Organisational innovation, information technology, and outsourcing to business services

Hölzl, Werner, Reinstaller, Andreas and Windrum, Paul (2005). Organisational innovation, information technology, and outsourcing to business services. UNU-MERIT Research Memoranda. UNU-MERIT.

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  • Sub-type Working paper
    Author Hölzl, Werner
    Reinstaller, Andreas
    Windrum, Paul
    Title Organisational innovation, information technology, and outsourcing to business services
    Series Title UNU-MERIT Research Memoranda
    Volume/Issue No. 30
    Publication Date 2005
    Place of Publication Maastrich
    Publisher UNU-MERIT
    Pages 19
    Language eng
    Abstract This chapter examines the relationship between organisational innovation, the introduction of new internet-based ICTs, de-verticalisation, and the rapid growth in business service outsourcing over the last decade. In order to examine this issue, we develop a model of organisational innovation. In this model, the goal of managers is to identify an organisational design that more effectively integrates all the administrative activities of the firm. As part of the process of innovation, the managers can choose to carry out an administrative activity in-house, or to outsource that activity. A key factor influencing this decision are the relative information costs of organising activities internally and the information costs associated with setting up and maintaining interfaces with external suppliers. The framework has been implemented in a novel model of organisational innovation. Simulations conducted on this model enabled us to consider the short- and long-run impacts of outsourcing on administration overheads and on long-term productivity growth. The interesting finding is that managers of a firm can become locked into a low productivity growth trajectory, associated with the outsourcing of activities, if they are myopic and learn through their own actions. They perceive outsourcing to cut overhead costs in the short-run (as expected), and so engage in further outsourcing thereafter. This is to the detriment of long-run productivity gains (system economies) generated though organisational innovation. This occurs because the potential for organisational innovation is reduced when modular components are outsourced, placing them beyond the control of the firms' management. The findings accord well with the empirical data, and provide a salutary warning for managers and policy-makers about the potential long-term implications of outsourcing.
    Keyword Outsourcing
    Organizational innovation
    Long run productivity development
    JEL D23
    D24
    D83
    O33
    Copyright Holder UNU-MERIT
    Copyright Year 2005
    Copyright type All rights reserved
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    Created: Fri, 13 Dec 2013, 12:38:40 JST