The Decision to Outsource: A Case Study of the Complex Interplay Between Strategic Wisdom and Behavioural Reality

Abstract

The last two decades have seen an unprecedented growth in the use of outsourcing interventions in diverse organisational contexts. This phenomenon can be viewed as a means of unbundling the vertically integrated activities of organisations in response to existing strategic wisdoms that focus upon value-creating activities as a means of enhancing an organisation's sustainable competitive advantage. This paper explores the delicate balance between these more conventional strategic motives and the more complex, emergent and interconnected behavioural impacts and considerations in the context of a decision to outsource the meter reading activities of a well-established, publicly listed Australian energy company. By drawing upon the idiosyncratic experiences reported by particular groups of individuals involved in, or affected by, an outsourcing decision, the authors note some important lessons that may inform the pursuit of such decisions in the future.In recent years the outsourcing phenomenon has fundamentally altered the processing and delivery of a wide range of -goods and services by organisations in public, private and not-for-profit sectors (Auguste et al. 2002; Osterman 1998; Industry Commission 1996; Domberger & Hall 1995). Despite the stellar rise of outsourcing as a mainstream management tool, outsourcing's proponents seem unable to successfully distance themselves from ongoing questioning of the rationale for, and fallout resulting from, its adoption (Jennings 2002: Doig et a1. 2001; Humphry 2000: Hunter & Gates 1998; Commonwealth Ombudsman 1996; Rees & Rodley 1995).Much of the debate and research relating to outsourcing has been informed by the principles of transaction cost economics (Williamson 1979; Williamson 1975; Coase 1937) whereby the make-or-buy decision is crystallised by simply comparing the costs of managing transactions (using the market) with production costs (producing internally). In short, the transaction cost approach suggests that markets are most efficient for all transactions, except those that involve assets of a highly specialised nature used frequently as these represent a set of circumstances open to opportunistic behaviour by the market.However, the hard lessons learned with the passage of time have shown (the informed observer) that managers who limit their sourcing decisions to cost comparisons alone are likely to run the risk of seeing their organisation wither and die: rigorous cost analysis is a part, albeit an important part, of a plethora of other strategic considerations that combine to move an organisation toward its long-term goals and objectives (Fill & Viser 2000; Rule 1999; Meredith 1998; Domberger 1998; Hunter & Gates 1998: Hodge 1996: Kochan et al. 1994). Indeed, this strategic context forms the cornerstone from which this paper proceeds to explore the appropriateness and meaningfulness of the strategic literature's conception of outsourcing decisions for the realities of a complex and dynamic operating environment.