One of the most important global economic trends is outsourcing of activities not considered as core business in firms. Economics teaches us that there are several reasons for this. Due to economies of scale and scope, as well as differences in factor costs, some actors can carry out certain activities more cost efficiently than other
actors. What is more, the research on outsourcing mostly focuses on relatively short-term economic effects, with some studies finding positive financial effects and others not. Financial effects, however, are not the only consequences of outsourcing. When firms outsource activities previously undertaken in-house, they risk losing important competencies, knowledge, skills, relationships and possibilities for creative renewal.
Somewhat surprisingly, such non-financial effects of outsourcing have hardly been studied at all. Further, most studies on effects of outsourcing focus on the outsourcing of relatively standardised activities such as manufacturing, ignoring that increasingly other functions in firms are outsourced. Therefore, this paper addresses
what happens to a firm-s capabilities when the firm
outsources functions (other than manufacturing) previously
performed in-house? A review of the literature on organisational capabilities revealed a great number of different capabilities and dimensions along which
they can be sorted. For the purpose of this paper we found it useful to look at capabilities from the perspective of the firm-s main functions, such as capabilities relating to
R&D, purchasing, manufacturing, marketing and sales, and
service. In effect, we created a model suggesting that the
outsourcing of one function (fully or in part) will negatively impact on capabilities not only relating to that specific function, but also relating to the capabilities of other functions in the firm. The model was expected to hold true only under the condition
that savings from outsourcing were not reinvested in capability improvements. As an initial test of the model, we undertook a focus group discussion involving eight experienced sourcing professionals from different firms and industries. This quickly led us to realise that
the model required significant revision. While, on a general level, focus group participants agreed that outsourcing could indeed have the effects posited, drawing on their own experience they identified numerous conditions under which the model would likely be falsified if tested. We, therefore, further qualified the model
by introducing a number of moderating variables. For instance, the posited negative effects on a firm-s capabilities are moderated by the degree of integration between the outsourcer (the buying firm) and the outsourcee (the supplier). The greater the degree of mutual exchange and communication, the smaller the likely
negative effects on capabilities, several participants in the focus group noted. In other words, the negative effects are moderated by managerial practices and contextual factors. Additional moderating factors include, among others, market structure, contractual form, and the outsourcer-s capability and capacity of managing external suppliers. In summary, we propose that, outsourcing of any function will negatively impact the capabilities of the same and other functions in the outsourcer-s organisation to a degree which depends on a set of managerial practices and contextual factors. Due to the complexity of the phenomenon, we intend to test this proposition by
carrying out a number of case studies on large organisations. Additionally, we intend to identify how and why capabilities are affected by outsourcing.