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 threeforms of organizational capital form intellectual capital: structural, human and customer. Structural capitalis 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 capitalis 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 mustthen 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 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 creatingKM 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 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 shadowingso that critical institutionalknowledge isn't lost if an IT workerwere 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 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 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 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 goalsof 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 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.
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 ofinformation sharing by further reducing their own sharing, an action that inhibits knowledgetransfer 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 toknowledge 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 atefficiency, knowledge application, and value-adding, the explorative alliances focus oninnovation 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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Michaelsen