiates it
from its competitors?
Outsourcing has also been seen to lead to sub-optimal results for the organization
as a whole when it has been used for solving acute problems in individual
operations. Piecemeal outsourcing has, in the past, resulted to patches of
overcapacity scattered at random throughout the firm’s operations, and end up with
large numbers of subcontractors, which are more costly to manage than in-house
operations that are individually less efficient (Milgate, 2001, 71).
This danger is especially acute in cost-minimizing or transactional outsourcing, but
it can also arise as a result from seeking external resources from multiple sources
and failing to see the ‘big picture.’ However, a more common objection raised
against outsourcing NPD activities is that the total competence necessary for the
development of new products is found only in teams where professions (marketing,
production, finance, design etc.) are integrated together (e.g. Wheelwright and Clark,
1992; Cagan and Vogel, 2001). Many researchers argue that splitting these activities
from each other results to inferior products and services.
Milgate (2001, 81-84) identified four critical issues in outsourcing, which apply to
NPD outsourcing as well. These are detailed briefly below.
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Transaction costs may threaten the competitiveness of outsourcing NPD, since
effective outsourcing typically requires the client to spend considerable time
managing the outsourcing relationship (e.g. Bruce and Morris, 1998). Time spent in
this activity causes transaction costs, which need to be included in the cost-benefit
analysis conducted before outsourcing any function. Transaction costs become a
problem especially if the relationship or the project has problems, as in-house
management time required for solving the difficulties can then rise dramatically.
Transaction costs may be problematic especially when sourcing intangible activities
such as NPD, since transaction costs are very difficult or impossible to quantify
(Bounfour, 1999)47.
Loss of key markets is a real risk for organizations that outsource all or part of the
design and/or manufacturing of their product (see also Porter, 1980). There is
danger that the provider could enter the market at a future stage in its own right,
and if this happens, the client not only gains a rival that has learned from it, but also
loses a source of supply in which it may have invested many years of effort48. To
guard against this possibility, the client should erect a ‘strategic wall’ (Milgate, 2001,
81) between the provider and the client’s customers. Often this strategic wall is the
core competence of the organization that forms a significant barrier to entry for
providers. In case of NPD outsourcing, the strategic wall can be maintained by
giving out only activities that are peripheral to the firm’s core business, or giving
only limited ‘pieces’ of core design activities for outsiders to perform. For example,
one interviewed firm always designed the baseline products in each product line,
even though design work for line extensions (e.g. bigger capacity models) was
normally performed by outside contractors (Firm A interviews, 2008). Other tactics
include spreading the design of components and subassemblies among a range of
providers, or owning the patent rights to key technologies used. However, the risks
47 See Appendix C for a short overview of transaction-cost theory and its applicability to NPD
outsourcing.
48 An illustrative example of this danger is that today, HTC is much larger mobile device
manufacturer compared to its long-time client Sony Ericsson (see Figure 1, p. 36).
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of e.g. spreading the key technology of the firm should be balanced against the risks
of not using an external provider to help. After all, most core competences are
diluted simply through passage of time (Welch and Nayak, 1992).
Loss of competencies can occur through lack of careful preparation. Core
competencies — those competencies that give the firm definable pre-eminence and
provide unique value to customers (Quinn and Hilmer, 1994) — might not be
accidentally outsourced49, but outsourcing can affect supporting competencies that
are not recognized as contributing to core competencies. Other competencies
should be nurtured in-house to retain and enhance long-term competiveness. For
example, a firm outsourcing its NPD market research function may easily lose
contact with its customers and, as a result, fail to grasp changing user or market
needs. Finally, today an organization can endanger its own future by outsourcing
relatively simple tasks that have been used to train new employees (e.g. drafting
production blueprints), to cheaper locations such as India.
Loss of cross-functional synergies by outsourcing key functions is an issue in
many NPD outsourcing considerations. In practice, problems typically arise when
NPD function is separated from either sales (resulting to a loss of ‘customer voice’
in NPD process) or manufacturing (resulting to a loss of tacit knowledge and
iterative development required to develop manufacturable products; see also Ulrich
and Ellinger, 2005). A well-managed outsourcing process can avoid these losses, but
only if the requirements for successful disintegration (Ulrich and Ellinger, 2005; see
Section 2.5.4) are satisfied. Even then, there is a real danger that outsourcing some
49 What is alarming, however, is that managers are surprisingly often unclear about the concept of
core competencies and their role in a business strategy, as evidenced in research by Milgate (2001,
26). When asked to name the core competencies of the firm, many managers reply by naming their
main product or service, or by referring to a vague concept such as ‘market leadership’ or ‘customer
service.’ Milgate (2001, 26-27) also identified a number of organizations that were embarking on
alliances and outsourcing without first defining the core competencies that should be nurtured in-
house. This ‘reactive outsourcing’ often resulted to ‘hollowing out’ the corporation. Perhaps the
best-known example of an entire ‘hollowed out’ industry has been American television
manufacturing, whose excessive outsourcing of R&D and manufacturing to Japanese providers
detached the industry from the key technological developments needed to be competitive in the
next generation of products (Milgate, 2001, 28; see also Chesbrough and Teece, 1996; Hayes et al.,
2005).
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NPD activities results to a ‘relay race,’ where all work is performed sequentially and
gains from integrated product development are lost (see e.g. Zirpoli and Caputo,
2002, for a study of practical problems in knowledge integration).
At worst, loss of competencies and valuable synergies can, at worst, lead to a ‘death
spiral’ illustrated in Figure 5.
Figure 5. Losing competitiveness through outsourcing. Adapted from Milgate
(2001, 141)
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3.4. Assessment
Prior planning and preparation prevents poor performance.
A British Army adage
As stated in the Introduction, proper planning is important for the success of the
outsourcing project. To capture the benefits and avoid the pitfalls of outsourcing
NPD, the outsourcing decision must be approached strategically (Quélin and
Duhamel, 2003, 658; Hätönen, 2008, 57). The strategic approach must provide the
firm with information about the reasoning behind outsourcing initiative and main
activities that could potentially be outsourced, and identify the driving forces behind
its success. In particular, firms need to establish whether the activity, resource or
capability is responsible for competitive advantage (Lonsdale, 1999, 181). According
to Hätönen (2008, 57), this internal assessment phase of the outsourcing process
entails identifying the key value-adding competences and assessing the implications
of the decomposition of the activities that are amenable to outsourcing. However,
the author argues that one of the first tasks in any outsourcing process should be
identifying the reasons why outsourcing should be considered and setting the
objectives for the process (what is wanted to achieve), since clarifying why
outsourced NPD is required has effects on all the other decisions made.
Because making assessments and decisions from a single standpoint can easily
overlook important factors, the assessment should be performed by a cross-
functional team that includes knowledge from three key functional areas in the firm:
market & business, product architecture & design, and supply chain (Barragan et al.,
2003).
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Market and business model knowledge is required to understand which product
features are highly valued by customers, and therefore help the firm to decide which
design elements provide the greatest competitive advantage.
Product architecture and design knowledge is required to assess, for example,
the product’s architectural modularity and technology maturity, both important
components in outsourcing decision-making.
Supply chain knowledge brings experience on managing partner relationships,
capability assessment, and market efficiency. Bringing the procurement
professionals into the process increases the probabilities of successful partner
selection (Barragan et al., 2003).
As a result, the first task in any outsourcing initiative should be assembling a team
of experts from these different areas (Greaver, 1998; Barragan et al., 2003). Once
the expertise is identified and assembled, the team — termed outsourcing initiative
team later in the text — should review the reasoning and objectives behind the
outsourcing initiative.
At this stage, the outsourcing process is just an initiative. Nothing has been decided
yet: options are analyzed and reviewed, providers screened, and initial discussions
may take place.
Finally, the planning process should, from the start, follow so-called discovery-
driven planning model (McGrath and MacMillan, 1995; see also Kawasaki, 2004).
Traditional planning methods such as stage-gate planning work well if the planners
have lots of experience in the subject area and there is high certainty that their
assumptions turn out to be right. NPD outsourcing, however, is a relatively recent
addition to strategic toolkit available to firms, and most firms have little experience
in conducting NPD outsourcing. At the same time, the world is changing faster than
ever before, eroding the validity of many long-held assumptions. Discovery-driven
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planning (McGrath and MacMillan, 1995) concentrates on identifying assumptions
underlying management thinking and finding inexpensive ways of testing these
assumptions before major commitments are made.
An overview of discovery-driven planning can be found at Appendix D. In brief,
discovery-driven planning starts from a viable business case (e.g. how much better
the provider should be for outsourcing to be considered) and tries to identify
testable assumptions that would lead to such an outcome (e.g. the provider needs to
be able to design our product in 4 months or less). From these assumptions flow
tasks for the project team (e.g. find out from previous clients how fast the provider
was) and milestones for the project (e.g. Milestone 1 would be finding fast enough
provider).
EXAMPLE: To illustrate the process as described here, a story of NPD outsourcing
considerations at Widgets Ltd.50 is presented as an example. Widgets Ltd. is a company
manufacturing and selling professional equipment called widgets. The firm currently has three main
product lines, dubbed Alpha, Beta and Gamma, which are primarily sold to three different
institutional customer groups in Finland and abroad. Widgets Ltd. also manufactures and sells
‘civilian’ versions of its equipment to some extent, but only as supplementary to its other business.
In addition to its own manufacturing, Widgets Ltd. also functions as a systems integrator by
integrating off-the-shelf support systems to products it sells. In its markets, Widgets Ltd. keeps close
contact to its customers and end-users, and is considered a trusted partner by its long-term clients.
The management of Widgets Ltd. assumes that the firm’s product development processes are not as
efficient as they should be. Although workforce is skilled and the firm’s products are noted for their
quality, CEO feels that product development is wasting its time on peripheral projects, many of
which have only one or two customers. This, in turn, keeps NPD teams busy in endless
modifications and custom orders, and the CEO fears that lack of focus may return to haunt the
50Widgets Ltd. is a semi-fictionalized, simplified composite of several existing firms and case
studies. It is used for purposes of illustrating actions taken according to framework presented in
this thesis, and not as an example of ‘good’ or ‘bad’ practices.
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firm in an eventual downturn. In addition, some customers have been hinting that the firm could be
more innovative in its products and perhaps seek ideas and advice from outside the organization.
To determine whether outsourced NPD would help Widgets Ltd., the CEO has called together an
outsourcing initiative team that has members from sales and marketing, product development,
manufacturing, and procurement. The initial assumptions need to be tested through more careful
analysis, and the first two milestones are determined to be 1) getting a consensus on objectives and
reasons for Widgets Ltd. to consider NPD outsourcing, 2) determining whether the Widgets Ltd’s
NPD process can be outsourced at all, and 3) finding suitable providers for the tasks that can be
outsourced.
3.4.1. Identifying the objectives: three basic strategies
Why would a firm consider outsourcing some or all of its new product development
functions? The ‘trigger’ for considering outsourcing as an option can come either
from the outside of the firm. It could be a result of changes in the environment (e.g.
what competitors are doing or what customers are requesting; see Cánez et al., 2000)
or a result of internal reassessments, such as concern about the capacity of internal
NPD (de Boer et al., 2006). Whatever is the case, the team considering outsourcing
should recognize and analyze the factors that have led to the initial decision to
initiate the outsourcing project. This root cause analysis is important, because
triggers usually influence the performance measures for outsourcing (Cánez et al.,
2000; de Boer et al., 2006). For example, if one of the trigger events is concern for
innovativeness, innovativeness of the provider’s solutions is likely to be a key
performance measure for the outsourcing arrangement.
As previously mentioned, NPD outsourcing usually happens because the firm needs
extra capacity, it must sharpen its focus, or as a stop-gap measure while building up
its own competences. Recognizing which motives, or combinations of motives, are
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behind the outsourcing initiative is required for setting strategies and objectives. The
following section discusses the implications from different objectives and examines
briefly some possible alternatives for outsourcing.
Capacity sourcing is probably the most straightforward case. In principle, the firm
makes a decision to acquire skills and workers through providers and independent
consultants instead of hiring them. The objective in this strategy is to increase
flexibility and possibly raise output of NPD to meet a sudden need, or accelerate an
important project.
Capacity sourcing means that the firm has some internal capacity, and even more
importantly, capability for managing the capacity. The result is that the firm can
(and often must) clearly define what is required from the provider and under what
constraints the outsourced NPD asset can work. While the provider may have some
influence over management of the work, the situation is not very different from
employing a worker or an internal team to work on the project. However, the client
must understand that while capacity sourcing is an attractive strategy for achieving
temporary flexibility, flexibility is a two-way street. At minimum, the client must
have a contingency plan in place if the provider either cannot meet the contractual
obligations, or is no longer available — perhaps not even in the business.
With proper planning, the effects of sudden changes in provider availability can be
mitigated. The client should, for example, ensure that the provider has enough
manpower to handle the tasks even if some key personnel leave the provider or
other unexpected situations arise. Even using two or more providers can be a wise
precaution in critical projects. Above all, the client needs to avoid getting into a
position where the provider can hold the client ransom with an implicit threat of
stopping an important project. Of course, simply internalizing the activity does not
eliminate the risks of availability: employees can quit or fall sick as well.
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Focus outsourcing may sometimes resemble capacity sourcing in that the client
only engages a specialist consultant(s) for some specific and limited tasks such as
industrial design or mechanical engineering. On the other hand, it can also involve
outsourcing entire product development and manufacturing to specialist ODM
providers. No matter what the scale of the deal, the objective behind this strategy is
to concentrate resources such as time and investment on building the client’s own
core competences, and outsource supplementary or complementary tasks to
providers who can do them more effectively.
Compared to capacity sourcing, focus outsourcing can be trickier to execute,
especially if the client has no capabilities or experience in tasks that are outsourced.
Lack of experience in the task often means that the client has limited understanding
and unrealistic assumptions about the task. If the provider cannot educate the client
about e.g. the expected outcomes and time or resources necessary, the results may
be less than satisfactory. In particular, providers often criticize their clients for not
understanding the possibilities, and as a result not using the provider’s capabilities to
the fullest (e.g. Bruce and Morris, 1998). These situations are more likely to arise in
small-scale outsourcing of specialist expertise, as large-scale projects such as ODM
deals are typically undertaken by large organizations that have specialized staff for
handling outsourcing negotiations and eventual relationship (Bruce and Morris,
1998).
Focus outsourcing can also result from a strategic decision to concentrate on
selected products or product lines and hire another firm to continue development
of discontinued lines (Firm B interviews, 2008). In these cases, the peculiarities of
the product are typically well understood, and the client can — at least for a while
before client’s knowledge becomes too dated — provide effective support for the
provider. However, if the discontinuation is intended to be permanent, the provider
should become relatively independent from the client and build its own capabilities
for e.g. capturing user requirements for the product.
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It is also important to note that today, firms undertaking both capacity sourcing and
especially focus outsourcing seek capacity and competencies from across the world.
Clients focusing on their core competences seek supplementary competences from
best-in-the-world providers (Milgate, 2001; Firm B interviews, 2008), and those
concerned about capacity and costs seek low-cost, high-capacity alternatives from
wherever they can find them. Although this thesis is does not cover the outsourcing
location decision, the effect this global search for talent has for — especially —
resource-seeking focus outsourcing cannot be denied. In short, by intensifying the
competition, global access has also made focus strategies possible, as firms today
have access to a wider variety of skills and competences than they had just ten years
ago (see e.g. Friedman, 2005).
Finally, stopgap and learning strategy is essentially similar to focus outsourcing,
but with an addition that the client seeks to develop its own competences in the area
and eventually replace the provider. This situation is potentially unstable, as the
provider may have little incentive to educate the client if it knows that its services
will be discontinued as soon as internal capability and capacity are in place. To avoid
this moral hazard, the client should be very clear from the beginning that the
objective of the outsourcing arrangement is to support the client’s internal
competency growth, and perhaps even promise bonuses if the competency can be
brought ‘up to speed’ sooner than expected.
As its name implies, stopgap outsourcing can also be undertaken in a hurry when
the market or customer needs change suddenly51. The obvious danger in this
strategy is the fact that it is undertaken in a hurry, and thus with less than desired
deliberation. Furthermore, outsourcing motivated for stopgap reasons has a
notorious track record of becoming permanent. Many firms that solve their short-
term problems through outsourcing fail to build their own competences even if the
competence is deemed desirable for the future of the firm (Milgate, 2001, 27-28).
51 That is, faster than the firm can react.
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EXAMPLE: During its initial sessions with the board of directors and the management, the
outsourcing initiative team of Widgets Ltd. determines that the objectives of outsourcing initiative
are to 1) sharpen the focus of the firm’s product development activities to those products that form
the core of the firm’s competitive advantage, 2) acquire, if possible, improved although not
necessarily best-in-the-world capability in product development in Widgets Ltd’s primary market
segments, and 3) seek ways to increase flexibility in case it is needed. If learning can be achieved,
that is considered a desirable bonus, but the main purpose of the effort is to enable the internal
NPD team to concentrate on Widgets Ltd’s key products and thus build world-class expertise in
them.
As can be seen, the motives for NPD outsourcing in Widgets Ltd. are primarily focus-oriented,
with some capacity considerations as well. Thus, the ‘successful outcome’ in Widgets Ltd’s case
would now mean improved focus and flexibility. During the planning process, the outsourcing
initiative team needs to determine under what assumptions these objectives can be reached, and find
ways for testing the assumptions — preferably before major commitments have to be made.
3.4.2. Determining process modularity
At this stage, the outsourcing initiative team should make assumptions about how
modular their NPD processes are. Some firms — especially many smaller start-ups
— have highly integrated and informal NPD processes that rely on tacit knowledge
and informal communication between specialists, making outsourcing any parts of
this process problematic and probably not worth the effort. Other firms follow
well-defined processes with clear ‘interfaces’ between tasks (Ethiraj and Levinthal,
2004), and substituting external resources for internal resources is relatively
straightforward. Most firms fall somewhere in between, and have both informal and
formal processes.
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The first step in analyzing modularity is to determine what activities are performed
during the NPD process, and analyze how the process moves from one activity to
another, e.g. how the previous activity is documented and information transferred
to the next phase. As previously discussed52, integration of two activities into the
same organizational entity is desirable, if 1) the quality of precedent activity is
difficult to measure and responsibility for both should be given to the same
organization in order to avoid shirking without detection (e.g. Holmström and
Milgrom, 1991), or 2) if iterative exchanges of information and cooperative
problem-solving are required between two activities – say, design and manufacturing
(Ulrich and Ellison, 2005). However, practical interaction can be achieved through
other forms than consolidation within the same legal entity (Dyer, 1997).
One practical example is division of the design process into concept design and
detailed design phases. This division may allow the firm to achieve the benefits of
internalized and outsourced activities (Ulrich and Ellison, 2005). Other ‘non-
hierarchical’ methods for organizational integration include geographic proximity,
use of face-to-face meetings, co-locating, joint design teams and design reviews
(Adler, 1995; Dyer, 1997). These integrative methods can minimize coordination
costs and thus mitigate the problems arising from conflicting motives to outsource
but integrate at the same time.
In other words, NPD tasks can be outsourced if their (relative) isolation from the
rest of the firm is not a problem, and if the results can be somehow measured and
judged. In practical terms, this means that typical NPD outsourcing happens at
junctions where the results of preceding tasks are collated and formalized in e.g.
market research and user needs reports, technical specifications, and design briefs
(Firm B interviews, 2008).
The outsourcing initiative team should review the existing procedures used within
the firm, and note where suitable junctures for disaggregating the tasks may exist.
52 See Section 2.5.4, page 51.
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Compiling a list of tasks performed within NPD process, and noting which tasks
need to be performed within same organizational entity (without, for the moment,
considering whether that entity is the firm or outsourcing provider) is a helpful
preliminary for later stages of outsourcing process. The team should also consider
whether the procedures could and should be adjusted so that outsourcing would
become easier to achieve. For example, the firm could start an initiative that aims to
standardize component interfaces, or it can begin to document technical
specifications in more detail instead of relying on tacit knowledge. These
modularization initiatives will help to improve the firm’s processes even if they do
not lead to outsourcing (e.g. Schilling, 2000).
Armed with a list of tasks and activities, the team can then move on to the next
phase of NPD outsourcing process: identifying the key value-added competences of
the firm.
EXAMPLE: The outsourcing initiative team at Widgets Ltd. determines, through its own
experiences and by interviewing other key personnel, that the firm’s product development process
usually starts from a user requirement that the firm’s current products cannot adequately satisfy.
This ‘voice of the customer’ is collected by sales and marketing staff, and through informal contacts
and discussions between the users and the firm’s product development engineers. As the users are
relatively specialized segment, the initiative team concludes that this initial market research and
ideation stage is unlikely to be possible to outsource completely, although additional market research
would be useful for validating the size of the market once a new user need is found. Another task
the engineers at Widgets Ltd. find beyond their means is coming up with radically new product
ideas based on user observation, as most of the time is spent on incrementally improving existing
products.
Typically, the engineers start the NPD process informally, and upper management is informed
when the engineers have a ‘business case’ to present. At this point, the NPD team might need help
from external professionals for visualizing and presenting their concepts. If a ‘Go’ decision is made,
the engineers determine technical specifications for the product in collaboration with users. The
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initiative team identifies these relatively detailed specifications as one possible juncture in the process:
Widgets Ltd. could outsource either a) crafting these detailed specifications, or b) developing
products to the specifications.
After specifications have been drafted, the development proceeds towards optimum solutions in an
iterative manner, where design engineers devise a potential design and test it with production
engineers, making changes when necessary. Some workstreams such as design of certain parts and
subassemblies are relatively independent from the main design work and could be outsourced: in
these cases, the internal NPD team could define interfaces for assemblies and source them from best
providers. This would save considerable manpower and, if the development work could be conducted
concurrently with main design work, decrease time-to-market. In addition, the firm already uses
industrial designers at the final stages of the NPD process, and as a systems integrator, it already
buys a number of commercial off-the-shelf components that complement its products.
In conclusion, the tasks or activities in NPD that could be easily outsourced are assumed to be:
1) Development of Subsystem A that is now developed for every major product revision and used
in nearly every widget manufactured by the Widgets Ltd.
2) Development of Subsystem B that is updated perhaps once every two years and installed in
most widgets manufactured.
3) Development of Parts Assembly C that is used in ‘heavy duty’ versions of the widgets.
4) Industrial design, which is already outsourced.
5) Development of radical new product ideas and concepts through user observation.
6) Complete development of a product from technical specifications.
Table 7. Activities identified modular enough to be considered for outsourcing at
Widgets Ltd.
Activities modular enough for outsourcing
Subsystem A development
Subsystem B development
Parts Assembly C development
Industrial design
Radical, user-centric innovation
NPD from technical specifications onwards
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3.4.3. Identifying the key value-added competences
Perhaps the most important determinant of what could be outsourced is the firm’s
focus. Business and economics scholars have for long been advising firms to focus
their energies on activities in which they shine (e.g. Williamson, 1975). Hamel and
Prahalad (1990) conceptualized these activities later as core competences. Core
competences are those competences in which the firm excels and which are valued
by the customer (Hätönen, 2008, 57). In context of outsourcing, Quinn and Hilmer
(1994) defined that the firm should keep core competences that give the firm
definable pre-eminence and provide unique value for customers.
However, defining the core competences in a given firm has proven to be
somewhat problematic. As noted above, managers are surprisingly often unclear
about the concept of core competences and their role in a business strategy
(Milgate, 2001, 27), often referring to vague concepts such as ‘market leadership’ or
‘customer service’ when asked to define their core competences.
Core competences are sources of long-term value for the firm, and these sources of
value need to be carefully identified before any outsourcing decisions can be made.
Hamel and Prahalad (1994) suggest three identification criteria:
1) Customer value
2) Competitor differentiation
3) Extendibility
First and foremost, a core competency must make a disproportionate contribution
to customer-perceived value, either directly or through its outcome (e.g. core
competency in reliability engineering leads to products with less downtime). Second,
a core competency must be competitively unique and hard for competitors to
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imitate. Third, a core competency should also be possible to extend to other
products or businesses as well.
Even though the idea behind core competences may be clear, identifying them may
be less easy than it sounds. As Prahalad and Hamel (1990) explained via their
analogy of core competences as the root system of a firm, core competences are
typically out of sight and not necessarily noticed by a casual observer (Milgate, 2001,
29). Figure 6 illustrates how core competences create value in a firm.
Figure 6. How core competences create value. Adapted from Prahalad and Hamel
(1990).
Generally, the identification of core competencies should be beyond the scope of an
outsourcing initiative, especially in larger firms. Senior management should provide
this information directly or indirectly, for example by putting certain core
competency areas off limits, and in any case finding core competencies in a larger
organization can be a very time consuming and expensive exercise (Greaver, 1998,
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96). However, since this treatise is also intended for managers in smaller
organizations, a short overview of the process is in order.
Although situations vary so much that ‘laundry lists,’ i.e. simple checklists for
determining core competences should be approached with caution (Snyder and
Ebeling, 1992), some basic tests can and should be applied to identify potential core
competencies for further analysis and validation53. For example, Milgate (2001, 30)
suggests that core competences often have the following characteristics:
1) Architectural support
2) Continuously renewed and enhanced
3) Difficult to copy
4) Embodied, exploited in multiple products or services
5) Enduring and understood
6) Envied by competitors and benchmark organizations
7) Monitored through performance measures
8) Recognized internally
9) Reinforced through training and development
10) True competitive asset
11) Truly distinctive
May (1998) recommends that, in order to determine core competencies, every
activity the firm undertakes should be assessed to determine whether:
1) It has a direct effect on satisfying customers’ needs;
2) Outsourcing would achieve comparable quality more cheaply;
3) Re-allocation of resources to other activities would earn a superior return; and
4) Other benefits might arise from outsourcing, such as lower inventory cost,
reduced management time, and improved production flow.
53 An example of criteria that could be used as a basis for defining core competences can be found
at Appendix D. Additional core competency checklist can be found in Appendix G.
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Once candidates for core competencies have been identified, Snyder and Ebeling
(1992) suggest the following simple tests for uncovering an organization’s
competences and for building management consensus about how they should be
defined:
1) Does the core competence contribute significantly to the ultimate value of the
end product?
2) Does it represent a unique capability that provides enduring competitive
advantage?
3) Does it have the potential to support multiple end products or services?
For determining whether the core competences are truly valuable, and measuring
how valuable they are, Greaver (1998, 96-99) and Hätönen (2008, 58) suggest that
their contribution to customer-perceived value should be established through
market research, uniqueness through competitor analysis and benchmarking, and
extendibility through internal analysis of core competencies — while noting that
internal analysis of core competencies calls for a great deal of objectivity and as a
result tends to be a tricky task (Hätönen, 2008, 58).
Snyder and Ebeling (1992) suggest that compelling arguments about core
competencies can also be derived from studying the organization’s internal
configuration. By this, they mean examining where the current weight of effort and
activity seems to be concentrated. However, simple insights can be as valuable as
sophisticated analysis. For example, focusing on the product areas that make most
profit may be a simple but effective strategy for many firms54 (Milgate, 2001, 37).
54 As an example, Charles Lazarus noted that the only product area where the then U.S.-based
Interstate Departmental Stores made a profit was toys. As a result of his decision to focus on that
line only, the organization — now named Toys’R’Us — built in fifteen years a set of impressive
competences around toy retailing, and won more than 20 percent of the retail toy business in the
United States while expanding overseas (Milgate, 2001, 37). Another example is Intel, whose switch
in market focus from DRAM memory chips to in microprocessors started with a discovery that
microprocessors had notably higher profit margins than memory chips (Grove, 1996).
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Core competences and product development are often linked through core products.
Core products are the components or subassemblies that actually contribute to the
value of the end products (Prahalad and Hamel, 1990). A firm may well achieve a
commanding position in a core product without possessing only a small share of the
global market for the end product. Examples quoted by Prahalad and Hamel (1990)
include Canon, which had a dominating position in the global market for laser
printer engines, and Matsushita, which had a large market for key VCR components.
As e.g. Venkatesan (1992) argued, firms should focus on these critical components
that the firm is distinctively good at making, while outsourcing components whose
suppliers have a distinctive comparative advantage or fundamentally lower cost
structure.
The core competencies evidently get attention at very high level in hierarchy. The
end products, in turn, are tangible and known by the whole organization. But who
decides what are the core products?
Traditionally, core products have been defined by production personnel. However,
for objective classification, a cross-functional team should categorize core products.
This is especially important whenever there is a risk that a manager wants to
strengthen his or her position by categorizing as core products as many products as
possible from his/her responsibility area. Although this would seem self-evident,
the roots of the production- or infrastructure-steered approach in the business
models (see Hagel and Singer, 1999) are still strong – especially in the heavy
equipment industry (Eklund, 2004).
Therefore, in product development setting, outsourcing decision-making and
partner selection should from the start involve expert participation from three key
knowledge areas previously mentioned: market & business, product architecture &
design, and supply chain (Barragan et al., 2003).
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Example: Previously, the core competences of Widget Ltd. have been determined to be 1) flexible,
high quality manufacturing, 2) good, long-term contacts with the users, and 3) long experience in
incremental improvement of widgets.
The activities identified in the previous phase as possible candidates for outsourcing are tested
against different core competency criteria. The activities are first assessed against the checklist for
core competences, with the emphasis on whether the activity has a direct effect on satisfying
customers’ needs. A brief user survey is conducted with help from an external research agency and
firm’s own sales representatives, competitors are benchmarked, and internal processes analyzed in a
discussion between initiative team members.
Development of Subsystem A is determined to be a core competency, because it satisfies customers’
needs and contributes significant value to the end product’s usability, represents an unique capability
that isn’t readily available from the marketplace, and supports multiple end products — nearly
every widget uses a version of the subsystem. In addition the situation is not expected to change in
the foreseeable future. On the other hand, Subsystem B and Parts Assembly C development tasks
are deemed non-core. Although Subsystem B supports multiple end products and is somewhat
unique to the firm, it contributes only modestly to customer value and ties significant NPD
resources to its development whenever it needs to be updated. Parts Assembly C doesn’t represent a
unique capability, and it supports only limited range of products.
Industrial design is already outsourced as Widgets Ltd. has recognized that industrial design is
needed only intermittently, and hiring an internal designer would create additional management
challenges. Development of radical new product ideas is not identified as a core competency of
Widgets Ltd., as the firm’s capabilities are recognized to be somewhat lacking in, for example, user
needs research. On the other hand, developing complete products from technical specifications is
implicitly a core competence for the firm.
The outsourcing initiative team then looks into Widget Ltd’s organizational structure. By
headcount, the main effort is put to serving product line Alpha customers, followed by Subsystem A
development. Other product lines and projects are served as resources permit.
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For additional insight, the outsourcing initiative team analyzes the Widget Ltd’s product lines,
Alpha, Beta and Gamma. Product line Alpha is the key product line both in terms of volume and
profitability. Product line Beta is a supporting product line whose profitability is relatively good but
whose sales are distinctly lower than those of Alpha; however, the management has high hopes for
Beta’s future prospects as its sales have been steadily increasing. Product line Gamma consists of
complementary products for Alpha and Beta customers; Gamma products are bundled with most
orders, but their profitability — while positive — is poorest of the lot.
At this point, the outsourcing initiative team has enough information to move to the next step of the
process: assessing the implications of possible outsourcing decision.
Table 8. Preliminary division of core and non-core activities at Widgets Ltd.
Core competences/products Non-core competences/products
Subsystem B development
Parts Assembly C development
Subsystem A development
Industrial design
Product line Alpha
NPD from technical specifications onwards
Product line Beta
Radical, user-centric innovation
Product line Gamma
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3.4.4. Assessment of implications of decision
Even if some competency is recognized as being non-core to the firm, the
outsourcing decision is still not as straightforward as it would seem. Two-fold
distinction between core and non-core (or ‘peripheral’) competencies oversimplifies
the actual business situation (e.g. Heikkilä and Cordon, 2002). Existing literature has
identified several reasons why some of the core competencies, even if they do not
rank as best-in-the-world, should also be kept in-house (Hätönen, 2008, 59)55. These
competencies, where the firm is not best-in-the-world but which are needed for
other reasons, could be termed ‘strategic’ after Hussey and Jenster (2003)56.
The current doctrine of outsourcing holds that in today’s marketplace, core
competence has to be close to a best-in-the-world capability and not merely
something at which the company is efficient (Quinn, 1999; Hätönen, 2008, 61). This
has led to a market decrease in number of ‘core’ activities of a firm, while more and
more activities become ‘peripheral,’ or at most, ‘strategic’ in nature. However, in
certain cases peripheral competencies should be kept in-house. Hätönen (2008, 59)
summed up the reasons for holding on to strategic competences, and these reasons
are briefly summarized in Table 9. This reasoning can, and should, be extended to
product lines and components as well.
55 In NPD settings, these reasons include customer requirements (Quinn, 1999), high asset
specificity (Lonsdale, 1999), protection of core competencies (Quinn, 1999), the interdependence
of competencies (Bryce and Useem, 1998; Ulrich and Ellinger, 2005) and inadequate supply-base
capabilities (Lonsdale, 1999; Fine et al., 2002). More examples can be found from Hätönen (2008,
59).
56 Other definitions have included ‘essential’ (Quinn, 1999) or ‘critical’ (Duarte et al., 2004).
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Table 9. Spotting strategic skills. Adapted from Hätönen (2008, 59-61)
Competency should be kept in-house if
Examples of reasoning
outsourcing
If a task cannot be disintegrated from another
Has a negative impact on real core competences (see Section 2.5.4), or outsourcing a task would
due to connections to them make important competencies or processes
dependent from the provider
No available providers to provide the service at
Provides no added value due to the absence of a
the required volume, performance level, and
competitive provider market
with the desired cost structure
Core competencies are not static, and
outsourcing a future prospect might have
severe consequences (although keeping a non-
Might cause the loss of possible future core promising competence is a cost burden that
competences takes resources away from real core
competencies); also, some activities are useful
training activities for new recruits, and losing
them can hinder their learning
Customers might insist that the company does
not outsource some activities out of a fear that
Is required by certain stakeholders this might lead to decreased value or increased
complexity in the supply chain; governments
may have an impact on locational decisions
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EXAMPLE: The outsourcing initiative team now analyzes the competences and product lines to
see whether they are strategically important for Widgets Ltd. The team starts by debating whether
outsourcing NPD would have an adverse effect for long-term competitiveness of the firm. The
strategic importance of Subsystem A and Product line Alpha is quickly established, but other
tasks are more difficult to specify.
Product line Beta, while promising, is nevertheless downgraded from its core product position due to
lack of experience within Widgets Ltd. for designing its products as compared to competitors.
However, as its outsourcing might cause the loss of possible future core competences, it is deemed
strategic in nature.
Although Widgets Ltd’s NPD process might not be the best in the world, the team determines that
completely outsourcing it would provide no added value, because it is difficult to see a provider
having same access to users, customers and manufacturing processes used by the Widgets Ltd.
Therefore, the NPD process is also classified as a strategic competence.
The ‘fuzzy front end’ of innovation causes much debate among the team. Some members argue that
the firm is seriously lacking in capabilities for user-centric innovation, and that it should outsource
this initial stage to a suitable provider, perhaps to a design agency. However, the R&D manager
objects on the grounds that spending some time for developing new concepts now and then is
important for many R&D engineers and an essential factor in their motivation and innovativeness.
Outsourcing the ‘fuzzy front end’ completely would, in the long run, harm the firm’s capability for
NPD — not increase it. As a result, ‘fuzzy front end’ is provisionally categorized as a strategic
competence.
Rest of the activities are finally determined to be peripheral to the firm. Subsystem B development
ties significant NPD resources, and since its development is needed only periodically, the initiative
team agrees that with some modifications to future products and procedures its development could be
handled by an external provider. Similar argument holds for Parts Assembly C. Industrial design
is already outsourced and the team does not see a need to change the situation.
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In a similar vein, product line Gamma is deemed to be peripheral. Although important for most
products, outsourcing the development of the Gamma line would free internal resources for more
lucrative projects, such as improvements in Alpha and further developments in the promising Beta
product line.
Finally, the team holds discussions with internal specialists to ensure that the competences and key
products are correctly identified. These discussions were motivated by one manager who remembered
reading a cautionary tale about the dangers of not understanding what is actually happening in the
production: when car manufacturer Jaguar streamlined its operations in the 1990’s, it laid off or
outsourced several engineers from quality control. However, unbeknownst to the management, one of
those engineers had been ‘tuning’ the doors of every Jaguar shipped out from the factory to ensure
that they would close with a satisfying, metallic sound. After six months, long-term customers
started complaining that their new Jaguars didn’t ‘feel’ like Jaguars, and only with much difficulty
and expense the management traced the reason to doors that didn’t sound ‘right.’
Core Strategic Peripheral
competences/products competences/products competences/products
Product line Beta Subsystem B development
NPD from technical Parts Assembly C
Subsystem A development
specifications onwards development
Product line Alpha
Radical, user-centric Industrial design
innovation Product line Gamma
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3.5. Selection and negotiation
Provider selection is another critical success factor in outsourcing, It is especially
important when outsourcing services, since the client cannot evaluate the provider’s
‘goods’ before payment for the services has been made. Buying a service always
includes an original element (Mitchell, 1994), and even with previous experience, the
client cannot be totally sure of what is being acquired.
Furthermore, in service relationships such as NPD outsourcing, clients should be
able to trust their service providers, feel safe in their dealings with the providers, and
be assured that their dealings are confidential (Parasuraman et al., 1985). For this
necessary level of trust to be achieved, the client and the provider must be a good
match for each other.
Although this thesis discusses selection and evaluation of service providers as an
independent activity occurring after core, strategic and peripheral competences have
already been determined, provider selection may shape the entire process for two
reasons. First, outsourcing process is often initiated or ‘triggered’ when the firm
learns that a suitable provider is available (Cánez et al., 2000; de Boer et al., 2006).
Second, capabilities of known providers shape the outsourcing decision-making
process and affect the decisions about core products and competences. In other
words, what is offered for outsourcing is determined by what the providers can do.
Only rarely is the outsourcing analysis performed before at least some suitable
providers have been identified, as most managers (sensibly) decline to ‘go through
the motions’ before ensuring that at least some providers exist for activities that are
considered for outsourcing.
For these reasons, this thesis assumes that the firm already knows that providers can
be found for activities identified earlier, but specific providers are not yet selected. If
provider selection is considered to be more important than determining the tasks
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that should be outsourced, the selection and evaluation processes described in this
stage can take place before core competence analysis. However, the author
recommends that at least the objectives and reasoning for outsourcing NPD be
considered before the provider is selected — whether implicitly or explicitly.
As for the process of provider selection itself, O'Farrell and Moffat (1991) and
Gallouj (1997) distinguish four significant stages in the process of selecting a
consultancy. First, general information on consultancies is searched. Second, the
firms are preliminarily evaluated and calls for tender or requests for proposals
(RFPs) are made. Third, tenders or RFPs are evaluated and the consultancies
shortlisted. Fourth, shortlisted consultancies give their presentations and the final
selection is made.
However, most real-life selection processes do not have such neatly defined stages.
Research (e.g. Gallouj, 1997; de Boer et al., 2006) suggests that in reality, the
selection and evaluation of a service provider appear to be a largely informal process
where the choice, selection and evaluation of service providers are linked together as
if in a single activity. In other words, the general information search on service
providers gathers information about possible service providers while simultaneously
evaluating them as ‘suitable’ or ‘non-suitable.’
As many real-life firms already have various provider evaluation and selection
processes in place (e.g. Redman and Allen, 1992), this text outlines the process only
briefly. However, the reader should note that evaluating and selecting a service
provider — and especially NPD provider — differs somewhat from more
traditional, transactional outsourcing of e.g. parts manufacturing.
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3.5.1. Information search and preliminary evaluation
The goal for analyzing providers is to ensure that providers have the necessary
capability and capacity to perform the NPD activities considered for outsourcing,
while determining which provider would be the best cultural and strategic fit for the
client. For this first phase of the search, the sources of information can be
numerous and often include both formal and informal sources. Because the search
for information is relatively costly in term of time and money, the client can only
take into account a limited number of candidates. Looking for a quick and
satisfactory rather than ‘optimal’ solution is therefore recommended, if searching for
the optimal solution would require exhaustive evaluation efforts (Gallouj, 1997; de
Boer et al., 2006).
The project team needs to identify the greatest number of providers who might
have the right qualifications and might be interested in providing the services.
Possible methods are networking with contacts in the industry and doing desk
research. When networking, “snowballing” the sample by asking knowledgeable
people in the industry whether they know any organizations that have conducted a
similar initiative is a good way to expand the initial contact list (Greaver, 1998, 172).
After a list of potential providers is identified, it needs to be pared down to a
manageable level. It is counterproductive for both the client and the providers to
send detailed Requests for Proposals (RFPs) to suppliers who are probably
unqualified, not interested, or incapable of pricing their services competitively, since
contacting, reviewing, evaluation and decision-making take time for both the client
and the potential providers. More than 10-15 RFPs sent indicate that the firm
probably didn’t screen the list sufficiently (Greaver, 1998, 172).
The initial contact list can be screened in a number of different ways. Above all, the
needs of the client and the provider should match, as bad matches create unstable
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relationships. This will be dealt in more detail when selection and negotiation are
discussed, but as a rule of thumb, the client and the provider should match each
other in strategic fit, strategic intent, and relative size (Milgate, 2001, 50-52; Firm B
interviews, 2008).
Matching strategic fit refers to matching the skills and needs of both the client
and the provider. Providers have differing competences, and NPD projects differ
from each other. At least the following aspects should be considered in NPD
outsourcing (adapted from Bruce and Morris, 1998):
1) Matching the NPD capability to the NPD project as ‘clean sheet of paper’ or
‘radical” innovations and ‘improvement” or ‘incremental’ situations require
different types of providers; incremental innovation is best left to specialists in a
particular technology, while radical innovations tend to require generalists that
can have a wider view at the problem
2) Matching inter-firm technologies so that the provider is sufficiently aware of the
client’s technological requirements, and is capable of dealing with them
3) Matching customer experience with the provider’s own insight, i.e. whether, and
to what extent, designers need to understand the client’s customers
Matching strategic intent means that both the provider and the client can see the
possible relationship as a win-win situation. Firms can and do outsource NPD
activities purely transactionally and relying on contracts and payments as the means
of motivating the providers. However, deeper relationships require that both the
client and the provider view each other as a window of opportunity on their
partner’s broad capabilities (Milgate, 2001, p. 51). This is especially important if one
of the objectives for outsourcing NPD includes learning (Milgate, 2001, 51).
Probing cultural compatibility is particularly important, as cultural compatibility is
an important contributor to mutual trust. Trust, in turn, is a necessary ingredient for
a successful NPD outsourcing process (e.g. Bruce and Morris, 1998). Some
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questions every potential partner in such an alliance should consider are listed below
(adapted from Milgate, 2001, 51):
1) What would be the broad, readily apparent objectives of this strategic alliance
for each partner?
2) How can the two parties complement each other to create common strengths
from which both can benefit?
3) How important an alliance would be within each partner’s corporate portfolio?
4) Would there be any problems with the alliance due to its relative closeness to the
core business of partners?
5) Are the potential partners sufficiently similar in culture?
Finally, the relative size of the client and the provider matters. Large providers are
often a bad fit for small clients, since they would probably represent only a small
percentage of the provider’s business and therefore receive less attention than they
deserve. In addition, large NPD service providers tend to have cost structures that
make their services unfeasibly expensive for small projects. On the other hand, large
clients are more interested in provider’s reliability and its ability to rapidly scale up
the development effort should a need arise. Therefore, they require equivalently
large and capable providers (Firm B interviews, 2008).
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EXAMPLE: Widgets Ltd’s outsourcing initiative team had searched for suitable providers and
identified seven provider candidates. One of these is the design agency Widgets Ltd. has previously
used for its industrial design needs, but other six are new and unknown to the firm. The team holds
brief discussions with representatives of each provider, trying to establish their competences and
motives for working for Widget Ltd. The results are collected in a table below.
Table 10. Providers identified by Widget Ltd.
Firm Notes Open questions
Able New domestic firm, only 8 employees – mostly Is this firm big enough
Assistants engineers. Not much experience, but very willing to to handle the project?
try their hands on Parts Assembly C or even Do they have enough
Subsystem B development challenges. experience?
Big Bureau Very large, well-known and respected engineering and Is this firm too large
design firm. Hundreds of employees across the for us – will we be a
world, small domestic office. Has lots of experience big enough client for
and a very structured approach to NPD process. A them?
potential candidate for outsourcing development of Do they have industry-
Product Line Gamma, would also be willing to take specific experience?
over industrial design from Diamond Designs.
Crown An experienced foreign subcontractor that designs Can we work
Contractors and manufactures custom parts and part assemblies effectively with a
for various clients in the industry. Has design offices foreign firm?
in Europe and factories in Asia. Could develop Parts
Assembly C or Subsystem B if desired; Product Line
Gamma development might be possible.
Diamond Medium-size industrial design and engineering Can a design agency
Designs consultancy that Widgets Ltd. has previously used for expand successfully
industrial design needs. Would be willing to increase from design to
the size of the account, e.g. Subsystem Beta engineering?
development or Parts Assembly C development. Do they understand
Might be too small for Product Line Gamma Gamma customers?
development.
Epic An engineering consultancy that has a good track Are subcontractors
Engineering record and references, but mostly in incremental reliable?
improvements. Could undertake Subsystem B and Can this firm provide
Parts Assembly A development. Product Line radical innovation that
Gamma development a possibility, if subcontractors may be required in the
are used. future?
Fine An ODM firm serving various clients in the industry. Would this firm
Factories A candidate for Product Line Gamma development become our
and manufacturing. competitor?
Do they understand
Gamma customers?
Great Goods A firm that both sells its own branded goods and What would be the
designs and manufactures ODM products for the effects of giving NPD
industry. Competes with Widgets Ltd. in Gamma to our competitor?
market; market leader. Could develop Product Line
Gamma; Subsystem B and Parts Assembly A
development also possible.
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The outsourcing team decides that this list should now be screened initially, but as there are only
seven candidates, and not one candidate can handle all the tasks, they all should be contacted for
further requests for proposals. However, team members raise concerns about strategic fit, strategic
intent, and relative size: Big Bureau might be too big for Widgets Ltd., while Fine Factories might
not understand Gamma customers as they should. The situation with Great Goods is problematic:
they are already competitors in the Gamma market, and there is a risk of giving valuable know-
how and might easily become competitor in Product Line Gamma. On the other hand, Great
Goods is a market leader in Gamma’s product segment, so their capability to develop Gamma-type
products is unquestioned.
3.5.2. Request for proposals
A request for proposals (RFP) or ‘call for tender’ phase is often omitted from more
informal selection processes (e.g. Gallouj, 1997). However, even though fully-
fledged tendering processes may not be sensible to undertake for smaller projects or
in smaller firms, going through the process of defining a request for proposals is
nevertheless valuable for the client. Because the RFP should summarize the needs
of the firm, as well as the findings so far made by the outsourcing initiative team, it
is a valuable documentation of the outsourcing initiative and helps future learning
(see e.g. Klein, 1998 and 2004). According to Greaver (1998), the RFP should
include
1) Reasons to outsource (see Section 3.4.1)
2) Scope and brief, if available. What services the provider is being asked to
deliver?
3) Provider qualifications; which qualifications are important? (For example,
references and key team member biographies)
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4) Performance standards/measures: The level of required performance, and how
this will be measured.
5) Pricing: What is the preferred pricing model, and how the estimated pricing
should be presented (for example, absolute firm price, or reasonable estimates)
6) What decision makers are accessible, and when
7) Questions: how the firm is going to answer any questions resulting from the
RFP.
8) Other special terms and conditions
9) Request for innovative ideas that would differentiate the provider’s services.
(Source: adapted from Greaver, 1998).
The providers should be asked to 1) focus their proposals on these issues, 2)
confirm specifically that the requested provisions can be delivered, and 3) specify
what they will not deliver.
One of the best recommendations is to ask the prospective provider for references
of customers that have had products or projects with similar requirements and find
out from the references how the provider met these requirements. Even better, the
client may ask if the potential provider can offer the names of some customers for
whom things did not work out and then find out why. If the failure of the
partnership was the client’s fault, rather than the provider’s, talks may be continued.
For example, a partnership might fall apart because the client cancelled the product,
rather than because the provider failed to deliver the promised expertise (Schweber,
2003).
Depending on the circumstances, the client may have a detailed creative brief or a
draft of a brief ready at this stage of the process. The brief is usually sensitive
enough to disclose only after non-disclosure agreements (NDAs) have been signed.
If possible, the client should consider preparing the first version of the brief early in
the outsourcing process and signing NDAs with the providers it sends the RFPs to,
because knowing the details of the project helps the providers to respond more
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accurately to the RFP. As detailed in Section 2.6.1 (p. 58), creative briefs should
include answers to the following questions:
1) The objectives: what is the purpose of the project?
2) The target audience: Who are the customers? What motivates them?
3) Targeted features: Specifications, components, manufacture; use in everyday
application; differences compared to competitors
4) Targeted user benefits: How the user will be better off? What are the trade-offs?
5) The competition
6) Preferences and constraints for budget, schedule, etc.
7) The single most important point; the primary focus of the end product (Source:
adapted from Creative Business, 2007)
Requests for proposals represent an important point in a possible relationship.
Having a smooth, professional approach from the start helps to establish to the
providers that the client is a serious, professional organization that should be taken
seriously (Greaver, 1998, 184). However the RFP is delivered — whether through
informal discussions or through detailed documentation — providers will want to
be have four things:
1) A clearly written request for proposals, or a brief
2) Sufficient information to shorten their time investment
3) Reasonable time to respond
4) Access to the firm’s decision makers.
(Source: Greaver, 1998, 184)
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EXAMPLE: As previously mentioned, Widgets Ltd. decides to contact all seven potential
candidates for more information. The team sees no need for a formal Request for Proposals stage,
but to clarify the thinking behind the outsourcing initiative, the team prepares a basic fact sheet for
each possible sub project (Subsystem B development; Parts Assembly C development; Industrial
design; Product line Gamma). An example is shown below.
SUBSYSTEM B DEVELOPMENT
1. Reason to outsource: Widgets Ltd. wishes to concentrate on its core competences and is therefore
seeking trusted providers for a long-term partnership where the provider develops Subsystem B for
Widget Ltd’s products.
2. Scope and brief: The scope of this project is to independently develop subsystem B and its
components. The idea is that this subsystem could then be installed to multiple end products
manufactured by Widgets Ltd. Therefore, the end result needs to be modular design with
standardized interfaces. This subsystem will need redesign approximately once every two years.
3. Provider qualifications: A provider should have experience in developing similar systems.
References and key developer backgrounds are important for the selection process.
4. Performance standards/measures: Widgets Ltd. seeks a high quality provider that can reliably
deliver the subsystem when it needs to be updated. Therefore, the performance standards emphasize
end product quality and timeliness. In addition, the provider needs to constantly lower the costs of
design and manufacturing of Subsystem B.
5. Pricing: The preferred pricing model is a flat fee for basic subsystem development, with
performance incentives such as sharing savings in development and manufacturing costs, and with
penalties in case of significant delays.
6. What decision makers are accessible, and when: The outsourcing initiative team is available for
further information.
7. Questions: Widgets Ltd’s outsourcing initiative team will try to provide answers to any questions
during the outsourcing process wherever possible.
8. Special terms and conditions: N/A
9. Differentiation: Widgets Ltd. welcomes any innovative ideas that would differentiate the
provider’s offering.
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3.5.3. Shortlisting
Shortlisting should take place in a reasonable time after RFPs are sent to the
providers. As a rule of thumb, preliminary planning for major projects requires
anything from three weeks to six months, whereas proposals for well-defined
auxiliary tasks such as market studies should be expected within a week.
The objective of shortlisting is to arrive at a shortlist of two to five providers who
will be invited to present their proposals. Shortlisting may involve several ‘rounds’
where the list of providers is winnowed down and the details of the project are
clarified. A suggestion made by Stryker (1982, quoted in Gallouj, 1997), is that the
client should consider the following four dimensions that cover the characteristics
of the problem and the providers themselves:
1) Understanding of the problem
2) Validity and pragmatism of the approach
3) Availability and competence of the team of consultants
4) Experience and qualifications of the provider
Of these, the understanding of the problem and validity and pragmatism of the
approach are very subjective, project-specific matters without any hard-and-fast
rules for evaluating them. Availability and competence of the team of consultants,
while more objective, matter more in NPD outsourcing projects where the client
seeks specialist expertise to help with a particularly difficult problem. They are less
important in projects where entire NPD processes are outsourced (for example,
when seeking an ODM provider).
However, providers’ qualifications and experience can and should be evaluated in all
cases. Provider’s qualifications can be divided into “hard” and “soft” qualifications,
i.e. those that are primarily historically based and can be reasonably verified, and
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those that are more attitudinal, may or may not be verifiable, and could change
based on circumstances. (Greaver, 1998, 173).
Greaver (1998, 173-174) lists several examples of qualifications that are further
divided into provider, process, and personnel qualifications. These mean, respectively,
whether the qualification applies to the provider’s organization, to the processes the
provider is using, and to provider’s personnel that would be dealing with the client.
Although other qualifications can apply, and not all of these qualifications apply to
each situation, these qualifications give a good starting point for the discussion and
are therefore summarized below in Tables 11 and 12. The qualifications are divided
between ‘hard’ qualifications that can be verified from data, and ‘soft’ qualifications
that are more subjective in nature. The tables also indicate whether or not the
particular qualification applies to the provider firm, provider’s processes, or
provider’s personnel.
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Table 11. 'Hard' qualifications. Source: Greaver (1998, 173-174)
Personnel
Hard
Provider
Examples/notes
Process
qualifications
Does the provider have customers to whom this service is being
Demonstrated Y Y Y
delivered today? How similar are their needs? How much of the
ability to deliver E E E
provider’s revenue would the client’s business represent? Does the
today S S S
provider have the size and scope to handle the service?
Y Y The experience to deliver: Is there a track record, either as a firm,
Experience to E E and/or individually, in delivering the service? Is experience in the
deliver S S client’s industry important?
Y Y Are strengths of the provider aligned with the project needs? Do
Provider strengths E E their core competencies complement the client’s core
S S competencies?
Y Y Y
Superior Does the provider have superior performance compared to the
E E E
performance internal capability?
S S S
Particularly if the client is hoping to network through the provider
Y Y Y
Deserved positive to increase sales or improve its credibility and image through
E E E
reputation association with the provider, the provider’s reputation is
S S S
important.
If the client has previously had issues with other provider’s
performance (of any type), this could become an issue. Is the
Y Y
Proven customer provider responsive to the customer’s needs and requests? Do they
E E
satisfaction measure customer satisfaction through surveys? What do the
S S
provider’s previous customers say? Is the provider responsive in a
timely fashion when confronted with issues?
Y
The provider’s ability to meet their long-term commitments
Financial stability E
depends whether they are going to be around for the long-term.
S
Proven Y Y Since human labour is significant in product development
management E E processes, capability to effectively manage the people and the
capabilities S S project is important.
Even in best-case scenarios, problems are likely to arise. How does
Shared approach Y Y
the provider address such problems? Are the provider’s people
to problem E E
defensive when confronted with problems or do they try to work
solving S S
through them to a solution?
Commitment to Y Y
Particularly in long-term contracts, does the provider continue to
continuous E E
improve?
improvement S S
Y Y
Strong transition Particularly if the client has little to no outsourcing experience, the
E E
experience provider needs to be able to guide the client through the process.
S S
The provider should be able to identify its key account team
Y Y members, and commit to their involvement. What is the provider’s
Commitment of
E E track record of turnover? Are the provider’s people satisfied and
specific resources
S S challenged? How are they organized? What is the emergency
backup plan?
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Table 12. 'Soft' qualifications. Source: Greaver (1998, 173-174)
Personnel
Provider
Soft
Process
Examples/notes
qualifications
What are the risks? A claim often made by opponents to
outsourcing is that outsourcing providers cannot be
trusted (Greaver, 1998, 176). This also applies to trust in
simple things, such as keeping deadlines and other
Y promises. What are the provider’s policies on trust issues?
Trust/security/
E How does the provider screen and hire employees? How
confidentiality
S does the provider handle breaches of trust? How does the
provider secure your information? What kind of
contingency plan and disaster recovery plan for operation
does the provider have? Only providers having high
integrity and quality security should be considered.
Y
Positive attitude helps in product development, simply
Positive attitude E
because it makes cooperation easier.
S
Good chemistry Y Since trust issues are very important, open, friendly
between key staff E relationships are much to be preferred over arms-length,
people S formal relationships.
Different cultures tend to see, approach, and solve
Y Y problems very differently. While this can be a good fit
Appropriate
E E when the client is seeking new ways of looking at things
cultural fit
S S and new ideas, it can also cause difficulties in some
settings.
Y Y Y Initial assumptions about projects will almost inevitably
Flexibility to
E E E change If the provider is not able or willing to be flexible,
change
S S S the deal should be called off.
The client doesn’t want to pay any more for the service
than is necessary. How does the provider measure and
Y Y monitor costs? What is the provider doing to avoid waste,
Cost conscious E E errors, and rework, to improve productivity, and so on? If
S S lower cost is the reason to outsource, how does the
provider achieve its lower costs? Providers should be
conscious of their costs and how they affect the client.
How open are the provider’s personnel to inquiries? How
willing are they to share that knowledge? The better the
client understands what the provider is doing, and how
Willingness to Y Y
they are delivering the service, the better it can integrate
share cutting-edge E E
them to the firm’s operations. The best results tend to
knowledge S S
occur when both parties can share knowledge (not just
information) in such a way that it can be turned into a
competitive advantage.
Y Especially important for early stage ideation and concept
Clear vision of
E generation, the provider should know the market, where it
their market
S will be in several years, and where they will be within it.
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It should be specifically noted that price is not included in these qualifications.
Experience shows that in evaluating proposals, it is better to separate price from the
other criteria, since knowing the price may unduly influence the evaluation
(Greaver, 1998, 178). A suggestion by Greaver (1998) is that if formal weighing
methods for different attributes or qualifications are used, the weightings should be
assigned before any proposals supplied by the providers are even read. This helps to
prevent any bias from a reviewer reading a particular proposal and setting the
criteria and weightings to give that proposal an unfair advantage.
Not all these qualifications are of equal importance. However, considering them all
helps to communicate the necessary qualifications in the request for proposal, and
makes the provider evaluation and selection phase as objective as possible.
Collecting background information on potential providers is also advisable at this
stage. Clients should be careful especially when dealing with unknown or foreign
providers, and make sure that they have necessary information about the provider’s
financial condition, ties to other firms, and other important factors. A provider
background checklist can be found in Appendix F.
If desired, shortlisting can be done in two or more stages, where the initial call for
proposals is followed by a more detailed RFP phase. If the providers are required to
do substantial work — for example, create detailed project proposals — the
providers should be compensated for the time spent. Although the compensation
can be nominal and some risk sharing is to be expected, most providers are loath to
undertake major planning initiatives for free. After all, their good ideas might be
appropriated either by the client, or leaked to another provider if they are not
chosen for the project. Paying the providers for their ideas is good form and sends a
message that the client is serious and professional about the project, while not
paying for planning is often considered unprofessional (Firm A interviews, 2008).
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EXAMPLE: All the seven candidates respond favourably to contacts from Widgets Ltd. Based
on their meetings, material, and discussions, the outsourcing initiative team uses the tables 11 and
12 to rank the providers. For example, the important qualifications for Subsystem B development
are given below.
HARD QUALIFICATIONS
Demonstrated ability to deliver today
Experience to deliver
Provider strengths
Financial stability
Shared approach to problem solving
Commitment to continuous problem solving
SOFT QUALIFICATIONS
Trust/security/confidentiality
Positive attitude
Good chemistry between key staff people
Flexibility to change
Cost conscious
In the end, the outsourcing team decides that Able Assistants and Big Bureau don’t make it to the
shortlist. The reasons for this are primarily due to size: Able Assistants is seen to be too small and
young, while Big Bureau seems to be too big and ponderous to be a successful match for Widgets
Ltd. Another effect of this decision is that it practically ensures that Diamond Designs remains the
industrial design provider for Widgets Ltd. They also seem to have a good case for developing Parts
Assembly C, since that involves some product design-related decisions and is within the capability of
Diamond’s engineers, and therefore the outsourcing team proceeds directly to further negotiations
with Diamond Designs for Parts Assembly C’s design work. As a result, Epic Engineering, Fine
Factories and Great Goods are now invited to do a preliminary evaluation, compensated by the
Widgets Ltd., and to present their proposals.
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3.5.4. Selection and negotiation of relationship
After the candidates have been shortlisted, the selected providers are usually invited
to present their project proposals. Depending on the scope of the outsourcing
initiative, the presentations can range from short, informal affairs — possibly even
conducted over phone or e-mail — to long sessions where every aspect of the
proposed project is exhaustively analyzed.
In terms of outsourcing management, the final decision is about whether to make,
buy or ally. Whereas ‘make’ refers to using hierarchies and ‘buy’ to using markets at
arms-length, ‘ally’ represents integration without internalization, i.e. without
ownership (see e.g. Milgate, 2001; Jacobides and Billinger, 2006).
Quinn and Hilmer (1994) see the provider selection being governed by two
variables: the degree of strategic vulnerability in the activity, and the potential for
competitive advantage from outsourcing it. The higher the competitive potential
and strategic vulnerability, the greater is the need to keep sourcing in-house (see
Figure 7).
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Figure 7. Outsourcing options: make, buy or ally. Source: Milgate (2001, 78).
Originally adapted from Quinn and Hilmer (1994) and Child and Faulkner (1998)
According to Milgate (2001, 78), the methods used to choose a provider are
governed by two important variables. The first is whether the function to be
outsourced is strategic or tactical. The second is how many potential providers are
available. In the final selection, the client often seeks to evaluate the inherent
qualities of the individual or agency, and evaluate the quality of past services and
their transferability to the current problems of the firm (Gallouj, 1997). Schweber
(2003) suggests that selection checklist should include both tangible and intangible
factors, including the contractor’s stability and resources, and the client should
check whether the provider has the expertise to handle any special requirements of
the project. Examples include industry certifications, and electrical or medical
equipment standards. The same checklist that was used in shortlisting should be
used as a basis for final selection. According to a review by Gallouj (1997), the
evaluation criteria listed in the various studies about service provider selection
generally focus on the following points:
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1) The proposed approach and planned action (data gathering and processing)
2) The method of work, procedures and possible alterations (creativity, co-
ordination, distribution of tasks, etc.)
3) The characteristics of the provider (history, activities and organization)
4) The consultancy team and its skill levels, including the proportion of junior to
senior staff
5) Project control, i.e. the ability to complete the mission within time and
budgetary limits
6) Experience and references of the consultants in the field concerned, including
experience with the technology, relevant regulations and the certification
processes if the latter are required (Schweber, 2003)
7) Background knowledge, possible references (very important in design
consulting)
8) The attitude of the consultants
9) Availability, involvement and personal commitment of the provider, including
location (Schweber, 2003; Hätönen, 2008)
During the selection process, the client should keep in mind what is actually being
selected and evaluated. As Gallouj (1997) notes, selection and evaluation can relate
to the provider’s representative personally or to the structure in which the provider
operates. Often, when choosing a provider, the client also selects a method.
Furthermore, in many cases the client chooses a person rather than a particular
provider, even though the evaluation of the provider's organization can be equally
important (Gallouj, 1997). Nevertheless, every organization will and should adopt
the selection methodology and criteria that are most appropriate in its own
particular case (Milgate, 2001, 79).
The evaluators should also keep in mind so-called halo effect (Rosenzweig, 2007) if
the shortlist includes famous or well-reputed providers. The halo effect refers to a
cognitive bias whereby providers that have been successful in other projects or
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contexts tend to be evaluated more favourably than providers that are less well
known to the client. The existence of halo effect doesn’t mean that a well-regarded
provider or consultant is necessarily bad for the proposed project. However, it
means that clients should be wary about thinking that past performance is a
guarantee for future success, especially in cases where the provider doesn’t have
experience in specific types of project proposed. New product development is a
tricky field as far as expertise is concerned, and expertise in one field may not be
easily transferred to another57 (see e.g. Shanteau, 1992; Klein, 1998). Examples of
the halo effect abound in business in general (see Rosenzweig, 2007); in NPD, the
halo effect hinders judgment most often when a highly regarded industrial designer
or a design agency is called in to ‘refresh’ the product line.
At the same time, the desired relationship needs to be established. The desired
relationship is determined by the desired level of control over the activity being
considered for outsourcing (Barragan et al., 2003, 278). Quinn and Hilmer (1994)
present a model relating the spectrum of sourcing relationships to different levels of
control and flexibility. Generally, if the technology basis of the activity being
outsourced is rapidly changing, a more flexible arrangement is desired (Barragan et
al., 2003, 278). Short-term contracts are typically the most flexible but offer the least
control. Alternatively, if the firm has specific requirements about — for example —
form factors, details, and materials used, the less flexible relationships are desirable.
In particular, outsourcing elements that contain the greatest competitive advantage
requires higher level of control so that the firm can extract the greatest amount of
value from the product and also develop a deep understanding of features and
functions (Barragan et al., 2003, 278). A distinct trade-off must be made at this
point: obtaining high control necessitates giving up flexibility, as illustrated by
Figure 8. In addition to formal contracts, control can also be achieved through non-
57Additional problem is that NPD professionals deal with uncertain future while basing their
studies and expertise on the nonrepeatable past. In other words, as NPD professionals try to
predict the tastes and preferences of future customers, they may become too constrained by their
previous experiences and expertise to develop truly novel and innovative solutions. See Taleb
(2007) for the problems of prediction in business.
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hierarchical institutions for coordination. Most notable of these instruments are
mutual trust and geographic proximity (Dyer, 1997). In some cases, tight ties
between the client and the provider can allow the outsourcing relationship remain
relatively flexible while the client retains good control over the activity. The
downside is that such relationships tend to be very personal and are fraught with
danger if, for example, key personnel change employers or the relationship turns
sour for some other reason.
Figure 8. Outsourcing trade-off: flexibility need vs. control need. Source: Barragan
et al. (2003). Adapted from Quinn and Hilmer (1994).58
The key considerations in selecting the relationship model relate to what kind of
control mechanisms are built in to the contract (Hätönen, 2008, 73). It has been
suggested that there are no optimal models for managing outsourcing relations, but
58 ‘Call option’ means that the client has a right, but not the obligation, to buy an agreed quantity of
work at a certain time. ‘Retainer’ means that the client pays the provider in advance for work before
it is specified and completed.
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often firms need to adapt both hard (contract-based) and soft (trust-based)
governance mechanisms (Barthelemy, 2003b). Hätönen (2008, 73) and Barthelemy
(2003b) argue that the mode of governance is highly determined and influenced by
the nature of the outsourced activity and the underlying motives. Choosing the
wrong governance mode for a specific outsourced activity is one of the prime
reasons for outsourcing failure; for example, tight control over details of the work
has a harmful effect on the results when providers are hoped to come up with
innovative solutions (Miozzo and Grimshaw, 2005; Carson, 2007).
As can be seen from Figure 8, the flexibility/control decision is essentially about
deciding whether the relationship is a short or a long-term one. Long-term
relationships are a must if areas that are outsourced are close to the core
competences of the firm (Greaver, 1998, 121), but firms and providers should enter
a relationship with a goal of making it a long-term relationship whenever possible.
Long-term relationships have benefits such as stability, understanding the client’s
needs and markets, and loyalty and trust, which can help the client to relax and give
suppliers more creative freedom (Bruce and Morris, 1998; Greaver, 1999, 121). The
advantages of short- and long-term relationships are summarized in Table 13 below.
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Table 13. 'Pros' and 'Cons' of short-term versus long-term relationships in NPD.
Adapted from Bruce and Morris (1998).
Short-term advantages Long-term advantages
1. Comparison purposes: having a relationship
1. Familiarity: improves the effectiveness of
with more than one provider enables the client
the NPD input from project to project
to compare quality and efficiency factors
between consultants.
2. Stability: Once a project has been
completed successfully with a provider,
2. Cost: Relationships are open to market forces.
management anxiety and uncertainty about
the relationship and product development in
3. Access to different expertise: Gives the client
general reduced
more choice in the type of expertise required.
3. Continuity: Retaining the same provider
4. Time: Providers are used to relieve short-term
ensures that the brand proposition within
in-house design workloads.
and, if required, across product ranges
remained the same. It also makes the initial
5. Compatibility: By maintaining a short-term
stages of each new project much easier
relationship with a provider, if the relationship is
because the “process” of using the same
“difficult” it gives the client the freedom to
consultant remains consistent.
choose a more compatible partner
A final step in deciding contract length is to explore the firm’s strategies to see if
there is a contract length that is best aligned with those strategies. For example, a
firm that has major new product launches for next two years, followed by two years
of research and redesign, could have a design contract that runs four to five years
(Greaver, 1998, 122). A good policy is to consider annual business cycles when
setting the actual dates for contract terminations, as many functions and processes
have both volume peak and valley periods, and contracts should end in valley
periods if possible (Greaver, 1998, 123).
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EXAMPLE: The final decision at Widgets Ltd. is reached after several rounds of presentations
and negotiations. The outsourcing initiative team confers with Widgets Ltd’s top management and
top management decides that the contract for development of Subsystem B will be awarded to Epic
Engineering. The reasoning for this is that the firm’s proposal was best overall, the price was
acceptable, and the firm enjoyed a good reputation. Since Subsystem B development was deemed to
be a ‘tactical’ task (i.e. its degree of strategic importance is low; see, for example, Figure 7), the
decision was relatively easy. After the initial design on newest version of Subsystem B, the proper
relationship is deemed to be a call option, i.e. a contract where Widgets Ltd. can acquire services
from Epic Engineering as required and Epic Engineering agrees to provide the services when
needed.
By comparison, the deliberations on what to do with Product line Gamma are far more difficult.
The offer from Fine Factories is satisfactory, but a lingering doubt remains whether they can really
produce added value to the Gamma line. On the other hand, Great Goods has made a decent offer
and expresses willingness to enter a long-term partnership where it develops the Gamma line with
an exclusive contract to Widgets Ltd. The management and the outsourcing team are divided in
their opinions; some argue that giving Great Goods control over one of Widget’s complementary
products, they would be giving far too much power to their possible competitor. However, in the end,
a decision is made to award the contract for supplying future Gamma line to Great Goods, as it is
clearly the market leader and can potentially provide much better product for Widget Ltd’s
customers. The terms of the contract call for long-term design contract with fairly clear specifications
as to what Great Goods should provide, and when; specifically, the future Gamma products should
employ equivalent technology as that used in Great Goods’ own products.
Finally, Diamond Designs’ contract was modified to include Parts Assembly C development as
well. In addition, the outsourcing initiative team started discussions about working together to build
up Widgets Ltd’s competences in radical, user-centric innovation that was identified as a need
earlier in the outsourcing process.
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3.6. Execution and relationship management
Once a firm has decided to proceed with the outsourcing, it needs to manage the
outsourcing process. Project planning and project management are somewhat
beyond the scope of this thesis, but since poor management is one of the primary
reasons why firms have been unsatisfied with outsourcing, the basics of NPD
outsourcing management are discussed here.
The management of outsourcing implementation can be divided into two distinct
phases: project transfer and project management (Hätönen, 2008, 82).
3.6.1. Project transfer
Project transfer refers to the management task of actually moving production to the
provider (Hätönen, 2008, 82). Transfer management in NPD outsourcing is about
communicating to the provider the knowledge it requires to effectively embark on
the project. If the groundwork for outsourcing initiative59 has been thoroughly
prepared, this task should not present too many difficulties. However, every project
is different and the client should be prepared to listen to the provider’s suggestions
and iteratively develop the project plan. Although both project planning and project
management lie beyond the scope of this thesis, in summary, project-
implementation planning in outsourced NPD projects fundamentally includes six
key areas of activity:
59 Objective setting, modularization, design briefs and guidelines, etc.
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1) Adjusting the internal NPD process to increase its modularity, if possible, by e.g.
improving documentation
2) Ensuring the client and the provider agree and understand the project brief, and
what will actually be delivered
3) Breaking down what needs to be done within each project stage into smaller
tasks and activities, prioritizing the tasks and estimating the time needed to
complete each one; identifying relationships between tasks
4) Identifying project roles, responsibilities, lines of communication and team-
management procedures
5) Identifying any additional resources or stakeholder involvement that will be
needed to complete the project
6) Ensuring the parties understand the system for information flow, the
documentation, record keeping and administration
(Best, 2006, 150; Hätönen, 2008)
The planning process in NPD-related tasks — especially when the goal is to create
innovative new products rather than radical improvements — should follow
discovery-driven planning model60 (McGrath and MacMillan, 1995, see also
Kawasaki, 2004). Because new ventures call for a firm to envision what is unknown,
uncertain and not yet obvious, extrapolating future results from a well-understood
and predictable platform of past experience is not possible and new ventures
inevitably experience deviations from their original planned targets.
EXAMPLE: After the decision has been made, Widgets Ltd. holds a series of meetings with the
providers. The objective of the meetings is to acquaint each firm’s key personnel with each other, and
discuss problems and opportunities in the projects. As a preliminary for transferring NPD tasks to
the providers, the documentation of parts and projects is improved. Meanwhile, Widgets Ltd’s
management explains the reasons and outcomes of the outsourcing initiative to its staff to put rest to
rumours about possible lay-offs related to the outsourcing deal.
A framework for discovery-driven planning (McGrath and MacMillan, 1995) is included in
60
Appendix E.
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3.6.2. Project management
Project management, on the other hand, is all about the ongoing management of the
outsourced process. Bad project management is the main reason for unsuccessful
outcomes and client dissatisfaction with many external NPD projects (e.g. Swoyer,
2004; Best, 2006, 154); hence project management and execution should be high
priority for both the clients wishing to get the most out from their investment, and
for the providers wishing to retain their clients.
Although project management is by far too vast a scope to be covered in this thesis,
and every firm and every situation are different, some of the issues particular to
outsourcing and NPD outsourcing are discussed below. The problem with some
firms is that network organization required for effective NPD outsourcing creates
new organizational forms that, in turn, need new management skills. These new
skills may not exist within the organization, especially if its previous relationships
with providers have been characterized by a transactional, arms-length approach
driven by cost cutting. According to Milgate (2001, 100), particularly important new
management skills that clients should learn are 1) managing multiple relationships,
2) cooperating and competing simultaneously, and 3) learning from alliances with
providers. To this list a fourth component, measuring outsourcing performance,
should also be added.
Managing multiple relationships is nothing new for most businesses, but
strategic partnerships are increasingly more complex than traditional business
transactions. A paradigm suggested by Snow et al. (1992) for the new role of
managers is to consider the managers as ‘brokers’ that operate across rather than
within hierarchies, assembling resources from both their own organization and from
outside sources.
Managers operating as brokers perform three important roles: first, as architects for
the relationship, they design the network and identify the component parts that are
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needed to form it. This requires vision to understand how new competitive
advantage can be harvested from external resources, and this requirement for long-
term vision, in its turn, is often one reason why strategic partnerships require
attention from chief executive level or close to it. Second, managers as brokers have
to lead the alliance network. They are often acting as an organizer who works more
often through negotiation and persuasion rather than through the more traditional
command and control mechanisms used in a conventional management hierarchy.
Thirdly, the manager as broker has to act as a caretaker for the alliance, keeping the
partnership moving forward and seeking new opportunities, while (often)
simultaneously proving the partnerships’ worth and business benefits to other
managers that are not close to the partnership (Snow et al., 1992; Milgate, 2001,
102).
By definition, strategic relationships are deep relationships. Building these deep
relationships and day-to-day management procedures with the provider is one of the
most vital elements behind success in outsourcing (Morgan, 2003, 44). If the firm
wishes to reap the benefits from non-hierarchical coordination — if it wants the
strengths of integration without the burdens of financial ownership — it needs to
build effective and trustworthy relationships with its network of providers. In
practice, building strong relationships requires very active communication, even
overcommunication, with the provider (Best, 2006, 148).
Cooperating and competing simultaneously is often the factor that causes most
tensions in many partnerships. In strategic NPD outsourcing, the provider may well
be someone who competes with the client in some markets. This is almost an
inevitable consequence of the fact that firms wish to outsource NPD to providers
that have superior capability: after all, what would be better evidence for superior
capability than competing successfully in the marketplace?
According to Milgate (2001, 103), two factors need to be in place in order to
manage the tensions. First, the partners need to be clear about their strategic intents
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for the partnership, and those intents need to be communicated to the partners.
Second, all the parties should come open with each other about what they expect to
gain from the partnership to defuse suspicions. In addition, spelling out clearly at
the outset of the relationship the areas of competition and the areas for cooperation
helps to ease tensions as well.
Particularly in cases where the provider can clearly pose a competitive threat to the
client (or vice versa), information flow between the partners needs to be managed.
One possibility is to establish ‘gatekeepers’ for technology areas or product lines
(Milgate, 2001, 105). Only these gatekeepers are authorized to pass technological
information to the partner. According to Milgate, this approach has two benefits:
first, it ensures that the partner only receives precise information that is usable in
decision-making, and second, it makes sure that what information is given away can
be controlled and documented. The management should also realize that
competences learned in one product or market — where there is no interpartner
competition — can sometimes be transferred to other products or markets, where
interpartner competition can be intense (Milgate, 2001, 108).
Learning from alliances is arguably one of the most important challenges facing
managers. Although learning is not always an explicit objective in NPD outsourcing,
partnerships are always an opportunity for learning for both the client and the
provider. At the minimum, the client should aim to increase its outsourcing skills, as
elaborated in the next section. According to Milgate (2001, 108), learning requires
managing and stimulating the in-flow of information, and using the information to
promote learning throughout the organization. The management should also note
that most of the valuable long-term organizational learning comes not from the
formal information exchanges, but from the informal interchange of information
that takes place between the client and the provider staff (Milgate, 2001, 109).
Finally, measuring outsourcing performance needs to be discussed. The well-
known axiom states ‘you cannot manage what you cannot measure,’ and without an
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appropriate measuring regime in place, judging the effectiveness of the outsourcing
partner will be impossible (Milgate, 2001, 80). Although some of the most valuable
gains from strategic partnerships — for example, organizational learning — are not
susceptible to precise measurement, establishing and agreeing the criteria for what a
successful outcome would be at the beginning of the project and following how
these criteria are fulfilled is crucial for the success of NPD outsourcing initiative
(Best, 2006, 170).
Some possible measures of quality, time and cost are given in a Table 14 below.
Measures should logically flow from the objectives of the outsourcing initiative so
that the selected measures actually support the client’s strategy. Both what is
measured and how it is measured must be agreed between the client and the
provider before the outsourcing contracts are signed. If outsourcing performance or
objectives in general are measured against a ‘baseline’ performance, this baseline
must be clearly defined. Usually the baseline is a measurement period of three to six
months immediately before the outsourcing arrangement comes into play (Milgate,
2001, 80).
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Table 14. Examples of measures of NPD quality, time, and cost. Adapted from Best
(2006, 149, 170-173).
Measures of Quality Performance
Features
Reliability
Conformance
Durability
Serviceability
Aesthetics
Perceived quality/reputation
Value for money
Awards (e.g. for good design)
Peer and press reviews
Improved brand image and customer perception
Increased brand awareness
Improved customer satisfaction
Measures of Time Manufacturing lead time
Due date
Rate of product information
Delivery lead time
Frequency of delivery
Time to market
Measures of Costs and Development costs
Benefits Capital budget
Manufacturing cost
Reductions in costs
Reductions in waste materials
Value-added
Selling price
Running cost
Service cost
Units sold
Annual growth in sales
Increase in market share
Reduced customer churn
Profit
Profit margins
When setting the measurements, the partners should also explore the possibility of
building incentives into the agreement for exceeding the minimum requirements.
Building incentives can be very difficult, but it is also very desirable for aligning the
interests of the provider with those of the client. While cash penalties for not
achieving the objectives may be even more useful, such arrangements are viewed
with deep suspicion by service providers (see e.g. Gallouj, 1997; Holopainen and
Järvinen, 2006). Typical incentives used in NPD outsourcing are royalties for units
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sold61, performance bonuses, and profit sharing, where the provider gets an agreed
percentage of e.g. cost savings generated. One problem with incentives is that they
need to be thought through very carefully to ensure that they are structured so that
performance is not skewed to hit certain targets at the expense of others (Milgate,
2001, 80).
EXAMPLE: One of the major ‘what-ifs’ in the outsourcing initiative was whether the
relationship with Great Goods could be made to work, as Great Goods had been traditionally seen
as a competitor in the Gamma market. Do dispel this fear before the contract was signed, Widgets
Ltd. and Great Goods held (relatively) frank discussions about their respective strategic intents for
the partnership. During the discussions, it turned out that Gamma line was relatively unprofitable
for Widgets Ltd., while it had a relatively good fit for Great Goods’ product line-up. Great Goods
had both the expertise and the scale to design and build better and cheaper Gamma products, and
Widgets Ltd’s management conceded that its own resources could be better spent somewhere else.
The two partners then decided that the cooperation was strictly limited to Gamma line of products
and their interfaces with Widgets Ltd’s other products; a non-competition clause in the agreement
stated that Great Goods was not to introduce products that competed directly with Widgets Ltd’s
core products or the deal would be called off and sanctions would be invoked.
The performance measurements were also agreed during this process. For Gamma products, key
performance measures were deemed to be cost reductions, performance and features, and improved
customer satisfaction. Great Goods would receive bonuses if these criteria were met.
To manage the information flow between the alliance partners, both Widgets Ltd. and Great
Goods appointed special ‘gatekeepers.’ Widgets Ltd. also gave its gatekeeper orders to promote
information in-flow, and gather knowledge about Great Goods’ product development techniques
whenever possible. Similar gatekeepers were identified for other providers as well.
61For example, usual royalties for product design in consumer goods range from 1 to 5 % of sales
for the first 5-10 years. Typically, initial royalty rate is higher and the royalties drop gradually to zero
during the contract period. In some cases, royalty advances are also used.
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3.7. Lessons learned
A difference between experience and expertise is that while increasing experience
requires only participation, increasing expertise requires active effort aimed at
learning from one’s successes and mistakes. In other words, if a firm wishes to
become more proficient in outsourcing — if it wants to be able to make better
outsourcing decisions — it must reflect on the lessons learned during outsourcing
projects.
As previously alluded to, gathering lessons learned should not wait until the end of
the project. Keeping track of decisions made, the underlying assumptions at the
time, and the subsequent results is an effective way of building managerial intuition
regarding future outsourcing projects (e.g. Klein, 1998; Khatri and Ng, 2000; Dane
and Pratt, 2007).
At the very least, both the client and the provider should have internal meetings
after the project has ended to discuss what could be learned from the project.
Optimally, regular meetings with project staff from both the client and the provider
should be arranged. Both the client and the provider would also do well if they
disseminate the lessons learned throughout their organizations.
EXAMPLE: From the start, the outsourcing initiative team tried to keep records of its
discussions and decisions. A Master’s student was later hired to compile these records and interview
the key personnel to learn what went right and what could have been improved. A series of group
discussions ensured that lessons from the project were spread to the organization.
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3.7.1. Renewal or termination of contract
Eventually, all outsourcing projects come to an end, either because project has been
completed or the client no longer requires the services of the provider. Whether to
renew or terminate the relationship depends on the needs of the client, the results,
and the relationship enjoyed. If there is a potential to establish a longer-term
relationship, ongoing contact is required between parties to ensure that the client-
provider relationship is continued once the initial project has ended. Moving from a
one-off project to an ongoing relationship takes time and commitment in building
up a personal relationship (Bruce and Morris, 1998), as well as willingness to operate
in a way that long-term relationship is possible (Greaver, 1998, 121). As previously
mentioned62, long-term relationships are usually worth the effort and should be the
goal for both the client and the provider.
Client-provider relationships in NPD have a distinct life cycle of compatibility,
familiarity and competency (Bruce and Morris, 1998). Initial compatibility —
compatibility to sourcing criteria, initial ‘gut feel’ and the provider’s ability to
understand the client’s business, etc. — is a requirement for outsourcing to occur in
the first place. Success in this initial stage, represented in good outcomes, positive
personal relationships and firm-level compatibility, typically moves the relationship
to the next stage: familiarity. In the familiarity stage of the relationship, firms build
mutual trust, understanding, and social and economic stability. Equally importantly,
NPD competency rises as the provider understands the client’s business better, and
the client understands how to work with the provider. Finally, some firms develop
their relationships even further to gain competencies from the relationship. This
stage is what is usually referred to as ‘strategic’ partnership in literature (e.g. Quinn
and Hilmer, 1994; Milgate, 2001), and what is important to realize is that reaching
the level where the relationship delivers unique, difficult-to-imitate competency —
62 See Section 3.4.1, Identifying the objectives.
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where 1+1 equals 3 — requires going through initial stages of compatibility and
familiarity. In short, shortcuts to strategic relationships are few and far in between.
Decision-making about relationship renewal or termination is governed primarily by
perceived future needs of the client. The decision itself is fundamentally a subjective
evaluation of the experiences during the relationship. The most pertinent criterion,
of course, is whether the client needs the provider’s services any longer. If not, there
is little point in continuing the relationship. If the need persists, the decision-making
is usually relatively straightforward: if the quality of the work has been satisfactory,
the relationship continues.
Ultimately, the decision whether to pursue an ongoing relationship with the
provider is based on the client’s assessment of the relationship enjoyed and the
results achieved. Both need to be satisfactory or at least show a credible promise of
improvement, although in practice, good personal relationships can sometimes
salvage a business relationship with poor results while even good results may not
save a relationship burdened by bad chemistry between key players.
EXAMPLE: Although the relationship with Epic Engineering had begun well, after two years it
became apparent that with personnel changes in Widgets Ltd. and Epic Engineering, the
relationship wasn’t working any longer. The subsystems designed by Epic were lacklustre and
behind Widgets Ltd’s competitors, and projects suffered from cost overruns and delays. Eventually,
a decision was made to discontinue Epic Engineering’s services and seek new providers for a longer-
term, strategic partnership. The outsourcing initiative team was called together again…
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3.8. Master checklists for NPD outsourcing
NPD outsourcing can be somewhat complex process and the procedure described
in this thesis may seem daunting to a newcomer. To help readers manage the
process, the key themes and questions of this chapter are collected below in
checklists. Although every firm has somewhat differing requirements and
procedures, and checklists and process diagrams are not substitutes for common
sense, a list of important actions is nevertheless a useful aid in avoiding the most
common errors.
The checklists are organized to follow the sections in this chapter. This does not
mean, however, that the given order of actions needs to be followed. The ‘Notes’
column contains references to sections where the issues are discussed. In addition to
this checklist, Appendixes D and G contain further checklists that may be useful for
firms considering outsourcing as a strategic option.
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Table 15. Checklist for preliminary activities.
Action Notes ✔ ✖
Gain acceptance from top management Management ‘buy-in’ critical
Assemble the initiative team; include experts from: See Section 3.5
Market and business model knowledge
Product architecture and design knowledge
Supply chain knowledge
Table 16. Checklist for identifying the objectives.
Question Notes ✔ ✖
Are objectives of outsourcing initiative clear to See Section 3.4.1
management?
What are the ‘triggers’ that started the thinking about I.e. what started the process
NPD outsourcing?
Have you analyzed the root causes why the firm
should seek external NPD help?
Is firm’s NPD capacity sufficient for future needs?
Is firm’s NPD capability good enough compared to
competition and market needs?
Can the firm hire enough NPD personnel it needs?
Is the firm’s culture conductive to innovation?
Are the firm’s resources spread to too many different
directions and objectives?
Do NPD efforts provide good return for investment
in all the product lines and categories?
Table 17. Checklist for determining process modularity.
Action/question Notes ✔ ✖
Create a list of activities performed during the NPD See Section 3.5.2
process
Analyze the interfaces between the activities; how
does information from one activity move to another?
Is the information codified? E.g. specifications-
Can the quality of information be measured?
Do the two activities require iterative exchanges of
information?
Would it be a problem if the activity weren’t
conducted inside the firm?
What kinds of problems would it create?
Can the procedures used today be adjusted so that E.g. codifying tacit
outsourcing would be easier? knowledge
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Table 18. Checklist for identifying key competences.
Action/question Notes ✔ ✖
Are core competences or off-limit areas determined See Section 3.5.3
by upper management?
Use the list of activities created in table 17 to check
whether these contribute to core competences
OR determine core competences using Appendices
D and G
Divide activities to core and non-core activities
Table 19. Checklist for assessing the strategic implications.
Action/question Notes ✔ ✖
Check each non-core activity for following: See Section 3.5.4
Is the activity or competence close to best-of-the-
world capability? If not,
Has outsourcing the activity a negative impact on
real core competences due to its connections with
them?
Are there competitive provider markets for the
activity?
Could the loss of activity cause a loss of possible
future core competences?
Do certain stakeholders require that the activity is E.g. customers may require
kept in-house? keeping task in-house
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Table 20. Checklist for information search and preliminary evaluation.
Action/question Notes ✔ ✖
Draw up a list of provider candidates See Section 3.6.1
Determine provider’s strategic fit: match the skills
and needs of both the client and the provider
Is the provider a specialist in particular technique,
or a generalist?
Is the provider best suited for incremental Usually, specialists are best
improvement or radical innovation (‘clean sheet of for incremental, generalists
paper’) type projects? for radical innovation.
Is the provider sufficiently aware of the client’s
technological requirements?
Can the provider deal with the client’s
technological requirements?
Does the task require customer insight or
understanding the client’s markets or business?
If yes, does the provider have such insights?
Determine provider’s strategic intent: can the
relationship be a win-win situation?
What would be the broad, readily apparent
objectives of this strategic partnership for each
partner?
How can the two parties complement each other to
create common strengths from which both can
benefit?
How important an alliance would be within each
partner’s corporate portfolio?
Would there be any problems with the alliance due
to relative closeness of the core businesses of
partners?
Determine effects of relative size
What percentage would the task approximately Bigger clients get more
represent in provider’s annual revenue? attention
Is the provider’s cost structure unnecessarily top- Does your firm need all the
heavy for the planned project? frills of a large provider?
Are reliability criteria important? If yes, larger providers good
Is the ability to scale up rapidly important? If yes, larger providers good
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Table 21. Checklist for request for proposals
Action/question Notes ✔ ✖
Is ‘official’ RFP phase necessary for the project? See Section 3.6.2
Build a RFP document:
Reasons to outsource
Scope and brief (if available): what services the
provider is asked to deliver?
Provider qualifications: which qualifications are
important, and why?
Performance standards: what is the level of
performance, and how this will be measured?
Pricing: what is the desired pricing model?
What decision makers are accessible, and when?
How you are going to answer any questions from
candidates?
Are there other special terms or conditions?
Could the provider differentiate through innovative
ideas? What these could be?
Does the provider have references of customers with
similar projects?
Can the provider provide names of some customers
for whom things did not work out, and reasons why?
Was the reason for failure the provider’s fault?
Before sending, check that you have:
A clearly written request for proposals or a brief
Sufficient information on hand to shorten
provider’s time investment
Reasonable time to respond
Access to the firm’s decision makers
Budget to cover costs incurred by providers
Table 22. Checklist for shortlisting
Action/question Notes ✔ ✖
Has a reasonable time been given to providers to See Section 3.6.3: 1-26
respond? weeks
Evaluate the provider candidates using Tables 11 and
12, OR through following four dimensions:
Understanding of the problem
Validity and pragmatism of the approach
Availability and competence of the team
Experience and qualifications of the provider
If necessary, have another round of shortlisting
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Table 23. Checklist for selection and negotiation of relationship.
Action/question Notes ✔ ✖
Arrange for presentations of shortlisted candidates See Section 3.6.4
Determine whether the activity is strategic or tactical I.e. whether to seek short-
in nature or long-term relationship
Are there many providers competing to offer the I.e. what are your
same activity? negotiation positions
Determine desired relationship:
What is the control need for the activity?
What is the flexibility need for the activity?
Prepare a selection checklist, based on shortlisting Use examples from thesis
criteria, OR determine the following:
What is the proposed approach and planned
actions?
What is the method of work, procedures, and
possible alterations?
What are the characteristics of the provider, i.e.
history, activities, and organization?
What is the consultancy team and its skill levels?
What is the proportion of junior to senior
designers?
Is the provider able to complete the mission within
time and budgetary limits?
What is the experience and references of designers
in the field concerned?
Experience with technology
Experience with markets
Experience with relevant regulations
Experience with certification processes, if
required
What is the provider’s background knowledge and
possible references?
What is the attitude of the provider’s
representatives or employees?
What are the availability, involvement, and personal
commitment of the provider’s personnel?
Would their location or different culture present
problems?
Have you taken ‘halo effect’ into account?
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Table 24. Checklist for project transfer.
Action/question Notes ✔ ✖
Adjust internal processes for easier modularization See Section 3.7.1
Improve documentation
Codify tacit knowledge
Contact the provider to start the planning process
Do client and provider agree and understand the
project brief, and what will actually be delivered?
Break down what needs to be done within each
project stage into smaller tasks and activities
Prioritize the tasks
Estimate time needed to complete each one
Identify project roles, responsibilities, lines of
communication and team-management procedures
Communicate these to the provider
Identify and communicate any additional resources
or stakeholder involvement that will be needed to
complete the project
Communicate these to the provider
Ensure the parties understand the systems for:
Information flow
Documentation
Record keeping
Administration
Table 25. Checklist for project management.
Action/question Notes ✔ ✖
Can the project managers handle multiple See Section 3.7.2
relationships?
Can the managers handle cooperation while
competing?
Are the partners clear about the strategic intents
for the partnership?
Are those intents communicated to the partner?
Are the parties open with each other about what
they expect to gain from the partnership?
Are areas of cooperation and areas of competition
clearly defined?
Are gatekeepers managing the information flow?
Are gatekeepers instructed of their responsibilities?
Is learning from the partner promoted within the
organization?
Are informal exchanges between the client and the
provider encouraged?
Are performance measurements in place?
Is the baseline clearly defined?
Is the possibility of incentives discussed?
Are the measurements/results followed regularly?
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Table 26. Checklist for lessons learned.
Action/question Notes ✔ ✖
Does the outsourcing initiative team keep track of See Section 3.8
their assumptions, activities, and decisions made?
Are internal or external debriefing meetings
scheduled for the project?
Are there in place systematic ways for gathering
lessons learned from the project?
Are there methods for disseminating the lessons
learned to the rest of the organization?
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4. Empirical survey
While outsourcing in general has long been a subject of intensive study, research on
product development outsourcing is more recent. The extent of the phenomena has
been documented in various studies (e.g. Roberts, 1995; Love and Roper, 1999,
2001, 2004, 2005; Howley, 2002; Duga and Studt, 2005; National Science
Foundation, 2005; Holopainen and Järvinen, 2006; Hätönen, 2008, among others),
but studies that focus on outsourcing product development of physical products
remain rare, with exception of studies that analyze industrial design outsourcing (e.g.
Holopainen and Järvinen, 2006). Most of the previous studies, such as the PDS
survey by Love and Roper (2001), suffer from being conducted during the mid-
nineties. Since then, and especially after the turn of the century, increased adoption
of information technology has lowered the transaction costs involved in
outsourcing. In theory, this should make outsourcing more prevalent (e.g. Schilling,
2005).
In addition, existing studies have rarely examined outsourcing in connection with
dynamic firm and industry factors except size and location, even though more
interesting observations could be made by linking the results to, for example, the
product cycle or the intensity of competition faced by the firm.
This study tries to explore quantitatively what parts of the product development
process firms typically outsource and what are the reasons for outsourcing product
development. The aim is to determine the relative importance of NPD outsourcing
in firm’s NPD processes and thus guide future research while validating certain
hypotheses developed through outsourcing theory.
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4.1. Hypotheses
Since this survey is intended to be exploratory rather than explanatory, research
hypotheses are limited to confirming existing predictions about NPD outsourcing
from elsewhere in the world. This is done in order to check whether the study gives
results that are consistent with theory, whether they could be generalized on a wider
scale, and to preliminarily analyze whether Finnish NPD outsourcing follows
patterns recognized in other countries.
First, Sobrero and Roberts (2001), echoing the distinction between systemic and
autonomous innovation made by Chesbrough and Teece (1996) in their analysis of
over 50 provider-manufacturer relationships, posit that there are two potentially
optimal types of provider-manufacturer relationships:
(1) Using providers merely as subcontractors, and assigning the specific
tasks in parts of the project exhibiting low interdependence.
(2) Externalizing completely the conception, design and realization of
highly interdependent parts, and jointly working on their overall
integration with the rest of the system (Sobrero and Roberts, 2001).
This involves higher coordination efforts and associated transaction
costs, but supplies more opportunities to access tacit knowledge bases
and so encourages learning.
Outsourcing limited, easily defined tasks doesn’t require finely honed capabilities in
network development, coordination and management. Therefore, it should be
expected that there is some correlation between the extent of outsourcing and the
firm’s organization model in regards to its attitudes towards providers and suppliers.
Thus, hypothesis 1 can be stated as
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H1: Firms that outsource major parts of their NPD activities tend to follow network model
of organization, while firms that control their suppliers tightly outsource less.
Second, Ulrich and Ellinger (2005) noted that NPD outsourcing is dependent on
the ability to disaggregate design and manufacturing. This is achieved via design rules
and standards that allow the designer to communicate clearly and unambiguously
the requirements to the manufacturer, and the manufacturer to communicate the
limits of the manufacturing process to the designer. Design rules and standards are
related to a concept of modularity, which reflects the degree to which the products
and their production processes are decomposed into smaller subsystems and
activities. These activities may be designed and managed independently yet function
as a whole (e.g. Baldwin and Clark, 2000; Mikkola, 2006). Design rules and
standards take time to become established; therefore, firms whose technologies are
relatively new should not, ceteris paribus, outsource design and development activities.
This leads to hypothesis 2, viz.
H2: Firms whose key technologies are new and rapidly developing outsource less than firms
whose technologies are mature and well known.
Third, according to Love and Roper (2001, 2005), NPD outsourcing is markedly
more common in larger firms and business units. Their suggestion is that larger
firms offer more opportunities for outsourcing and are often more focused on their
competencies. Their study, based on survey data from European firms, found a
significant increase in outsourcing as firm size increased over 100 employees.
Therefore, hypothesis three can be stated as
H3: Firms with over 100 employees are more likely to outsource than firms with 100
employees or less.
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Fourth, according to Welch and Nayak (1992), Greaver (1998) and Quinn (2000),
NPD outsourcing can be used to accelerate new product development.
Nevertheless, there is little data about the effects of firm’s time-to-market cycle on
the need of NPD outsourcing. Traditional transaction cost economics posits that
shorter intervals between product updates or market launches, i.e. greater utilization
rates for internal R&D, should lead to less need for outsourced services; however,
as outsourcing NPD can be used to develop new products in a ‘surge,’ fast time-to-
market cycles can also indicate a need to involve external services63. Depending on
the nature of the firm and its products, a firm could either outsource the design of
complementary ‘gap filler’ products to an outsider, or it could purchase temporary
design capacity. A hypothesis therefore formed is
H4: Firms with faster time-to-market cycles are more likely to use external providers in
supplementary roles, but less likely to completely outsource NPD functions.
63 See Stalk (1988) for a discussion about the practical application of overloading the market with
the firm’s own products and thus building customer expectations about entire markets.
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4.2. Survey design
Data was gathered from Finnish registered companies that export their products, as
these firms were thought more likely to have an incentive keep their product
development processes up-to-date. For contacting the relevant persons, a database
search was made by a commercial databank Suomen Asiakastieto.
Based on their data from 2006 and 2007, a total of 526 persons who were
responsible for either research or products and production within their companies
(product managers, product development managers, research managers, managing
directors et cetera) were identified from the Asiakastieto’s register that included data
from firms with at least 10 employees. These persons represented 389 distinct firms.
According to official Finnish Statistics Bureau statistics, in 2006 a total of 2 254
Finnish firms conducted product development activities (Tilastokeskus, 2007).
Therefore, the original sample represents roughly 17% of total Finnish firms with
product development activities.
Five product development professionals from various backgrounds tested the
questionnaire (see Appendix H) and their suggestions for improvement were carried
out. The group used for this pilot study was not part of the sample used in the full
study to avoid problems with representativeness of the sample (Bryman and Bell,
2007, 274).
The study was on firm or independent business unit level.
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4.3. Operationalization of variables
The operationalization of variables is about finding suitable metrics that allow the
researcher to make conclusions on the phenomena under study. In general,
questions can be divided into four types:
1) Factual questions
2) Information questions
3) Opinion questions
4) Motive questions
Source: Laaksovirta (1988, 53).
This study uses mostly factual questions to measure factors underlying product
development outsourcing. Facts are easier to measure and therefore have a greater
utility to, for example, service providers looking for a market opportunity and to
researchers looking for general patterns. Factual questions are supported by
opinion- and motive-related questions, partly to explain motives and partly to check
for inconsistencies in respondent’s answers. In addition, the respondents had the
opportunity to answer to open questions and to comment the study. However, this
opportunity was not widely used.
Since product development is often considered one of the most critical and sensitive
functions of a firm, gathering direct data about precise tasks outsourced and R&D
expenditures used for outsourcing was judged to be too sensitive a subject to yield
meaningful answers from the respondents. In addition, defining in a concise and
unambiguous manner what, exactly, is product development outsourcing is very
challenging. For these reasons, the questions were deliberately broad and asked only
the amount of work being outsourced in any particular phase of the project.
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However, the amount of work outsourced correlates relatively well with the share of
product development budget used for outsourcing, particularly because firms in this
study were not likely to offshore significant amounts of their product development
to countries with different cost structures.
In the following, the factors under study and the questionnaire strategy used are
explained. The detailed questionnaire (in Finnish) is included in Appendix H.
The background variable and initial question used in the study simply asks the
respondents to state whether their organizations (firm or business unit) outsource
any product development related activities at all. If the respondent selected ‘No’
from two variables, s/he would skip the detailed questions and asked to elaborate
on reasons why they are not outsourcing any product development.
The first questions of the actual study were relatively straightforward. The
respondents were asked to first approximate the amount of outsourced work in the
different phases of product development process (Ulrich & Eppinger, 2008). In the
next questions, they were also asked to evaluate the outsourcing of specific
processes or tasks in different phases of the PD process. These tasks were identified
by Ulrich and Eppinger (2008) and were complemented with several additions based
on feedback from pilot study. The questionnaire also included open answer options
so that respondents could describe other tasks or processes that their firm is
outsourcing. In case the phases and processes described didn’t apply to their firm,
the respondents were instructed to leave the question blank and/or describe their
processes in a separate open form.
Question 9 asked the respondents to describe the reasons for outsourcing product
development activities. The answer options were gathered from a variety of sources
described in the literature review section of this study and from discussions with
product development professionals. An open field was also included.
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Question 10 was included to determine the strategic approach used and the role
played by the respondent’s firm or business unit. This question was inspired by
Andrew and Sirkin (2003), who argued that companies generally play one of three
basic roles in commercializing innovation, being either integrators, orchestrators, or
licensers. Previous empirical studies such as Sobrero and Roberts (2001) have also
identified two potentially optimal types of provider-client relationships (using
providers merely as subcontractors vs. externalizing completely the realization of
independent parts and integrating them) with specific trade-offs for efficiency and
learning. Again, an open answer option was included.
Question 11 asked the respondents to answer what they consider major obstacles to
outsourcing product development. Respondents who answered ‘no’ to the
background variable question started the questionnaire from this question. The
answer options were derived from literature review and from discussions with
product development professionals. An open answer option was included.
Question 12 was included to test for variations in Ulrich and Eppinger’s generic
product development process. The respondents were asked to answer what of the
options best described the products or services of their firm or business unit. The
options were from Ulrich and Eppinger (2008), with no open answer option.
Question 13 attempted to measure the maturity of the technology and existence of
design rules (Ulrich and Ellison, 2005). The respondents were asked to describe the
key technology or technologies used by their firm, with answer options forming a
two-by-two with technology (mature-new) on one axis and existence of standards
(limited-widespread) on another axis. An open answer option was also included.
Question 14 measured the competitive situation faced by the firm. The respondents
were asked about their opinion of the competitive situation on a scale of 0 to 10,
where 0 represented no competition at all and 10 represented an intense, cutthroat
competition.
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Question 15 measured the product cycle of the firm in question, in terms of new
product launches or significant upgrades to an existing product. A drawback in this
type of question is that it doesn’t differentiate between line upgrades (so-called ‘n+1
products’, see Buxton, 2007) and totally new products.
Question 16.1 measured the amount of expertise the firm in total had in
outsourcing any process or activity. As outsourcing experience in general correlates
with a propensity to outsource innovation (Love and Roper, 2001), the answer to
this question was expected to correlate with the amount of outsourcing of product
development activities.
Question 16.2 measured more specifically the amount of experience in outsourcing
product development activities. Of particular importance would have been a case
where the firm didn’t outsource product development activities any longer, after
having done so for some period.
Question 16.3 measured the size of the firm or business unit, in employees. Prior
studies (e.g. Love and Roper, 2004, 2005) have found that there is a significant
change in propensity for outsourcing innovation-related activities when the firm size
grows from less than 100 to more than 100.
Question 16.4 was included to check the accuracy of the questionnaire. The
respondents were asked to evaluate how reliable their answers would be, in terms of
whether the respondent felt s/he was the right person to answer this type of study.
Any answers with two or less (on a scale from one to five) were disregarded in final
analysis.
Question 17 was included to categorize the firms by their industry.
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4.4. Survey execution and response rate
The survey was conducted as an online survey, using web-based tool that allowed
respondents to answer the questionnaire by clicking a link in invitation e-mail.
After the questionnaire was tested with outside product development professionals
and their suggestions for improvement were carried out, invitations were sent by e-
mail. Two follow-ups were sent later to remind the invitees to respond to the study
if they hadn’t already done so. The e-mail also included instructions on how to
contact the author in case the invitee wanted more information or didn’t want to be
included in the survey, for example.
A copy of accompanying e-mail (in Finnish) is included in Appendix I. The entire
survey took place between 12.3.2008 - 1.4.2008.
A total of 67 individual respondents completed the questionnaire, giving a response
rate of 17 %, which is relatively good for an Internet survey. Of these, 60 responses
were fully usable for the purposes of this thesis, with seven answers being either
incomplete (1 occasion) or indicated lack of knowledge on the subject area by
answering 1 or 2 to Question 16.4 and were therefore deemed to be unreliable (5
occasions).
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4.5. Results of the study
After the questionnaire was completed, the data was operationalized and analyzed.
First, incomplete answers and those answers with low internal reliability64 were
expunged from the data, along with one response from a building contractor who
indicated in a open question that the survey wasn’t suitable into their model of
operations. This left 60 valid answers, of which 31 outsourced some aspects of
product development, and 29 kept NPD completely internalized.
Respondents who answered positively to a preliminary question on whether the
respondent’s firm or business unit outsourced any NPD activities were then asked
to evaluate the approximate percentage of outsourced NPD activities per phase of
product development process. Based on answers from these two initial questions,
the responses were grouped into four groups. The grouping is based on work by
Willcocks and Choi (1995), who quantified 80% outsourcing level to mean ‘total’ or
‘turnkey’ outsourcing (van Weele, 2005, 54-55), and on Sanders et al. (2007, 7) who
divide outsourcing into four categories in terms of the scope: 1) out-tasking, 2) co-
managed activity, 3) managed activity, and 4) total outsourcing. The following
classification criteria was used:
1) No NPD outsourcing: negative responses to preliminary question (‘Does your
firm or business unit outsource NPD activities?’)
2) Some NPD outsourcing in supporting role: respondents who indicated that
they do outsource NPD activities, but outsourced less than 40% of any single
phase of the process
3) NPD outsourcing in a significant role: respondents who outsourced at least
40% but less than 80% of any single phase of the process
64Those with score two or less on Question 16.4; ‘Evaluate whether you were the right person to
answer to this questionnaire’ on scale one to five.
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4) Some NPD activities completely or nearly completely outsourced:
respondents who outsourced at least 80% of any single phase of the process.
Due to low number of responses (3) that indicated complete outsourcing (group 4),
a decision was made to combine these answers to group 3 (NPD outsourcing in a
significant role). However, the charts below show the answers of group 4 for
comparison purposes, even though small sample size makes generalizations
problematic. The results from this classification are summarized in Diagram 1
below.
Diagram 1. Classification of respondents by category (n = 60).
An average outsourcing level was also calculated for the entire sample and for
different groups to illustrate the extent of outsourcing in different phases of product
development. This was done by considering range band answers (i.e. ‘40 to 60 %’)
to represent their average value (i.e. 50 %). Data for this diagram came from
preliminary question 2 (approximate the amount of outsourced work in the different phases of
product development process). It was decided not to use more detailed data gathered by
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questions 3 to 7, where the respondents were asked to detail what tasks in the NPD
process they were outsourcing. The reasoning behind this decision was that the
respondents were very heterogeneous in terms of field of business, size, and
location (see, for example, Diagrams 4 and 5), and therefore more detailed questions
were deemed too likely to misrepresent the NPD process used by the firm.
However, data from these questions was also analyzed and used as background
material for the study as Grounded Theory methodology suggests (e.g. Glaser,
1992).
The resulting Diagram 2 is shown below.
Diagram 2. Extent of NPD outsourcing, as percentage of respondents (n = 60).
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As the graph indicates, outsourcing tends to become more prominent in detailed
design and testing/refinement phases of the NPD process. Interestingly, firms that
outsourced some functions nearly completely were especially eager to outsource
production ramp-up, even though this was outsourced relatively less often by other
firms. This could indicate that the firms in this group are OEMs that re-brand and
sell products manufactured elsewhere.
4.5.1. Background data
The background data for the firms involved was determined through Asiakastieto’s
register, which included the firm’s turnover in 2006, and by including questions
about firm size and field of business. The key figures for 60 respondents included in
the final sample are given in Table 27 below.
Table 27. Key figures of survey respondent firms/SBUs.
Size (employees) Turnover (millions €)
Minimum 10 1.3
Maximum 1434 975
Average 100 46.8
Median 46 6.6
Modal range band Between 20 and 50 Between 10 and 50
The background data from respondents is given in graphical form in Diagrams 3
and 4 below. Turnover ranged from 1.3 million € to 975 million €, with median
turnover of all respondent firms/business units being 6.6 million € and average
turnover 46.8 million €. Modal turnover range band was between 10 and 50 million
€ annual turnover. By employee count, firms ranged in size from 10 to 1434
employees, with average size being 100. Median size was 46 employees, and modal
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size range band was 20 to 50 employees. The results are therefore relatively
heterogeneous, especially
When analyzing the data, the size and turnover were grouped into range bands as
recommended by EU definitions for small, medium and large enterprises
(2003/361/EU).
Diagram 3. Firm/SBU personnel, as percentage of respondents (n = 60).
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Diagram 4. Firm/SBU turnover, in millions €, as percentage of respondents (n =
60).
As can be seen from the Diagrams 3 and 4 above, most respondent firms can be
classified as small or medium enterprises65. Interestingly, those firms that support
their activities with outsourcing (category 2) are relatively evenly spread across
different-sized firms.
The respondents’ field of business can be seen at Diagram 5.
65Less than 250 employees and turnover less than 50 million €, see European Commission’s
definitions for small and medium enterprises, 2003/361/EU.
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Diagram 5. Firms by field of business, as percentage of respondents (n = 60).
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4.5.2. Reliability and validity
A key assumption made during the study is that responses reflect accurately the true
situation within the firm. If the questionnaire doesn’t capture what’s actually going
on within the firm, the reliability of the study could be called into question.
Reliability of measurements was determined primarily through inter-observer
consistency (see Bryman and Bell, 2007, 163). As stated above, five different
product development professionals were used as a pilot study group, and their
suggestions for improvement were carried out. All five agreed that the survey
questions were appropriate and reflected real NPD processes.
Reliability depends heavily upon validity of data. If data is not valid, the study
cannot be reliable. Primary test for validity used in this survey was its face validity
(see Bryman and Bell, 2007, 163): the survey results were in line with both the
predictions from theory and earlier studies of the subject (e.g. Love and Roper,
2001). Internal validity was controlled by checking whether answers from
preliminary question 2 (approximate the amount of outsourced work in the different phases of
product development process) and more detailed answers where the respondents were
asked to evaluate level of outsourcing in specific NPD tasks were in line with each
other. In general, firms that scored highly in preliminary question 2 also scored
highly in more specific questions, supporting the internal validity of the survey.
Another way internal validity was controlled was by asking the respondents to
evaluate whether they were qualified to answer to the questionnaire in Question
16.4. As mentioned above, six answers that indicated low confidence (1 or 2 in a 5-
step Likert scale) were disregarded in analysis. In the end, the survey can be
considered relatively valid and reliable, although heterogeneity of respondents in
terms of firm size, turnover, location and field of business makes any generalizations
uncertain.
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4.5.3. Hypothesis 1
H1: Firms that outsource major parts of their NPD activities tend to follow network model
of organization, while firms that control their suppliers tightly outsource less.
As can be seen from the Diagram 6 below66, firms that increase more NPD
activities indeed choose more often to build networks with their contractors and
suppliers. However, this finding can be criticized as somewhat context-dependent
and deterministic: it is not clear from the answers whether major outsourcing
initiatives came first, and organizational structure was adapted to fit the reality, or
whether the organizational structure was designed in anticipation of outsourcing
initiatives. In most cases, truth is probably somewhere in between: what actually
emerges as an organizational form is the result of interplay between intended and
unintended incidents and initiatives67. However, the conclusion from the results is
that Hypothesis 1 is supported by available evidence.
66 Question 10 ‘Which of the following best describes your relationship with your suppliers and service providers?’
67 For a discussion about intended and emergent strategies, see e.g. Mintzberg et al. (1998).
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Diagram 6. The effect of client-provider relationship on NPD outsourcing, as
percentage of respondents (n = 60).
4.5.4. Hypothesis 2
H2: Firms whose key technologies are new and rapidly developing outsource less than firms
whose technologies are mature and well known.
For this hypothesis, the results from the study are more ambiguous. Compared to
those firms that don’t utilize NPD outsourcing, a larger percentage of firms
practicing extensive outsourcing use well-known and standardized technologies68
(see Diagram 7). However, according to the findings outsourcing in a supporting
role is more common among firms whose technologies should not, per se, be as
68 Question 13: ‘Which of the following best describes the key technology or technologies used by your firm/SBU?’
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suitable for outsourcing. The solution to this dilemma might be found from the
different strategies for NPD outsourcing: firms that use NPD outsourcing in a
supporting role tend to outsource specific aspects of NPD process to gain specific
competences from outside the firm (‘focus’ strategy described in Section 3.4.1; see
also Diagram 12). These competences may be easier to standardize and specify,
freeing the firm to concentrate on their own key technologies that may be less
standardized.
An interesting duality is that the majority of both non-outsourcers and significant
outsourcers use key technologies that are well known and understood. The probable
explanation for this would be that non-outsourcers are relatively small, traditional
firms such as machine shops that do not have much reason for extensive new
product development beyond their particular niche. In addition, it is probable that a
majority of all firms use technologies that are relatively mature; hence, the result
should not be surprising.
In conclusion, the evidence supports Hypothesis 2.
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Diagram 7. The effect of key technology maturity on NPD outsourcing, as
percentage of respondents (n = 60).
4.5.5. Hypothesis 3
H3: Firms with over 100 employees are more likely to outsource than firms with 100
employees or less.
Love and Roper’s (2001) study showed significant increase in NPD outsourcing
when firm/SBU size exceeded 100 employees. As can be seen69 from Diagram 8,
69 Question 16.3: Personnel of your firm/SBU.
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which depicts the distribution of firm size for each of the three categories,70 the
division is not as prominent in this study. NPD outsourcing is most prominently
used in relatively small firms (size less than 50 employees), with larger firms using
NPD outsourcing more often in a supporting role. Interestingly, both the majority
of firms that do not outsource NPD and the three firms that outsourced NPD
nearly completely are small, under 50-person firms.
Although the results may suffer from relatively small sample (n = 60), the logical
explanation for the distribution is that many small firms, lacking resources, do not
have the capability to conduct the entire NPD process themselves – for example,
most smaller firms do not employ industrial designers (e.g. Holopainen and
Järvinen, 2006). At one extreme are firms that act more like marketers or
manufacturers while buying designs from external providers. On the other hand,
small firms are often a brainchild of one or few specialists with relatively stable
customer relationships and little need for external NPD resources, a description that
fits many small firms in machinery and technology industries. Another explanation
from the difference in results between this study and Love and Roper’s (2001) study
is that the latter used data gathered during early 1990s; NPD outsourcing, especially
in Finland, has become more widespread only during the late 1990s – early 2000s.
Thus, it is to be expected that NPD outsourcing has spread to smaller firms as well.
As the firm grows, it usually faces a challenge of finding new products and new
markets, both of which may require external assistance in NPD. Larger firms also
tend to have both the financial means and the readiness to utilize external
consultants, while their larger size means that they conduct significant R&D
themselves.
The data can nevertheless indicate that larger firms do indeed outsource more, since
the questionnaire didn’t ask questions about absolute amount of outsourced work
70As with all the diagrams, the fourth category, NPD nearly completely outsourced, is shown for
comparison purposes although it is integrated in the third category as described in Section 4.5.
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done. As can be seen from Diagram 4 (p. 168), all surveyed firms whose annual
revenue exceeds 50 million Euros use external NPD services. If we assume that the
R&D budget consumes a fixed percentage irrespective of firm size, larger firms
would indeed outsource more. However, the finding by Love and Roper (2001) and
the resulting Hypothesis 3 were explicitly about firm size in employees, and in
conclusion, the available evidence does not support Hypothesis 3.
Diagram 8. The effect of firm size to NPD outsourcing, as percentage of
respondents (n = 60).
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4.5.6. Hypothesis 4
H4: Firms with faster time-to-market cycles are more likely to use external providers for
capacity and flexibility reasons, but less likely to completely outsource NPD functions.
Hypothesis 4 has some support from the results of this study. As indicated by
Diagram 9, firms with shorter product life cycles71 are significantly more likely to
utilize at least some form of outsourced NPD compared to those whose product
life cycles are longer. While firms with fastest product life cycles (time between
significant updates less than a month) use outsourcing only in supporting role, as
predicted by theory, other results are more ambiguous. Most interestingly, firms that
outsource significant parts of the NPD process seem to have shorter product cycles
than average, but as the sample size for those firms is very small (n = 3) the results
are inconclusive in one way or another. An explanation for this phenomenon could
be that those firms either act as marketers for products designed by someone else,
or have such a wide portfolio of products that their internal NPD is insufficient.
Determining this would require further study as the respondents weren’t asked
questions concerning the breath of their product portfolios.
Another interesting finding is that firms with longer product life cycles are
significantly more unlikely to use NPD outsourcing. This could indicate that the
firms with longer product life cycles either rely heavily on the skills and expertise of
their employees, and/or practice only limited new product development72
In conclusion, the evidence provisionally supports the hypothesis: firms whose
product development cycles are faster need external help but since investments in
R&D capability are more easily recouped and justified, complete outsourcing is
unlikely.
71 Question 15: ‘How often your firm/SBU brings a new product or a significant upgrade to the market?’
72 See also Hypothesis 3.
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Diagram 9. The effect of product life cycle to NPD outsourcing, as percentage of
respondents (n = 60).
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4.5.7. Conclusions about hypotheses
In conclusion, two hypotheses (Hypotheses 1 and 2) were relatively well supported
by the evidence, while Hypothesis 4 received provisional support and Hypothesis 3
was unsupported. Thus, the study could be said to broadly agree with the general
theory and past findings. The spread in answers was likely to be caused by small
sample size and by the heterogeneity of the sample: anecdotal evidence73 suggests
that respondents included several firms with very little actual NPD activities, such as
machine shops doing contract manufacturing and one-off projects. The presence of
these firms, who typically do not sell branded products, may have a significant effect
on the results. Controlling for this factor should therefore be attempted in future
studies of the subject.
73 For example, evidence from the respondent’s Internet home pages.
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4.6. Other findings
In addition to finding answers to the hypotheses, the study attempted to map the
NPD outsourcing phenomenon in Finland in general. To this end, the survey
included questions about respondent firm’s product development processes,
obstacles and reasons for NPD outsourcing, and previous experiences on NPD
outsourcing and outsourcing in general. These results give further insights to the
phenomenon of NPD outsourcing in Finland and in general, and will be discussed
below. The findings should be considered preliminary and exploratory; a more
detailed analysis of the data cannot fit the scope of this thesis and will be published
separately.
4.6.1. Differences in product development process
All firms have slightly different product development processes. The generic
product development process (Ulrich and Eppinger, 2008) used as a baseline in this
study is closest to a so-called market pull or market driven product development
process, where a firm begins product development as a response to a market
opportunity and then uses whatever available technologies are required to satisfy the
market need. In effect, the market needs ‘pull’ the development decisions. In
addition to market pull process, several variants are common and correspond to the
following: process-intensive products, customized products, technology push products, and
platform products (Ulrich and Eppinger, 2008, 21). In addition, products that have
high risk of marketplace failure, such as aerospace and medical products, often
utilize a significantly different product development process compared to more
predictable products.
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Question 12 attempted to chart whether variations from generic product
development process (Ulrich and Eppinger, 2008, 21) have any effect on NPD
outsourcing intensity74. A prediction from theory would be that firms whose
products are market-driven and hence the technology used is selected based on end-
user need tend to use more mature technologies, as searching for mature
technologies is easier than searching for technologies for which design rules do not
exist yet, and therefore they would be in a position to outsource NPD more easily
than firms whose products are technology- or process-driven. Although technology-
driven firms should benefit from concentrating on their core technologies and
outsourcing easily standardized parts of the NPD process (see also Hypothesis 2),
especially process-driven firms should find outsourcing NPD relatively difficult, as
developing new products would require intimate knowledge of the manufacturing
process used.
The findings, represented in Diagram 10, tend to reinforce this theory. Firms with
market pull product development are clearly over-represented among firms
significantly outsourcing NPD, and some firms with technology push products
outsource significant parts of their NPD process. On the other hand, firms whose
product features are determined primarily through process technologies used either
don’t outsource NPD at all, or outsource certain specific competencies that are not
needed regularly within the firm. When the survey data is analyzed in more detail, it
can be seen that process technology firms outsource mainly tasks such as industrial
design, development of marketing materials, and (in some cases) processes related
to legal and other acceptances. This is very much as would be expected from the
theory.
74 Question 12: ‘What of the following best describes the product development process used in your firm/SBU?’
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Diagram 10. Different product development approaches, as percentage of
respondents (n = 60).
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4.6.2. Obstacles to outsourcing NPD
The respondents were also asked to evaluate a selection of statements about
perceived obstacles to outsourcing NPD75. The results, presented in Diagram 11
below, indicate that non-outsourcers and significant outsourcers view the problems
in NPD outsourcing somewhat differently. Broadly speaking, non-outsourcers tend
to think that required knowledge exists only within their firm, and that potential
providers do not understand the requirements imposed by the clients and
customers. On the other hand, significant outsourcers think that providers are
expensive and offer only limited services. Interestingly for providers of NPD
services, respondents whose firms practiced limited NPD outsourcing lamented the
lack of suitable providers, and lack of knowledge about suitable providers. This
would indicate an unmet market opportunity.
In summary, Table 28 shows top three obstacles76 to outsourcing for each type of
respondent. All of the groups felt that providers had problems understanding the
client’s products and their qualities, and difficulties in controlling the providers were
major obstacles to NPD outsourcing.
Table 28. Top three obstacles to outsourcing NPD.
Non-outsourcers Firms with limited Firms with significant NPD
NPD outsourcing outsourcing
1. Required knowledge exists 1. Lack of suitable 1. The services available are too
only in our firm / Need for providers expensive
secrecy/confidentiality
2. Provider doesn’t 2. Required knowledge 2. Difficulties in controlling the
understand what qualities are exists only in our firm providers
important in our products
3. Difficulties in controlling 3. Difficulties in 3. Lack of suitable providers /
the providers controlling providers Need for secrecy/confidentiality
/ Provider doesn’t understand
what qualities are important in
our products / Providers lack the
ability to supply complete
offerings that we need
75 Question 11: ‘What of the following, in your opinion, are obstacles to outsourcing NPD?’
76 Some top three positions are shared by more than one obstacle.
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Diagram 11. The obstacles to NPD outsourcing, as % of respondents (n = 60).
185

4.6.3. Reasons for outsourcing NPD
Respondent’s answers to their reasons for outsourcing NPD gives preliminary
support to the theory that predicts three primary strategies for NPD outsourcing77,
that is, capacity, focus, and stopgap outsourcing. As Diagram 12 shows, focusing on
certain competences is an important reason for nearly every respondent78. As
answers to the control question (‘We focus on certain products and outsource complementary
products’) indicate, firms tend to buy know-how and capability, not complete
‘turnkey’ new product development. A more detailed analysis is, however, required
for further conclusions, and this finding should only be treated as provisional.
An intriguing suggestion for further research is that all the firms that outsourced
their NPD processes nearly completely cited time savings as their reasons for NPD
outsourcing, while simultaneously considering cost savings as important reasons.
This suggests that at least some firms indeed consider that outsourced NPD could
compete favourably against investments in internal R&D, such as setting up internal
NPD capability.
77 See Section 3.4.1.
78 Question 9: ‘Which of the following describes your reasons for outsourcing NPD activities?’
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Diagram 12. Reasons for outsourcing NPD, as percentage of respondents (n = 60).
4.6.4. Previous outsourcing and NPD outsourcing
Previous outsourcing in general is seen as a good indicator for firm’s potential to
outsource further functions. This is also confirmed by the findings of this study, as
indicated by Diagram 1379. The reason why firms tend to approach outsourcing
incrementally is that developing capabilities for handling external relationships takes
time and effort, and trust in providers is not built overnight. As a result, firms often
outsource small parts as an experiment (see e.g. de Boer et al., 2006) and, if the
experiment is a success, are encouraged to outsource further functions.
79 Question 16.1: ‘How much does your firm or SBU have experience on outsourcing any process of function?’
187

Diagram 13. The extent of previous outsourcing initiatives, as percentage of
respondents (n = 60).
Since previous outsourcing is a good indicator of future outsourcing, it is no
surprise to see that, in general, the more a firm outsourced its NPD process, the
more previous experience it had in NPD outsourcing. This tends to reinforce the
findings from previous studies (see e.g. Hätönen, 2008) that outsourcing proceeds
incrementally, as trust to the provider and general ability to handle external
relationships increases.
188

Diagram 14. Previous NPD outsourcing experience, as percentage of respondents
(n = 60).
As can be seen from the Diagram 1480, most firms (42 out of 60) had at least tried
NPD outsourcing in some form. Of special importance were those firms that had
practiced NPD outsourcing previously, but weren’t continuing to do so. 18 such
firms were identified. No single reason why these firms weren’t outsourcing NPD
any longer could be identified, but examining the perceived obstacles to NPD
outsourcing sheds some light to the issue. From the limited data, it seems that NPD
outsourcing service providers should pay more attention to understanding their
clients, since issues related to knowledge transfer and relationship seem to crop to
the top of the list of obstacles in both Diagrams 11 and 15. Comparing Diagram 11
to Diagram 15, it can be seen that firms whose NPD outsourcing initiatives have
80 Question 16.2: ‘How much does your firm/SBU have experience on NPD outsourcing?’
189

ended have found suitable providers, but weren’t satisfied with the way the
providers understood the client’s problems.
Diagram 15. Why firms aren’t outsourcing NPD any longer, as percentage of
respondents (n = 60).
190

4.7. Limits of generalization
The study and its results are valid only for Finnish firms that export their products.
Although the original sample was relatively large in comparison to total number of
firms that perform innovation activities (17 %), the results of the study cannot be
taken to constitute a generalized view of the situation. In particular, the sample is
somewhat skewed towards small and medium enterprises. Although these findings
might be more useful for general policy setting, the fact is that the relative lack of
large companies with their specialized product development processes might leave
out important insights and potential niche markets for small ‘boutique’ product
development consultancies and other service providers. These problems are partially
addressed through interviews of firms A and B, however.
Another limitation of the study is that quantitative results in themselves are always
subject to interpretation and depend heavily on logical reasoning. Therefore, the
results should be taken as broad directions and not as ultimate truths of the subject
matter. However, they do give a foundation for further studies and for studies that
aim to explain the working mechanisms of product development outsourcing.
A particular cause for concern is that the diversity of product development
vocabulary and variety of theoretical approaches might cause a distortion in the
results. Although the study tried to control for this factor by pre-testing the survey,
distortion in the results remains within realm of possibility.
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5. Discussion and practical implications
The results of this study show that transformative outsourcing is more complex
phenomenon than traditional cost-minimizing transactional outsourcing.
Transformative outsourcing seeks primarily to expand the capabilities of a firm
instead of reducing its costs. It is a way to do more with same resources, instead of
doing the same with fewer resources. To understand transformative outsourcing, a
relatively broad, interdisciplinary view is necessary. The study has addressed these
demands by considering contributions from strategic management, network
theories, and service businesses. All these viewpoints provide a partial picture of
outsourced new product development. Taken together, they sketch a picture of
transformative outsourcing that helps managers to understand the potentially
complex interrelationships between what to outsource, to whom to outsource, and
how to outsource.
The thesis argues that outsourcing seemingly ‘core’ competences can be a successful
strategy. However, success requires that a distinction be made between ‘true’ core
competences, strategic competences, and peripheral competences. In addition,
outsourcing important activities that are not easily codified requires good
relationships and high trust between the client and the provider. The thesis also
makes a reasoned argument that lessons from design management can serve
decision-makers well when outsourcing NPD activities. One limitation of the thesis
is that it doesn’t explicitly take the locational decision (whether to outsource to e.g.
low labour cost country) into account. However, this is taken implicitly into account
if the thesis’s recommendations about the importance of relationships and process
modularity are followed.
The interviews and the survey conducted for this study indicate that NPD
outsourcing follows broadly similar patterns in Finland as abroad. Firms are
surprisingly often using external services to aid their product development efforts,
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especially in industries with mature technologies and fast product update cycles.
Firms are using NPD outsourcing both to temporarily increase their NPC capacity,
and to source best-in-the-class skills from external providers.
As stated in the Chapter 1 and evidenced by the survey and interviews conducted
for this thesis, transformative outsourcing of new product development and other
innovation-related activities is changing the competitive landscape in many
industries. Literature review indicates that many firms are achieving remarkable
reductions in time-to-market and NPD costs by using external R&D. Others have
reaped significant benefits from innovations generated with help from external
design and product development consultancies.
Managing NPD outsourcing is possible and can be very important for the firm, and
all evidence suggests that NPD outsourcing should become part of the strategic
decision-making of the firm. Since nothing is constant with the exception of change,
firms need also to realize that a strategy today day may have to be revised in the
future. Outsourcing is not a one-way street, and by constantly balancing economic,
technical, and relationship factors, managers should be able to make decisions that
help their firms grow and prosper.
The rest of this chapter discusses some practical implications of outsourcing NPD,
including its impact on customer perceptions of products and brands, the effect it
may have on organizations, and on business strategies. The linkages to
crowdsourcing and Open Innovation are also briefly discussed. Finally, the chapter
ends with implications to new product development service providers. Outsourcing
is not a panacea for all ills, but if it is used with wisdom, it can be an important tool
for better products and, ultimately, for more profits. Although managers in small
and medium enterprises have probably the most to gain from this thesis, the author
hopes that the text serves others interested in this relatively recent phenomenon in
their studies and professional lives.
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5.1. Impact on products and brands
If new product development is no longer performed within the firm, what remains
of firm’s distinctive products and its distinctive brand? In theory, outsourced NPD
means less differentiation between competing products and no distinctive
competitive advantage between them, as product development skills are acquired
from open markets where all competitors – at least in theory – have access to them.
However, in real life, firms have several means at their disposal to differentiate their
offerings –packages of products and services bundled under one distinctive brand.
Designing every single part of a product in-house has never been a sensible strategy,
and even if NPD would be partly or completely outsourced, the effect on product
differentiation is not likely to be significant unless the product gains some
distinctive customer value from being designed in-house81. Excepting those rare
cases, customers do not typically care who, in fact, designed the product – providing
it fulfils the customer’s needs.
Much more important consideration is whether outsourcing affects the customer
orientation and customer/end user understanding in new product development.
Previously, this thesis has argued that outsourcing NPD should be approached with
caution if there is a danger that valuable customer understanding would be lost in
transfer. Losing touch with one’s customers can have such severe effects that
reiterating the warning is appropriate, but the flip side of the coin is that in some
cases, external service providers can be better positioned and/or have more
experience in understanding the customers or end users. A long-term threat in such
cases is the effect this may have on branding and marketing of the product line:
unless marketing and NPD are coordinated, a situation may arise where marketing
81An example of gaining marketing advantage from in-house design would be ‘Designed by Apple
in California’ text found in Apple products.
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department has one vision of product’s customer base, and the (external) NPD
team has another.
This challenge is not the only one posed to branding and marketing by the changing
competitive environment and wide availability of external service providers. When
knowledge and skills required to develop successful innovations become
commodities, incumbent firms must be even more paranoid about new challengers
popping up suddenly. Branding and marketing become more important as the role
of technological differentiation diminishes or becomes marginalized; the best
innovator is no longer the one with the best technology or R&D labs, but one who
best combines different technologies and products together to a superior product
line offering. A case in point is Apple’s development of iPod and iPhone product
lines: technologically, both were inferior to existing competitors when they were
launched, but they combined different technologies effectively enough while
delivering superior overall customer experience and ease of use.
Today, innovation increasingly means finding distinctive attributes of product and
service offerings and concentrating on delivering those attributes using both internal
and external expertise as required. Firms need to concentrate on overall customer
perception and learn to coordinate various internal and external players – from
product development and design consultancies to advertising agencies and delivery
channels – to deliver a differentiated product.
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5.2. Impact on organizations
The impact of NPD outsourcing on organizations is twofold: on one hand,
outsourcing NPD could mean that employees in the client firm (particularly in the
West) would have more time to spend on real value-add innovation while more
routine improvements and non-core product lines would be outsourced to more
efficient or cheaper providers. On the other hand, outsourcing relatively easy entry-
level tasks may be harmful for the long-term competitiveness of the organization, if
those less important tasks were used to train new recruits to firm’s products and
ways of working.
Outsourcing in general is a subject that tends to raise strong emotions, and
outsourcing NPD is no exception. Employees will fear for their job security, and
that fear may become a liability unless the process and the transition are managed
actively and humanely. Active, frank and direct communication is especially
important if outsourcing results to layoffs, but proactivity will be beneficial even if
this isn’t the case.
Outsourcing high-value-added design and engineering tasks might raise a difficult
question: if the firm outsources everything, what is its actual value? In particular,
institutional investors may be asking this hard question, and unless the management
can justify the outsourcing initiatives in terms of improved focus, better capability,
or better future prospects through learning from the provider, the firm’s market
capitalization may be in danger.
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5.3. Impact on business strategies
NPD outsourcing opens new strategic opportunities for the benefit of incumbent
firms while leveling the playing field for the benefit smaller challengers. In short,
NPD outsourcing is another strategic tool for firms to use: it is simultaneously an
opportunity and a challenge.
The fundamental opportunity/challenge stems from the changing focus of
innovation. In the 20th century, innovation was about processes, products, and
services, and as a result, most boardrooms are still investing in lower-order
innovation. However, higher-order innovation – business model, strategic, and
management innovation – is associated with significantly more powerful and
durable value creation.
NPD outsourcing can allow business model and management innovation by freeing
corporate resources – especially management time – from daily grind of incremental
innovation. NPD outsourcing is a remarkably suitable tool for innovations that
don’t depend on technological mastery or economies of scale, but rely more on
new, innovative ways of organizing the activities of people.
For example, Apple has successfully leveraged simple, relatively low-tech product
innovations, like the iPod and iPhone, with disruptive new value chain designs such
as iTunes and the Apps Market. As new product development has been
commodized and made available through the marketplace, similar innovation
opportunities are open to firms whose capabilities wouldn’t have been nearly
enough to deliver just ten years ago. However, one should keep in mind that in
Apple’s case, the key to value chain innovation was Apple’s mastery of user
interface design: similarly, firms intent on higher-order innovation should leverage
their strong competences and build new value chains around them.
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The following sections will discuss some examples how outsourced NPD can bring
strategic benefits. The sections will first discuss the benefits of flexibility inherent in
using outsourced services, termed offensive, opportunistic and defensive flexibility in this
thesis. In addition, this section will also briefly discuss capability strategies and using
Original Design Manufacturers (ODMs).
5.3.1. Offensive flexibility: shaping the marketplace82
One strategic opportunity that becomes more easily available to firms via NPD
outsourcing is shaping the marketplace through strategic agility. The aim of shaping
is to saturate the marketplace with firm’s own designs, thus keeping the competition
off balance while shaping the customers’ perceptions of what the product should
look and feel like, and thus put competition on a disadvantage.
To understand strategic agility or surge strategy in NPD, one has to think about
product specifications that describe in some detail what the end customer wants
from the product. The question is: who wrote the specification?
In principle, customers ‘want’ something because a supplier has shaped the
marketplace by offering something to them. If this is the case – if the competition
has shaped the marketplace instead of your firm – a ‘discovery of customer wants’
represents not a strategy but a failure of strategy. A firm that desires to become
more competitive must, therefore, find ways of shaping the marketplace with its
own offerings.
An example of this strategy from the 1980s is documented by Stalk (1988). In 1981,
Yamaha opened a new, larger factory and announced that it would become the
82 This section is primarily based on Richards (2004) and Stalk (1988).
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world’s largest motorcycle manufacturer, surpassing incumbent Honda in the
process. Instead of competing directly via manufacturing capacity, Honda chose to
fight through speed and agility: over the 18-month period of the ‘H-Y War’, Honda
introduced 113 new models to replace the 60 it had in the beginning. In contrast,
Yamaha was only able to bring out 37. Each model introduced by Honda helped it
learn how the public accepted each model, and make changes accordingly. The end
result was that both Honda models and public tastes evolved during the course of
the campaign. By the end of the ‘war,’ Yamaha models weren’t selling any longer,
and the firm conceded defeat.
Although Stalk’s (1988) analysis was that Honda had managed structural changes
that enabled them to execute their NPD processes much faster, another option
would have been to use external NPD assets to overwhelm the markets in a
coordinated campaign. In short, firms can use external assets to increase the speed
of their ‘fire-aim-fire-fire-fire’ (McGrory, 2006) cycle that enables both learning
about customer wants and shaping them at the same time. This contrasts to
traditional ‘ready-aim-fire’ cycle of planning and execution, which can easily lead to
long reaction times when market or customer needs are in a flux.
5.3.2. Opportunistic flexibility: real options approach
Building product development capability is a significant investment in time and
money. Recruiting new personnel may take months; building effective teamwork
and required expertise might take years. Making such investments in an uncertain,
risk-laden environment is tricky and increasingly unlikely. However, by buying
services on a case-by-case basis from external service providers, firms can make
small investments in multiple options or approaches. If one approach proves
successful, external resources can be shifted to pursue that opportunity.
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These small, initial investments can be regarded as real options: real option is a ‘right,
but not the obligation, to take an action in the future’ (Amram and Kulatilaka, 1999,
5) Real options are management tools for uncertainty reduction – making a small,
initial investment under high levels of uncertainty allows one to create an option
while waiting until the uncertainty about the opportunity has decreased. Firms
approaching NPD from real options point of view can benefit 1) from early
involvement in a particular product area, 2) from delayed entry or delayed financial
commitment, 3) by offering the firm the advantage of an early exit, and 4) by
allowing the firm to benefit from delaying an exit and either spin in the external
product development function, or sell the resulting innovation to e.g. venture
capitalists (Vanhaverbeke et al., 2008, 253-254). Anecdotal evidence suggests that
firms are, in fact, using NPD outsourcing contracts as a way to evaluate service
providers (especially ODM manufacturers) for possible acquisition.
By using external services, a firm can start exploring the commercial possibilities of
a particular concept without committing internal resources. External help also
enables the firm to consider a broader portfolio of entry options at the beginning,
and supports more ways to develop growth opportunities from a product line or
technology (Vanhaverbeke et al., 2008, 254).
5.3.3. Defensive flexibility: contractors and crises
Outsourcing is often justified by its inherent flexibility. Traditionally, this has
referred to the fact that getting rid of contractors is often easier than getting rid of
employees, if economic situation so requires. In short, outsourcing allows firms to
response to changing demand more flexibly than internal resources, and shed man-
hours if demand for new product development sinks. This uncertainty is usually
priced into service provider’s fees: a long-term, binding contract becomes cheaper
than a series of short-term contracts.
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Although showing contractors the door is a viable response to a suddenly worsening
economic outlook, firms should avoid hasty decisions. Cutting back product
development during time of crisis can be a costly mistake that is regretted later
when demand picks up again. For example, historical data suggests that increasing
marketing and adjusting the product portfolio to better respond to customer needs
can be a winning strategy during recessions, providing the firm has resources (i.e.
capital) to do so (e.g. Linder and McCarthy, 2003; Srinivasan et al., 2005).
New product development during recessions should concentrate on improving
product’s value for money and researching customer needs more carefully. During
recessions, firms need to know how consumers are redefining value and responding
to the recession in order to respond with proper product portfolio. This suggests
that clients may need to retain providers that have capabilities in these areas, even
though new product launches might have to be shelved for duration.
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5.4. Links to Open Innovation and crowdsourcing
Open Innovation has been defined as the use of purposive inflows and outflows of
knowledge to accelerate internal innovation, and expand the markets for external
use of innovation, respectively (Chesbrough, 2006). NPD outsourcing, and this
thesis, is more concerned about inflows of knowledge to accelerate internal
innovation. Hence, NPD outsourcing can be thought of as a special case of broader
Open Innovation theory. It can be argued that many skills required to work
effectively with external NPD providers are useful when managing Open
Innovation, and vice versa: for example, mitigating the notorious Not Invented
Here syndrome is a requirement for successful NPD outsourcing as well as for
successful Open Innovation.
The primary focus in this thesis has been in the ‘classic’ outsourcing scenario where
a firm engages a specialist firm or a consultant to provide a service it cannot or will
not do internally. However, specialist consultancies are not necessary for new
product development: in fact, much of actual new product development happens
when hardware or software suppliers collaborate with their clients, or firms
collaborate with their customers, to develop new solutions that meet a previously
unmet need. The framework proposed in this thesis can be used as a starting point
for NPD contract negotiations with these suppliers as well.
Another buzzword of the early 2000s – at least when the subject is new product
development – has been crowdsourcing. Crowdsourcing refers to the act of taking a
task traditionally performed internally or by a contractor, and outsourcing it to an
undefined, generally large group of people or community in the form of an open
call (Howe, 2006). Crowdsourcing thus differs from traditional outsourcing in that
the client doesn’t know in advance who actually will provide the service. Some of
the benefits include comparatively low costs and access to wider talent than present
internally (von Hippel, 2005; Tapscott and Williams, 2006). While crowdsourcing
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has attracted attention from several business practitioners, trade press, and from
several researchers as a potentially extremely valuable addition to corporate
problem-solving toolkit, the limitations of this approach to user-driven innovation
are also becoming visible. Crowdsourcing seems to be suited mostly to problems
and tasks that can be split into ‘chunks’ manageable by single persons or small
groups. In addition, the tasks shouldn’t require significant initial investment or
specialized knowledge from the ‘crowd.’ Breaking the tasks down into ‘chunks’ that
are manageable by single persons or small teams is important, as well. Relevant, well
thought out design briefs are especially important for crowdsourcing, since vague
briefs result to vague projects as crowdsourcing lacks the constructive feedback that
specialized consultants give as a part of their proposal. In essence, crowdsourcing
seems to be a useful tool for tasks that rely on creating or manipulating (mostly)
digital data, but its applications are somewhat more limited when real, physical
objects need to be created.
However, in some cases crowdsourcing can be a viable alternative for outsourcing
NPD – especially if the product has a large number of users. Successful
crowdsourcing requires that the product has value to external developers: in short, this
means either a reward for successful design, or (more often) that developers
themselves are using the product and thus have an incentive to develop a better
version. Von Hippel (2005, 147-164) has identified five criteria for successful user
innovation in non-software applications, which are summarized in Table 29. In
addition, crowdsourcing is more likely to succeed if the product is also a so-called
identity product for its customers, i.e. if the product is important for customer’s self
image and identity83.
83 For example, Harley Davidson motorcycles.
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Table 29. Five criteria for successful user innovation. Source: von Hippel (2005, 147-
164).
Criteria Explanation
1. Learning by trial and error Users must be able to go through complete trial-and-error
cycles when designing the product. This allows the users to
see the consequences of the design choices they make, and
thereby decide more precisely what they really want.
2. An appropriate solution space A solution space is defined by the flexibility in which the
producer can produce the desired result. Any production
process has a set of limiting factors, and these factors
define the solution space. If the solution space is small, the
chance of user innovations is small.
3. A user friendly toolkit The process must be available to the users so that they can
use the skills and languages they already know. This frees
the users from learning the different design-specific skills
and languages associated with manufacturing.
4. Commonly used modules Custom designs are seldom made up of unique parts, but
instead share a set of standard modules. Therefore a library
of standard modules should be available to the user. This
allows the user to focus on the unique parts that are truly
important.
5. Results easily created ‘The result from the process must be easily converted into
the language needed for the production system, and be
without error. If the result of the process must be manually
translated, much of the effect of the toolkit may be lost.
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5.5. Implications for service providers
The developments discussed in this thesis have several impacts to service providers
as well. Perhaps the most important (even if the most obvious) implication comes
from the fact that trust is an important factor in NPD outsourcing. Providers
should consciously cultivate trusted relationships with their clients and actively
promote practices that increase trust within the relationship.
The second important finding is that outsourced NPD process and the relationship
can and should be managed. The responsibility for educating clients in NPD
outsourcing process management probably falls to service providers, as improving
relationship management is ultimately in their interests.
Third, if external service providers play their cards well, they have a role to play
regardless of economic climate. During economic booms, external service providers
can be used to explore attractive alternatives when their clients lack resources
(notably manpower) to do so. This favours generalist providers that can take a
broader look to the problem and possible solutions. During recessions, the focus on
improving product value and increasing reliability, durability, safety and
performance, as well as increased attention paid to user research, favour specialist
firms that can supply skills in these sectors.
Finally, a development with potential for significant impact to providers is that
clients increasingly seek ‘one-stop’ solutions for their NPD needs. Other clients seek
capacity and reliability that comes from large, integrated service providers. This calls
for larger, more capable providers, or alternatively, for more effective networks of
smaller providers. Mergers and acquisitions among NPD service providers and
ODM manufacturers are likely to increase in the coming years, as firms seek to
strengthen their service portfolios.
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6. Conclusions
This thesis has given a broad overview of important issues influencing modern
transformative outsourcing. The selected methodology has enabled broad scope and
reduced the risk of one-sided conclusions based on too narrow theoretical
viewpoint. The historical context of outsourcing and NPD outsourcing have been
briefly discussed, and the current situation is shown to be a logical continuation of
long-term, global trends. Key research streams affecting NPD outsourcing have
been identified and outlined. The lessons from these research streams have then
been used to build a framework of NPD outsourcing process, and an example case
build on interviews, research, and experience has been detailed. For practical
purposes, a checklist of important issues has been created.
The current state of NPD outsourcing in Finland has been researched through
empirical study with 60 respondents representing a diverse selection of firms and
industries. Four hypotheses have been tested against empirical evidence, and the
Finnish NPD outsourcing scene is shown to broadly follow examples from other
countries. The importance of external NPD to firms has been established. Finally,
the thesis discusses practical implications for both clients and providers of external
NPD services. A selection of further tools and analysis has been included as
appendices.
By following the recommendations in this thesis, managers can ‘make sense’ of the
subject of outsourcing NPD activities. Outsourcing new product development
capability can be disastrous if thinking behind outsourcing decisions is based on
limited viewpoints or frameworks that have been developed for transactional
outsourcing. The primary limitation of the thesis is that it doesn’t explicitly cover
international outsourcing, but given the emphasis placed on non-hierarchical
coordination methods such as trust, this issue is implicitly covered. The secondary
limitation, imposed by the thesis format, is lack of empirical validation for the
framework developed in the thesis.
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6.1. Directions for further research
This thesis follows the research tradition recently exemplified by e.g. Hätönen
(2008) and Hoetker (2005) in taking a broad view of the subject of modern,
transformative outsourcing. The exhaustive literature review and preliminary survey
conducted for the thesis should form an interesting starting point for future
research, and some suggestions are given below.
First, the limitations of thesis format precluded a deeper study into how’s and why’s
of NPD outsourcing selection and management. The framework developed in the
thesis assumes that NPD outsourcing services resemble other outsourced
professional services in general and design services in particular. However, this
assumption should be tested, since the existence of e.g. ODM providers blurs the
line between manufacturing and services outsourcing.
Second, the applicability of the framework for real-life cases should be tested and
the framework improved. The author is under no illusions of intellectual superiority
and believes that the framework presented here is woefully incomplete and even
misleading; however, it certainly can form a basis for more refined and – hopefully –
simpler framework. Case studies of actual outsourcing decision-making would be
particularly helpful, but this as reported by other researchers, the author found out
that firms were reluctant to discuss the subject in detail and spoke only in general
terms.
Third, the empirical research could be deepened with case studies and more focused
questionnaires. Specific industry segments should be targeted, as the homogenous
sample in the survey makes drawing hard conclusions problematic. Special attention
should be paid to firms that outsource major portions of their NPD, and to those
firms that have used NPD outsourcing but do not do so any longer. Future studies
should also seek to control for firms that do not actually perform NPD activities at
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all. In addition, the diversity of product development vocabulary and a lack of
commonly agreed definitions and practices may hinder research efforts.
Fourth, linkages of NPD with Open Innovation and crowdsourcing are thesis
subjects in their own right. Both of these organizational innovations have brought
new opportunities and challenges for NPD. A research establishing the conditions
of when Open Innovation or crowdsourcing could be used as an alternative to
traditional NPD consulting would be welcome.
Fifth, the long-term effects of NPD outsourcing have received relatively little
attention. A particular problem in this case is gathering data from past decision-
making, but if such longitudinal data source could be found, the case study would
be valuable for both researchers and practitioners. For example, if simple tasks are
outsourced to cheaper labour countries, is there a danger that new hires no longer
have ‘entry level’ tasks that help them learn about the firm, its products, and its
working practices?
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8. Appendices
8.1. Appendix A: Semi-structured interview protocol
A semi-structured interview, such as the one used in this thesis for interviews with
product development personnel from Firms A and B, is a method for eliciting
qualitative data from the subject matter experts. In a semi-structured interview, the
researcher has a list of questions on fairly specific topics to be covered, often
referred to as an interview guide, but the interviewee has a great deal of leeway in how
to reply (Bryman and Bell, 2007, 474). The researcher can also depart from the
guide as he picks up on things said by interviewees. Nevertheless, all the questions
will be usually asked and a similar wording will be used from interviewee to
interviewee (Bryman and Bell, 2007, 474).
The emphasis must be based on how the interviewee frames and understands issues
and events. According to Bryman and Bell (2007, 479), semi-structured interview is
useful for addressing more specific issues when the researcher has relatively clear
focus about the topic. As the interviews followed extensive literature research, this
approach proved justified.
The interviewees were preliminarily identified by asking knowledgeable sources,
such as the supervisor of this thesis, for suggestions. Those identified were then
contacted via phone and e-mail. In total, 13 subjects were identified, and of those,
interviews could be arranged with five interviewees – one from Firm A and four
from Firm B. The interview guide was then prepared according to suggestions by
Bryman and Bell (2007, 482-483). The questions were checked with one
knowledgeable NPD professional at Seos Design Ltd. before the interviews. The
professional agreed that the questions were relevant to the aims of the study.
The interviews were conducted in meeting rooms, and with one exception took
place at the interviewees’ workplaces. The interview was immediately transcribed on
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researcher’s laptop. Attempts were made to record the interviews as well, but
technical failures prevented that in every occasion. However, given that the author’s
typing skills, the transcript could be considered relatively reliable even without the
recordings. Moreover, since the approach entailed detailed attention to subject
matter instead of language used, lack of recordings presented no real handicap (see
Bryson and Bell, 2007, 489). The interview sampling followed so-called ‘snowball
sampling’ model (Bryson and Bell, 2007, 200), where interviewees are requested to
identify other relevant interviewees until answers become saturated and no new data
emerges. This was not possible with Firm A, but was used with success in Firm B’s
interviews.
The interview guide (in Finnish) is presented below.
Tulosyksikön tiedot (koko, asiakkaat, tuotteet jne)
Miten paljon haastateltavalla on kokemusta tuotekehityksen ulkoistamisesta? Millaista?
Kuvaile lyhyesti tuotekehitysprosessianne (vaiheet, portit jne)
Mitä yrityksessänne/tulosyksikössänne ulkoistetaan?
Mitä ei ulkoisteta missään nimessä?
Kuinka päätetään, mitä ulkoistetaan?
Kuinka paljon ja millaista “luovuutta”/omatoimisuutta & itsenäisyyttä ongelmien
ratkaisemisessa alihankkijalta odotetaan?
Kuinka paljon alihankkijan odotetaan tekevän yhteistyötä tuotekehityksen seuraavan vaiheen
kanssa? (Mikäli ulkoistetaan vain tietty vaihe tuotekehityksestä, esim. tutkimus tai konseptointi)
Mikä “laukaisee” ulkoistamispäätöksen?
Kuinka ulkoistamispäätös tehdään (vaiheet ja ihmiset joita siihen osallistuu, ihmisten työtehtävät)
Roadmap?
Miten palveluntuottaja valitaan?
Mitä asioita palveluntuottajassa arvostetaan?
Miten ratkaisun onnistumista mitataan?
Millaisia palveluita, mitä nykyään ette saa, kaipaisitte palveluntarjoajilta?
Mitä muuta kehittäisitte palveluntarjoajissa?
Onko käytössä mitään menetelmää/viitekehystä ratkaisun tekemiseen?
Olisiko viitekehys mitenkään relevantti tai tarpeellinen?
Millaisia asioita hyvän viitekehyksen tulisi ottaa huomioon?
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8.2. Appendix B: Overview of outsourcing decision models
To give the reader an overview of theoretical outsourcing frameworks, and of the
parameters these frameworks contain, six “classics” of outsourcing literature are
briefly outlined below.
Walker (1988) proposes a strategic sourcing framework, based on: (1) strategic risk
associated with an activity (appropriation risk, technology diffusion, end-product
degradation), and (2) organization’s competence in performing the activity as
opposed to that of providers. Walker’s approach is a good example of how
outsourcing was viewed during the 1980s (the ‘big bang’ of outsourcing, see
Hätönen, 2008) as a vehicle for cutting and reducing operational costs. However, its
basic lesson – that the firm should concentrate on its own core competency and
outsource the rest – is still sound.
Venkatesan (1992) argues that firms had neglected the opportunity to develop
proprietary components that are sources of competitive advantage. To avoid
eroding the capability to design and manufacture components that are critical to the
product and hard to manufacture, firms should
(1) Focus on those components that are critical to the product and that
the firm is distinctively good at making;
(2) Outsource components where suppliers have a distinctive
comparative advantage, greater scale, fundamentally lower cost
structure or stronger performance incentives, and
(3) Use outsourcing as means of generating employee commitment to
improving manufacturing performance.
Venkatesan’s core message is that not all components in a product produce equal
customer value and satisfaction; some components are more critical than others,
and the firm should not outsource their design or manufacturing.
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Welch and Nayak (1992) propose a strategic decision matrix that considers three
dimensions of process technology:
(1) The process technology role in providing a competitive advantage,
(2) The maturity of the process technologies under consideration, and
(3) The competitors’ process technology positions
In short, Welch and Nayak’s decision matrix recommends that competences which
are important in the future should be developed, if the firm’s future position is likely
to be tenable or superior to the competitors. If the firm’s relative position is likely to
be inferior, however, the activity should be sourced from external partners.
Quinn and Hilmer (1994) argue that core competence is a major strategic concept
in sourcing decisions. The decisions should therefore consider
(1) Competitive edge derived from the activity,
(2) Strategic vulnerability introduced by outsourcing, and
(3) Transaction costs incurred due to outsourcing.
They also note that outsourcing always involves a trade-off between control and
flexibility, and outsourcing an activity inevitably means that the firm loses some
control. Quinn and Hilmer’s model has been quoted in length in various studies
about outsourcing.
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Apte and Mason (1995) propose a framework based on disaggregation of services.
After services have been disaggregated from each other, the parts can be sourced
from external providers. Eligible activities for disaggregation are determined
through
(1) Information intensity requirements,
(2) Customer contact need, and
(3) Physical presence need.
Once a decision to disaggregate is made, Apte and Mason’s two-stage process
postulates a further decision as to the sourcing of the activity. This should be carried
out if
(1) The activity is strategically not important, and
(2) If the organization is relatively less efficient in performing the activity
relative to competition.
Greaver (1998), based on a long personal experience in managing outsourcing
deals, develops a methodology for more complex outsourcing initiatives (significant
asset transfers and multi-year contracts) that has seven steps:
(1) Planning initiatives, such as risk assessment, project team formation,
and objective setting;
(2) Exploring strategic implications, where the initiative is aligned with,
for example, the organization’s vision, core competencies, structure
and value chain;
(3) Analyzing costs and performance, where activity costs are measured
and future costs projected;
(4) Selecting providers;
(5) Negotiating terms;
(6) Transitioning resources such as people and equipment; and
(7) Managing relationships.
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Interestingly, more academic accounts rarely discuss or even mention the
importance of relationships and relationship management. However, Greaver’s
model is suitable primarily for major, strategic outsourcing initiatives, although its
lessons apply to smaller-scale projects as well.
Sislian and Satir (2000) develop a composite that attempts to incorporate factors
thought important in previous studies into a single framework. Their two-stage
process includes
(1) Competitive advantage and
(2) Demand flexibility for determining whether to outsource or not,
while
(3) Process capability,
(4) Process maturity and
(5) Strategic risk and managerial considerations required to implement
the decision.
Cánez et al. (2000) base their research largely on interviews and case studies. The
authors develop and operationalize a make-or-buy framework, which addresses
specific make-or-buy decisions by trading off relevant factors. In their framework,
the external environment, on which the company has little or no influence, usually
activates triggers for the make-or-buy analysis and usually forms the basis for key
performance indicators - for instance, if the trigger is cost reduction, cost saving is
logically the key performance measure. Relevant factors for make-or-buy decision
can be clustered to four areas, namely
(1) Technology and manufacturing processes,
(2) Cost,
(3) Supply chain management and logistics, and
(4) Support systems.
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Finally, performance measures for sourcing decisions feed back into the external
environment and possibly activate other triggers that raise again the make-or-buy
decision, thus adding a feedback link that is missing from other decision-making
models. Based on their case studies, the authors repeatedly point out that two key
issues that were associated with the success of the decision were
(1) The involvement of a multi-disciplinary team in the decision-making
process, and
(2) The structure and documentation of the decision-making process.
Kumar and Eickhoff (2005) start from Offodile and Abdel-Malek’s (2002)
generalized outsourcing decision model, and modify it to include offshoring,
intellectual property concerns, product obsolescence, inventory and currency risks
and technology and communication needs. They also critique Offodile and Abdel-
Malek (2002) from suggesting that outsourcing of core competencies is acceptable,
arguing that outsourcing a core competency should only be considered if internal
capabilities cannot be brought up fast enough to meet market demands or when
capital is limited. Finally, Kumar and Eickhoff (2005) note that as re-evaluating the
outsourcing decision from time to time is important, outsourcing frameworks
should be amended to a closed loop instead of one-way process.
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8.3. Appendix C: The economics perspective
Economics perspective, closely linked with Transaction Cost Economics (TCE)
(Coase, 1937; Williamson, 1985 and 1991) is concerned with efficiency, and the
objective of outsourcing decision-makers is thought to lie in minimizing the total
costs of “receiving” a good or a service. In the economizing view, the firm should
compare the total cost of producing the good or service internally with the total cost
of outsourcing, and choose the alternative that is more economical.
In economics and related disciplines, a transaction cost is a cost incurred in making
an economic exchange. Transaction costs consist of adaptation costs, which represent
the difficulty in modifying contrasts to changing conditions; safeguarding costs, that
represent the cost of an exchange partner acting opportunistically once investments
in the relationship have been made (Pisano, 1990); and measurement costs,
representing the costs involved in verifying that contracts have been completed as
specified (Calantone and Stanko, 2007). A fourth factor was added by Williamson
(1985) to account for transaction frequency, the reasoning being that firms are
incentivized to perform internally those functions which occur more frequently
since the costs involved are easier to recoup.
Within the context of outsourcing, transaction cost economics can be used to find
the theoretically optimal way of organizing production of a given product or service.
A rule of thumb is that integration restricts the buyer’s choice to one supplier, hence
production costs tend to be higher than for outsourcing - but integration reduces
transaction costs by eliminating the need to gather and analyze a great deal of
information about different suppliers and makes the risk of opportunism smaller.
Thus, transaction cost view would stipulate that firms should outsource when
information about suppliers is widely available and reliable, and when the threat
from opportunism is low - for example, when scale economies are required to
produce cost effectively.
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However, pure transaction cost economics fail to address several pertinent
viewpoints normally associated with business life by disregarding factors that are not
directly related to costs, such as pre-existing firm capabilities and resources
(Williamson, 1991), competitive situation of the industry (Williamson, 1991),
learning (Langlois and Robertson, 1995) and innovation (Pajarinen, 2001), the
effects of trust and relationships, and market power.
However, an argument could be made that traditional transaction cost economics
already takes coordination-related issues such as trust into account. Since TCE starts
from an assumption that the objective of outsourcing decision-makers is to
minimize the total costs of “receiving” a good or a service, lack of trust would
translate to higher search, measurement, adaptation and safeguarding costs.
Therefore, additions to existing frameworks would be unnecessary. However, most
authors readily admit that TCE analysis typically disregards many relevant factors
such as trust, primarily because operationalizing and measuring these factors is
usually very difficult.
In the context of this thesis, the argument can be disregarded simply due to the fact
that the importance of personal relationships in design outsourcing has increased in
the 2000s (Holopainen and Järvinen, 2006), not decreased as would be predicted
thanks to lower search costs associated with Internet (Pereira, 2005).
These problems, especially the importance of efficiency in transaction cost analysis
and the resulting neglect of other factors such as learning make transaction cost
economics somewhat problematical in analyzing outsourcing of innovation
activities. Although transaction costs are often used to analyze innovation
outsourcing - for example, Calantone and Stanko (2007) construct their hypothesis
of innovation outsourcing’s drivers based on TCE - Love and Roper (2005) have
empirical evidence that even highly respected economists that have been actively
involved in developing transaction cost analysis cannot predict which new product
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development activities are likely to be outsourced. Others, such as Pajarinen (2001),
have pointed out the detrimental long-term effects of trying to minimize transaction
and production costs may have on, for example, innovation in general.
Nevertheless, there is strong support for using transaction cost explanations of the
make-or-buy decision in the empirical literature, even in new product development
contexts (Veugelers and Cassiman, 1999; Love and Roper, 2005). According to
Buckley and Chapman (1998), the reason for this disparity could be that because
managerial perception plays a large role in these decisions, objective measurement
of transaction costs is very difficult.
Other studies have found that property right factors dominate over transaction cost
factors in innovation outsourcing (Gooroochurn and Hanley, 2007). Transaction
cost variables are more important for process innovation, while property rights
variables are more significant for firms involved in product innovation. According
to Gooroochum and Hanley, the fundamental difference is that transaction cost
literature predicts that large-scale process innovation should enjoy the protection of
scale economies, while the property rights literature suggests that products may be
innovative enough to enjoy patent protection or their returns may be uncertain
enough to make opportunism by partners not viable. Gooroochurn and Hanley
conjecture that the generic transaction cost literature is likely to explain a small part
of outsourcing decisions (cost saving aspects), while the property rights literature
has more to do with revenue maximization. Other way of looking into same
problem is to predict that if transaction cost variables dominate, then innovation
outsourcing behaves very much like any other type of outsourcing such as raw
materials or janitorial services. On the other hand, if property rights variables are
more important, knowledge transfer enters into the equation. (Gooroochum and
Hanley, 2007)
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8.4. Appendix D: Baldridge criteria for core competences
The first step in developing and nurturing core competences is to develop a clear
understanding among senior managers of the three elements (technology,
governance process, and organizational learning) that make up a competence.
Prahalad (1993) advises managers to think of the factors that leverage the working
of core competence in terms of an equation:
Competence = Technology x Governance Process x Collective Learning (1)
In other words, a competence is a product of technology, governance processes,
and collective learning within the firm. Core competencies should also stand the test
of being core. In other words, the competence must be central to business success.
Snyder and Ebeling (1992) suggest three tests for this:
1) Does the core competence contribute significantly to the ultimate value of the
end product?
2) Does it represent a unique capability that provides enduring competitive
advantage?
3) Does it have the potential to support multiple end products or services?
Once competences have been identified, they should be benchmarked so that the
firm knows where they stand relative to competition. Jennings and Westfall (1992)
recommend that ‘strategic benchmarking’ should take place against three criteria:
customers; competences; and competitors. They point out that one of the problems
in benchmarking competencies is defining the criteria of excellence for the
competencies themselves. They suggest one possible set of criteria are those used in
the Malcolm Baldridge awards. In fact, these criteria do match off quite
conveniently against the three competence elements defined by Prahalad (1993).
(See also Appendix G for additional core competence checklist.) The Baldridge
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criteria, which can be used as a basis for thinking about the organization’s core
competences, are:
1. Leadership
Senior executive leadership
Quality values
Management for quality
Public responsibility
2. Information and analysis
Scope of management
Competitive comparisons and benchmarks
Analysis of quality data and information
3. Strategic quality planning
Strategic quality planning process
Quality goals and plans
4. Human resources utilization
Human resource management
Employee involvement
Quality education and training
Employee recognition and performance measurement
Employee well-being and morale
5. Quality assurance of products and services
Design and introduction of quality products and services
Process quality control
Continuous improvement of process
Quality assessment
Documentation
Business process and support service quality
Supplier quality
6. Quality results
Product and service quality results
Business process, operational and support quality results
Supplier quality results
7. Customer satisfaction
Determining customer requirements and expectations
Customer relationship management
Customer service standards
Commitment to customers
Complaint resolution for quality improvement
Determining customer satisfaction
Customer satisfaction results
Customer satisfaction comparison
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8.5. Appendix E: Discovery-driven planning
In traditional planning processes, the feasibility of a business proposal is judged
according to projected future benefits such as savings, increases in quality, and so
on. However, planning by extrapolating from historical trends becomes increasingly
questionable as firms look beyond incremental improvement to their existing
operations and aim for radical, transformational change. As outsourcing and NPD
outsourcing are both possible strategies for achieving transformational change (see
e.g. Hätönen, 2008), it follows that firms should treat extrapolative models with
caution when planning for outsourcing.
However, many firms follow old models of planning, with all their limitations,
simply because they see no alternative. The purpose of this Appendix is to briefly
introduce the idea of discovery-driven planning (McGrath and MacMillan, 1995).
Discovery-driven planning is originally developed for planning for new, uncertain
ventures such as new product development, and as such is ideal for firms with little
experience in outsourcing and/or NPD outsourcing. For more detail about the
process and case examples, the reader is advised to study the original article by
McGrath and MacMillan (1995), as well as contributions by Kawasaki (2004) and
Christensen et al. (2008). In particular, Christensen et al. recommend that discovery-
driven planning be used in innovation-related activities.
Discovery-driven planning is based on McGrath and MacMillan’s (1995)
observation that firms tend to make four kinds of planning errors:
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1) Firms don’t have hard data but, once a few key decisions are made, proceed as
though their assumptions were facts.
2) Firms have all the hard data they need to check assumptions but fail to see the
implications.
3) Firms possess all the data necessary to determine that a real opportunity exists
but make implicit and inappropriate assumptions about their ability to
implement the plan.
4) Firms start off with the right data, but they implicitly assume a static
environment and thus fail to notice until too late that a key variable has changed.
Discovery-driven planning offers a systematic way to uncover the dangerous
implicit assumptions that would otherwise be unnoticed in the plan. It concentrates
on identifying assumptions underlying management thinking and finding
inexpensive ways of testing these assumptions before major commitments are made.
The most important features of discovery-driven planning are a reverse benefits
statement, which models the basic business case for the venture; key assumptions
checklist, which is used to ensure that assumptions inherent in the reverse benefits
statement are checked; and a milestone planning chart, which specifies the assumptions
to be tested at each project milestone. As the venture unfolds and new data are
uncovered, each of the documents is updated.
Reverse benefits statement is based on a simple logic: if the firm knows how
good a business case for e.g. outsourcing should look in order for it to be accepted,
why go through the charade of making and revising assumptions and projections in
order to fabricate an acceptable set of numbers and business benefits (Christensen et
al., 2008)? Reverse benefits statements begin with minimally acceptable business
benefits (e.g. sales in x months, income, time-to-market, savings, quality), and
continue by raising the critical issues: what set of assumptions must prove true in order for
these benefits to materialize?
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Key assumptions checklist is based on the reverse benefits statement. It is a list of
things that need to prove true for the project to succeed. The items on the checklist
are rank-ordered, with the deal killers and the assumptions that can be tested with
little expense toward the top. When a project enters a new stage, the assumptions
checklist is used as the basis of the project plan for that stage.
Milestone planning chart is a plan for learning by testing the assumptions and
monitoring the progress of new ventures. The basic idea is to postpone major
commitments of resources until the evidence from the milestone event signals that
the risk of taking the next step is justified. Assumptions are linked to the milestone
chart so that a set of assumptions is verified between each milestone. In NPD
outsourcing process, the milestone chart could include the following steps:
1) Need for external NPD confirmed
2) Suitable providers found
3) Initial compatibility established and candidates shortlisted
4) Preliminary scale and scope negotiations completed
5) Provider selected
6) Project kick-off
7) Project milestone 1
…
Tables 30 and 31 below represent a simplified example of a project plan formed
through discovery-driven planning process. First, the benefits are listed in the left-
hand column of Table 30. Assumptions under which the results could be achieved
are then listed in the right-hand column. After the assumptions have been listed,
they are grouped with proper milestones in Table 31, with most important and
easily tested assumptions being first to be tested.
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Table 30. Benefits and assumptions.
Benefits sought Assumptions made
Faster time-to- Provider can design the product faster than internal NPD
market Provider has experience in fast product introductions
Improved quality Provider has more experience than internal NPD
Provider’s previous projects have been successful
Designs needs to Technology X is ready and components are available
use technology X Provider can work with the technology X
Good integration Personal chemistry between key players works well
with the provider Information systems can be made compatible with each other
Table 31. Assumptions grouped with milestones form a task list.
Milestone Assumptions tested
1. Technological Technology X is ready and components are available
feasibility
2. Provider Provider’s previous projects have been successful
compatibility Provider has experience in fast product introductions
Provider has more experience than internal NPD
Provider can work with the technology X
Personal chemistry between key players works well
Information systems can be made compatible with each other
3. Pilot project 1 Provider can design the product faster than internal NPD
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8.6. Appendix F: Bidder due diligence checklist
The following ‘due diligence’ checklist for screening outsourcing and alliance
partners has been adapted from Milgate (2001, Appendix A, 189-191). This list can
be used as such or as a basis for the firm’s own due diligence checklist.
• Firm/consortia Information
o Name
o Address
o Telephone, fax, e-mail, web site
o Incorporation date (and articles)
o Incorporation place and business registry number
o Brief history
o Related firms
o Associated firms
o Net assets movements
• Litigation
o Historic litigation
o Pending litigation
• Addresses five years back
• Personnel
o List of directors, secretary, executives
o Former directors
o Auditors
o Consultants (working for the proposed project)
• Ownership
o Twenty largest shareholders
o Beneficial ownership
• Financial information
o Audited financial statements
o Holding company financial statements, if any
o Loans
o Change to financial situations
o Confirmations
• Business affiliations
o Director affiliations
o Agencies and branches
o Agencies
o Changes of names
• Credit rating
• Government investigation
o Investigation or charges
o Corporate regulatory investigation
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• Licenses
o Software licenses
• Corporate Structure
o Corporate structure diagram
o Joint venture details
• Share structure
• Business failure
o Receivership/liquidation
o Charges
o Agreement/composition
o Receiver/liquidator
o Judgments
• Relevant experience
o Applications
o References
o Terminated contracts
• Publicly listed corporations
o Fines, suspensions for breach of rules
o Media releases
• Foreign corporations
o Last year accounts
o Last half-yearly accounts
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8.7. Appendix G: Key questions for a lean organization
The following checklists, adapted from Milgate (2001, Appendix D, pp. 215-222),
are intended as aids for thinking about outsourcing and the related issues. They are
not comprehensive, but checking that the firm has answers to all these questions
should help eliminate most common mistakes made in outsourcing.
Table 32. Core competences checklist
Core competences ✓ ✖
Can the board of directors and/or senior managers define the organization’s core
competencies?
If not, have core competencies been defined but not adequately
communicated?
If core competencies have not been defined, what action should be taken to do
so?
Who should play a part in defining core competencies: the board, strategic
planners, SBU managers, line managers?
Is everybody involved in defining core competencies clear about the three
elements in a competence: technology, governance process, and collective
learning?
To what extent do the organization’s core competencies underpin the
organization’s products and services?
Have the competencies been benchmarked against other excellent competitors?
If so, were the competencies found to be best in class?
If not, what actions should be taken to improve the effectiveness of core
competencies?
If competencies have not been benchmarked, what needs to be done to gather
performance data about them?
Do products and services need to be more effectively aligned with core
competencies?
What proportion of investment is directed at building and developing core
competencies?
If this is low, do investment priorities need to be re-examined?
Have managers looked at all the ways in which current core competencies might
be exploited, for example, in related product areas?
Are the core competencies strong enough to sustain the organization’s success in
the medium and long term?
If not, can the competencies be strengthened with internal investment and
development?
If not, can the organization acquire additional relevant competencies through
strategic partnerships or alliances?
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Table 33. Existing partnerships checklist
Existing partnerships ✓ ✖
Does your organization currently work with any strategic partners?
How do these partnerships contribute to the organization’s overall business
objectives?
Is the contribution of these partnerships to business objectives regularly
measured and monitored?
Are there lessons from these successful partnerships that can be applied
elsewhere in the organization?
Has the organization entered any partnerships that failed to deliver their
objectives?
What lessons can be learned from those partnerships?
Table 34. Searching for new partners checklist
Searching for new partners ✓ ✖
Has the board a clear view of how its business strategy is to be achieved, with or
without partnerships?
In which area of your organization’s activities might the board need to search for
new partners?
Has the organization identified clear gaps in the fulfilment of its business strategy
that could be filled with the aid of a partner or partners?
What kind of partners might be needed in those areas, strategic or tactical, short
or long term?
In any given area, what contribution is your organization looking for from a
prospective partner: assets, know-how, market position, intellectual property,
cash, and so forth?
In any given area, what can your organization contribute to a partnership: assets,
know-how, market position, intellectual property, cash, and so forth?
Has your organization established clear criteria for its prospective partner: cultural
compatibility, financial strength, technical contribution, market contribution?
Have prospective partners been fully evaluated against all relevant criteria?
Can prospective partners on the short list realistically provide what the
organization is looking for?
Has your organization matched its core competencies against those of
prospective partners?
If so, is there complementarity or is there a risk of conflict?
Do prospective partners on the short list have reasonable cultural compatibility
with the organization?
Is it likely that the prospective partners might be willing to enter an alliance with
your organization?
How can your organization frame its approach to the prospective partner(s) in an
attractive and enticing way?
At what level should the prospective partner be approached: board/director level,
SBU level, departmental head?
Who should lead the approach to the prospective partner?
Has your organization considered what processes to use to consider any
partnership offers that it receives?
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Table 35. Negotiating a partnership deal checklist
Negotiating a partnership deal ✓ ✖
In your organization, is there high-level sponsorship (usually from the board) for
the proposed partnership?
Before opening negotiations, have you defined what you want to achieve from
the partnership?
Have you identified those areas where concessions or compromise would be
unwise?
Have you defined those areas where it will be possible to be flexible in
negotiations?
Who will be involved in the negotiation team?
Does the negotiation team contain a range of skills and knowledge together with
negotiating and presentation skills?
What are the limits of authority of the negotiating team?
Are consultants needed during the negotiation?
If so, has the role of the consultants been adequately defined?
Has a timetable been set for the negotiations?
What form of partnership will best meet the needs of the parties: collaboration,
joint venture, or merger?
What is each party going to contribute to the partnership?
Does what the other party is contributing to the partnership adequately match
your own organization’s expectations?
Can the organization deliver what it says it will contribute?
Can the partner deliver what it says it will contribute?
Does the memorandum of understanding (or what you have called your legal
documentation) encapsulate the full terms of the agreement?
Does the memorandum of understanding define responsibilities for
implementation and set a timetable?
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Table 36. Implementing a partnership checklist
Implementing a partnership ✓ ✖
Does the final agreement include all relevant matters including contributions,
management of the partnership, conflict resolution, apportionment of profits,
and exit provisions?
What level of autonomy is given to the partnership operation?
What type and frequency of reporting is required from the partnership operation?
Does the partnership have clear milestone events at which progress can be
judged?
Has the purpose of the partnership been widely communicated within your
organization?
Has there been wide buy-in to the partnership or are there still pockets of
resistance that need to be addressed?
Have any change management issues raised by the partnership been adequately
addressed?
Is there adequate machinery in place for communicating with the partner(s)?
In what ways might information technology be used in order to communicate
more effectively with the partner(s)?
Is there a need to define the limits of information that may be exchanged with the
partner(s)?
Does staff working in the partnership need special training, for example, in
languages or understanding a foreign culture?
Is your organization organized in order to learn from the partnership?
What structures underpin the organizational learning?
How will organizational learning be captured and disseminated throughout your
organization?
In the short, medium and long term, what criteria are you using to determine the
success or failure of the partnership?
How are you measuring those criteria?
Are further opportunities for developing the partnership being adequately
explored?
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Table 37. Outsourcing partnerships checklist
Outsourcing partnerships ✓ ✖
Does your organization already use outsourcing?
If so, are those arrangements working satisfactorily and what lessons can be
learned from them?
Has the organization developed a comprehensive view of the role of outsourcing
in its business strategy?
If not, should such a review be undertaken?
Does your organization have a clear view of its core competencies and, thus, its
peripheral activities that might be candidates for outsourcing?
Should outsourcing be limited to support functions, such as IT and accounting,
or should it include manufacturing functions or NPD functions?
If manufacturing or NPD is to be outsourced in whole or in part, what are the
risks that your organization will lose core skills in technologies?
Do all manufacturing or NPD functions need to be integrated with each other
and with other functions within the firm, or can they be disaggregated and
outsourced?
Alternatively, is it necessary to outsource some aspects of manufacturing or NPD
in order to acquire key skills, for example in technologies or manufacturing
processes?
What are the risks that your provider might ultimately become a competitor in
your core market?
Are these risks acceptable and how can they be minimized?
If manufacturing or NPD is outsourced, what steps can your organization take to
erect a strategic block between the provider and your market?
Before choosing provider, have you defined the criteria you will use in the
selection?
Have the outsourcing supplier’s claims been carefully checked and have
references been thoroughly investigated?
Are you confident that the provider can deliver what it says it will?
What is the downside if it cannot and is there a contingency plan to deal with
this situation?
Has your organization made a realistic cost-benefit analysis of outsourcing,
including the transaction costs that it entails?
Do you feel there is a suitable cultural fit between your organization and the
outsourcing provider?
Is the agreement sufficiently flexible to deal with your needs and meet changing
requirements?
Are the criteria by which the provider will be judged defined with precision?
What are the staffing implications of entering the outsourcing agreement and
what are the costs of dealing with them?
Are the circumstances and terms for ending the agreement clearly defined?
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Table 38. Management disciplines for partnerships and outsourcing checklist
Management disciplines for partnerships and outsourcing ✓ ✖
Has your organization identified those managers who could be effective in
working through partnerships and outsourcing?
Is your organization’s culture adept at working in partnerships, for example in
searching for win-win situations?
What cultural changes do managers need to assimilate in order to become more
adept at managing through partnerships and outsourcing?
How will your organization define the roles and responsibilities of managers who
work with partnerships and outsourcing?
Does your organization have managers who would make good ‘brokers’ in
partnerships and alliances?
Do managers have the necessary skills to use partnerships and alliances as
learning opportunities and to develop that learning into organizational
knowledge?
Table 39. Partnership culture checklist
Partnership culture ✓ ✖
Is your organization’s structure compatible with developing a partnership culture?
Do the values that underpin your organization encourage people to work in
partnership?
How far has your organization developed internal partnerships?
Does your organization work with business teams that cross internal
departmental or functional boundaries?
What can be done to make those teams work more effectively?
Can cross-functional teamworking be extended in the organization?
How does your organization define roles and responsibilities for its staff?
Does your organization truly empower employees and foster decision-making at
the lowest possible levels?
What steps does your organization take in order to manage conflict and personal
stress, sometimes the unwelcome side effects of a networking culture?
Table 40. Technology enablers checklist
Technology enablers ✓ ✖
In which ways does the use of IT reinforce and develop core competencies?
Do all employees have access to an appropriate level of IT support?
Have they been trained to make the best possible use of that support?
What can be done to enable IT to facilitate more effective business processes?
In which ways can IT be used to promote more effective organizational learning?
How can IT be used more effectively to promote communication within the
organization and with external partners?
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8.8. Appendix H: Empirical survey questionnaire
Questions 2-8. What NPD tasks are you outsourcing currently.
247

248

249

250

Question 9. Reasons for outsourcing NPD activities
Question 10. Relationship with providers.
251

Question 11. Obstacles to NPD outsourcing.
252

Question 12. What of the following best describes the products or services ofyour
firm/SBU?
Question 13. What of the following best describes the technologies used by your
firm/SBU?
253

Question 14. Intensity of competition.
Question 15. Product cycle of your firm/SBU.
254

Questions 16.1- 16.4. Expertise in outsourcing and NPD outsourcing; Size of the
firm/SBU; Accuracy self-evaluation
255

256

Question 17. Field of business
257

258

8.9. Appendix I: E-mail invitation for the survey
The e-mail sent to the survey sample is included below.
Tervehdys,
osana Teknillisen korkeakoulun FutureLab of Product Design-tutkimushanketta
ja omaa
diplomityötäni tutkin suomalaisten yritysten käyttämiä tuotekehityksen tuki- ja
ulkoistuspalveluja. Olisin erittäin kiitollinen, jos Teillä olisi n. 20 minuuttia aikaa
vastata
kyselyyn yrityksenne/tulosyksikkönne tuotekehitystoiminnasta alla olevassa
osoitteessa:
https://www.survette.com/15878-12217-809@0010accnt79&cbican
Kyselyssä on mukana n. 500 suomalaista tuotekehitystä harjoittavaa yritystä.
Halutessanne saatte tutkimuksen valmistuttua yhteenvedon tuloksista.
Kaikkia tietoja käsitellään luottamuksellisesti.
Sähköpostiosoitteenne on peräisin Suomen Asiakastiedon tietokannasta. Jos
ette ole
missään tekemisissä yrityksenne tai tulosyksikkönne tuotekehityksen kanssa,
toivoisin
että voisitte edelleenlähettää tämän viestin oikeaan osoitteeseen.
Mikäli Teillä on jotain kysyttävää tai haluaisitte lisätietoja, älkää epäröikö ottaa
yhteyttä
minuun, joko sähköpostitse, j.m.korhonen@tkk.fi tai puhelimitse, 041 501 8481.
Parhain terveisin,
Janne Korhonen
FutureLab of Product Design, TKK
041 501 8481
j.m.korhonen@tkk.fi
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