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Relational and Contractual Governance for Innovation

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Dynamic Innovation in Outsourcing

Part of the book series: Technology, Work and Globalization ((TWG))

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Abstract

While the early years of Information Technology (IT) and business process outsourcing (BPO) were mainly characterized by a quest for cost savings (Loh and Venkatraman 1992; Lacity and Hirschheim 1993) and a focus on core competences (Quinn and Hilmer 1994), evidence from 2000 onwards suggests that client firms have been seeking added value from outsourcing by accessing suppliers’ competences (e.g. Dyer and Nobeoka 2000; Quinn 2000; Whitley and Willcocks 2011). Mol (2005) argued that “firms are increasingly relying on partnering relationships with outside suppliers that can act as an effective substitute to the internal generation of knowledge and innovation”. Similarly, Linder et al. (2003) and Weeks and Feeny (2008) argued that client firms rely on external suppliers in the search for new ideas. Accepting that innovation is outsourced and offshored, Lewin et al. (2009) studied the determinants driving firms to offshore innovations only to conclude that firms have been entering a global race for talent in which solutions will be sought wherever skills are available. Such observations suggest that innovation may be considered as one of the possible outcomes of outsourcing engagements.

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Notes

  1. 1.

    Infosys developed and implemented a marketing platform for Diageo (a global premium drinks company) that enabled Diageo to centrally manage brands through multiple social media channels, such as Facebook, Twitter and others (radical innovation in Diageo’s marketing and brand management approaches, their core growth strategy). See press release: http://www.infosys.com/industries/consumer-packaged-goods/case-studies/Pages/new-digital-consumer-connections.aspx

  2. 2.

    See press release: http://www-03.ibm.com/press/us/en/pressrelease/29022.wss

  3. 3.

    Pointer to the IBM story mentioned earlier.

  4. 4.

    We have formulated this hypothesis as non-directional, as based on the literature we may expect either positive or negative effects on the strength of client-supplier relationships.

  5. 5.

    Joint venture contract is a partnership type of contract that defines how client and supplier firms contribute resources to the new venture and states how profits will be shared. The partners outline the mission and objectives for the joint venture, including the provision of funding, initial physical assets, intellectual capital, staff members and management capabilities. We use terms partnership and joint venture (with profit sharing) interchangeably throughout the paper referring to the same type of contract.

  6. 6.

    Respondents had the opportunity to indicate that they used multiple contract types, but we excluded those responses, as they would not allow us to test clearly the effect of contract type on strategic innovation on the firm level.

  7. 7.

    Since there is very limited literature on strategic innovation in the context of IT and BPO, there were no previous studies that used an operational measure of strategic innovation through outsourcing in IS literature. Comparing how Weeks and Feeny (2008) define strategic innovation (included earlier in the chapter) with the established definitions from the innovation literature where radical/exploratory innovations are considered to result in new products and/or service lines (Droege et al. 2009) entering new markets (Berry et al. 2006) or introducing new distribution channels (Jansen et al. 2006), we have concluded that “strategic innovation” in the IS outsourcing context is in line with what is viewed as radical or exploratory innovations. Therefore, the existing measure of exploratory innovation was adopted.

  8. 8.

    We attempted additional controls including industry, country and size of the company, but none of them had a significant effect on the outcomes; in order to avoid over-saturating the regression model, we do not include them in further analysis.

  9. 9.

    In line with IS outsourcing literature, we have distinguished between IT and BPO (Mani et al. 2010). IT outsourcing (ITO) is defined as the sourcing of IT services through an external third party. BPO refers to the delegation of one or more IT-enabled business processes to an external service provider (Mani et al. 2010: 39). While ITO and BPO share many common attributes, such as the reliance on IT solutions, there are some important differences between these two forms that have implications for the present study. From a client perspective, the main drivers of ITO are the ability to focus on core competencies of the firm and achieve reduction in costs. BPO, on the other hand, offers numerous objectives ranging from cost reductions to innovation and business transformation (Mani et al. 2010). It flows from this that client firms expect innovation to be delivered in the case of BPO. At the same time, ITO consists of at least two different components: IT development and application maintenance (e.g. Gopal and Sivaramakrishnan 2008; Gopal et al. 2003). IT development implies opportunities to innovate while application maintenance is traditionally perceived as less prone for innovation.

  10. 10.

    Work by Bedeian and Mossholder suggests that a theoretically important and statistically significant prediction are the two most important factors of an interaction effect in a moderation model.

  11. 11.

    In order to address that this effect may be because the firms that used joint venture contracts are outliers or very different to the other firms in the sample, we conducted a series of chi-square tests to analyse whether the patterns we see in the descriptive statistics differ significantly between the groups. We did not find evidence to suggest the firms that engaged in joint venture contracts differed from those that used either fixed-price or time and materials contracts.

  12. 12.

    We thank the anonymous reviewer for helpful suggestions regarding interpreting these results.

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Author information

Authors and Affiliations

  1. Loughborough University, Loughborough, UK

    Ilan Oshri

  2. Aston Business School, Aston University, Birmingham, UK

    Julia Kotlarsky

  3. University of Exeter, Exeter, UK

    Alexandra Gerbasi

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  1. Ilan Oshri
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Editor information

Editors and Affiliations

  1. London School of Economics and Political Science, London, United Kingdom

    Leslie P. Willcocks

  2. Loughborough University, Loughborough, United Kingdom

    Ilan Oshri

  3. Aston Business School, Aston University, Birmingham, United Kingdom

    Julia Kotlarsky

Appendix 1: Measures and Items

Appendix 1: Measures and Items

The following text was included in the beginning of the questionnaire: “In this research questionnaire we are going to ask you about the outsourcing of IT and business processes to third-party providers. By outsourcing we mean business process outsourcing and technology outsourcing as opposed to facilities and service management.”

Strategic Innovation*

Based on Jansen et al. (2006)

  • We have invented new products and/or services working with third parties.

  • We experiment with new products and services in our existing market through work with third parties.

  • Our organization accepts demands from clients that go beyond existing products and services.

  • We commercialize products and services that are completely new to our organization through work with third parties.

  • We frequently utilize new opportunities in new markets through work with third parties.

  • Our organization is exploring opportunities to use new distribution channels to deliver products and services through work with third parties.

Client-Supplier Relationships

Based on Jaworski and Kohli (1993)

  • In our organization, there is ample opportunity for informal conversation among our staff and third-party employees that are based on our premises.

  • In our organization, our employees and third-party staff feel comfortable approaching each other when the need arises.

  • Managers discourage employees discussing work-related matters with those who are not immediate superiors.**

  • People involved in the outsourcing relationship are quite accessible to each other (regardless of whether they represent client or supplier side).

  • In our outsourcing organization, it is easy to talk with virtually anyone you need to, regardless of rank, position or organization to which he/she belongs.

*All items were measured on a five-point scale, anchored by 1 = strongly disagree and 5 = strongly agree.

** Reversed item.

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Oshri, I., Kotlarsky, J., Gerbasi, A. (2018). Relational and Contractual Governance for Innovation. In: Willcocks, L., Oshri, I., Kotlarsky, J. (eds) Dynamic Innovation in Outsourcing. Technology, Work and Globalization. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-75352-2_5

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