Modifying Outsourcing Relationships Post-Formation: The Role of Controls

Abstract

Recognizing the importance for firms in inter-organizational relationships to adapt to the changing environment, this study examines the role of controls in facilitating or hindering outsourcing firm-initiated changes to outsourced activities. Drawing on the concept of adaptive capacity in TCE, we propose that archetypes of controls have different adaptive capacities; and that the type of control established at the outset of outsourcing relationships will influence the ease experienced by outsourcing firms in implementing modifications post formation. Multiple case studies are conducted to explore the adaptive capacity of different archetypes of controls and their impact on the ease of modifying outsourced activities. As expected, patterns observed across 20 outsourcing arrangements show that a greater proportion of firms with trust-based controls experience a higher ease of modification than firms with bureaucratic-based controls. In addition, results reveal that different mechanisms within each archetype of control drive its adaptive capacity, namely, contractual and relational mechanisms. The findings in this study further indicate that only firms with trust-based controls are able to make substantial changes to their outsourced activities. This highlights an interesting tension between trust-based controls’ high ability to facilitate changes with incumbent suppliers (as shown in this study), and how the costs of adopting such controls limit the ease of switching suppliers (as shown in prior literature). Finally, while observing that none of the firms in this study implemented large modifications that give rise to new control requirements, we draw on extant literature to propose that further research investigating such misalignment-causing modifications is necessary and important.

Keywords: control, outsourcing, modification, transaction cost economics

JEL Classification: M41