Does Strategic Outsourcing Undermine the Innovative Capability of Organizations?

Abstract

In this chapter we argue that firms have responded to the intense pressure from markets and financial operators to reduce asset investments by outsourcing activities. Outsourcing was originally confined to peripheral business functions and mainly motivated by a cost saving logic, but has now developed into a routine strategic management move that affects not only peripheral functions but the heart of the competitive core of organisations. At the same time there is a move from traditional outsourcing with one or a small number of key partners and long-term contracts to strategic outsourcing with multiple partners and short-term contracts. This chapter investigates the innovation-related risks that can arise from strategic outsourcing. It uses the example of Information technology/Information Systems (IT/IS) outsourcing to highlight the increased risks that arise from a move from traditional to strategic outsourcing and discusses some measures that managers can take to attempt to control these risks. The nature of the risk is closely related to the risk of information leakage that arises from collaborative research and technology development between organisations in technology-intensive sectors that has been analysed by Hoecht and Trott (1999).