Consequences of outsourcing for organizational capabilities

Abstract

PurposeThe 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/approachBased 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.FindingsThe 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/implicationsBy 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/valueThis 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.