Research Methods

1. Proposed Working Title (Provisional)

MANAGING THE RELATIONSHIP AND CONTROL BETWEEN THE CLIENT

AND THE SERVICE PROVIDER: A KEY TO SUCCESSFUL OUTSOURCING?

1.0 Introduction

Outsourcing is generally associated with support service such as catering, security,

property and facilities management, information technology and logistics. In such
cases, the service is completely handled over to the specialist service provider for a
period of years. A service level agreement is used to ensure the day-to-day running
of the contract to the desired standard (Rogers, 2008). In general, IT outsourcing
arrangements can be said to deliver one or more of the three following capabilities:
infrastructure services and data centre operations, application development and
maintenance, and business processes. Extensive research has been conducted on the
subject of the benefits of IT outsourcing, presenting a number of potential benefits
for organisations that let external vendors provide some or all of the IT related
capabilities needed. (McFarlan & Nolan, 1995; Ross & Westerman, 2004) When
evaluating the option to outsource different stakeholders‟ perceptions and interests
tend to bring a mix of financial, technical and political factors into play (Willcocks &
Lacity, 1998). When an organisation is evaluating whether to outsource or not, it is
important not to forget the risks associated with outsourcing arrangements. When
outsourcing IT services or capabilities the company will hand over a substantial part
of its control. Ross and Westerman (2004) divide the risks with outsourcing into four
major types: relationships risks, transition risks, strategic risks and finally
vendor/technical risks. Going into an outsourcing relationship with an external
vendor both parties should realise that the situation for the client today could be quite
different in the end of the contractual period, and not only when dealing with long
term contracts. As the market changes and new technologies create new opportunities
and challenges for the client, the needs can also change dramatically. Since these
changes and their impact are very hard to foresee the client always takes a risk when
signing a contract with a vendor that later might not meet future needs. This risk
should be taken seriously, particularly when signing long time contracts. (Ross &
Westerman, 2004; Lacity et al., 1995). The relationship between a client and a

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supplier usually dictates the success or failure of the outsourcing firms in terms of
attaining its objectives. It is very important to consider whether the supplier will be
able to meet the expectation of the client firm in terms of innovation. Innovative
firms in industries as diverse as software, automotive and aerospace, as well as high
tech industries such as consumer packaged goods are choosing to outsource
innovation efforts (Carson, 2007). Innovation efforts are often unsuccessful and can
require tremendous investments (Chandy et al, 2006). Outsourcing leaves some
ground of uncertainty when it comes to innovation and may raise question in the
mind of business practitioners like; which is the path to innovate success: internal
pursuit of innovation activities or contracting these activities to other firms?
However, it is found that outsourcing can be successful if there is a state of
connectedness between the client and supplier (Alborz & Seddon, 2005). In addition
to this, (Lee & Kim, 1999) conclude that interaction and behavioural attributes such
as communication, participation and information-sharing significantly influence
partnership quality; while (Kern & Wilcocks, 2001, p356) state that behavioural
attributes such as conflict, cooperation and trust influence, interaction and the
efficiency outcome of an outsourcing arrangement and finally (Klepper & Jones,
1998) note that communication, cooperation and information sharing are required in
building relationship.

1.1 Research Aim

Aim and objectives

The aim of this research is to explain the different dimensions of outsourcing in terms
of managing relationship between the client and service provider and also to explore
how the control exercised by the client lead to innovation success. In order to
accomplish the aim, the research will be based in the line with the following
objectives:
 To carry out a literature review to establish and investigate the affiliation
involving outsourcing and innovation success based on client-supplier
relationship role in achieving the desired results.

 To find out the effect of client‟s control on the service provider and measure
the degree to which the targeted objectives of the client is achieved.

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 To understand the rationale which governs the client-supplier relationship and

also to explore the inter dependencies between both parties.

 To use qualitative research to determine how managers views and reactions

towards outsourcing and effort in maintaining a relationship with service
provider.

 To establish a correlation between the literature review and the findings

comparing and contrasting them to be able to illustrate conclusions.

The methodology applied will be from a large literature and several previous
empirical examinations on outsourcing. For future research, it would be very
interesting to explore outsourcing phenomena from both clients and service providers‟
perspectives and the engagement of both parties to make it successful.

2.0 Literature Review

Drivers of outsourcing

(Wood & Chaffey, 2005) while presenting the concept of outsourcing have come up
with certain reasons why firms opt for outsourcing and the main reasons can be
outlined as follows: (1) reduce and control operational costs; (2) improve company
focus; (3) gain access to world-class capabilities; (4) free internal resources for other
purposes; (5) resources are not available internally; (6) accelerate re-engineering
benefits; (7) function difficult to manage or out of control; (8) make capital funds
available; (9) share risks and finally cash infusion. However, (Benvenuto, 2005)
through his empirical research and also from a survey found that the main drivers for
outsourcing were; (i) cost or internal headcount needs to be reduced; (ii) internal
capacity is constrained by increasing market demand (interestingly senior
management chose constrained capacity rather than the need to reduce costs as the
primary drivers of outsourcing); and (iii) internal manufacturing or service
performance is insufficient or does not meet requirements. The cost of internal
compared with external has always been a major consideration in making the

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decision to outsource, however, it is common to find that the total cost of the targeted
outsourced functions are not well understood. Many companies struggle to identify
the actual tasks performed by the functions being outsourced. These unknowns may
affect the cost of the outsourcing or the level of satisfaction with the end product or
service. Total costs, including functional interdependencies, must also be understood
because they often drive costs indirectly related to the outsourced functions. These
total costs must also be included in the quantitative analysis (Benvenuto, 2005).

The Risks of Outsourcing

(Earl, 1996) made a presentation in his analytical framework in relation to

outsourcing decisions where he portrayed if the business value is high but the
operational performance is weak, then market testing (or benchmarking) might make
sense, at least so a company can see what performance improvement might be
possible by either internal or external sourcing. The framework also suggests that
outsourcing of information systems (IS) central to a business strategy may be a
dangerous diversion, especially if IT operations are already efficient. Insourcing in
this situation is preferred. If the company has outsourced IT services and downsized
as well, its ability to innovate may be impaired. Innovation needs slack resources,
organic fluid, organisational process, and experimental and intrapreneurial
competences – all attributes that external sourcing dose not guarantee (Earl, 1996).

Creativity and Control

Innovative new products are key to revenue growth (Sorescu et al, 2003) and future
market leadership (Chandy & Tellis, 1998). Creativity may be defined succinctly as
the generation of meaningful novelty (Andrews & Smith, 1996). And, to be
successful enough depends on how much effort the respective organisations invest in
managing in managing their relationships (Klepper, 1998). General hypothesis that
emerges from the creativity literature is that client control is detrimental to supplier
task performance in relationships in which the outsourced task requires a high degree
of creativity on the part of supplier (Andrews & Smith, 1996; Thompson, 1965).
Thus clients would be expected to exercise less control over suppliers to the extent
that the outsourced in the relationship is creative in nature. There are notably two

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ways of control presented by (Carson, 2007) namely; „ex ante and ex post control‟
where the former is shown to increase supplier performance and the latter is shown to
reduce supplier performance. The adoption of these control depend on the creative
and non-creative nature of the task. Development relationships are governed by ex
ante contracts (i.e. development agreements) that vary in extensiveness from
relationship to relationship. Most development tasks cannot be fully programmed in
advance because of their uncertain and unfolding in nature (Pisano, 1990) ex ante
contracts usually accompanied by ex post control mechanisms. Ex post client control
refers to ongoing control exercised during the performance of the suppliers‟ work (e.g.
Heide & John, 1990; Stinchcombe, 1985). Typical measures of the ex post control in
the channels literature focus on monitoring, reporting requirements, and decision-
making influence. The organisational creative literature identifies numerous factors
that improve task performance when tasks are highly creative in nature. The list is
broad and includes integration and coordination, reciprocity or mutual helpfulness,
horizontal communications, cross-functional teams, intrinsic rewards, diversity of
experiences and backgrounds within the team, a tolerance for conflict, limited
formalization, high professionalism, positive attitudes toward risk and change, slack
resources, environmental scanning, specialization, managerial tenure, technical and
market knowledge, resource sufficiency, challenging work, and organisational
encouragement of creativity ( Pierce ( Delbecq, 1997; Thompson, 1965). Most
commonly identified factor is the absence of outside control which links to various
negative effects on organisational decision making that tend to limit the ability to
perform creative tasks Amabile & Gitomer, 1984). Among the effects detailed in the
literature, control limits the supplier‟s discretion and ability to apply its expertise in
creative problem solving (Andrews & Smith, 1996, Thompson, 1965). Control also
leads to greater formalisation in relationship governance and requires “up – and –
over” information flows (Zaltman et al, 1973); both of which tend to limit horizontal
communications and the ability to perform creative work. Likewise, a supplier‟s
taking and novel idea generation are constrained in the presence of outside control
because of pressures introduced by external evaluations, especially if these are
confrontational in nature (Thomas & Velthouse, 1990). In addition to these effects,
client control can also limit the supplier‟s ability to perform creative tasks through its
efficient on intrinsic motivation (Amabile, 1979; Deci & Ryan, 1985). It is important
to observe that the detrimental effects of the client control on the supplier

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performance are posited only to the extent that the task is creative in nature; client
control is not expected to unduly limit the performance of tasks that require little or
no creativity. When clients decide how much control to exercise, they are expected to
assess the creative or non creative nature of the tasks and anticipate the effects of their
control on subsequent supplier performance. The hypotheses made were as follows:
the creative nature of the task is negatively related to ex ante client control while the
same effect is considered on ex post client control (Carson, 2007). (Amabile, 1983)
suggest that the „know-how‟ of a particular client is a critical input to creativity and
only unskilled clients will harm suppliers‟ performance with their control.

Transaction-Specific Investment

As (Pisano, 1990), (Ulset, 1996), and others discuss in detail, client investments in
external product development relationship tend to be highly transaction specific (i.e.
non redeployable, non salvageable). Transaction cost analysis suggest that external
development relationships should be governed with relatively levels of client control
to safeguard the clients transaction – specific investments against opportunistic
bargaining and maintaining the client‟s incentives to undertake efficient levels of
external development (Williamson, 1985).

Environmental Uncertainty

This phenomenon is defined as the frequency of the unpredictable change in the task
environment (John & Weitz, 1988). Uncertainty has been commonly used as a
predictor of governance selection in the channels literature, with mixed results
(Rindfleisch & Heide, 1997). Transaction cost economics (TCA) predicts a negative
relationship between environmental uncertainty and ex ante control because contracts
must be left incomplete to facilitate ex post adaptation in rapidly changing
environments. The explanation made by (Anderson, 1985) for this relation is that
uncertainty increases the risks of opportunism by increasing the frequency of ex post
adjustment, prompting greater safeguarding through ex post client control. While,
(Dwyer et al, 1987, posited that the selection of both ex ante and ex post client
control will depend on the history of relationships between the firms.

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2.1 Organisational Background

Alliance Boots is a leading international pharmacy-led health and beauty group. The
group primarily operates in Europe and its core businesses are pharmacy-led health
and beauty retailing and pharmaceutical wholesaling.

The health & beauty division conducts businesses in seven countries. In this division,
the group operates more than 3,000 health and beauty retail outlets. Boots is the
principal brand in the health & beauty division. Boots offers following major brands:
No7, cosmetics and skincare brand; Soltan, suncare products; Botanics, a range of
skin, hair, bath and body products; and Almus, a brand of generic medicines.

The group also offers contract pharmaceutical manufacturing services. Boots has
three owned manufacturing facilities (the UK, France, and Germany) and one
associate assembly plant (Poland) (Datamonitor, 2009).

On Oct, 1, 2002 The famous high street retailer namely; The Boots Company and
IBM went into an outsourcing agreement for a period of 10 year worth $ 1.1 billion
[ £ 700 million] which according to IBM Press release the intention is to „enhance the
customer experience and generate costs efficiencies for Boots „ information
technology‟ (IT) operations. The service provider will deliver consulting, services,
hardware and software as part of the deal and the expected savings from this
outsourcing decision is expected at £130 million. Boots also signed a deal with IT
vendor Xansa to outsource its central application development and support operations
and some of its consulting services to Tata Consultancy Services (Wood & Chaffey,
2005).

The statement made by the IT Director of Boots Group; Rob Fraser made it clear that
the trust and maintaining effective relationship with IBM has lead to flourishing
outsourcing , the successful deployment of the solution confirms his trust in IBM as a
team mate, and testifies to the breadth and depth of IBM‟s expertise. “IBM is unique
in its ability to deliver such a comprehensive, end-to end solution and stand behind it

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for the long haul. Our new solution, and our ongoing relationship with IBM, puts us
on a firm foundation for the future” (Service Boulder Website, 2009).

3.0 Methodology

In this section the practical procedure of the study will be presented. The different
choices made should be evaluated with the aim of the study in mind. The purpose of
this section is to enable the study to be replicated and also to be part of the evaluation
of the final product.

3.1 An Explorative Social Constructivist Approach

All scientific research derives from a scientific approach. There are two mains
directions, positivism and constructivism. The two approaches represent two different
views on reality and “the scientific truth”, thus also affecting how research is
conducted. The scientific approach is therefore influencing large parts of the study,
which methods that are chosen, the analytical process and therefore the end result
(Saunders et al, 1997). Constructivism believes that one specific can‟t be isolated
from its context and that a person‟s impressions and impression are created in a social
context. People are in that sense not objects, but subjects, who themselves are
involved in creating their knowledge (Gergen, 1995).

There are several ways and starting points from one can conduct research. One part
of the scientific research is to generate hypothesis and new statements. Another way
of conducting research is to use a deductive approach that starts off with an existing
hypothesis and then collect empirical material to either support or reject the
hypothesis (Saunders et al, 1997).

The specific literature around the research topic is scarce and our aim is to answer
question how, hence the study can be labelled as explorative/inductive. Therefore, an
inductive approach will be chosen to carry out research where new knowledge in a
sub-area is likely to be an obvious outcome.

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3.2 The Data Collection Process

In a scientific study one can fond both primary and secondary data. The former is a
first hand data, collected by the researcher himself/herself while the latter is already
existed in some forms and available for use (Saunders et al, 1997). Both primary and
secondary data will be employed in this study.

3.3Qualitative semi-structured Interviews

Since the study is of exploratory in nature which will ultimately leave room for new
findings, the qualitative interviews will be conducted for this research. The
qualitative method should be used when there is a need of penetrating a given
problem to answer questions like „how‟ and „why‟ (Saunders et al, 1997). However,
“open-questions” can be useful but it may lead the interviews to become too scattered.
Therefore, a semi-structured questionnaire will be useful and will help in
differentiating respondents with each other.

3.4 Pilot Testing

The researcher will engage in conducting a pilot interview where semi-structured

questionnaire will be tested. This is seen an important aspect of the research where
the quality and clarity of the questions will be ensured.

3.5The selection criteria for the respondents

When conducting a study that aims to generalise and find trends in the population, a
statistically significant amount should be randomly selected from the target
population. Although this is preferable, it is in reality seldom done possible due to
cost and large amount of time that is necessary. Since the total generalisation is not
the aim it is important to start contact the named company through the informal
contacts the researcher has in the referred firm. The later stage of the selection
process will have more the characteristics of a „snowball session‟, where previous
contacts will lead to further contact and thus establishing a network of respondents.

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3.6 Data Analysis

The study will make use of qualitative analysis due to the type of research
methodology will be applied. The use of other relevant software will be considered if
the use will help in the analysis, like the Statistical Package for the Social Science
(SPSS). The software can be accessed at the college premises or can also be
downloaded through some servers.

4.0 Conclusion

This section will show any limitations while conducting the research and also
recommendations will be included in line with the research topics and also what could
have been done to make it a more refined piece of work.

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