This document summarizes a research paper about how organizational structure, group interests, and resources affect outsourcing decisions. The researchers interviewed managers at an IT department in a bank. They found that outsourcing decisions were influenced by the different goals and responsibilities of groups within the organization, as well as organizational rules and interdependencies between groups. Managers' evaluations of outsourcing were shaped by the authority, information, and resources their groups possessed. Contracting decisions were sometimes made to satisfy internal audiences rather than minimize costs. The organizational structure created incentives that led outsourcing choices to be based on structural factors rather than maximizing benefits to the whole organization.

1. Presenters:
Roland Adi Nugraha
Syayyidah Maftuhatul Jannah
Hendy Mustiko Aji
Politics and Firm Boundaries: How Organizational
Structure, Group Interest, and Resources Affect
Outsourcing
Matthew J. Biddwell

2. Problems
 Most researches on this research area still used unitary-model in
explaining organizational decision making process.
 In fact, organization is not unitary, there are groups within, with
different set of goals.
 Prior researches showed that there were a conflict of interests
(between group within organization) affecting make-or-buy decision
making.
 However, reason and how those conflicts might happened were
rarely found and explained in most research paper.
Presenter: Roland Adi Nugraha

3. Objectives
 To explain the phenomena of how intra-organizational interests
affecting outsourcing decision making process.
 Moreover, this paper also want to explain how intra-organizational
politics influencing make-or-buy decision making process.
Presenter: Roland Adi Nugraha

4. Theoretical Background
 Capabilities-based View
 Firm may gain competitive advantage through unique capabilities
that other firms lack of. (Grant, 1991; Hayes et al., 1996)
 Firm need to reinvest to prevent and improve its capabilities, so that
competitors can not imitate. (Mahoney, 1995).
 Transaction cost-based Theory
 The theory of how cost level may influence organizational decision
in providing goods or services through market or internal
organization.
Presenter: Roland Adi Nugraha

5. Theoretical Background
 Agency Theory
 This theory explains how information asymmetry (conflict) between
principal and agent occurred.
 Resources Dependence Theory
 Group ability to influence decision making output is contingent on
the in-return resources.
Presenter: Roland Adi Nugraha

6. Theoretical Background
 Bidwell (2012) guessed that the different interests accross group within
organization may influence decision making process whether to or not
to outsource.
 Some factors might influencing intre-organizational interests:
– Each group’s goal & responsibility within organiztion
– Internal coordination and administrative control mechanism.
Presenter: Roland Adi Nugraha

7. Research Settings & Method
 This study used qualitative method, and quantitative (survey),
involving IT department in a Bank.
 IT department tasks are: application making, problem solving,
responsible for development.
 Some IT’s tasks are usually both accomplised insourcely (by internal
employees) and outsourcely (by external vendors)
 Three IT units involved in this research divided into 3 division:
1. Consumer
2. Specialist
3. Institutional
Presenter: Roland Adi Nugraha

8. Research Settings & Method
Presenter: Roland Adi Nugraha

9. Data
 The interview involved 64 informants, they are:
• 9 Senior Manager
• 4 HR Manager
• 13 Sourcing Manager
• 6 Finance Manager
• 22 Project Manager
• 7 Developer
• 3 Vendor
Presenter: Roland Adi Nugraha

10. Data
Presenter: Roland Adi Nugraha

11. Theoretical Model
Sources of Group
Interest
Effects of
Outsourcing
Group Evaluation of
Outsourcing
• Differentiated Goals and
Responsibilites
• Organizational Rules
• Interdependency
• Differentiated interest in
evaluating capabilities
• Arbitraging organizational
rules
• Contracting externally to
reduce internal uncertainty
• Loss of authority
• Change in incentives and
controls
• Different capabilities
Presenter: Syayyidah Maftuhatul Jannah

12. Sources of Group Interests
“Working with (offshore vendors)
has proved to be difficult though.
They are in different time zones,
there is less communication, they
need to get to understand the
legacy systems, and there is a
need to get the Business to really
think deeply about what they want
up front ...”
(Sourcing manager)
Differentiated Goals and Responsibilities
Presenter: Syayyidah Maftuhatul Jannah

13. Sources of Group Interests
“I almost think the firm purposely
puts very interntional road
blocks to bringing on permanent
staff because at the most senior
levels of the firm they want to
rigidly control headcount and
spending,...”
(Project manager)
Organizational Rules
Presenter: Syayyidah Maftuhatul Jannah

14. Sources of Group Interests
Interdependencies
“It has been a very painful process to get the
idea adopted that we need to document
things, and that the business needs to
document things. For example, now we will
not give an estimate until we have a spec
from the business... It is hard to change the
way that they are doing things. Using [the
outsourced vendors] helps...”
(Manager within consumer)
Presenter: Syayyidah Maftuhatul Jannah

15. Group Resources
•“That was really a program pushed from the highest levels of technology management here…
[It’s a] matter of how aggressively individual managers pursued it. Some managers did it to get
more bodies in the door. [It was not about] what projects are more suitable.” (Project manager
–institutional group)
Hierarchical authority
•Mandates to increase outsourcing seemed to be more rigorously enforced in smaller IT groups
in which information asymmetrics between senior managers and project managers were
lower.
Access to information
•“There are some groups that are politically powerful and don’t want to use [offshore
vendors]. For example, there is one desk that made 9 figures for the firm last year and have
their own developers that have worked for them for years, and been brought along with
them..”
Contribution of resources
Presenter: Syayyidah Maftuhatul Jannah

16. Theoretical Model
Group Resources
Group Evaluation of
Outsourcing
Effect of Conflict
• Hierarchical Authority
• Access to information
• Provision of valued resources
• Resources as determinant
of outcomes
• Contracting for internal
audiences
Continue…
Presenter: Hendy Mustiko Aji

17. “[Doing a project fixed price] is
desirable from a lot of perspectives. As
a project manager it is tougher to sell,
but It helps to validate the sell.
Financial understands exactly what the
cost is.”
(Sourcing Manager)
Contracting for Internal Audiences
Minimizing costs of outsourcing
Presenter: Hendy Mustiko Aji

18. “Are the contract terms about disciplining
you or the vendors?”
Interviewer
“Probably disciplining us!
The vendor will do what we ask them to
do
Project Manager
Contracting for Internal Audiences
Prevent internal actor from engaging in costly behavior
Presenter: Hendy Mustiko Aji

19. Discussion
Organization-Level Perspective on Firm Boundaries
 Organizational structure creates the system of incentives, information and
authority through it’s effects on the interest and resources of different
groups.
 Outsourcing decisions were shaped by structural considerations as the
allocation of goals and authority as well as structure of work and controls.
 “First-best” decision that maximize the interests of overall organization
will not be made by manager.
 But to made “second-best” decision for incentives and task assignment to
reduce information asymmetry.
Presenter: Hendy Mustiko Aji

20. Discussion
Structural Variables for Understanding Firm Boundaries
 Evaluation of outsourcing decisions was strongly influenced by
differentiation of goals and responsibilities across groups.
 Outsourcing decisions were influenced by the nature of organizational
rules within the organization.
 Pattern of internal interdependences may affect managers’ incentives to
outsource.
 Allocation of authority, information, and other resources across groups
affect outsourcing decision
Presenter: Hendy Mustiko Aji

21. THANK YOU!