Does Peripheral Knowledge Complement Control? A Study of Software Services Outsourcing Alliances

Abstract

While the normative logic for forming technology outsourcing alliances is that such alliances allow outsourcing firms to specialize deeper in their domain of core competence without being distracted by non-core activities, recent empirical studies have reported the puzzling phenomenon of some firms continuing to invest in R&D in domains that are fully outsourced to specialized alliance partners. An underlying - and widely made - assertion that can potentially reconcile this contradiction is that "peripheral" knowledge (specialized knowledge in the domain of outsourced activities) complements control in technology outsourcing alliances. However, this assertion is untested; and empirically testing it is the objective of this research note.

Using data from 59 software services outsourcing alliances, we show that such peripheral knowledge and alliance control are imperfect complements: Peripheral knowledge complements outcomes-based formal control but not process-based control. Thus, outsourcing firms might sometimes need knowledge outside their core domain because such knowledge facilitates effective alliance governance. Our theoretical elaboration and empirical testing of the assumed complementarities between peripheral knowledge and control in technology outsourcing alliances has significant implications for strategy theory and practice, which are also discussed.

Keywords: Peripheral Knowledge, knowledge management, outsourcing, control theory