Knowledge management has in important role in effective outsourcing. The
decision to outsource knowledge should be attained through careful review of the firm’s
knowledge management (KM) structure, goals, and the benefits of obtaining innovation
externally. “Knowledge is the single most important resource for organizations today
and managing knowledge like any other resource is therefore critical to business
performance (Davenport and Prusak, 1998)” (Aydin & Bakker, 2008, p.294). In order for
the outsourcing relationship to function successfully, the outsourcing parties must design
the KM framework to encourage, incent and leverage knowledge transfer.
Stewart (2001) states three forms of organizational capital form intellectual
capital: structural, human and customer. Structural capital is the organizational tools that
promote knowledge by connecting people to the explicit data or tacit experience they
need. Human capital is individual specific, and it is representative of the value the
employee to the firm. Customer capital is the value of an organization’s relationships
with its clients (Stewart, 2001). Willcocks then argues that a fourth capital, social capital,
is the trust that it is built between the firm and the external community (Willcocks, 2004).
Outsourcing knowledge is desirable because it is the intersection of these four forms of
capital. The firm’s challenge is not only to identify where the knowledge advantage
occurs, they must then increase the knowledge exchange with these outsourced groups.
The organization has the incentive to keep all processes within its company and
therefore keep the knowledge generation to itself. There is no confusion of knowledge
ownership, and they control all rights to this intellectual capital. However, this closed
approach can ultimately be detrimental to innovation in knowledge creation. The firm
may be too entrenched in already used practices and the cultural climate to take
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advantage of all knowledge generation possibilities and utilization of external intelligent
resources.
Outsourcing through consultants can result in a benefit of rented knowledge that
is not readily absorbed within the company, as mentioned by Davenport and Prusak
(1998).
Although some knowledge might be transferred, the contract and arrangement
should be such that the organization will continually gain from the interaction. This
external and temporary relationship is an example of how the design of the outsourcing
process must be focused on creating KM systems in order to fully benefit from the
outsourcing itself.
Outsourcing groups need to be vigilant in addressing KM before the interaction
occurs. Due to managerial fears about losing valuable knowledge to the outsourced
party, the framework for dealings needs to be established well before the relationship
takes place. The agreement should be arranged so that knowledge can be transferred and
leveraged. While the outsourcing occurs, the groups need to constantly analyze the
critical knowledge and how it can be captured and transferred. A governance board or a
hierarchal knowledge management system is a productive knowledge management tool
that can ensure that knowledge will be retained by an organization after the outsourcing is
complete. Also, Service Level Agreements (SLA) provide a clear documentation for the
outsourcing parties and can provide better control over the knowledge acquisition process
(Aydin, 2008).
Choosing the right individuals to manage the outsourcing relationship is
imperative to the ultimate success of the venture as well as future relationships. Ideally,
the benefit of the knowledge outsourcing will be reciprocal for all parties involved and all
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will be working towards a common, profitable goal. However, the competitive nature of
firms vying for resources will deteriorate this relationship and make it difficult for
outsourcing parties to benefit from the process. Maintaining the outsourcing relationship
is a complicated, yet important process for ensuring that all parties can mutually benefit.
The outsourcing relationship should be a cross fertilization of ideas. “When
managers at Deere made the decision to source a hydrostatic transmission from a
supplier, they simultaneously created a group of engineers to work closely with its
supplier engineers” (Venkatesan, 1992, p. 103). This paring of resources between the
outsourced party and the firm may seem redundant or evidence of a poorly designed and
inefficient system. However, this system ensures that any knowledge creation can be
retained within the firm. Those who manage the outsourcing should be vigilant in
creating this joint focus. “Provide ongoing training and job shadowing so that critical
institutional knowledge isn't lost if an IT worker were to leave the outsourcer (Hoffman,
2004, pg. 50).
Addressing the knowledge gap when people leave the company is an important
process in managing knowledge during outsourcing. The firm must identify the key
employees and knowledge centers. Aydin and Bakker (2008) mention that an
interviewee discussed the Sarbanes-Oxley law’s effect in their firm’s identification of key
areas and personnel. Care must be taken to recognize critical points in which one person
or only a select group of people control knowledge.
Walden and Wetherbe (2005) argue that exclusivity concerns should be addressed
before the decision to outsource innovation. “Companies hoping to strike similarly
advantageous deals must recognize that information assets (intellectual property) differ
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from physical assets in that they can be at once given away and retained” (Walden &
Wetherbe, 2005, p 32.). The authors describe Merrill Lynch’s outsourcing deal with
Bloomberg in 1983 to build a software program for delivering the most current financial
data to the firm. They created an agreement in which Merrill Lynch would have
exclusive rights to the software in the initial period and retain a share in its interests.
Merrill Lynch not only had the advantage of being the first to market with this
innovation, they made a large profit from selling off its share of the company in 1996.
This structure exemplifies strategic knowledge outsourcing through foresight to ensure
that the company will benefit from the knowledge creation and transfer, as well as
maintain incentives for the innovation.
The following is a case study discussion concerning designing outsourcing
relationships for knowledge transfer through a social capital lens. Rottman (2008)
presents eight practices in which companies can foster and promote social capital to
transfer knowledge in strategic alliances. Social capital is the network of trust that
promotes the exchange of ideas and knowledge. Specifically, he uses framework
developed by Inkpen and Tsang (2005) to reveal these social capital building practices in
three areas: structural, cognitive and relational. Rottman develops these practices by
examining a case study of two outsourcing attempts by US Manufacturing’s Software
Center of Excellence (SCE) to have the outsourced supplier “…create the embedded
software intended to control the steering systems and interface with the GPS satellites”
(Rottman, 2008, p. 34). According to Rottman, the first attempt was unsuccessful
because the firm did not foster social capital and therefore did not adequately design the
outsourcing relationship’s knowledge transfer system.
“Their success in the second
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attempt can be attributed in large part to the paying of significant attention to he
knowledge transfer processes and creation and cultivation of social capital” (Rottman,
2008, p. 32).
The first successful structural practice employed by the SCE was using multiple
supplier firms “to enhance network ties and increase social networks” (Rottman, 2008, p.
36). In the first attempt at outsourcing to a single supplier, the SCE found they were apt
to protect proprietary knowledge and core competencies, and hence, the relationship was
rooted in distrust. With multiple suppliers, the overhead and transaction costs did
increase, however, the gains in the ability for knowledge transfer were higher. SCE was
able to obtain a diverse set of ideas, viewpoints, styles and expertise. Additionally, SCE
was able to protect against loss of intellectual property because no one organization had
the key to all of their trade secrets. The supplier firms only had fragments and could not
assemble the intellectual property as a whole, which helped SCE to be able to have
symbiotic relationship of knowledge sharing and creation with the supplier firms.
The second structural practice identified by Rottman (2008) was the division of
work into small segments. Since the SCE was using three suppliers, the work was
already being divided up into pieces. This process was extended into defining specific
tasks and objectives even further and identifying responsible teams for each task.
Although this may seem like micro-managing the entire project, this created a network of
ties that increased the social capital among all firms. Specifically, he describes the
resulting network landscape as nodes (teams) with strong and weak ties to other nodes.
“In the case of US Manufacturing, the strong ties facilitated trust, reciprocal information
exchange and performance, while the weak ties facilitated the generation of new
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information” (Rottman, 2008, p. 37). Additionally, Rottman asserts this increased
network utilization increased the frequency of exchanges between US Manufacturing and
the three suppliers and created multiple connections between them also. “Successful
knowledge managers realize that knowledge is transferred through multiple channels that
reinforce each other” (Davenport & Prusak, 1998, p. 159).
The third structural practice that SCE used relates to the previous discussion of
job shadowing to mitigate against employee turnover. The SCE insisted on maintaining a
stable network to encourage interpersonal relationships and ease knowledge transfer.
One way in which they ensured this was requiring supplier employees to commit to one
year on the project or have the suppliers to cover the costs of training replacements
(Rottman, 2008). This process promoted a common understanding and frame of
reference that subsequently encouraged knowledge transfer.
Rottman (2008) asserts there are four cognitive practices the SCE used to
successfully increase social capital. The first practice is to physically visit the supplier to
understand their culture and build personal associations. Davenport and Prusak (1998)
also state the value of face-to-face meetings for the increased propensity to share tacit
knowledge. The second cognitive practice, or social awareness measure, the SCE used
was to explicitly state the goals of the outsourcing strategies to all parties involved.
Specifically, they stated that the goal was to disseminate the workload, not to decrease
the number employed. This allowed both groups to feel as though they were not
competing for their job survival and incented their desire to share their knowledge. The
third cognitive practice the SCE used was to integrate the suppliers’ employees with
internal employees to feel like a cohesive group through project development and social
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activities. This fostered the “common ground” that Davenport and Prusak (1998) declare
is necessary for knowledge transfer success. The fourth cognitive practice was to
conduct supplier and internal employee training simultaneously. This fostered a
collaborative environment and established the method for exchanging the considerable
amounts of information needed to develop the software.
The last dimension that Rottman (2008) discusses in his case study of the SCE is
increasing social capital through the relational practice developing trust by stating how
outsourcing would enhance internal career trajectories. This required future project
forecasting and determining demand for internal employees. “The open communication
of the vibrant internal career path and long-term commitment to suppliers laid the
foundation for trust among the parties. Both sides saw the benefit of the relationship”
(Rottman, 2008, p. 41). Fostering trust, the repeating benefit of increased social capital,
develops the propensity to share information among individuals.
The social capital of a firm, detailed through a case study by Rottman, yields a
KM framework to accommodate for several measures that affect knowledge transfer.
Khamseh and Jolly (2008) emphasize four components influencing knowledge transfer
levels: the characteristics of knowledge, absorptive capacity of partners, reciprocal
behavior, and the nature of the alliance activity. They assert that tacit, complex, core and
non-complementary knowledge is the most difficult to transfer through strategic
alliances. Conversely, the explicit, simple, non-core and complementary knowledge is
the easiest to transfer. The SCE’s practices targeted these areas of knowledge that are
difficult to transfer by creating incentives to share the tacit, complex and core knowledge.
They designed training methods to facilitate non-complementary knowledge sharing.
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In regards to knowledge transfer and the absorptive capacity of the partners, prior
relationships and interconnectedness of transferred knowledge with existing knowledge
contribute to increased knowledge transfer (Khamseh & Jolly, 2008). The relationship
that the SCE developed had created a network that would be prone to and planned for
future relationships and projects. Additionally, they have cultivated and invested in a
knowledge base that will most likely be compounded upon in the future. Knowledge
absorption in these future outsourcing relationships will increase.
Reciprocal behavior is another factor that affects knowledge transfer. As stated
previously, the each party desires to protect their core knowledge and intellectual
property. “Partners often respond to each other’s limiting of information sharing by
further reducing their own sharing, an action that inhibits knowledge transfer by the focal
firm” (Khamseh & Jolly, 2008, p. 43). This reciprocal behavior failure occurred during
the SCE’s first outsourcing attempt and significantly reduced knowledge transfer.
Another aspect of reciprocal behavior Khamseh and Jolly stress is the partner’s desire to
learn. “Without this intent, a partner is less likely to commit resources to knowledge
transfer and less likely to take actions to appropriate a firm’s knowledge” (Khamseh &
Jolly, 2008, p. 44). It is clear the SCEs knowledge transfer efforts would have been in
vain had their supplier firms not desired or demanded the same efforts. And the final
reciprocal behavior Khamseh and Jolly describe is trust. The SCE resolved this issue by
outsourcing in pieces to many suppliers and also creating a unified and cohesive group.
Lastly, Khamseh and Jolly assert the character of the strategic alliance
relationship affects knowledge transfer. “While the exploitative alliances aim at
efficiency, knowledge application, and value-adding, the explorative alliances focus on
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innovation and knowledge creation (Khamseh & Jolly, 2008, p. 45). The exploitative
relationship encourages knowledge protection of core competencies and the explorative
relationship necessitates sharing in order to create new knowledge, as described in the
SCE case study.
Some organizations do not have the metrics by which to measure the knowledge
gains and transfers through outsourcing. The Knowledge Value Added measurement can
embody the gains from outsourcing to be able to determine knowledge transfer (Wu,
2007). These quantified gains can be the benchmark to which the success of how well
the outsourcing knowledge management system is designed and also warrant future
outsourcing.
Regardless of how success is measured, it is clear that the structure of the
outsourcing relationship must be considered prior to the outsourcing and continuously
monitored to incent knowledge transfer. To outsource innovation, these several
interdependent factors must be addressed in designing the knowledge management
system. Leveraging knowledge transfer can then become an asset to the firm and ensure
its survival in an innovative society.
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