they produce client services in both types of service production (i.e., services characterized by either sequential task interdependence or reciprocal task interdependence).
Our findings show that interactions with clients in the service-production process do not uniformly contribute to the development of human capital capabilities, organizational capital capabilities, and management capabilities. Moreover, neither sequential nor reciprocal tasks contribute to the development of all three capabilities, which implies some potential managerial challenges. We summarize the different contributions to capability development in Table 2-3.
Table 2-‐3 Capability development of sequential and reciprocal services
Sequential services Reciprocal services Propositions Human capital capabilities Not developed Developed P1
Organizational capital
capabilities Developed Not developed P2 Management capabilities Developed Developed P3
Implications for future research
This study contributes to our understanding of the contribution of client interaction on the capability development of service providers. In addition to the capabilities discussed above, the extant research has noted that emerging-market firms do not always possess capabilities from the outset, although they do possess factor-cost advantages. Thus, linkages with and spillovers from developed-market firms (including client firms) are crucial for the development of capabilities in emerging-market firms (Matthews, 2002; 2006). Recent work finds that even though firms from emerging markets engage in innovative activities, they have not necessarily caught up with developed-market firms (Awate et al., 2014; Brandl and Mudambi, 2014).
More specifically, the study makes three contributions to the research on offshore outsourcing of services. First, while previous research predominantly studies offshoring from a client-firm perspective, we adopt the perspective of the service provider firm. We therefore address the research gap described in the introduction of the paper. Second, we identify the roles played by different types of service activities in the development of capabilities in service provider firms. By taking an activity-based perspective in our analysis of responses to questions pertaining to firm strategy (Johnson et al., 2003), we are able to uncover dimensions of offshore outsourcing and capability building at a more fine-grained level of analysis. In this regard, the study more broadly contributes to our understanding of the impact of offshore outsourcing on the competitiveness of service provider firms. As a significant part of the services-outsourcing industry consists of firms from emerging markets, which is also the case in our study, the paper also relates to the evolving research stream on the nature and growth of emerging-market firms (e.g., Cuervo-Cazurra, 2012; Narula, 2012). Third, the study contributes to the theoretical discussion in the research strand on firm resources and capabilities, as it is connected to questions raised by strategy scholars concerning how heterogeneous firm resources and
capabilities may be built (Dierickx and Cool, 1989; Kraajenbrink, Spender, and Groen, 2010; Maritan and Peteraf, 2011), and whether such resources and capabilities may stem from firm- internal or firm-external sources (Barney, Ketchen, and Wright, 2011; Dyer and Singh, 1998; Johanson and Vahlne, 2009; Kedia and Mukherjee, 2009; Maritan and Peteraf, 2011).
In this regard, our findings also suggest that there may be linkages between the literature on firm resources and capabilities and the literature on global value chains. The latter stream of literature has addressed questions relating to the role of firms from emerging markets and developing countries in global value chains, the barriers to and possibilities for entering the global value chains, and the potential for upgrading and business development (e.g. Gereffi, Humphrey, and Sturgeon 2005). The global value chain literature proposes that the learning required to develop and enhance capabilities can be time consuming, path dependent, and challenging. Thus, learning from external sources, such as a client, may expedite this process and assist in upgrading capabilities (Gereffi et al., 2005). By investing in close ties with developed-market clients, emerging-market firms enter into relationships that may help with the development of capabilities and enable them to achieve mature-market standards through spillovers (Mudambi, 2008).
A discussion of capability development lends itself to a more nuanced view of the upgrading mechanisms discussed in the global value chain literature. We found that the combination of the existing knowledge base with new knowledge acquired from clients led to functional upgrading (Humphrey and Schmitz, 2000; 2002), whereby the service providers expanded their range of offerings and provided more sophisticated solutions to existing problems. Moreover, the combination of client demands with service providers’ initiative enhanced in-house human and management capabilities, which also led to functional upgrades.
Furthermore, the development of organizational capital capabilities through the performance of sequential tasks contributed to process upgrades for the service provider. The enhancement of organizational capital capabilities led to an increase in the overall knowledge stock within the service provider firm, which allowed it to replicate such processes in other client accounts. We see this point as a contribution to the global value chain literature, as we demonstrate the specific mechanisms and processes through which capabilities are developed, which in turn leads to process or functional upgrading within a firm. In other words, our study sheds light on the mechanisms through which the service providers’ capabilities are enhanced through linkages and interactions with the client.
While the global value chain literature has been preoccupied with barriers to entry, the subordinate role of firms from emerging markets and developing countries in the global value chains, and the difficulties such firms face in upgrading their services and products (e.g., Buckley, 2009; Palpaucer, Gibbon, and Thomsen, 2005; Thomsen, 2015), our findings highlight positive influences on capability development in service provider firms. However, our findings also support such points from the global value chain literature, at least to some extent, as they show that linking with, learning from, and leveraging knowledge from client firms are not panaceas for the business-development challenges faced by service provider firms. The impact of interactions with clients in the offshore outsourcing of advanced services is positive, but it seems to offer only the potential for sustaining and building competitive advantage. Significant efforts on the part of service provider firms are required to explore and exploit that potential. We elaborate on this point in our discussion of the strategic implications for service provider firms. In sum, our findings suggest that there are clear parallels between research on capability
development in the literature on firm resources and capabilities, and the upgrading phenomenon as discussed in the global value chain literature.
Implications for firm strategy
While the enhancement of human capital through reciprocal activities is attractive for individual employees, human capital capabilities are not necessarily translated into and/or embedded at the organizational level in either a business unit or the firm as a whole. The high attrition rates often observed among service providers in India suggest that service providers struggle to ensure that the knowledge capabilities built at the individual level are transferred and scaled-up at a more aggregated organizational level. If the service provider firm does not succeed in this regard, then the individual’s contributions to human capital and competitive resources are likely to be very limited. The knowledge remains with the individual employee and, therefore, disappears when that individual leaves the firm.
This is analogous to sequential service production, where we see a contribution to organizational capital capabilities but no development of new content knowledge or other forms of human capital capabilities. Organizational routines are built, but they simply entail the execution of business processes as defined by the client without any accompanying development of human capital capabilities. The value added for the service provider in terms of developing resources that may be used for further business development or advancing the service offering is consequently limited. While the development of organizational capital capabilities benefits the service provider by increasing its explicit knowledge stock, this can be a short-term strategy for the service provider. Industry trends show that the relocation of advanced services such as R&D activities to India is increasingly common (Lewin et al., 2009), but these activities are largely reliant upon tacit knowledge and the co-creation of new knowledge. Therefore, enhancing
organizational capital capabilities of the sort observed in this study may not lead to a long-term competitively favorable position within the Indian or global outsourcing industry.
Continued engagement with clients can lead to additional functional and product upgrades, as the service providers can provide a broader range of more sophisticated solutions. However, there is one potential pitfall—employees working with specific clients might accumulate idiosyncratic knowledge and develop human capital capabilities that are closely tied to particular clients. While the production of more sophisticated services may be beneficial for clients, it may not translate into increased competitiveness for the service provider as a whole. The relationship may become stronger and employees may gain more experience, which may be important for maintaining the relationship and the contract with the client. Beyond these aspects, however, the positive implications for the firm might not be significant.
From a managerial perspective, we show that the development of capabilities at, for example, the human-resource level does not automatically translate into organizational capital capabilities. We identify some limitations of capability development. In particular, managers need to ensure that developed capabilities are retained in house, and not lost through attrition or an inability to convert tacit knowledge into organizational standards. In view of the growing competition in emerging markets, these implications are important for service providers and, if effectively managed, they can significantly affect their performance and competitiveness. In addition to employee attrition, service providers could mitigate these risks by taking a strategic approach to the selection of partners, and ensure that they carry out both sequential and reciprocal activities. This may ensure that the service provider benefits from the development of various capabilities through partnerships with these clients. Our study suggests that services providers are best served by adopting a selective, targeted approach in their client-selection
strategies, as we find a direct link between the types of service production undertaken by the service provider and the development of the firm’s own capabilities.
2.5 CONCLUSION
In this multiple case study, we analyzed how offshore outsourcing of advanced service activities contributes to the development of capabilities in service provider firm. We also examined how different types of task interdependence in the service-production process influence this development. We find support for our overall hypothesis that the development of various capabilities is influenced by the characteristics of the service-production process. More specifically, we show that when advanced services characterized by sequential task interdependence are offshore outsourced, the service provider firms develop organizational capital capabilities and management capabilities. At the same time, human capital capabilities remain unchanged. In contrast, when advanced services characterized by reciprocal task interdependence are offshore outsourced, the development of human capital capabilities and management capabilities is supported. However, this type of service production does not support the development of organizational capital capabilities. It follows that neither type of service production contributes simultaneously to the building of all three types of capabilities, which together constitute the dependent variable in the study.
We discussed the strategic implications for service provider firms resulting from the influence of the two types of service production. Moreover, we presented three propositions for further investigation in larger-scale studies, and we have positioned our findings in relation to the literature on firm resources and capabilities, and the literature on global value chains.