Benchmarking: An International Journal

Consequences of outsourcing for organizational capabilities: Some experiences from

best practice
Henrik Agndal, Fredrik Nordin,
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Henrik Agndal, Fredrik Nordin, (2009) "Consequences of outsourcing for organizational capabilities: Some
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BIJ
16,3 Consequences of outsourcing
for organizational capabilities
Some experiences from best practice
316
Henrik Agndal
Department of Marketing and Strategy, Stockholm School of Economics,
Stockholm, Sweden, and
Fredrik Nordin
Industrial Marketing Division, Department of Management and Engineering,
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Linköping University, Linköping, Sweden

Abstract
Purpose – The research on effects of outsourcing tends to focus on financial effects and effects at a
country level. These are not the only consequences of outsourcing, though. When firms outsource
functions previously performed in-house, they risk losing important competencies, knowledge, skills,
relationships, and possibilities for creative renewal. Such non-financial consequences are poorly
addressed in the literature, even though they may explain financial effects of outsourcing. Therefore,
the purpose of this paper is to develop a model that enables the study of non-financial consequences of
outsourcing.
Design/methodology/approach – Based on a review of the literature on interdependencies
between organizational functions, a main proposition is developed: given that savings gained from
outsourcing are not reinvested in the organization, outsourcing of any function will negatively impact
the capabilities of that and other functions in the organization. This proposition is broken down into
sub-propositions, which are tested through a focus group study. Respondents include purchasing
professionals with experience from best practice outsourcing.
Findings – The initial proposition is developed through identification of variables mediating the
proposed negative consequences of outsourcing. Mediating variables are broken down into four
categories: variables relating to the outsourcer, the outsourcee, the relationship between the parties,
and the context.
Research limitations/implications – By developing a model for the study of non-financial
consequences of outsourcing, this paper takes a step towards opening up an important avenue for
future research.
Originality/value – This paper contributes to the outsourcing field by not only considering
non-financial effects, but also by drawing on examples of best practice outsourcing to identify ways in
which potentially negative consequences of outsourcing may be managed.
Keywords Outsourcing, Organizational effectiveness, Best practice, Focus groups, Modelling
Paper type Research paper

Introduction
Currently, one of the most prominent global economic trends is outsourcing of activities
Benchmarking: An International previously carried out in-house. Owing to economies of scale and scope as well as
Journal differences in factor costs, some actors can carry out certain activities more cost
Vol. 16 No. 3, 2009
pp. 316-334 efficiently than other actors (Cachon and Harker, 2002; Jennings, 2002). In line with this
q Emerald Group Publishing Limited
1463-5771
reasoning, much of the research on the outcomes of outsourcing focuses on economic
DOI 10.1108/14635770910961353 effects for society and financial effects for firms, such as reductions in number of
 employees, lower overheads, greater share of purchasing in relation to value of sales, and Consequences
profit margins. While most studies have found no negative economic effects for society, of outsourcing
e.g. in terms of job dislocation (Ekholm and Hakkala, 2005; Soo, 2005), some studies have
found negative effects for firms, e.g. that internal sourcing of non-core services is
negative for performance, as is foreign sourcing of services (Kotabe et al., 1998).
Economic and financial effects, however, are not the only outcomes of outsourcing. By
definition, outsourcing refers to the purchasing from an external supplier of a function 317
previously carried out within the company (Axelsson and Wynstra, 2002; Shekar, 2008).
When a firm no longer carries out an activity formerly undertaken in-house, logically that
firm risks losing competencies, knowledge and skills related to that function. It might also
lose business relationships and opportunities for creative renewal arising in interaction
between different functions. In effect, the firm’s capabilities, i.e. abilities to perform certain
functions, are reduced as a consequence of outsourcing.
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This might not be a problem if the outsourced function has very limited bearing on
the firm’s core business processes. Increasingly, however, we see firms outsourcing
functions that are traditionally not seen primarily a support functions, such as R&D
and purchasing (Bardhan and Kroll, 2003; Chiesa et al., 2004; Fernandez and Kekale,
2007). Outsourcing these functions may have more detrimental consequences for
organizational capabilities. Interestingly, non-financial outcomes of outsourcing
appear hardly to have been studied at all (Nordin and Agndal, 2008). In particular,
what happens inside firms that actually explains financial effects is poorly addressed
in research. Thus, the question “what are the mechanisms that explain long-term
effects of outsourcing?” remains to be answered. The aim of this paper is to begin
addressing that gap. More specifically its purpose is “to develop a model that enables
the study of non-financial consequences of outsourcing.”
At this stage, we make an important delimitation. Most studies on effects of
outsourcing focus on the outsourcing of relatively standardized activities such as
manufacturing, ignoring that increasingly other functions in firms are outsourced
(Agndal et al., 2007; Amiti and Wei, 2006; Bardhan and Kroll, 2003; Nordin, 2008).
Therefore, we focus on the outsourcing of functions other than manufacturing.
The remainder of the paper breaks down into six sections. First, we review the
literature on interdependencies between firm functions and organizational capabilities
to begin constructing a framework of the consequences of outsourcing. Drawing on
these discussions, we formulate a main proposition and four sub-propositions. The
method of an empirical study to test the propositions, the study’s findings and a
revised model are presented in three separate sections. The final section of the paper
contains some implications, suggestions for future research, and limitations.

Framework and propositions

A basic premise of this paper is that the outsourcing of an activity or function might
hamper the firm’s ability to perform or maintain control over that function
(Barthélemy, 2003; Bettis et al., 1992). For example, if the information technology (IT)
function is outsourced, helpdesk routines may change and some of the people who
work in the IT function may have to leave the organization. Thus, the outsourcing
organization’s IT capabilities may be negatively impacted.
However, not only those activities or functions that are outsourced are impacted by
the outsourcing decision; While early models of organizations tend to portray these as
 BIJ consisting of a set of separate departments carrying out activities in a sequential
16,3 manner with limited interaction, more recent depictions of firms reject this notion
(Tuominen et al., 2000). Rather, nowadays firms are seen as relatively complex entities
with numerous connections between functions and departments (Hillebrand and
Biemans, 2003; Kahn, 1996). There are also frequent discussion in the literature
concerning the need for using cross-functional teams in organizations (Jassawalla and
318 Sashittal, 1998), e.g. as a means of developing better products. With this understanding
of a firm, we argue that the outsourcing of a function might not only negatively impact
on the ability to perform the outsourced function, but other functions as well. Thus, we
contend that the implications of outsourcing are often more far-reaching than
anticipated.
The motive for outsourcing primarily tends to be an economic one (Shekar, 2008).
That is, firms outsource to save money. Naturally, this may free up capital that can be
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used to strengthen other functions in the firm. Often, the purpose of outsourcing is to
reduce operating costs, though, to simply improve the bottom line (Quélin and
Duhamel, 2003). Thus, outsourcing means that capabilities are drained from the firm
and, if the money saved is not reinvested in the organization, the capabilities of the
organization as a whole deteriorate. Kotabe and Murray (2004, p. 12) argue that:
[. . .] it can be anticipated that companies using a transactional purchasing behaviour and
arms’ length relationships with their suppliers will lose sight of emerging technologies and
expertise, and thus their ability to manufacture, for instance, and their competitiveness.
In line with these discussions, we formulate the following main proposition:
Main proposition
Given that savings gained from outsourcing are not reinvested in the organization,
outsourcing of any function will negatively impact the capabilities needed to
perform that function as well as other functions in the organization.
This overarching proposition requires further qualification, though. In particular, it is
necessary to define what a function is. Drawing on a simplified version of the value
chain framework (Porter, 1985), we focus on five functions. These include R&D,
purchasing, manufacturing, marketing and sales, and customer service (Note that in
accordance with our earlier delimitation, we do not focus on the effects of outsourcing
of manufacturing, but are, nonetheless, interested in the effects of outsourcing of other
functions on capabilities relating to manufacturing).

Outsourcing of R&D
Increasingly, there are reports of firms outsourcing the R&D function (Calantone and
Stanko, 2007; Chiesa et al., 2004). This may have a variety of effects on the outsourcing
organization. For example, connections between R&D and manufacturing are well
described in the literature. Deep knowledge about a product might be lost if R&D is
outsourced. This might be negative if changes have to be made to a product during the
manufacturing cycle. Further, the advice often given as a result of many studies
focusing on the manufacturing and R&D interface (Sussman and Dean, 1992;
Wheelwright and Clark, 1992) is to move from using “functional silos” to coordinating
the two functions or work more “concurrently,” because of their close interdependence.
Similar conclusions have been drawn regarding the interface between R&D and other
 functions. For instance, since marketing and R&D typically share responsibilities for Consequences
setting new product goals, identifying new product opportunities, and resolving of outsourcing
engineering and customer-need tradeoffs, cooperation is needed throughout the entire
product development process (Griffin and Hauser, 1996), if the capability to carry out
the different functions is not to deteriorate. Likewise, Goffin (2000) highlights another
factor that companies often neglect, namely the importance of ensuring that products
are easy and economical to service and support. To ensure supportability of products, 319
cooperation between R&D engineers and customer service personnel is, therefore,
important. Additionally, since outsourcing arguably increases the physical and
cultural distance between the two functions, outsourcing of R&D may negatively
impact the capability to develop supportable products. Hence, the following
proposition can be stated regarding outsourcing of R&D:
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P1. Given that savings gained from outsourcing are not reinvested in the
organization, outsourcing of R&D will negatively impact capabilities needed
to perform R&D as well as other functions in the organization.

Outsourcing of purchasing
Purchasing is increasingly recognized as an important strategic function and a source
of innovation in firms (Holcomb and Hitt, 2007; Mol, 2003). The reason is that proactive
purchasing managers understand their firm’s business strategy and seek opportunities
upstream that may support that strategy. The purchasing function may also be
strongly related to much of the firm’s technical skills (Franceschini et al., 2003).
Therefore, outsourcing of purchasing may lead firms to miss important innovations
that could make manufacturing more efficient and products more competitive. Also, if
a strategically oriented purchasing function (Carr and Pearson, 2002) is outsourced,
this might impair knowledge in the firm regarding materials and other technical
aspects, and important opportunities for new market knowledge, e.g. regarding new
business opportunities in countries overseas, may be lost. Purchasing practices can
also influence the degree of manufacturing flexibility through, e.g. supplier
involvement and by using cross-functional purchasing teams (Narasimhan and Das,
2000). The adoption of such practices might be more difficult if the purchasing function
has been outsourced, and, thus, the capability to handle manufacturing effectively and
efficiently may be negatively influenced. Hence, the following proposition can be stated
regarding the outsourcing of purchasing:
P2. Given that savings gained from outsourcing are not reinvested in the
organization, outsourcing of purchasing will negatively impact capabilities
needed to perform purchasing as well as other functions in the
organization.

Outsourcing of marketing and sales

While outsourcing of marketing and sales has perhaps not been studied to the extent of
many other functions, a similar logic can be applied when interdependencies between
functions are considered. For example, the management of customer relationships, or
“CRM,” is often seen as an important capability in generating competitive advantage
(Hennig-Thurau and Hansen, 2000). In essence, CRM refers to the firm’s ability to
create and maintain appropriate relationships with customers in order to improve
 BIJ shareholder value (Payne and Frow, 2005). While outsourcing of activities relating to
16,3 marketing and sales may, of course, lead to better quality and lower costs (McGovern
and Quelch, 2005), the outsourcer’s ability to address and segment customers may be
partly lost. This does not necessarily mean that important customers are not given
sufficient attention, but may mean that too much time and resources are spent
servicing less-important customers. Outsourcing customer-facing activities such as
320 marketing and sales may also hamper the firm’s abilities to design unique solutions to
individual customers’ problems, i.e. the connection between R&D and marketing may
be partly lost, as argued above.
Market channel management capabilities relate to CRM capabilities, but concern
the management of relationships across several channel levels. Outsourcing of
marketing may mean that the ability to find and manage information further down
the market channel is lost, which means that important feedback to R&D and
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production – e.g. regarding quality concerns – may fail to be generated (Lancaster,

1993; St John and Hall, 1991). It may also mean that firms lose the ability to identify
and communicate market needs, both through formalized market research and
through a “feel for what goes on,” and their “market sensing capabilities” (Day,
1994) deteriorate. For similar reasons, capabilities related to purchasing and supply
may also deteriorate with outsourcing of marketing, since this will make it more
difficult for buyers, for instance, to keep in touch with changing customer demands
(Williams et al., 1994). Based on these examples and conceptual arguments,
we propose:
P3. Given that savings gained from outsourcing are not reinvested in the
organization, outsourcing of marketing and sales will negatively impact
capabilities needed to perform the marketing and sales as well as other
functions in the organization.

Outsourcing of customer service

Finally, we are also concerned with the effects of outsourcing of customer service. Here,
logic similar to other functions can be applied, where an outsourced customer service
function may, e.g. lead to difficulties in designing supportable products (Goffin, 2000).
Like outsourcing of marketing and sales, this may also generate less feedback to the
firm regarding customers’ operations; information often needed to develop new
products, to adjust manufacturing systems and similar (Armistead and Clark, 1992;
Nordin, 2005, 2006). In particular, providing customized services such as integrated
solutions, consulting or full-services typically renders possible relatively deep insights
into customer needs (Storer et al., 2002; Tuli et al., 2007) and thus facilitates marketing
and sales activities. Another reason for keeping customer service activities and other
customer-facing activities in-house is that internal employees are believed to have a
better network within the company, something that is considered important to solve
customers’ problems (Åhlström and Nordin, 2006, p. 83). We, thus, propose the
following:
P4. Given that savings gained from outsourcing are not reinvested in the
organization, outsourcing of the customer service function will negatively
impact capabilities needed to perform customer service as well as other
functions in the organization.
 Summary and initial model Consequences
Our arguments so far have focused on the potentially negative effects of outsourcing of outsourcing
for various functions. In summary, we present a model based on these arguments
(Figure 1).
We recognize that the model regarding effects of outsourcing is somewhat simplistic
and naı̈ve, however. In fact, if we adopt a contextual perspective on organizations
(Lawrence and Lorsch, 1967) it is evident that outsourcing effects are also a result of 321
various other internal and external factors. Among those suggested in previous studies are
degree of product complexity (Loomba, 1996; Nordin, 2005), product maturity (Armistead
and Clark, 1991; Nordin, 2005) service revenues (Mathe and Shapiro, 1993; Nordin, 2005),
service intensity (Armistead and Clark, 1991; Nordin, 2005), environmental dynamism
(Gilley and Rasheed, 2000; Nordin, 2008), quality of the relationship with the supplier,
including information sharing (Lee, 2001; Li et al., 2006), and learning (Lee, 2001) and
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knowledge management (Drejer and Sorensen, 2002) abilities. While most of this research
is not concerned with effects of outsourcing on organizational capabilities, it nonetheless
implies that that there are a number of variables that may mediate the effects of
outsourcing. Therefore, to test the relevance of the conceptual model and to identify
mediating factors, an empirical study was undertaken.

Method
Owing to the exploratory nature of the research objectives of this paper, a qualitative
research approach was chosen. More specifically, the propositions were tested on a
group of experienced senior procurement managers in what is commonly referred to as
a focus group study.
The respondents jointly represent numerous cases of best practice in sourcing and
have been active for many years as senior executives and consultants in different
private and public organizations. These range from information and communication
technology (ICT), automotive, construction, pharmaceuticals, energy, logistics, and
chemical firms. Owing to reasons of confidentiality, and since the focus of the analysis
is on practices of experienced managers as opposed to practices in particular firms, no
specific company names are revealed here.
All respondents were responsible for buying a wide range of business services, from
administrative services and logistics to IT consulting and marketing services. The
focus group allowed for gathering detailed data and enabled a deeper understanding of
the views and experiences of these highly qualified executives, all working at firms
that may be considered leaders in their respective industries. As such, it was judged a
suitable arena for discussing our initial model.
… will negatively impact
Outsourcing of …
capabilities needed for
R&D R&D

Purchasing
Purchasing
Production
etc.
Marketing and sales
Marketing and sales
Figure 1.
Initial research model
Customer service Customer service
 BIJ During the focus group session, one of the authors first introduced the theme of the
16,3 session while the other author introduced the literature-based propositions regarding
consequences of outsourcing, in line with the conceptual model (Figure 1). A moderator
form guided the discussion of the propositions, which took about two hours. A third,
senior researcher acted as participant observer.
In an attempt to stimulate discussion, all statements were deliberately somewhat
322 simplistic, and emphasized negative effects only, all in line with the Main proposition. The
respondents were then allowed to discuss each statement while both authors asked for
explanations and concrete examples of practical experiences of the participants. The focus
group format allows the researcher to interact directly with respondents and allows
respondents to react to and build upon the responses of other group members (Stewart and
Shamdasani, 1990, p. 16). By using this method, the participants could, thus, benchmark
their practices against the others’ practices. In other words, the focus group session
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constituted an opportunity for learning from others, something which many authors
describe as a central feature of benchmarking (Fernandez et al., 2001; Razmi et al., 2000).
However, the focus group method also has some limitations, such as the difficulty in
interpreting the open-ended and often messy nature of the data (Kidd and Parshall, 2000;
Stewart and Shamdasani, 1990). Because of the exploratory nature of the research, it
was, nonetheless, seen as an efficient and sufficiently effective way of gathering data.
The focus group session was recorded and transcribed in detail directly afterwards.
The two authors then independently content analyzed the material to search for general
themes. In practical terms, this entailed making detailed notes and highlighting central
sections of the material. In particular, evidence in support of or contradicting the
propositions was marked, as well as factors influencing the effects of outsourcing different
functions. After a discussion of the initial analysis, the transcript was reduced into relevant
text sections and factors were clustered into four categories, in line with the research
purpose. Statements and examples given by the respondents in support of and against the
propositions were separated. A manual approach was used to condense the material.
A new document was created, which was read and discussed by both authors to check on
the analysis process and to form consensus on the clustering of data. Subsequently, a
revised version of this document, as well as the original detailed transcriptions, served as
the basis for creating a revised model of the consequences of outsourcing.
To further assess the validity of the research, the revised model was discussed with
the third senior researcher that participated in the focus group session.

Focus group findings

In the following sections, the results of the empirical investigation are presented with a
focus on the most pertinent findings. To bring life to the presentation, we make
frequent use of quotes.
The respondents largely agreed with the main proposition stated, although provided
examples of activities undertaken at their firms to reduce or eliminate the potentially
negative effects of outsourcing. In particular, regarding the four sub-propositions
numerous specific examples of successful as well as failed outsourcing projects were
provided by focus group participants. While respondents recounted examples of good
practices in preserving capabilities regarding individual outsourced functions, they
found it more difficult to identify ways in which they mediated potentially negative
effects on the abilities to perform other functions, though.
 Outsourcing of R&D Consequences
The focus group discussion began by addressing the outsourcing of R&D. The of outsourcing
respondents generally agreed that outsourcing R&D can have broad and negative effects
on different capabilities, but also mentioned a number of factors that mediated such
effects. For instance, a procurement consultant emphasized the role of specifications in
R&D outsourcing and drawing on appropriate competencies in the firm. He said:
Nowadays companies in general are less and less afraid to outsource, but specifying the
323
[R&D] service remains a major challenge. What type of development work should be
delivered? Often, pretty much anyone can be involved in specifying [R&D] services, but they
may not be accustomed to procurement work.
The discussions proceeded to the topic of the relationship between the outsourcer and
the outsourcee, which was seen as an important variable influencing the outcome of
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outsourcing. While this was emphasized as an important aspect of outsourcing, it was

nevertheless not always managed well. One respondent noted:
You must not underestimate internally managing the relationship. Myself I’ve been involved
in cases where it did not turn out well. Who should take over and maintain the contractual
relationship in the long-term? You often fail in that respect.
Another respondent continued along the same lines, and reported experiences from both
successful and less-successful relationships and different ways of managing them:
[Undisclosed] and [undisclosed] are a great example of successful collaboration. [The two
firms] are dependent [respondent’s emphasis] on each other, but this is not always the case,
like when we outsourced services. It works better when there is strong joint interest in
collaboration.
A point made by several respondents was that in close and mutually rewarding
relationships with a high degree of trust and cultural compatibility, some potential
problems, such as the risk that the outsourcee gradually takes over important
capabilities from the outsourcer, is often relatively low.
Discussions then moved on to competencies in the procurement function, where they
stressed the importance of not outsourcing too much R&D and, thereby, loosing important
competencies. A respondent currently working in a Swedish municipality said:
To strengthen the procurement function generally means that competencies must remain
with the buying firm. The procurement officer can never become an expert in all the different
processes [i.e. the procured services as such]. You must [. . .] ensure that competencies remain
in the firm. But that’s not easy if you say ‘This is no longer our thing.’ Then you easily lose
competence.
Another issue mentioned by respondents was the structure of the procurement market,
in particular its maturity. In markets where the roles and responsibilities of different
actors have not stabilized and suppliers lack in experience, respondents noted that
effects of outsourcing R&D are more difficult to survey. One respondent said that this
could be a problem, “since there are so many more issues to deal with on an immature
supply market, which makes it [outsourcing R&D] even more complex.” Similar
reasoning was used regarding the ambition of suppliers, where some suppliers act
more as competitors than others, and are thus more likely to steal important knowledge
if they are awarded a contract.
 BIJ Outsourcing of purchasing
16,3 We then discussed the outsourcing of the purchasing function as such. Although not all
respondents had experience from this, some strong opinions were aired. Respondents
were not entirely unanimous, though, and there was a vivid debate regarding the effects
of outsourcing the purchasing function. A procurement consultant emphasized that
outsourcing may actually increase the need to develop certain aspects of purchasing,
324 such as handling requirements and dealing with problems. She said:
I outsourced part of my purchasing department at [undisclosed firm name]. I spent a lot of
time thinking about this. At first I felt sure it would not work, and 3-4 years later I am still not
100 per cent sure. But what struck me is that this forced us to become really good buyers.
Others reported negative experiences from outsourcing purchasing. One respondent
said that they had recently insourced previously outsourced purchasing activities, since
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the suppliers “were not particularly keen on listening to our specific demands” and “were
too focused on achieving economies of scale.” He also mentioned that the interaction with
the purchasing function had not worked as well as before, even though the buyers were
the same. “There was a lack of information and sometimes we were not allowed to
participate in meetings,” he said. In this instance, purchasing was outsourced to a
separate firm that handled purchasing activities for a number of organizations of
different sizes. The respondent continued: “[The respondent’s organisation] is so
incredibly much larger and has completely different needs than [some of the smaller
organizations] so it becomes really tricky and there are different specifications.”
Regarding the connection between outsourcing R&D and losing purchasing
capabilities, most did not report any negative experiences. Indeed, one respondent
stressed:
I have no negative experiences there. It is important to define the interfaces. [. . .] You can also
chose [to outsource] products of less strategic importance. [. . .] The level of purchasing
maturity in the company is also important, if you work in cross-functional teams involving
both the outsourcer and the outsourcee you [can avoid negative effects].
Along the same lines, another respondent pointed out the importance of the physical
location of the outsourcee’s representative: “Another important issue is whether the
outsourcee should be placed inside or outside your organization. That really
[respondent’s emphasis] affects your capabilities.” It was noted, though, that this also
depends on the nature of the service in question, where services such as field services
and training cannot easily be centralized.
One respondent also emphasized that there is a difference between outsourcing
operational and strategic purchasing activities. Although operational purchasing –
such as handling orders – is more suitable for outsourcing than strategic activities
such as specifying requirements, operational and strategic activities are also closely
interrelated, he noted, continuing:
We outsource operational aspects of sourcing; what’s important when you develop your
sourcing strategies is that you communicate these strategies; there is a greater risk that a gap
will appear here if there is an external party [managing operational purchasing] compared to
if you work in the same organization. You must actively communicate everything
[i.e. strategies] or there is chance you miss something.
 Outsourcing of marketing and sales Consequences
In line with our proposition, discussions regarding the effects of outsourcing marketing of outsourcing
and sales were mainly negative and highlighted problems in maintaining customer
contact. One respondent described a case he had been involved in:
[We lost] customer contact. [. . .] This we have to compensate for. Basically we save a
tremendous amount of money. For our customers, availability increased tremendously, but
[we] lost something! 325
A respondent from the ICT industry made similar observations and also hinted at how
the negative consequences may be moderated:
All operators [list of company names] outsource sales to the customer segment. There is
incredible interactivity in this, the systems, communication and so on, but the customer
contact is “out there,” and this means that we have to get a lot of information back, not to lose
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[contact with the market].

Consensus among the respondents appeared to be that the outsourcing of marketing
and sales is potentially very risky. The importance of not losing customer feedback
was stressed by several respondents, for example. Our respondents, thus, implied that
outsourcing marketing and sales could be potentially negative for most other
functions. Different systems for handling customer feedback were suggested to
counteract such effects, including developing partnership-type relationships with
suppliers and/or having frequent supplier meetings, to reduce the risk of deteriorated
capabilities. Overall, though, the general opinion was that outsourcing marketing and
sales was so potentially risky that they mostly preferred to retain the function in the
firm.

Outsourcing of customer service

Several of the focus group participants had been involved in outsourcing parts of the
customer service function. Some positive and negative experiences were reported,
partly depending on the perceived importance of customer service to the outsourcing
organization. For example, one respondent noted:
In the past I was involved in outsourcing telephony and reception services. That improved
greatly, but the telephony and reception services we have today I would not want to
outsource. You just cannot be sure enough [that it will work].
The message given by the respondents was that the effects of outsourcing customer
service vary depending on the importance of the service outsourced for the outsourcer’s
business. It also depends on the maturity and complexity of the service process. “Are
there any competent suppliers available that can handle the task as well as or better
than we do?,” a respondent said. Another respondent reported negative initial
experiences, and how his company decided to manage this:
[Company name] outsourced all its telephony to a telemarketing firm in [name of city]. There
were huge initial problems in interaction between the parties. Now we have actually
developed a parallel web-based service that we manage ourselves, as a means of keeping in
touch with our customers.
Again, the issue of customer contact – which was raised as the most important concern
in outsourcing marketing and sales – was mentioned. In particular, the importance of
 BIJ listening to and understanding changing customer needs was frequently mentioned.
16,3 One respondent noted “You need to keep in touch with customer needs even if you
outsource.” Another respondent argued:
The difficult thing is to seize the moment. You have to put into place systems and models from a
strong buying organization. How can you make the outsourcee seize these moments? There has
to be an incentive. I have experiences from customer service at [firm] and [firm]. This is
326 constantly an issue. [. . .] You have to find models to capture the signals [from the market].
Respondents also noted that an outsourced customer service function is often less
likely to skilfully handle customer concerns than an internal equivalent. One
respondent argued:
You need continuous education, especially with an external supplier, because otherwise there
is a risk that the customer service personnel become indifferent and stop collecting
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information regarding changing customer needs for new products, and so on.
Along the same lines, another focus group participant emphasized the importance of
handling customer complaints:
Partly there is the moment when you make the sale, but then also when the customer calls
and is less than happy. Then you have to be able to handle this and explain, so the customer
isn’t unhappy.
To conclude the discussion, another respondent continued along the same lines and
stressed the importance of “incentives for the supplier to manage all these aspects, and
to receive the signals from customers.”

Analysis and revised research model

As the summary of the focus group discussion reveals, our study yielded some support
for the main and sub-propositions. However, respondents clearly provided many
examples of outsourcing deals where they had been able to overcome potentially
negative consequences through good business practices or where such consequences
were perceived as irrelevant due to the outsourcing context. In a content analysis of
focus group data, we identified four main categories of mediating variables: variables
relating to the outsourcer, variables relating to the outsourcee, variables relating to the
relationship, and (other) contextual variables.

Mediating variables relating to the outsourcer

A number of mediating variables relating to the outsourcer, or buyer, were identified.
In particular, factors relating to knowledge management emerged as especially
important (Drejer and Sorensen, 2002). Our observations from the focus group are in
line with arguments that capabilities are developed through experience, articulation
and codification of knowledge (Zollo and Winter, 1999) and that capabilities related to
handling different functions are often interrelated (Hillebrand and Biemans, 2003;
Kahn, 1996). By creating systems that facilitate learning and interaction between
different functions, negative effects of outsourcing can apparently be mediated as
capabilities are maintained and even developed in interaction with the outsourcee. In
practical terms, continuous education, providing the purchasing function with more
and more skilled staff and other support measures would seem crucial to develop the
outsourcer’s abilities as buyer. As several respondents implied, with increasing
 outsourcing the outsourcer is forced to become a good buyer, or a “strong buying Consequences
organization.” of outsourcing
Other abilities as a buyer were also stressed; even if a function is outsourced, all
competencies relating to that function must not be lost, if purchasing competence is to
be maintained. The purchasing organization must, for example, still be able to specify
outsourced services and carry out quality control.
Strategies and policies of the buying organization also appear to be important 327
factors. Respondents argued that services of high-strategic importance or strategic
functions were less suited to outsourcing than operational functions. For example, at
an operational level establishing systems for maintaining customer contact, even when
marketing and sales and customer service are outsourced, is an important measure that
a firm can undertake.
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Mediating variables relating to the outsourcee

Mediating variables relating to the outsourcee, or service provider, can also be
identified. These relate in particular to the outsourcee’s delivery capabilities and
ambitions/strategies and policies. Although this can be difficult to evaluate a priori
(Shekar, 2008), a fundamental question is whether the supplier is really able to handle
the outsourced processes effectively and efficiently. In line with previous literature
(Armistead and Clark, 1991; Loomba, 1996; Nordin, 2005), the respondents mentioned
that this depends, among other things, on the maturity and complexity of the service
process being outsourced. The consequences of outsourcing also depend on the overall
ambitions of the supplier, e.g. whether the supplier aims to be a niche leader or if the
supplier aims to develop broader competencies. Also, it is sometimes better to contract
a less-ambitious supplier to reduce the risk of losing important knowledge (Åhlström
and Nordin, 2006).

Mediating variables relating to the relationship

In line with previous literature (Lee, 2001; Li et al., 2006), our study implies that
the relationship between outsourcer and outsourcee can strongly influence
the consequences of outsourcing. As implied by some of the respondents the relative
power is an important factor to consider, although the importance of joint interests and
compatibility was stressed more often.
Mutual interests and dependence may lead to depth in collaboration, and this may
moderate the risk of the various kinds of problems the respondents noted, such as the
risk of losing important information to the supplier. In the same vein, trust also
appears to be important. This may be based on prior experience, shared values and
communication, but may be more difficult to achieve if the outsourcer and supplier are
not sufficiently compatible, which may be the case if there are significant cultural
differences, for instance. Related to all these factors is integration between the buyer
and seller. The establishment of cross-functional and cross-firm teams (Jassawalla and
Sashittal, 1998; Narasimhan and Das, 2000), where, for example, members of the
outsourcee’s team are physically located at the outsourcer’s facilities can be one way to
retain capabilities even if a function is outsourced.
 BIJ Mediating contextual variables
16,3 A number of contextual variables were also mentioned, i.e. variables not directly
connected to either of the parties in the outsourcing relationship. For example, several
respondents noted that the physical location of staff was a crucial variable influencing
the consequences of outsourcing. Location of service staff, however, depends on the
nature of the activity being outsourced, where it is difficult to centralize services such
328 as field services and training to the outsourcer’s premises, for instance.
The structure and maturity of the market not only influences power relationship,
but has other effects related to outsourcing. For instance, according to our respondents,
effects of outsourcing on immature markets are less predictable since the roles and
responsibilities of the players involved have not yet set. Such instability may be called
“environmental dynamism.” Worth noting is that, while our respondents implied that a
high degree of dynamism makes the consequences less predictable and outsourcing,
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thus, less feasible or at least more difficult, others have argued that in dynamic
environments outsourcing is a good way of increasing technology-related flexibility
(Gilley and Rasheed, 2000) and of taking advantage of emerging technologies without
investing large amounts of capital (Quinn, 1992). It has also been argued previously
that the risk of losing important knowledge to external organizations is greater in more
stable and mature environments. One reason for this is that the causal ambiguity
(Dierickx and Cool, 1989) between resources and skills and firms’ success in the
industry (and, thus, competitive advantage) may be much less pronounced in stable
environments. To conclude, the influence of environmental dynamism on outsourcing
outcome appears to be significant albeit multifaceted.

Revised model
In summary, we propose a revised research model that takes into consideration these
four groups of mediating variables (Figure 2).
In addition to theoretical implications, the revised model has implications for
managerial practice. It should be seen as a framework constituting a system of central
factors that need to be considered, adjusted, and adjusted to. As such, it serves as a broad
guideline for managerial decisions. In particular, it implies that by thorough vendor
selection and careful management of outsourcing projects, outsourcing may not result in
negative effects on organizational capabilities. In practice, this means that companies
should ensure that important functions are not outsourced unless appropriate processes
and systems for learning and transfer of knowledge between outsourcer and outsourcee
have been established. This applies in particular to the outsourcing of strategically
important functions to ambitious and powerful suppliers. Establishing cross-functional
teams incorporating both outsourcee and outsourcer is a tangible measure firms can
undertake to handle knowledge management issues. For certain functions, even
physical co-location of staff from both organizations may be an option.

Concluding discussion
This paper makes several contributions to the debate on outsourcing. First, two main
arguments are developed as points of departure in dealing with an aspect of
outsourcing largely ignored in extant research; effects of outsourcing on organizational
capabilities:
 The outsourcer The outsourcee
Consequences
- Knowledge management - Delivery abilities of outsourcing
- Abilities as buyer - Strategies and policies
- Strategies and policies

R&D R&D 329

Purchasing
Purchasing
Production

Marketing and sales

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Marketing and sales

Customer service Customer service

The Relationship The Context

- Power, trust, depth - Type of activity being
- Integration outsourced
- Communication - Market structure Figure 2.
- Compatibility - Environmental dynamism Revised research model

(1) When a function is outsourced, the ability to perform that function is partly or
fully lost, as people leave the organization, start working with other functions,
or when existing systems and routines are no longer employed.
(2) Owing to the many interdependencies between functions in a firm, the
outsourcing of one function may negatively impact on the abilities to perform
other functions, i.e. the organization’s capabilities.

Second, we conduct a focus group study, which finds some support for these
arguments. Our research shows that the negative impact of outsourcing on capabilities
may be mediated by managerial actions, though, and several examples of best practice
were identified in the study. Therefore, a third and main contribution of this paper is
the development of a model of such mediating variables. In particular, these include
implementing systems for knowledge management, improving abilities as buyer,
critically considering which functions to outsource, carefully selecting suppliers whose
abilities and ambitions match the needs of the outsourcer, managing and developing
the relationship with the outsourcee to ensure appropriate levels of integration, and
putting into place interfaces for communication.
Whilst partly based on a focus group interview, this paper should be considered
largely conceptual in nature, though, and its model remains to be tested. Other
limitations of this research must also be recognized. Our study uses relatively few
key informants, and cannot be said to be generalizeable in any statistical sense.
Further, a focus group study primarily draws on opinions of research subjects. In that
sense, its findings represent a greater degree of subjectivity than, e.g. a multiple
 BIJ case study. Additionally, while the format of the focus group is conducive to the
16,3 exchange and in-depth discussion of ideas, as such it may be less well suited for truly
exhaustive examination of a topic. Therefore, our study may have overlooked some
relevant mediating variables.
To address some of these limitations and to extend the study of non-financial effects
of outsourcing, we propose six specific avenues for future research.
330 First, we suggest that the specific and relative influences of the mediating variables
on the outcomes of outsourcing be investigated. Are some variables more closely
connected to certain functions? In other words, which variables mediate the effects of
outsourcing of which functions and what is the strength of such associations?
Second, largely representing an analysis of the discussions during one focus group
session, the revised model cannot claim to be completely exhaustive in terms of
mediating variables. Are there additional variables not identified in our study that may
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mediate the effects of outsourcing?

Third, not all firms and industries operate according to the same logic. Can patterns
regarding mediating variables be identified within and across industries?
Fourth, while we focus on the outsourcing of four specific functions, many other
functions are performed in firms, even if these often take the role of support functions,
such as logistics, IT, finance department, pay rolls, facilities management, etc.
Future research should find out whether the outsourcing of such supporting
functions also negatively impacts firm capabilities, if so to what extent, and whether
these effects are also mediated by a set of relevant variables.
Fifth, we suggest that future research should identify and describe cases of best
practice outsourcing in terms of managing potentially negative effects. While our
study hints at effective ways of managing outsourcing, in-depth descriptions of best
practice cases will be very valuable for managers contemplating outsourcing.
Sixth, this paper focuses on outsourcing from the buyer’s perspective, activities the
buyer may undertake to mediate potentially negative effects of outsourcing, and
activities that buyers believe service suppliers should perform. However, each
outsourcing deal includes at least two parties, and to get a more balanced picture of
outsourcing management, future research should look at outsourcing also from the
point of view of the provider.
As a concluding point, it should be stressed that this paper is not intended as being
negative to outsourcing as such. To the contrary, it recognizes that the outsourcing of
non-essential functions as well as of functions relatively close to core business
processes has proved to be financially very sound for many firms. Even if the overall
outcome for the firm is beneficial, there might still be negative non-financial
consequences that managers would be wise to take into consideration, though.

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16,3
About the authors
Henrik Agndal is an Associate Professor at Stockholm School of Economics, Sweden. He received
his PhD in 2004, and currently has two main research interests, internationalization and
334 purchasing. He has published in, e.g. European Journal of Marketing, Journal of International
Marketing, Regional Studies, Journal of Purchasing and Supply Management, and Management
Accounting Research. He has primarily taught in the areas of international marketing,
business-to-business marketing, and purchasing. Henrik Agndal is the corresponding author and
can be contacted at: [email protected]
Fredrik Nordin is a Research Fellow at Linköping University, Sweden, and received his PhD
in 2005. Before joining academia, he held a series of positions in the high-tech industry, focusing
on purchasing management and service development. The same areas are now the focus of his
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research. He serves as an Editorial Board member of Industrial Marketing Management and has
previously published in, e.g. Industrial Marketing Management, International Journal of Physical
Distribution & Logistics Management, Journal of Purchasing and Supply Management, and
International Journal of Production Economics. He has taught in the areas of marketing,
organization theory, purchasing, and supply chain management.

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