international outsourcing of services: a partnership model

Journal of International Management 13 (2007) 22–37

International outsourcing of services:A partnership model

Ben L. Kedia ⁎, Somnath Lahiri

Robert Wang Center for International Business Education and Research, The University of Memphis,Memphis, TN 38152, USA

Received 16 December 2005; received in revised form 30 May 2006; accepted 18 September 2006Available online 5 February 2007

Abstract

The business landscape is currently witnessing widespread migration of service functions fromdeveloped nations like the U.S to several foreign destinations as India, China, Ireland, Philippines etc. Thishappens as more and more firms engage in international outsourcing of services (IOS) to survive in today'shighly competitive business environment. Despite increase in IOS, the nature of partnerships involvedbetween clients and their overseas providers have not received adequate attention in the scholarly literature.In this paper, we develop a conceptual model that explains three possible types of IOS partnership. Wediscuss how these partnerships vary in the way they are conceived and implemented. Propositions areoffered after elaborating on each type of partnership. We conclude by discussing the academic and practicalimplications of our model.© 2007 Elsevier Inc. All rights reserved.

Keywords: International outsourcing; Services; Tactical, Strategic, Transformational

1. Introduction

⁎ CorE-m

1075-4doi:10.

“My advice to you is: Girls, finish your homework — people in China and India arestarving for your jobs” (Friedman, 2005: 237).

First came manufacturing, now companies are farming out R&D to cut costs and get newproducts to market faster. Are they going too far? (BusinessWeek, March 21, 2005: 84).

responding author. Tel.: +1 901 678 4044; fax: +1 901 678 3678.ail address: [email protected] (B.L. Kedia).

253/$ - see front matter © 2007 Elsevier Inc. All rights reserved.1016/j.intman.2006.09.006

mailto:[email protected]

http://dx.doi.org/10.1016/j.intman.2006.09.006

23B.L. Kedia, S. Lahiri / Journal of International Management 13 (2007) 22–37

Welcome to the world of international outsourcing of services (IOS). If there is a singlebusiness issue that has constantly merited the attention of practitioners, academicians,consultants, policy makers, politicians and common public in the last few years, it is theincreasing regularity with which firms have been migrating service functions to providers inoffshore destinations. The initial euphoria and debate having subsided, it is now largelyrecognized that this growing trend is practically unstoppable and should, therefore, be consideredas a standard business practice that has potential to result in manifold gains at the firm level. Buthow firms contemplate partnerships with overseas providers? Are all partnerships same? Ourpurpose in this paper is to elucidate the types of partnership possible in IOS.

IOS refers to handing over of service functions (that were done in-house) by firms to providers(i.e., vendors) located in a (or several) foreign country(ies) where the former does not haveownership, authority or direct control (Stack and Downing, 2005). (The spectrum of IOS alsoincludes the practice of firms setting up their own centers in foreign countries and maintaining fullcontrol, a practice commonly referred to as captive offshoring. However, for this paper we like tofocus on the former notion of IOS which is also referred to as independent third-party offshoreoutsourcing in the extant literature). IOS is not restricted to the Fortune 500 or large European orJapanese firms, but is also common in many small and mid-size businesses (Carmel andNicholson, 2005). The phenomenon has been referred to as “controversial national issue”(Weidenbaum, 2005: 311) and is observed to be “on the increase at an increasing rate” (JainPalvia, 2004: 1).

Despite its current and anticipated future growth, the practice of IOS has not received adequateattention in the scholarly literature (Mol et al., 2004; Stack and Downing, 2005). For example, aclear understanding of the fundamental dynamics of various partnerships involved in IOS is stillelusive. IOS partnerships are critical because they are complex to plan and execute, and haveramifications for organizational performance, competitiveness and sustenance (Gainey and Klaas,2005; Lee and Kim, 1999; neoIT, 2003). Moreover, the associated intricacies of such partnershipshave “been relatively unexplored” (Oza and Hall, 2005:1). Our primary intention in this paper isto offer a model that will help understand various types of IOS partnership, and the factors thatclients (i.e., firms that outsource service functions to foreign providers) need to focus on to enablethem enhance the quality and duration of their partnerships. We use partnership as a general termto mean cooperative behavior between clients and providers.

The paper proceeds as follows. A brief overview of IOS is provided first to underline itssignificance as an important research domain. In the next section, predominant types of IOSpartnership (tactical, strategic, and transformational) are elaborated through development of aconceptual model. Thereafter, two factors (trustworthiness and cultural distance) are discussedas having implications for influencing the strength and longevity of partnerships. The finalsection highlights how our model may aid future theory building and improve managerialpractice.

2. Overview of IOS

2.1. The growing phenomenon

That international outsourcing has been referred to as one of the drivers that have made theworld “flat” (Friedman, 2005) in recent times speaks volumes about the importance of thisphenomenon in the domain of research in international management. The prevailing wisdomdriving clients toward IOS is that certain service functions can be performed cheaper, better, and

24 B.L. Kedia, S. Lahiri / Journal of International Management 13 (2007) 22–37

faster by overseas providers (Clott, 2004; Pfannenstein and Tsai, 2004). Thus clients, mainlyfrom the U.S, Europe and Japan, have been increasingly partnering with providers in India, China,Philippines, Ireland, Russia etc. to benefit from the latter's expertise without having to makesubstantially new investments. However, IOS is not always a win–win situation—instances offailure abound (Niederman et al., 2006: 60; Sullivan and Ngwenyama, 2005).

The growing trend of IOS has indeed altered the way business is conducted (Doh, 2005;Kotabe, 1998). This is primarily because the manifestations of this practice profoundlyinfluence the interests and prospects of organizational stakeholders in different ways(Niederman et al., 2006). The wide array of business functions that IOS has graduallybrought under its fold is almost unending. The list includes software development, varieddigitized business processes as order processing, insurance claims and billing, customerservice, accounts and payroll, telemarketing, medical transcription, tax preparation, legalservices, and even research and development (R&D) (Erber and Sayed-Ahmed, 2005; Stackand Downing, 2005).

With increase in international outsourcing, the sourcing debate has moved from what and howto outsource to what and where to outsource (Venkatraman, 2004). IOS has emerged as a suitablemeans through which clients have been able to enhance business value (Bryce and Useem, 1998).This is possible as outsourcing has been often known to reveal the inner business strengths thatare normally not possible to sight amidst day-to-day operations. The sources of value for theclients include cost savings, better quality and faster delivery of services, greater concentration onthe business core, better re-allocation and utilization of saved resources, increased risk sharing,greater business flexibility, and increased overseas market. Likewise, providers are also able toaugment their value through IOS partnerships by improving firm level capabilities, individualskills, and increasing partake in global business. Although much academic interest has revolvedaround what activities to internationally outsource and which nations to consider for potential IOSpartners, the nature of possible IOS partnerships, including varying value considerations therein,have largely remained unaddressed.

Significant attempts have been made by scholars to explain the practice of outsourcing andIOS utilizing various theoretical perspectives (Cheon et al., 1995; Doh, 2005; Graf and Mudambi,2005; Gurung and Prater, 2006). Broadly, the conceptual pillars of IOS seem to rest on insightsdrawn from the domains of strategic management, international business, and economics. In thisregard, we concur with Niederman et al. (2006) that it is practically impossible to understand IOSthrough the use of a single theoretical lens. Therefore, our conceptualization of different types ofIOS partnership that we elaborate in the next section is based on three different theoreticalperspectives.

3. IOS partnerships

To sum up the extant understanding, IOS may be conceived as a practice through which clientspartner with international providers in the quest of executed service functions and, in the process,develop their own valuable resources that are meant to promote future competitiveness, flexibilityin operations, and overall value enhancement. However, businesses possess different goals andperform differently even if they operate within the same competitive environment. Therefore, notall clients will have the same kind of motivation that drives partnership with their providers. Doesthis imply that different kinds of IOS partnerships are possible? If yes, what is their nature? Howdo they vary among themselves? Unfortunately, these issues have not been suitably addressed inthe current literature on IOS.


We argue that although IOS is commonplace with many firms, the nature of client–providerpartnership is not uniform in all cases. Thus, whether to consider providers as just cost reducers orvalue enhancers, opportunistic agents or helpful stewards, suppliers of services or activecollaborators—will depend on the nature of relationship that clients develop and maintain withtheir partners. The core of our conceptualization is shown in Fig. 1. We suggest that the threepossible types of IOS partnerships – tactical, strategic, and transformational – represent valuepropositions and nature of involvement with providers in different ways.

3.1. Tactical partnership

In tactical partnership, clients aim at generating cost savings, preventing future investmentsor reducing staffing burden. Thus operational cost reduction is a primary driver for this type ofpartnership. Such partnerships stem from clients' need to address specific problems likerequirement for higher quality of service development than is possible to achieve (i.e., make)in-house or procure (i.e., buy) from providers functioning within the same geographic nation.In-house factors may be lack of resources to undertake developmental expenditures or dearth ofmanagement capability and individual skills (Brown and Wilson, 2005: 21; Graf and Mudambi,2005). Broader factors may include shortage of talented manpower in the extant workforce.(For example, a report prepared by the U.S chamber of commerce noted that the nation hasshortage of health care providers, auto mechanics, security firm workers, construction firmworkers etc. (Special report, 2004)). Tactical partnerships do not foster any kind of strategicrelationship with the providers as they are generally short term in nature and essentially taskbased. In short, this type of partnership is used as a tactical tool by clients i.e., to get the jobdone at a lower cost.

A large number of IOS partnerships are tactical in nature and limited in scope and value-creating potential. Primarily these arrangements are initiatives that include value propositions ascost savings from labor arbitrage, and higher work quality from knowledge arbitrage arising outof wide pool of inexpensive skilled labor with the providers. As is widely known now, jobs of

Fig. 1. Different types of IOS partnership.


programming, coding, transcripting, X-ray plate reading etc. can be done in many offshorelocations at a fraction of costs than in the U.S (see Garner, 2004: 13 for a tabular comparison).Moreover, such jobs are usually performed by college graduates who possess better technicalskills than their western counterparts who often happen to be high school diploma holders withlimited commitment to work (Ramachandran and Voleti, 2004).

The essence of this type of partnership being transaction aimed at cost reduction, transactioncost economics (TCE) (Williamson, 1981; Gainey and Klaas, 2003; Geyskens et al., 2006) seemsto be the dominant theoretical perspective to conceptualize its tactical nature. According to thisperspective, clients engage in tactical IOS partnership based on the realization that the transactioncosts associated with partnering is relatively lower than internalizing certain activities into theirown hierarchical structures. TCE views the firm as a governance structure. Therefore, adoptingmarket mechanism of governance appears to be favorable in tactical partnership than continuingto produce the services internally at higher cost.

As shown in Fig. 1, the nature of involvement with providers in this type of partnership isarm's length, i.e., exchange is purely rule-based or contract oriented. This kind of pure buyer–seller relationship may be explained on the basis of TCE. As per TCE, clients are limited in theirrational thinking and decision making ability (aka bounded rationality). This constraint tends toprevent the clients from entering into long-term contracts with their providers and developing anystrategic relationship. Further, providers may be opportunistic in their behavior meaning theymight resort to cheating, distortion of information, shirking of responsibility or other forms ofdishonest behavior (Williamson, 1985). Therefore, so long the clients' needs for cost reductionand higher work quality are satisfied there will be no propensity to engage into partnerships thatare deeper relationship-oriented.

As shown in Fig. 1, tactical IOS partnerships are characterized by relatively lower valueproposition than the other two types. This is so because lowering of costs remain the primarymotive of clients. As per TCE, clients tend to be wary of the issues that can safeguard theirtransaction costs arising from ex ante and ex post reasons involved in contracting, coordinatingand enforcing activities. An essential argument in TCE is uncertainty that may arise because ofenvironmental reasons (changes in the broader business landscape) and behavioral reasons(unpredictable provider actions). Therefore, clients will continue to favor tactical IOS so longthe benefits derived from tapping into the inexpensive- and high skilled labor pool of theproviders outweigh the costs arising out of market transaction and control associated with suchpartnerships.

In sum, tactical partnerships allow clients to benefit from better service for less capitalexpenditure i.e., by doing more with less (Gilley and Rasheed, 2000). The U.S banking industry isan example in this regard. It saved annually $6 billion to $8 billion by outsourcing functions toIndia (Pfannenstein and Tsai, 2004: 73). Another example is the case of Claimpower Inc., a NewJersey based medical billing service provider. By outsourcing some of its routine work overseas,Claimpower achieved cost leadership by charging U.S doctors less than what its competitorsmanaged to do. As a result, within a time-period of just more than 2 years, the firm's client list ofdoctors rose from 10 to 41, and the firm's annual revenue increased seven-fold (Karmin, 2004).Based on the above elaboration, we propose

P1. The higher the clients' need for cost reduction and higher work quality, the higher thelikelihood to engage in tactical IOS partnership.

P2. The higher the availability of inexpensive and high skilled labor pool with providers, thehigher the clients' likelihood to engage in tactical IOS partnership.


3.2. Strategic partnership

Strategic partnership is primarily driven by increasing tension experienced by clients to remainlocally responsive as well as be globally integrative, and the growing need to concentrate more onbusiness core in order to develop sources of current and future competencies. Owing toglobalization, firms have been experiencing increased competitive pressures to survive andprosper in an environment where business models are being invented at an ever-quickening pace(D'Aveni, 2002; Dess et al., 1995). This has resulted in greater need to look inside for sources ofcompetitive advantage and concentrate on what forms core of firms' survival (Barney, 1995).Given these drivers, more clients have been using IOS as strategic tool for improving businessperformance.

Often referred to as the second generation of outsourcing (Brown and Wilson, 2005), thefundamental shift in thinking from cost reduction towards value enhancement has called forexecutives to contemplate IOS as business partnership having strategic implications, and not justa buyer–seller contract aimed at slashing of operational expenditures. Value creation in strategicpartnership occurs through building long-term relationships with a few best-in-class integratedservice providers (Quinn, 1999).

To initiate and continue with this kind of partnership, clients chiefly rely on two attributes of theproviders—cumulative experience and learning scope. (Feeny et al., 2005; Kedia et al., 2005;Kotabe and Murray, 2001). IOS logic suggests that functions that are outsourced by the clientsform core competencies of their providers. In being able to pool useful resources, primarily skilledprofessionals at lower costs, and executing the same services repeatedly for various clients over theglobe, providers in India, China, Philippines or Singapore have been able to move up the learningcurve and generate cumulative experience through scale and scope economies (Auguste et al.,2002). Precisely these factors that result in better, varied and faster services at lower costs haveinspired western firms to engage in strategic partnerships with their providers. Such accrual ofadvantages would not have been possible had the clients executed the activities in their ownpremises.

Another factor that drives clients to engage in strategic IOS partnerships with their providers isthe scope to learn from such involvements. Learning refers to processes through whichorganizations acquire knowledge from experience. Organizations can learn not only from theirown direct experience, but also from the experience of other organizations (Levitt and March,1988). Organizational learning has been suggested as a fundamental strategic process and asustainable advantage for the future (Wu and Cavusgil, 2006). In case of strategic IOS, learningmay include greater understanding of the sources of value destruction like incompatible activitiesor processes, better comprehension of IOS competitive dynamics, deeper insights of the functionsand behavior of providers, increased knowledge of core competencies and business processes,and greater assessment of customer needs.

Cumulative experience and learning scope constitute useful organizational resources and canbe potential sources of competitive advantage. Therefore, the perspectives of resource-basedtheory (Barney, 1996; Peteraf and Barney, 2003) may be used to shed light on strategic IOSpartnership. According to this theory, a firm may be viewed as a collection of imperfectly imitableresources and capabilities that forms the basis of its successful competition against other firms(Wernerfelt, 1984). These resources may be physical, human, or organizational. By utilizingvarious resources and capabilities, firms are able to capitalize on environmental opportunities andminimize the effects of threats that exist and are, thereby, able to obtain competitive edge overother firms that do not possess useful resources or are unable to capitalize on them.


To sustain competitive pressure arising from fast changing business models on a global scale andto enable increased focus on business core, clients need to benefit from the assets possessed by theirproviders who are deemed to be experts in their operations. Through strategic partnership, clientsbenefit from the useful resources (cumulative experience and learning scope) of their providerswithout having to invest in possessing them. Tapping into the wide experience of providers enablestheir clients to fill in the resource-voids of their businesses (Cheon et al., 1995: 212). This alsoenables the clients to devise means to neutralize the threats arising out of newer businessphilosophies thrown open by close competitors as the hassles of executing routine activities are nolonger part of their value chains but are instead taken care of by the providers. Further, organizationallearning that results from this partnership renders the clients to new ways of doing business byfocusing attention and resources more narrowly on the business functions they do best.

Resource-based theory proposes that a firm can achieve sustained competitive advantage if itsresources possess four attributes—value, rareness, imperfect inimitability and non-substitutabil-ity. Therefore, for a client to gain advantage out of a strategic IOS contract, increased focus on thecore should ideally lead to the development of these four attributes to the essential resources of itsvalue chain such that they form bases of future competitiveness. The long-term nature of strategicpartnership provides a context whereby learning takes place gradually and the clients are able toutilize their deep involvement with providers in developing best resources and capabilities.

Two examples will make our arguments clear. First is the case of Qatar Airways that hasstrategically partnered with India-based Kale Consultants and outsourced its revenue accountingand recovery processes. This helped the airlines company to concentrate on flying—its corebusiness function (Johnson, 2006). Second is the example of ABN AMRO of the U.S that usedstrategic partnership with its India based provider Patni Computer Systems Ltd. In the words ofBruce Jacobs, Executive Vice President, ABN AMRO Services Company Inc.

“ABN AMRO Services Company values the relationship we have built with Patni over thelast two years. Patni's personal approach and the support of its senior leadership team hasbeen instrumental in helping us grow our outsourcing efforts. Specifically, we valuePatni's demonstrated flexibility and adaptability in working within our environment whilecontinuing to use its methodologies, tools and best practices to bring benefits to the Bank.We look forward to this relationship growing into a strong partnership over the years” (c.f.http://www.patni.com/about-us/testimonial.htm, accessed 09 /07/ 06).

Based on the above discussion, we propose

P3. The higher the clients' experienced competitive pressure and need to focus on corecompetencies, the higher the likelihood to engage in strategic IOS partnership.

P4. The higher the cumulative experience and learning scope enabled by providers, the higherthe likelihood of clients to engage in strategic IOS partnership.

3.3. Transformational partnership

This form of partnership has been referred to as third generation outsourcing (Brown andWilson, 2005: 24). Transformational partnership implies a rapid, step-change improvement inenterprise-level performance of clients (Linder, 2004a). The motivation here is to use IOS for thepurpose of redefining existing businesses. The partnership nature may be viewed as powerfulforce for change for the clients, and the providers may be considered as allies in the battle formarket share and competitive advantage. Firms as Procter and Gamble, DuPont, Cisco Systems,

http://www.patni.com/about-us/testimonial.htm


ABN Amro, Unilever, Rockwell Collins, and Marriot have engaged in such partnerships worthbillions of dollars (BusinessWeek, January 31, 2006: 55). The major drivers of this type ofpartnership include need for increased risk-sharing and flexibility, and business transformation(Czinkota and Ronkainen, 2005; Doh, 2005; Linder, 2004a,b).

Increasingly IOS has resulted in business risks being shared with providers on account ofreduced need for capital expenditure on infrastructure- and manpower development. Risk sharingrefers to the clients' realization that they may not ever need full in-house ownership of a particularactivity. For example, the decision of Swiss International Airlines and Austrian Airlines tooutsource revenue and traffic accounting, passenger interlines billing, and frequent flyer programadministration to AFS (of Tata Consultancy Services in India) was meant to share business risks(World Investment Report, 2004, Chapter IV).

In a globalized business environment, firms need to respond faster to industry demands, complywith changed regulations, adjust to increasing business competition and respond to changingcustomer tastes, i.e., in short, remain flexible (Czinkota and Ronkainen, 2005). In general, IOSpartnerships enable increased flexibility by freeing valuable staff resources to do what may berequired best at a particular business juncture and relocating business capital to procure/developvaluable resources. Flexibility is further enhanced through 24/7 (i.e., round-the-clock all week)operating hours that ensure continuous support through integrated in-house and offshore basedstaff in other time zones (Ramachandran and Voleti, 2004). For example, PC-maker Dell generatesbusiness flexibility by relying on multiple providers for supply of component design andinnovation, and this enables the firm management to concentrate on maintaining and developingsupport systems related to customer service and supplier relationships.

Finally, IOS partnerships have provided opportunities for clients to redefine their businessesthrough transformation. A typical transformational partnership may work as follows:

“Genpact, Accenture, IBM services, or another big outsourcing specialist dispatches teamsto meticulously dissect the workflow of an entire human resources, finance, or info techdepartment. The team then helps build a new IT platform, redesigns all processes, andadministers programs, acting as a virtual subsidiary. The contractor then disperses workamong global networks of staff ranging from the U.S to Asia to Eastern Europe”(BusinessWeek, January 30, 2006: 78).

Such transformation of entire business processes are often aimed at overhauling old businessoperations, turning around dying businesses, or speed up organizational innovation. Thesetransformations result in radical business models meant for achieving competitive edge throughgrowth without investing for capacity enhancement in the client's own nation.

What factors on the provider side inspire clients to engage in transformational partnership? Theseare availability of global innovative talent, and reliance on world class delivery model. Providersnow have competency in catering to a wide array of services in the areas of audiovisual and culture,business, computers and allied areas, higher education and training, finance, health, internet related,and various professional services (World Investment Report, 2004). To do this, huge amounts ofinvestments are being undertaken in recruiting suitable talents, and imparting them required businessskills in the areas of effective communication, negotiation, leadership, team-building, technology,and business analysis through in-house or overseas training (Kumra and Sinha, 2003). At the firmlevel, providers are acquiring required licenses and certifications that enable them to develop globaldelivery model in order to provide their clients with seamless solutions. As a result, technologygiants like Philips, Motorola, Dell etc. have decided to outsource even their R&D functions toproviders operating in many Asian countries (BusinessWeek, March 21, 2005: 87).


From a theoretical perspective clients, therefore, need to consider their providers more thanactive collaborators or alliance partners possessing valuable resources and capabilities. Theinvolvement of clients with providers is muchmore intense in transformational IOS than the abovetwo types of partnership and the value creating potential is also the highest (Fig. 1). A useful way toconceptualize this form of partnership is through the lens of resource-dependence theory. Thistheory focuses on how firms manage to deal with the effects of broader environmental attributes inorder to compete effectively.

According to resource-dependence theory, firms are actively involved in their broaderenvironments and are dependent on other organizations for supply of critical resources (Murrayet al., 2005; Pfeffer and Salancik, 1978). A recommendation of this theory is that a firm shouldattempt to reduce its dependence on other organizations for resources and should strive to adjust itsboundaries in order to overcome the environmental uncertainties and thereby improve performance.

IOS clients are very much part of today's business environment that is dynamic and uncertainin several ways (Garg et al., 2003) and calls for the need to remain flexible and less prone to risks.Therefore they are dependent on their providers to supply critical resources in the form globalinnovative talent and world class delivery model. The former enable clients to benefit from theirproviders' high-end skill base, cumulative domain expertise, and industry-specific knowledgethat result in integrated, innovative solutions. World class delivery model of providers benefitclients to receive focused solution to their particular objectives, challenges and needs, and alsoensures compressed delivery timeframes. Such resources help clients to initiate rapid improvisingchanges or bring turnarounds of failing businesses. Clients resort to this type of partnershipbecause they are not able to generate these solutions on their own and so are dependent on theirforeign partners. In the process, they manage to overcome the environmental uncertainties andboost performance levels as a result of transformation in business.

Like any other form of partnership, transformational IOS is not without risks. For example,there may be cases of ruining of entire business agenda, loss of control over functions, risk ofdisrupting operations, and loss of focus (Linder, 2004a,b). Resource dependence theory placesconsiderable stress on the strategic choice exercised by managers for they are the actors who canmanipulate the environment in firm's favor or disadvantage (Hrebiniak and Joyce, 1985; Pfefferand Salancik, 1978). Therefore, in order that clients gain the desired benefits throughtransformational IOS partnership, decision-makers need to exercise their judicious choices inovercoming uncertainties and engage in intense involvement with their providers to result in thehighest form of value creation (Farrell, 2004).

The above three drivers (need for risk sharing and flexibility, and business transformation)have indeed spurred the adoption of transformational IOS partnerships by clients. However, inaddition to all the dramatic potential benefits, there are flip sides to this type of partnership that wementioned earlier. In addition, specifying the required performance level of the providers in suchpartnerships is almost impossible. Moreover, the success of transformation requires that theinnovation (brought about by the provider's help) be industry leading. Thus to achieve successfultransformation through outsourcing, executives must “go beyond ‘making deals’ and insteaddesign business models that will work” (Linder, 2004b: 30). Based on the foregoing discussion,we propose

P5. The higher the clients' need for increased risk-sharing and flexibility, and business trans-formation, the higher the likelihood of engaging in transformational IOS partnership.

P6. The higher the availability of global innovative talent and world class delivery model withproviders, the higher the likelihood of clients to engage in transformational IOS partnership.


Table 1 encapsulates salient features of the three types of IOS partnership based on what hasbeen discussed in the preceding sections.

4. Moderating factors

Looking beyond the direct considerations in deciding to engage in IOS partnership oftenenables gathering insights on factors that might affect the drivers–partnership linkage as argued inthe earlier sections. What critical issues need to be considered in order for cooperative behaviorbetween clients and providers to emerge as stable and enduring partnerships? We discuss tworelational factors – trustworthiness and cultural distance – in the next section that may potentiallymoderate the partnership dynamics. Our main thesis here is that engaging and continuing oneffective IOS partnerships is not a one-way (i.e., client specific) consideration, but that there isneed to consider relevant aspects that have implications for the providers as well. This is akin tothe observations of Liang and Parkhe (1997) who posited that international exchangeconsiderations should include both exporters and importers who represent two sides of thesame coin.

4.1. Trustworthiness

Research in management has stressed that trust and commitment are essential features forensuring quality and success of interfirm relationships, collaborative ventures or alliances betweenoverseas partners (Cullen et al., 2000; Jeffries and Reed, 2000). In fact trustworthiness has beenreferred to as a source of competitive advantage (Barney and Hansen, 1994). If IOS partners needto benefit from their partnership, it is required that they trust each other and appear mutuallytrustworthy. Clients need to trust their providers with regard to desired quality and timing ofservice delivery, maintenance of confidentiality and security of inside information, and non-

Table 1Salient features of IOS partnerships

Parameter Tactical IOS partnership Strategic IOS partnership Transformational IOSpartnership

Generation First Second ThirdBasis Transaction-based Cost-based with strategic

implicationsValue-based

Relationshipwith provider

Buyer–seller Long-term businesspartners

Powerful forcesof change

Required providercompetency

Delivery Relational Transformational

Time-frame Short-term Long-term Long-termValue proposition Low High HighestInvolvement

with providerArm's length Deep Intense

Dominant theoreticalanchor

Transaction cost economics Resource-based theory Resource-dependencetheory

View of provider Enabler of market mechanismfor execution of services

Bundle of resources andcapabilities i.e., assets,skills, and expertise

Reducer of clients'dependence on externalenvironment

Example US Banking Industry;Claimpower Inc.

Qatar Airways; ABN AMROServices Company Inc

Procter and Gamble;Cisco Systems


display of opportunistic behavior that might lead to loss of control over the outsourced activity oreven double outsourcing (Clott, 2004: 165) that involves subcontracting work elsewhere foradditional profits. Likewise, providers need to trust their clients in the matters of demand stability,timely payment of contract amounts, release of promised incentives, and adherence to ethical andlegal standards particularly when disputes arise.

As evident in our earlier examples, it is virtually impossible to embark upon and continue withIOS partnerships if clients do not have adequate trust towards their providers. Likewise, noprovider can execute services in favor of its clients for long if it cannot trust its overseas partnersin the first place. However, the effect of trust on outsourcing partnership has not been examinedadequately (see Gainey and Klaas, 2003; Langfield-Smith and Smith, 2003 for exception). Trustis a multi-dimensional concept and can take different forms (Das and Teng, 2001; Mayer et al.,1995).

In the present context, the idea of competence trust as proposed by Das and Teng (2001)seems to apply to tactical IOS partnership. This form of trust relies on the expectation ofpartner's role performance based on technical competence arising out of the possession ofdiverse resources and capabilities. The arm's length involvement in tactical partnership givesrise to the expectations that the respective partners will have the ability to fulfill their com-petent roles in a relatively short-term period. We mentioned earlier what are the possibleexpectations of IOS partners from each other. In short, trust in this case tends to be morecalculative and is less affect-based.

At the other extreme, the notion of goodwill trust (Das and Teng, 2001) seems to apply totransformational IOS partnership where the involvement between partners is intense. As argued inthe literature, this form of trust is based on the expectation that partners will tend to fulfill their roleswhile exhibiting fair and faithful behavior, and care for each other's welfare. Further, goodwilltrust has been argued to develop over time, reduce perceived likelihood of opportunism andcontribute to lower transaction costs. Therefore, this type of trust is more relevant fortransformational IOS partnership that is more long-term in nature than the other two types andhas the highest potential in creating value.

In between the two extremes of competence and goodwill, trust in strategic IOSpartnership may be mid-range in nature that is more on the side of goodwill trust havinglesser calculative component involved than in the tactical type but certainly possessing highconsiderations of competence. Overall, it is logical to presume that, ceteris paribus, greaterfeelings of trustworthiness between IOS partners will encourage them to engage into strongcooperation and continue partnerships on a long-term basis. On the contrary, more theclients feel that their providers are not high on trustworthiness (and vice versa) or more thepartners consider each other to be less than trustworthy, there will be lesser chances ofengagement in strong cooperation and continued partnership on a longer time-frame. We,therefore, propose

P7. Trustworthiness of partners will moderate the effects of drivers (client side and provider side)on the quality and longevity of IOS partnerships such that increased trustworthiness will fosterstrong and continued partnership.

4.2. Cultural distance

IOS partners may be located in nations with very dissimilar national cultures (as Germany-based Siemens and China-based I.T. UNITED) or may possess varying organizational cultures.


Extant literature on cross-cultural variations has noted how cultural distance (i.e., extent ofcultural dissimilarity) may negatively influence relationship between partners in the realm ofinternational business decisions, collaborative learning, cross border knowledge- and technologytransfer, and alliance performance (Bhagat et al., 2002; Cui et al., 2006; Kedia and Bhagat, 1988;Sirmon and Lane, 2004). Such arguments are based on the logic that cultural differences manifestin the form of differing employee values and norms, attitudes towards technology, customers,interpersonal contact and interaction, and overall role perception. Based on this understanding,scholars have underscored the influence of cultural distance – national and organizational – asbeing important in partner selection and partnership continuance (Gurung and Prater, 2006;Parkhe, 2001).

Apart from India, China, Philippines, Ireland, and Russia, clients today have a wide number oflocations to choose their providers from like Mexico, Romania, Argentina, Costa Rica, Vietnam,Poland, Nicaragua, Botswana, Sri Lanka, South Africa, Malaysia, Jordan, Ghana, Tunisia andothers (BusinessWeek, January 30, 2006: 62, 64). These nations represent a wide array of nationalcultural patterns that may not be known well to clients across the globe. Further, several of theabove destinations represent economies in transition characterized by changing marketinstitutions and business environments, and development of newer organizational practices.This begs the question of how western clients need to devise business strategies to conform to theinherent cultural patters of these nations and of the providers embedded within these cultures(Khanna et al., 2005; Peng and Luo, 2000).

Based on the nature of partnerships described in this paper, the effect of cultural distancewill tend to be lesser in tactical IOS partnerships because of their inherent transactional- andshort-term nature of involvement. But the effects of cultural dissimilarity will be higher in thestrategic IOS and highest in the transformational type as these partnerships represent in-creasingly greater degree of involvement among partners over greater time periods thatnecessitates enhanced understanding and tolerance of differing organizational practices, anddeeper norms and values. It is, therefore, logical to argue that all things being equal, increasedcultural distance will deter partners' willingness to engage into and continue with IOS part-nerships. Contrarily, any IOS partnership that is characterized by lesser cultural distance (i.e.,

Fig. 2. Model of IOS partnership.


increased proximity) between partners is likely to be strong and continued on a long-term basis.Our final proposition is

P8. Cultural distance between partners will moderate the effects of drivers (client side andprovider side) on the quality and longevity of IOS partnerships such that increased distance willdeter development of strong and continued partnerships.

Our partnership model is shown in Fig. 2.

5. Conclusions and implications

IOS is a growing phenomenon. However, the current state of research suggests that theoreticaland empirical scholarly works has a long way to go before the conceptual and practicalunderpinnings of IOS can be adequately fathomed. Partly to fulfill this research gap we haveelaborated in this paper what constitute IOS partnerships. Overall, this paper has made severalimportant contributions towards extension of our general understanding of IOS partnerships andforwarding a broader research agenda.

First, our discussion on IOS partnerships has clarified that all forms of cooperative behaviorbetween clients and providers are not the same in terms of value proposition and degree ofinvolvement. Although decreasing business costs and increasing value have been discussed in theexisting literature, the question of how such considerations differ on a continuum has not beenadequately addressed before. Conceptualizing the true nature of relationship between outsourcingpartners is yet to capture attention of scholars. This paper is first to offer such an understanding.Second, this paper has shown that there are several factors that may influence how IOSpartnerships may continue to be beneficial to the clients and providers. It is true that there may beother issues that can impact partnerships and their continuity. But our attempt was to include thoseeffects that appear to be most relevant in the context of IOS partnerships. The moderating effectsof trustworthiness and cultural distance as discussed here has reinforced the notion that enablingand promoting drivers of IOS do not automatically foster quality partnerships.

Our discussion has several implications that can inform and guide managerial practice. First, ithelps one to understand the nature of IOS in general, and what makes it an important practice tocontemplate and embark upon. Also it helps to caution that ill-planned IOS partnerships may leadto business downturns. Second, executives may find the discussion on the types of IOSpartnership indeed helpful. The salient attributes associated with each type of partnership, ashighlighted in Table 1, may help them to plan and implement their moves better. Third, our modelinforms the practitioner that several additional factors need to be considered in order to heightenthe quality of partnerships or to ensure longevity. It is necessary to tie up with overseas partnerswho can be trusted and whose trustworthiness will continue during the currency of contract.Executives should also endeavor to remain trustworthy to their partners particularly in the mattersof timely payments, incentives, and demands for too much deviation from contact clauses. Alsoboth the partners need to ensure how their ongoing partnership may help to mutually move up therespective value chains, and minimize the incompatibilities in behavior and actions that may ariseowing to cultural differences.

Future theorizing work need to consider Doh's (2005) observation that IOS is likely to presentchallenges not only for firms but also for societies and stakeholders for a long time to come.Therefore, how IOS partnerships impact domains beyond the firm level will present significanttheorizing opportunities to researchers. Scholars also need to build on the suggestion offered by


Gilley, McGee, and Rasheed (2004) “that the development of a general theory of outsourcingshould include both internal and external antecedents of outsourcing” (2004: 120). IOS part-nerships may start with simple buyer–seller transactions but may gradually develop into deeperlong-term relationships based on continued trust-based partnership over time. Examination ofsuch partnership evolution for a particular network of client and its providers will provide fertilegrounds for future theorizing on and empirical testing of IOS partnership types.

Since IOS involves services (and not tangible products), any theory building needs to take intoaccount the nature of services per se. In this regard relevant insights need to be drawn from themarketing literature, which IB scholars have not adequately done so far. For example, services aredifferentiated from goods in terms of archetypal characteristics as intangibility, inseparability,heterogeneity, and perishability (Vargo and Lusch, 2004). Pertinent questions that arise in thiscontext are: how do considerations of these attributes alter the conceptual boundaries ofinternational outsourcing that was originally based on manufacturing activities? At theoperational level, how does disaggregating services value chain and reassembling the outsourcedservice functions differ from practices that involved manufacturing i.e., products outsourcing?These issues, and many others, need to be addressed by scholars interested in developing futuretheories of IOS.

To conclude, this paper has provided an understanding of IOS partnership that has potential tostir academic interest and improve current and future practice. Our discussion will, hopefully,benefit researchers with new thoughtful insights. Practitioners may gain newer perspectives onhow to best deal with the wider implications of IOS partnerships. In sum, this paper has elementsto aid comprehending the next practices of IOS.

Acknowledgements

We are grateful to the Temple University CIBER for its financial support to present an earlierversion of this paper at the 7th Annual International Business Research Forum. We are thankful toeditor Masaaki Kotabe, guest editor Arvind Parkhe, anonymous reviewers, and participants of theforum for their helpful comments on this paper.

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