Journal of International Management 19 (2013) 377–389

Contents lists available at ScienceDirect

Journal of International Management

Creating value through offshore outsourcing: An integrative framework

Debmalya Mukherjee a,⁎, Ajai S. Gaur b,1, Avimanyu Datta c

a Department of Management, College of Business Administration, The University of Akron, Akron, OH 44325, USAb Department of Management and Global Business, Rutgers Business School, Newark and New Brunswick, 1 Washington Park, Newark, NJ 07102, USAc Illinois State University, MQM Department, College of Business, Campus Box: 5580, Normal, IL 61790-5580, USA

a r t i c l e i n f o

⁎ Corresponding author. Tel.: +1 330 972 7039; faxE-mail addresses: mukherjee.debmalya@gmail.com

1 Tel.: +1 732 646 5094; fax: +1 973 353 1664.

1075-4253/$ – see front matter © 2013 Elsevier Inc. Ahttp://dx.doi.org/10.1016/j.intman.2013.03.015

a b s t r a c t

Article history:Received 27 March 2013Accepted 28 March 2013Available online 16 May 2013

This article proposes an analytical framework to explain value creation through offshoreoutsourcing by addressing a key question: How do firms create value by outsourcing theirbusiness functions to foreign external providers? The growing prevalence of offshoreoutsourcing as a dominant business practice in global business makes this question worthy offurther research attention. Situated within the organizational design literature, our proposedvalue creation framework also draws from strategic resource management, disintegration,location-specific resourcing, and externalization (D–L–E) and contingency perspectives. Ouranalysis shows that firms embarking on offshore outsourcing create value by effectivelymanaging their internal and external resources in accordance with a changing globalenvironment. The framework has significant implications for theory and practice andsuggests avenues for further research.

© 2013 Elsevier Inc. All rights reserved.

Keywords:Offshore outsourcingResource managementValue creationDLE framework

1. Introduction

Offshore outsourcing occurs when firms relocate business functions that previously were performed in-house to independentservice providers located overseas. The use of offshoring as a strategic device is typical among firms from advanced economies,primarily because it helps client firms reduce productions costs in the short run (Maskell et al., 2007), and has potential to become astrategic device for value co-creation in the long run (Contractor et al., 2010; Liesch et al., 2012). Increasingly standardized businessprocesses as well as high valued-added activities, such as engineering, R&D, and product design are currently moving to offshoreexternal vendors (Jensen and Pedersen, 2011a, 2011b;Mudambi and Venzin, 2010). In addition to the cost savings they achieve fromwage differentials in emergingmarkets, firmsmay engage in offshoring to increase service quality, fend off competition, and augmenttheir existing resource base by acquiring qualified human capital around the world (Demirbag and Glaister, 2010; Doh et al., 2009;Larsen et al., 2012).

As offshore outsourcingmoves to the next level and includesmore value-added activities, the realization of suchdiverse objectivesmay become challenging, giving rise to complex questions such as how it can create value (Doh, 2005; Mudambi and Venzin, 2010).Indeed, the extant scholarly literature and a quick scanning of the popular business press indicate that in spite of the acknowledgedbenefits of offshoring, many firms fail to realize the same. For example, Larsen et al. (2012) note thatmany companies have started tocomprehend the difficulties and complexities associated with managing a globally dispersed organization. This realization indicatesthat as companies relocate their value chain activities across country borders, value creation becomes an increasingly difficultproposition. Recently, scholars have started to address this issue by adopting an organizational design perspective (Andersson andPedersen, 2010; Lampel and Bhalla, 2011). For instance, Srikanth and Puranam (2011)while studying the distributed work setting of

: +1 330 972 6588.(D. Mukherjee), ajai@business.rutgers.edu (A.S. Gaur), adatta@ilstu.edu (A. Datta).

ll rights reserved.

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business process offshoring, identify a distinct set of coordinationmechanisms that can offset the adverse performance consequencesof interdependence between onsite and offshore locations. Similarly, Andersson and Pedersen (2010) shed light on how to bestdesign the configuration of globally distributed R&D activities and underscore the importance of appropriate coordination and controlmechanisms that can create value by mitigating the costs arising from the complexities associated with offshoring. Collectively, thisstream of literature argues that offshoring is an organizational design issue which entails significant reconfiguration of a firm's valuechain activities and value is created through the development of firm-specific capabilities that help in the process of subsequentreintegration (Larsen et al., 2012). This proposition is in tune with the findings in the realm of strategy literature that suggest that afirm's ability to manage internal and external resources and capabilities is an important determinant of value creation in anincreasingly competitive, complex, and uncertain global marketplace (Karim, 2006, 2009; Karim and Mitchell, 2004; Sirmon et al.,2007, 2011).

Despite this acknowledgement that offshoring is primarily an organizational design issue (Kumar et al., 2009; Larsen et al.,2012), the scholarly literature has surprisingly paid scant attention to better understand the resource management processesand capabilities that are important for the success of offshoring as a strategic tool. As offshoring activities gain impetus and ascomplex tasks spanning several locations and centers of innovation and multiple regional service delivery bases arise, moreresearch is needed to better understand the specific success factors associated with this strategic device (Kenney et al., 2009;Larsen et al., 2012; Mudambi and Venzin, 2010).

We attempt to provide such insight by conceiving the value creation in offshore outsourcing as an organizational designprocess by which resources and capabilities of the offshoring organization are restructured, re-bundled and leveraged. Weintegrate organizational design (Karim, 2006, 2009; Karim and Mitchell, 2000; Kumar et al., 2009) and resource orchestrationperspectives (Sirmon and Hitt, 2009; Sirmon et al., 2007, 2008, 2011) with disintegration–location–externalization (DLE)framework of offshoring (Kedia and Mukherjee, 2009; Mukherjee and Kedia, 2012) to establish the foundation for our analysis.Our framework goes beyond the DLE framework (Kedia and Mukherjee, 2009) by conceptualizing the phenomenon of offshoreoutsourcing as a set of strategic actions that help firms reconfigure, acquire, and modify their organizational structure andultimately their resource bases to keep pace with environmental changes (Capron andMitchell, 1998; Capron et al., 1998; Karimand Mitchell, 2000). More specifically, our framework identifies the specific resource management processes and associatedenvironmental contingencies that enable offshore outsourcing firms to create value by managing their internal and externalresources and capabilities in a dynamic environment.

The process of offshore outsourcing entails the firm-specific disintegration of different functions or activities, the pursuit of suitablelocation(s) for appropriate service provider(s), and the externalization of those processes to an independent provider in a foreigncountry (Kedia andMukherjee, 2009). Consistentwith this, we conceptualize three components of the resourcemanagement processmodel—resource restructuring, resource rebundling, and leveraging externalized resource bundles—in an offshore outsourcingcontext and integrate these stages with the DLE framework. Our theoretical framework addresses the following research questions:

• What resource management processes and capabilities are required to achieve value creation in offshore outsourcing?• What factors affect the development of these capabilities?

By noting the dynamics of value creation through offshore outsourcing, we contribute to the existing literature in two ways. First,we respond to recent calls for integrative research that recognizes that global sourcing is an organizational design issue whichencompasses both ends of the firm's value chain and the need to explore firm-specific mechanisms that create value by offsetting thecomplexities and uncertainties associated with the process (Kumar et al., 2009; Larsen et al., 2012;Manning et al., 2008). Second, weidentify various factors underlying different resource management stages and investigate how they affect the value creation process.By adopting an organizational design view of offshoring, and by specifying the associated contingencies in each stage,we significantlyextend the extant literature that discusses value creation (e.g., Doh, 2005; Kedia and Mukherjee, 2009). Our discussion on thecontingencies contributes to the contingency theory of firm (Chandler, 1962; Lawrence and Lorsch, 1967) and emphasizes theviewpoint that the processes involved inmanaging global resources also depend on the domestic and global environmental context inwhich firms operate.With our proposed framework, we offer both theoretical and practical guidance for value creation in the contextof offshore outsourcing.

The remainder of this article is organized as follows: First, we elaborate on the importance of value creation in offshoreoutsourcing and the concept of value as discussed in the extant literature and from an organizational design perspective.Second, we provide an overview of offshore outsourcing in the context of strategic resource management frameworks with afocus on organizational reconfiguration literature. Third, we introduce our integrated value creation framework to describe howvalue creation occurs, alongwith a detailed discussion on how to understand value creation in each of the resourcemanagementstages. Fourth and finally, we explicate the importance of our proposed framework for both researchers and practitioners.

2. Value creation in offshore outsourcing

The notion of value creation has received considerable attention from business scholars. There is consensus amongst researchersand practitioners that wealth or value creation is the principal purpose of business (Conner, 1991). In general, value refers to thedifference between the benefits derived and the costs incurred in pursuing a particular strategy (Sirmon et al., 2007). In the context ofoffshore outsourcing, the process of value creation remains a central issue (Doh, 2005; Jensen and Pedersen, 2011b; Kedia andMukherjee, 2009; Liesch et al., 2012). For example, Bryce and Useem (1998) argue that the concept of value differs for outsourcersversus providers. For the offshoring organization, sources of value creation include access to the expertise and economy of scale

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offered by the provider, a greater focus on strategic issues rather than routine activities or operational problems, alternative uses ofthe capital freed up by linking with the provider, increased innovation capabilities, and increased product market performancethrough better service delivery. These value enhancement avenues may enhance the outsourcer's stock price performance, reduceoperating costs, improve service performance, and generate an overall strategic advantage.

The literature exploring the relationship between offshoring and subsequent performance measures has found mixedresults. Early studies, for instance Murray and Kotabe (1999) find that internal and foreign sourcing of services is actuallynegatively related to firm performance. In addition, Mol et al. (2005) while examining 200 manufacturing firms in Netherlandsfind no effect of international outsourcing on firm performance. Similarly, Bhalla et al. (2008) explore the linkage between afirm's performance and the extent of its international outsourcing of IT-enabled services, focusing on large Western companies.These authors used accounting based measures of financial performance over a six year period from 1999–2004, and find nolinkage between outsourcing and financial performance. On the other hand, Lewin and Peeters (2006) find that organizationalbenefits from offshoring for the client companies often exceed the initial expectations.

More recent studies, however, have found more positive results. For example, Nieto and Rodriguez (2011) find a positiverelationship between R&D offshoring and focal firm innovation capabilities supporting the view that offshoring firms benefit fromlocation-specific and specialization advantages. Likewise, Bertrand (2011) also finds a strong positive relationship between offshoreoutsourcing and export performance, arguing that outsourcing reduces productions costs and increases flexibility. Additionally, theyalso observe that certain firm-specific capabilities accentuate the positive effect of outsourcing on performance.

It is apparent from this discussion that although offshoring may provide certain benefits to the client firm, such benefits are notoften easy to realize. Relocation of formerly co-located activities often involves unexpected challenges and uncertainties that arereferred to as ‘hidden costs’ (Larsen et al., 2012). Such costs frequently offset the straightforward benefits that could have beenderived from offshoring. Thus, companies that are able to surmount these challenges may outcompete their rivals that are also usingoffshore outsourcing as a strategic tool. Researchers addressing this issue have started to identify the mechanisms and conditionsunder which a focal firm may become successful. From a configuration view of strategy, Lampel and Bhalla (2011) suggest thatrelocation of high-value activities disrupts the existing configuration of the organization and often destroys the potential of valuecreation. Based on an in-depth case study, they suggest that the process of offshoring is often a ‘learning experience’ inwhich the focalfirm may have to adapt and adjust the linkages that tightly couple the offshored activities with the core configuration. Similarly,Jensen (2012) exploreswhat contributes to the resource-stock enhancement of client firms and identifies the factors thatmay hinderthe resource building process.

From a somewhat different level, theDLE framework, as proposed byKedia andMukherjee (2009) contends that the juxtapositionof three sets of interrelated advantages that firms perceive can explain why they embark on offshoring (Kedia andMukherjee, 2009).They argue that firms contemplate offshoringwhen they have advantages associatedwith the disintegration of the non-core activitiesfrom their value chain. These disintegration advantages likely stem from increasedmodularity in their structure or increased focus ontheir core capabilities. Another set of advantages results from location-specific resourcing: Firms attempt to harness superior externalresources and move offshore if location-specific advantages, such as, a good infrastructure, low wage rates, and better qualityintellectual capital, suggest non-core support activities can be completed outside their value chain. Finally, boosted by the advantagesassociated with externalization, such as co-specialization and organizational learning, firms might externalize the first two sets ofadvantages to independent offshore service providers.

Collectively, although the extant literature has identified an important set of antecedents that drive value creation throughoffshoring, the specific resource reconfiguration processes that contribute to value creation remain implicit. We attempt to fill thisvoid. In this paper we go beyond the extant literature in suggesting that in order to more fully understand the question of valuecreation in offshore outsourcing we should look more closely at the resource management processes of a focal firm, identifyspecific capabilities, and emphasize the environmental contingencies under which the resource portfolio of the client firm isreconfigured. To gain a deeper understanding of these processes, we next discuss the notion of strategic resource managementframework as developed by Sirmon and his colleagues (Sirmon and Hitt, 2009; Sirmon et al., 2007, 2008, 2011).

3. Strategic resource management and offshore outsourcing

In pursuit of the answer to the central question of strategic management—why do some firms perform better than others?—strategy scholars have investigated performance from several different vantage points. However, starting in the 1980s, theresource-based view (RBV) of the firm became a dominant framework to analyze this issue (Barney, 1986, 1991; Wernerfelt, 1984).RBV assumes resource heterogeneity (i.e., competing firms possess different bundles of resources) and resource immobility (i.e.,resource differences may persist), such that organizations are heterogeneous bundles of resources that inhere to the firm insemi-permanent fashion (Barney, 1991;Wernerfelt, 1984). According to the RBV, resources combine or emerge over time to generateunique capabilities, which increases a firm's competitive advantage (Amit and Shoemaker, 1993). In other words, firm-specificresources and capabilities that are unique, inimitable, non-substitutable, and rare form the bases for competitive advantage (Barney,1991; Wernerfelt, 1984). Thus, the RBV has been extensively used to identify and explain persistent performance differences (Lahiriet al., 2012; Sirmon et al., 2011).

It must be noted that the RBV did not originally aim to explain firm boundaries (Barney, 1986; Peteraf, 1993). However, from astrategic perspective, the RBV suggests that competitive advantage is a function of the resources a firm develops or acquires toimplement its product market strategy (Wernerfelt, 1984). Day (1994, p. 38) classifies resources in two categories: assets, or“resource endowments the business has accumulated,” and capabilities, which “are the glue that brings these assets together.”Hence,

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resources are the tangible and intangible assets that firms control and capabilities are the ability to perform ‘a coordinated set of tasksutilizing organizational resources’ (Helfat and Peteraf, 2003, p. 999). Firms that can accumulate distinctive assets and capabilitiesachieve a competitive advantage over competitors (Barney, 1991; Lahiri et al., 2012).

Extending this argument, Sirmon and his colleagues posit that the firm's ability to manage its resource portfolio affects itsperformance (Sirmon and Hitt, 2003, 2009; Sirmon et al., 2007, 2011). The presence of resources alone is unlikely to predict firmperformance differentials; rather, resources provide competitive advantages only when they are managed strategically (Helfat et al.,2007). Accordingly, strategic resource management is not readily imitable by rival firms, is often idiosyncratic, and remains deeplyembedded in the unique context of the focal firm (Lahiri et al., 2012; Sirmon et al., 2011). From an organizational design perspective,this process includes structuring the resource portfolio, bundling resources to form capabilities, and leveraging capabilities to createwealth (Sirmon and Hitt, 2003; Sirmon et al., 2011). The extension of RBV arguments to organizational design literature is not new.For example, Karim andMitchell (2000) demonstrate how firms use acquisitions in order to reconfigure their business aswell as theirexisting resource stocks. Karim (2006) integrates the strategy–structure literaturewith research on dynamic capabilities and suggeststhat a firm's structure and its internal resource combinations are dynamic in nature and constantly evolving. Following this logic, weargue that by offshore outsourcing firms restructure their resource portfolio through disintegration; rebundle resource stocks withlocation-specific resourcing, and leverage externalized capabilities (acquired from offshore service providers) to create value.

4. Toward an integrative framework

There are three critical resource management stages in offshore outsourcing: restructuring of internal resources, acquiringoffshore human capital, and leveraging externalized knowledge resources. Our conceptualization follows an intellectual movementthat increasingly looks inward to identify sources of competitive advantage and value creation (Adner and Helfat, 2003; Helfat et al.,2007). We argue that an offshore outsourcing client firm creates value by restructuring and refining its existing resource stocks andimproving their management and use.

Fig. 1 presents our value creation model. The arrow from location to externalization does not imply that externalization alwaystakes place after the location decision; these decisions often are simultaneous (Hatonen, 2009; Jensen, 2009; Mudambi and Venzin,2010). We also incorporate various sub-processes in each stage. However, because the firm must have resources to bundle intocapabilities and because capabilities must exist for leveraging to occur, the resource management process is at least partiallysequential in nature. Furthermore, the model incorporates possible environmental contingencies associated with each process. For

Fig. 1. Offshore outsourcing: an integrative framework for value creation. Adapted from Sirmon et al. (2007) dynamic resource management model, Fig. 1, p 276.

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the sake of brevity and parsimony, our discussionmainly focuses on pertinent resources management processes and capabilities. Themanagement of resources is dynamic, and change results from adaptations to environmental contingencies and exploitations ofopportunities created by those contingencies. With Table 1, we attempt to facilitate the identification and differentiation of processesnoted in the resourcemanagementmodel.We also identify howwe canmeasure the key concepts of our framework in Table 1 in theright-most column.

4.1. Value creation at the disintegration stage and associated contingencies

Disintegration refers to the process of unbundling value chain activities into core (primary) and non-core (support) activities,divesting non-core resources, and redeploying scarce resources to core areas that represent the firm's competitive advantage. Beforewe discuss each sub-process, we briefly note the environmental contingencies that lead to disintegration at this particular resourcemanagement stage.

The processes involved in managing resources depend on the environmental context in which a firm operates (Lichtenstein andBrush, 2001). Three types of environmental factors may affect resource management processes at the disintegration stage. First,heightened competition in the global world has shortened the periods of competitive advantage enjoyed by firms (D'Aveni, 1994);the best ways to organize resources and activities in such environments remain unclear. Firms might restructure their resourceportfolio and disintegrate value chain activities; for example, one stream of research argues that organizations should be moreflexible, leaner, and more focused on their core competencies to stay competitive and responsive in hypercompetitive environments(Jacobides, 2005; Schilling and Steensma, 2001). Second, the resourcemanagement process at the disintegration stagemight providea means to reduce institutional uncertainty. Researchers caution that to achieve the expected benefits from offshore outsourcing,organizationsmust undertake careful planning as part of their overall strategy (e.g., Quinn and Hilmer, 1994).Managers actively seekuseful resources from their external environment, but institutional pressures may also prompt them to jump on the offshoreoutsourcing bandwagon, without fully evaluating the idiosyncratic risks and benefits. Third, the internal resource environment or the‘stickiness of knowledge’ issue (Srikanth and Puranam, 2011) of the firmmay lead to strategic uncertainty aboutwhich resources bestserve the core competencies and what can be divested to reap optimum benefits.

4.2. Restructuring the resource portfolio through disintegration

In this stage, a firm restructures its resource portfolio by evaluating its core and non-core areas, divesting less valuable resources,and refocusing scarce resources in the areas where the firm has competitive advantage. We briefly discuss each sub-process'scontribution to value creation.

Table 1Factors affecting the creation of value through offshore outsourcing.

Internal facilitators Accompanying processes Measures and sources

Disintegration considerations Strategic intent • The process of identifying core andnon-core areas (Evaluating)

• Core related specificity (Barthélemyand Quelin, 2006); Process KnowledgeStickiness (Srikanth and Puranam(2011)

Emphasis on innovation • The process of shedding off thenon-core resources (Divesting)

• New scale developed from Sirmon et al.(2010) and Wang et al. (2012)

• Developing organization-wide supportsystems for redeploying scarce resourcesin core areas

• Process of redeploying scarceresources to core areas (Refocusing)

• Percentage increase in investment(R&D, Marketing etc.) (Kor andMahoney, 2005)

Location considerations Environmental scanning to select ofcapable vendors/human capitalworldwide

• Process of choosing the right vendorsfor areas already divested (Locating)

• Location choice scales (ORN surveys)

• Developing internal capabilities fordeveloping suitable contracts

Process of choosing and contractingsuitable vendors and/or human capitalworldwide (Recruiting and Selecting)

• Global vendor management(Ranganathan and Balaji, 2007)

• Developing internal resources andknowledge management systems tosupport offshore partners

• Process of acquiring, keeping, andmanaging external human capital(Retaining)

• HR practices and Managerial support(Doh et al., 2011)

Externalization considerations Adoption of a collaborative mindsetwithin and across the organization

• Process of integrating externalresources into the internal knowledgemanagement system (Coordinating)

• Coordination mechanisms (Srikanthand Puranam, 2011); ProcessIntegration (Luo et al., 2012)

• Intent to work closely and learn fromoffshore partners

The process of organizing relevantinternal resources to support theexternal relationship (Collaborating)

• Partnership quality (Lahiri et al., 2012)

• Developing suitable absorptivecapacity and systems supportingco-creation with offshore partners

• Process of extending currentcapabilities and producing newcapabilities that render competitiveadvantages (Transforming)

• Innovation performance (Grimpe andKaiser, 2010)

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4.2.1. EvaluatingThe first step entails an evaluation of the activities and resources that can be offshored and those that must stay within the firm

boundary. Tangible resources such as financial capital or equipment and intangible resources such as domain expertise relate to anygiven function or value chain activity. Some activities are core to the business; others refer to peripheral functions, systems, andinfrastructure set up to support the company's value proposition, product line, or core business activity. These support systemsinclude human resource management, customer relationship management, sales, accounting, and general and administrativefunctions or services. Thus identifying core versus non-core or primary and support areas is not easy. Identifying the benefits of twodifferent procurement methods for the same transaction requires an intricate, nuanced analysis of the value chain (Tadelis, 2007).

The evaluation also is not straightforward.Make-or-buy decisions have long been central tomanufacturing environments though.For example, Li & Fung, which produces and exports private-label consumer goods, orchestrates a global network of vendors from 40countries to deliver its high-quality products. A parka might be assembled in China with fabric from Korea; label, elastic, and studsfrom Hong Kong; and a zipper from Japan. In contrast, business and knowledge processes tend to be more closely connected, withintensive human capital elements. To deal with the challenges of determining which processes can or cannot be disintegratedeffectively, prior research suggests two criteria. The first criterion refers to the offshore sensitivity of the business process—that is,how closely connected and interdependent the processes in question are. The second criterion determines whether the focal firmshould disintegrate certain tasks, irrespective of their offshorability. The loss of control that results from changing ownership mighterode a firm's core capabilities and resources, compared with retaining those activities and processes in house (Lei and Hitt, 1995).Reizeig andWagner (2010) argue, for example, that outsourcing might disrupt incremental in-house learning processes. Companiesshould consider several issues to evaluate the offshoreability of a business process.

Even when they have been disintegrated and outsourced, the delivery of processes must be synchronous and support real-timeinteractions with customers and entities within a firm. However, language and cultural differences may become exacerbated whenexecuting a business process outside the firm. Performing the processes often requires deep idiosyncratic knowledge of the companyand its products and services, which can be acquired only over time. Furthermore, unlike tangible products that feature easilypartitioned components, business and knowledge processes are interdependent. Accordingly, the complex evaluation stage includesidentifying core and non-core areas, then dissociating value chain activities and related resources.

The Indianapolis-based Conseco insurance and finance company offers a case in point. In April 2002, Conseco acquired a firm thatspecialized in customer service and back-office outsourcing to India and planned to move 14% of its U.S. jobs to India in the followingtwo years. But Conseco quickly backed away from its plan and announced that it had sold its interest in the outsourcing firm, as part ofits effort to refocus its resources and management on core businesses. Conseco also decided to return many of the outsourced jobs toits U.S. facilities, for two main reasons: a reduced volume of business and the need to exercise close control over the processes thatdirectly affected its relationshipswith current customers and distribution partners. The company admitted that it found someof theseprocesses difficult to manage successfully from a distance.

4.2.2. DivestingRecent management literature stresses the significance of flexibility in modern competitive landscapes (Lahiri and Kedia,

2011; Mudambi and Tallman, 2010). Firms must develop core competencies and human capital to achieve strategic flexibility andmodularity (Hitt et al., 1998), which then help them become more responsive to external demands. By divesting its unwantedresources, the offshoring firm can achieve greater flexibility and create value. Resource divestment refers to “the disposition of anasset from the firm's resource portfolio and the associated factor market transfer of that resource to another firm in the industry”(Moliterno and Wiersema, 2007, p. 1065). Moliterno and Wiersema (2007) also argue that resource divestment is anorganizational capability comprising a two-step process: the focal firm's motivation to divest, and then the decision about whichresources to divest. That is, divesting encompasses the process by which firms shed resources associated with their non-core areasand transfer them to the strategic factor market to create optimum value. If they divest less valuable resources, firms mightacquire more valued resources from strategic factor markets (Berry, 2010; Sirmon et al., 2007). Thus, resources that are abundant,less profitable, and related to offshorable business processes can be divested.

Firms alsomust determine if it will be profitable to seek outsourcing contract services for redundant support functions or sell themas an aggregate unit (Østbø et al., 2010). Divesting can instantly reduce operating costs, increase financial capital, and erasenon-performing assets from the balance sheet,without sacrificing any competitive advantage. Indeed, a recent trendby the offshoringfirms has been to divest their non-core captive centers to the top BPO players in exchange for better outsourcing rate and long termcontracts. In 2008 Citibank sold its Indian back-office business to TCS for around $505million and Citi Technology Services for around$127 million to Wipro. These transactions were coupled with the assurance of $3 billion business to TCS and Wipro. In a win-winsituation, the Citigroup benefited from freed-up financial resources that were tied with their non-core business.

Thus, divesting profitably offers both an opportunity (Berry, 2010; Nees, 1981) and a value-creating capability. However,divesting alone cannot create value, which instead demands subsequent refocusing of crucial resources in core areas.

4.2.3. RefocusingAs a process of allocating freed resources to the most vital areas of core competencies, refocusing primarily has been

discussed at the corporate level: Companieswith unrelated businesses under their corporate umbrella might attempt to regrouprelated business units to gain synergistic benefits (Bigley andWiersema, 2002). The underlying logic is that regrouping supportsincreased coordination, helps the focal firm narrow its strategies, and sets clearly defined goals (Rondi and Vannoni, 2005). Italso helps the firm concentrate its effort on what it does best, such that the firmmay benefit from superior resource alignment in

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its core revenue-generating areas (Berry, 2010; Lahiri et al., 2012). Redeployment also leads to more efficient usage of scarceresources, which is crucial for long-term growth prospects.

5. Value creation in the location-specific resourcing stage and associated contingencies

Offshore outsourcing, compared to domestic outsourcing, creates unique challenges due to cultural differences, geographicdistance, and/or language barriers between the client and vendor countries (Lahiri and Kedia, 2011; Larsen et al., 2012).Furthermore, time zone differences and specific institutional features of offshore countries, such as their infrastructure, security,political conditions, or intellectual property regulations, must be taken into account in offshore outsourcing arrangements(Brown and Wilson, 2005; Graf and Mudambi, 2005). Client firms need relationships with a wide range of organizations andindividuals, including local employees, suppliers, intermediaries, banks, and governmental institutions. They also need totransfer management methods and values, decide on appropriate arrangements for organizing their business activities, andadapt their organizational structures and processes.

All of these challenges are location-specific, because they arise only when the offshore vendor is located in a country orgeographical region different from that of the client. We note three location-specific value-creating capabilities and resourcemanagement processes of offshore outsourcing firms that may help firms surmount these location-specific challenges.

5.1. Locating

The geographic distribution of firm's processes, defined as the extent towhich a firm's value chain activities spread and coordinateacross country boundaries, determines its geographic scope. The main attraction of a greater geographic scope through offshoringinvolves the availability of low-cost inputs and talent, exposure to new markets, and benefits from location-specific advantages(Kumar et al., 2009; Liesch et al., 2012). Moving offshore may facilitate firms' ability to understand the business environment andestablish their presence in foreign markets. In a global economy, few firms can neglect major outsourcing destinations (e.g., India,China), which provide rich resources, cheap labor, and growing product markets. For example, Dell has no manufacturing base inIndia, but it enjoys major brand recognition because of its Indian call center operations. Dell's growth in India thus has beensignificantly greater than the industry average. A shortage of suitable talent in the U.S market and increased restrictions on hiringforeign talent have also contributed to offshoring of activities to locations with superior talent base (Manning et al., 2008). A limitedtalent pool implies that firms may have difficulty retaining global talent as “talent poaching” and salaries increase quickly.

However, these benefits might be overshadowed by the risks of doing business in a foreign environment. A lack of physicalinfrastructure, labor quality, distance (i.e., language, culture, legal, time), and the political environment all can counter the advantagesof wage differentials and highly available labor pools. The risks of unstable government, taxation or regulation policy shifts, or evenoutright expropriation may require the firm to seek safeguards of its service sourcing from the host country vendors. Thus, a clientfirm needs to understandwhich location is best for each kind of activity. Moreover, companies need to take a long-term view on theirchoice of location, because moving would be expensive from any perspective.

The complex location decision depends on various factors: Client companies fromWestern Europe often prefer eastern Europeancountries over India, China, or the Philippines as offshore destinations because of their time zone advantages. Client companies alsomight divide the task and distribute it to different companies across the globe, such that the completed task relies on a global deliverymodel. For example, R&Dmay be located in India,whereas customer support centers appear in the Philippines. The sourcing companyhas the responsibility of learning the unique attributes of multiple offshore distributions and choosing the correct location, accordingto each country's mix of strengths and weaknesses (Vestring et al., 2005). Some firms respond by spreading their foreign operationsand offshoring relationships over a broader, balanced mix of regions and countries (Vestring et al., 2005). Accordingly, locatingconstitutes an important organizational capability that is pertinent to the offshoring process and represents the first step in resourcerebundling. Jensen and Pedersen (2011a) provide an example of Vestas, a wind turbine producer from Denmark that highlights theintricacies and interconnectedness of the importance of the location decision. Vestas has R&D centers in Denmark, Singapore, Indiaand the U.S. for different reasons such as access to the latest technological breakthroughs as well as to stay abreast with the markettrends in the important markets in China (through a center in Singapore) and the U.S. (through a center in Texas) (see Jensen andPedersen, 2011a for details).

5.2. Managing global talent

Recruitment, development, and retention of employees are central factors of organizational survival. A focus on people as a sourceof superior performance has gained notable prominence in offshoring contexts (Kenney et al., 2009). In particular, recruiting,developing, and retaining global talent are important for location-specific rebundling (Manning et al., 2008). These global talentmanagement capabilities should allow the offshore outsourcing client companies to manage their global talent in multiple locations,find and integrate human capital in new locations, and collaborate with external partners worldwide. In short, these organizationalcapabilities support companies' uses of human capital, which may not be confined to a single process or provider but instead couldspan multiple processes and providers simultaneously.

Selecting the best offshore service provider from a set of pre-identified ones and preparing the best contract or service levelagreements are two significant organizational capabilities (Mayer and Argyres, 2004). The focal firm must actively evaluate thecredentials of its selected provider, including past performance, reliability, trustworthiness, resourcefulness, and market reputation.

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The contract preparation should address the inclusion of relevant clauses that ensure it is balanced, complete, and at the same timeflexible enough to accommodate future contingencies (Barthélemy, 2003). The risks of improperly executed outsourcing moves arevast, including “hollowed out” corporations, loss of strategic intent, loss of an existing knowledge base or organizational learning, lossof employee morale, reduced organizational innovation, and lack of control over outsourced activities (Barthélemy, 2003; Hoetker,2005). In turn, the focal firm must also ensure that its requirements are clearly understood by the service provider. Moreover, itshould acquire thorough knowledge of the provider's capabilities, to avoid unforeseen deviations from the contract (e.g., delay insupply, degradation of supply quality) and ensure that the client receives its desired value from this strategic relationship (Feeny et al.,2005).

Developing and retaining global talent is the next resourcemanagement phase.We assume that the independent service provideris mainly responsible for managing its talent, but the client firm still must ensure the transfer of best practices with regard to thedevelopment and retention of employees. Turnover rates in emerging economies tend to be very high. In India for example, a recentestimate suggests that a 25% difference in the turnover rate equates with a million-dollar organizational expense to replaceprofessional workers for every 50 positions in a company (Doh et al., 2011). Appropriate performance management and rewardsystems should be in place to get the best out of global talent (Tymon et al., 2010). In short, we maintain that locating, recruiting,developing, and retaining capabilities all are important value-creation elements of location-specific rebundling.

6. Value creation by leveraging externalization and associated contingencies

Learning from external partners generates both proximate and distal benefits, such as improving productivity, incrementalinnovations, and particular dynamic capabilities that consistently improve competences in stable environments by increasing theefficiency of knowledge searches, absorption, and combination (Mudambi and Tallman, 2010). In alliancemanagement literature, anexternal partnership leveraging capability has been identified as a source of competitive advantage (Dyer and Singh, 1998; Kedia andLahiri, 2007). We argue that three distinct resource management processes are involved at this stage: coordinating (Sirmon et al.,2007), collaborating, and transforming (Kedia and Lahiri, 2007). That is, the success of an externalized offshoring relationship iscontingent on an effective coordination effort, a successful collaboration between the client and the service provider, and thetransformation of knowledge generated through their co-specialization.

6.1. Coordinating

International business literature has long recognized the importance of coordination mechanisms for multinational companies(Kogut and Zander, 1996; Martinez and Jarillo, 1989). Coordination aims to integrate acquired capabilities from the offshore partnereffectively and efficiently to create internal capability configurations for the focal firm. Proactive coordination involves combinative,experienced-based routines for integrating capabilities to implement a subsequent leveraging strategy effectively and thus createvalue for customers, aswell as for the focal firm (Sirmon et al., 2007). The effective coordination of capabilities encourages knowledgeexchange between two parties that help the focal firm to better integrate capabilities into effective configurations (Sirmon et al.,2007). For example, companies such as Accenture, SAP, Emerson, and IBM, have established “global innovation networks” ascoordination entities that help promote knowledge sharing among R&D labs and local teams in countries such as India, France andGermany (Manning et al., 2008).

What kind of knowledge should be coordinated though? The offshore outsourcing of business process/IT or knowledge servicesoften involves colocation of the service provider's staff with the focal firm's in-house employees, including project managers fromeach side, whomust interact to ensure the resultant services are complements and fit the clients' business requirements. OutsourcedIT services that do not complement the rest of the client's IT system or fail to meet the client's business needs add little value; in theworst case, they even might destroy the value of the client's IT system (Hui et al., 2008).

A clientmight transfer its application domain knowledge to the vendor, including knowledge about the business processes and theuser information needs, to be reflected by the software application. Moreover, the vendor should gain a solid understanding of theclient's existing technical infrastructure, including source and target applications of the software application to be developed ormaintained. Having adopted the necessary client domain knowledge, the vendor could specify major functional requirements andperform the design, coding, implementation, and testing stages. Alternatively, the client could perform the majority of therequirement specification (or even its design). For instance, Tata Consultancy Service (TCS), a well-known offshore service providertests thousands of automobile engine components by using computer generatedmodels, and suggests design improvements to one ofthe largest Detroit-based automobile company (Economist, 2013).

Both these activities require the client to invest time, effort, and resources to support transfer of knowledge and specification.Accordingly, these complementary procedural coordination strategies likely need to be balanced in any offshore outsourcing ofapplication development and maintenance (Mirani, 2007). Typically the parties agree to a transition phase, during which keyvendor personnel move onshore for a period to support the transfer of knowledge from the client to the vendor (Mirani, 2007).

Effective coordination also demands advanced technologies that allow for free-flowing exchanges of information, ideas, and bestpractices to and from the client and the offshore firm. Coordination of value-adding activities across the globe helps the focal firmexploit its location-specific comparative advantages and achieve offshoring objectives (Hatonen, 2009; Mudambi and Venzin, 2010).The coordinating capabilities (i.e., sharing information and strategic integration of geographically dispersed knowledge) then can beconceptualized as organizational capabilities that provide the focal firm with a value-creating market advantage.

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6.2. Collaborating

Closely related to the notion of coordination is the concept of collaboration. Collaboration captures the need for relationshipintegration “for partners to combine resources and integrate their activities in the course of undertaking a joint task” (White and Lui,2005, p. 914). The importance of collaboration and the establishment of close relationships based on trust also has been stressed byvarious scholars (Kedia and Lahiri, 2007; Kedia and Mukherjee, 2009; Manning et al., 2008). The benefits of close collaborationbetween a client and partner firm aremany. For example, Darr and Kurtzberg (2000) find that strategic similarity between partners iseven more important than customer or locational similarities for predicting knowledge transfer. Agency theory describes partneralignment as a means to reduce agency costs in contractual relationships, and transaction cost economics asserts that betteralignment between partners can lessen the transaction costs associated with monitoring and coordination (Williamson, 1999).

The importance of collaboration is particularly salient in offshore outsourcing, which suffers high threats of opportunism in theform of shirking, data leakages, loss of control, or performance measurement difficulties. In such situations, informal contractingmechanisms, such as trust and relationship specificity, can serve as safeguards. Direct performance monitoring is easier in captiveoffshoring deals, when the client firm has more control. In third-party offshoring though, service providers often refuse to allow theclient firms to exercise such control over service delivery (Manning et al., 2011). Thus traditionalmonitoringmechanisms giveway toinformal incentive alignmentmechanisms, such as longer andmore flexible contracts or frequent interactionswith various boundaryspanners. Such involvement also allows the service provider to develop a solid, client-specific expertise.

6.3. Transforming

Offshoring partnerships can be important conduits of organizational learning for focal firms (Kedia and Lahiri, 2007). Thecombined experience of both partners and their learning scope can generate outcomes that are transformational in nature. Researchhas highlighted the importance of such partnership-based learning in the context of strategic alliances, joint ventures, and other typesof interorganizational relationships (Hatonen, 2009; Jensen, 2009). Moreover, when offshoring firms search for the best serviceproviders, through negotiations with potential partners, they learn more about the industry-specific needs and the environment,which should help them compete. We argue that through offshoring and externalization of non-core activities, client firms also canachieve business transformation (Linder, 2004). Resources or capabilities acquired externally also can become valuable whencombined with the skills and knowledge of workers and other internal resources (Kogut and Zander, 1992). If these combinationspoint to new uses for previously existing resources, they could be a source of economic rent.

Offshore service providers often possess innovative talents andworld-class service deliverymodels. Theworld-class deliverymodel of offshore outsourcing providers also benefits clients that receive focused solutions, especially with compressed deliverytimeframes. Tata Consultancy Services (TCS) as a service provider is a case in point. It has six R&D labs (Engineering & Industrialsolutions, Insurance, Telecom, Travel & Hospitality, Retail, and IT). TCS has 72 patents and more than 800 applications pending(Tata Consultancy Services, 2012). Furthermore, these providers specialize in certain activities that are continually externalizedto them. Their competencies include in catering to a wide array of services related to audiovisual connections, business,computers and allied areas, higher education and training, finance, health, or various other professional services (Kedia andMukherjee, 2009). Accordingly, they invest heavily to recruit suitable talent and give them the required business skills, such aseffective communication, negotiation, leadership, team-building, technology, and business analysis, through in-house oroverseas training (Lahiri et al., 2012). The offshoring firms benefit from this high-end skill base, collective domain expertise, andindustry-specific knowledge, which can produce integrated, innovative solutions. Such resources help clients initiate rapidimprovisational changes or achieve turnarounds in failing businesses.

Software giant SAPs co-innovation labs are a case in point. To drive benefits from engaging external partners, SAP madepromoting co-innovation as one of the key pillars of its growth strategy in 2007 and set-up ‘co-innovation lab initiative’ in 2007.The idea was to set-up dedicated facility within SAP Labs to offer an environment in which ISVs, system integrators, andtechnology partners could work with SAP and with customers on new technologies. The first co-innovation lab facility locatedinside SAP Labs Palo Alto opened in June 2007 with Cisco, HP, Intel and NetApp acting as founding sponsors and committingsubstantial resources to the initiative. Such advantages related to working closely with external partners have helped these labsto become centers of strategic growth (SAP, 2007). Thus, transforming current capabilities and creating new ones from currentresources is the last phase of resource management in offshore outsourcing.

7. Discussion

7.1. Implications for research

This analysis expands understanding of value creation processes in offshore outsourcing by focusing on the internal resourcemanagement processes of focal firms and external environmental contingencies at each resourcemanagement stage. Situated withinthe language of organizational design (Karim, 2006, 2009; Srikanth and Puranam, 2011) our framework suggests that effectiveresource management is critical to the process of value creation. In addition, we note external factors that influence the strategicresource choices of offshoring firms. The framework identifies sub-processes involved in each resource management stage. Thus, ouranalysis clarifies the conditions in which resource choices made by firms are likely to succeed or fail.

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We thus contribute to extant literature in several ways. First, our paper explores a relatively underdeveloped, implicit, importantquestion pertaining to offshore outsourcing: How does offshore outsourcing create value? Answering this question is important,because it relates directly to firms' performance. In addition, this issue has significant political, corporate, and societal implications.Several researchers have addressed the question somewhat inadvertently (Doh, 2005; Farrell, 2005; Kotabe and Mudambi, 2009;Liesch et al., 2012); perhaps offshore outsourcing can even create value for the national economies through significant economicchanges (Farrell, 2005). Lahiri et al. (2012) also indicate that offshore outsourcing creates immense economic benefits for offshoreservice providers.

Second, framework has crucial implications for organization design and reconfiguration literature. The resource restructuringstage involves the disruption of the existing configuration of resources. It includes the evaluation of the activities as to what extentthey are interdependent and also entails the decision on what activities can be fine sliced and dispersed. Tightly-coupled stickyactivities that are often tacit, intangible and ambiguous (Kumar et al., 2009) are likely to remain collocated. Such knowledge intensivesticky activities are only offshored when the focal organization invests significantly to reduce the stickiness through frequentinformation sharing, investing in bridging technology and increased cross-cultural training of relevant personnel or by travelingphysically to the offshore location (Kumar et al., 2009). Next, activities and associated resources that are considered obsolete oradding very less value are divested. The last step at this stage involves refocusing resources to support important tasks or activities.From a reconfiguration perspective the focal firm gets itself reshuffled from a tightly-coupled position to a loosely-coupled one, addsor deletes appropriate resources and gets back to a tightly-coupled position. Resources that can support the offshored processes infuture are often identified and retained at this stage.

The location-specific resourcing stage involves selecting, recruiting and retaining global service providers or human talent. Thus, atthis stage, the internal and external value chains of a firm are reconfigured to suit the newdesign of orchestrated system (Kumar et al.,2009; Larsen et al., 2012). The focal firm attempts to account for the increased configurational complexity both structural andoperational (Larsen et al., 2012). Larsen et al. (2012) argue that when an activity or a process is offshored it creates newinterdependencies among organizational units and also among newly created fine sliced processes that are now located acrosscountry borders. Firm-specific capabilities discussed in our framework are responsible for managing these new set of complexitiesand remain flexible at this stage. Finally, the leveraging externalization stage entails managing social complexity that arises from lackof physical interaction, trust, and other differences such as culture, language between the client firm and the offshore vendor (Larsenet al., 2012). At this stage it is also important for the client firm to reintegrate the knowledge resources created by the external partner.Thus, from an organization design perspective the focal organization attempts to recombine its newly acquired external resources toproduce new knowledge solutions. The capabilities we identify at this stage—coordinating, collaborating, and transforming helpovercome the configuration complexity issues under such conditions. Our analysis also extends the strategic resource managementand resource orchestration framework to the realm of offshore outsourcing.

Finally, this analysis systematically integrates apparently diverse but inherently related literature streams: the organizationaldesign perspective, resource management/resource orchestration framework, and the recently introduced DLE framework. Inaddition we also situate our framework within a broad contingency theory of firm which argues that organizational value creation isenhanced by an external fit between its task environment and the design of its internal structure (Chandler, 1962; Lawrence andLorsch, 1967). In fact, the organizational design literature was largely triggered by Chandler's core thesis that an organisation'senvironment shapes its strategy and economic inefficiency results from a mismatch between organizational structure and strategy.The works of Lawrence and Lorsch (1967), Thompson (1967) suggest that organizational value creation is largely contingent on itsability to achieve a fit between its internal structure and design and the changing external demands (Sinha and Van de Ven, 2005).Our framework suggests that to create value, focal firms must make effective resource choices or arrangements at each stage.However, we also emphasize that although resource configuration processes are internal in nature, they are constant interactionwithan offshoring organizations task environment and such environmental contingencies affect firm-specific resource choices. A fitbetween these environmental contingencies and internal resource configuration is important for value creation.

To assess the effectiveness of the resource management framework we presented above, it would be important to empiricallytest its different components. Extant literature offers some guidelines on how to operationalize different components of theresource management framework. In Table 1, we present a summary of different measures which can be adopted with little or nomodification. Some of these measures, such as relative change in investment in R&D and marketing activities (Kor and Mahoney,2005) can be derived from secondary sources, while others need to be collected through surveys. In addition, some recent studieshave operationalized focal firm value creation by measuring offshore outsourcing performance (e.g., Martinez‐Noya et al., 2013).Partner firm value has been measured by Lahiri et al. (2012). New scales need to be developed to measure customer value.

The challenge in designing a survey to test our framework is that the psychometric properties of some of the scales are not wellestablished. This would mean that researchers may have to first conduct smaller pilot studies to assess the reliability and validity ofscales, followed by large scale surveys to collect the data for empirical testing. As the field progresses, there is going to be a greatercritical mass of studies and a greater availability of instruments to conduct more empirical studies in this domain.

7.2. Implications for managers

Our analysis has several implications formanagers of focal firms that participate directly or indirectly in offshore outsourcing. First,our framework offers guidance for managers and organizations regarding how they should manage their resources during offshoreoutsourcing processes. Second, we identify specific environmental factors that appear associated with the offshore outsourcingdecision-making processes. We stress, in particular, the internal facilitators that may help overcome the potential challenge of

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uncertainties. For example, operatingmanagers and employees should obtain a sophisticated understanding of the link between theirown employees and offshore vendors or human capital to accrue long-term benefits for both partners. In so doing, organizations andindividuals can develop collective trust, which is conceptually similar to other types of shared resources. Developing variousorganizational systems also can helpmanagers and employees overcomepotential barriers to trust—such as an organizational culturethat supports trust orientation, frequent interactions of key boundary spanners with the offshore service provider, and so on. Firmsalsomight provide training and educational opportunities to enable and enhance employees' communication behavior. Training anddevelopment opportunities should enhance managers' competencies, skills, and capabilities, especially in the areas of sharedleadership, contractmanagement, performance management, unambiguous communication, and absorptive capacities. As managersincrease their specific relationshipmanagement skills through training and development, they aremore likely to initiate and exercisethose abilities to the benefit of offshore outsourcing initiatives.

Finally, effective resourcemanagement provides a source of competitive advantages (Helfat et al., 2007; Sirmon et al., 2007, 2011).Environmental and competitive pressures push organizations toward flatter and nimbler core structures with multiple externalpartnerships. Organizational researchers in turn have started to put greater emphasis on trust-based interorganizational processes;some scholars even argue that trust-based relational capital offers a source of competitive advantage. Yet these changes can comeabout only with greatermonitoring and control, increased trust between employees andmanagement, or some combination thereof.The limits of employee monitoringmean that high levels of mutual trust between client managers and offshore employees likely arecritical to the success of offshore outsourcing efforts. Companies that anticipate and implement these changes, designing theirorganization and encouraging their managers to initiate and establish collaborative relationships, will be well positioned for thefuture to exploit the benefits of offshore outsourcing.

8. Conclusion

It is noteworthy that most prominent offshoring destinations (e.g., India, China, Philippines, and Russia) are emerging economies,with relatively weak institutional frameworks, inefficient legal systems, poor intellectual property right protections, and weakcontract enforcement. The externalization and creation of value in such environments thus requires the effective management ofresources by client firms. In knowledge-based economies, innovation and learning are vital for value creation. Myriad researchershave pointed out that firms develop strategies based on their core knowledge and capabilities but also work to restructure, rebundle,and leverage their external partnerships to create further value in dynamic environments. These processes—or strategic resourcemanagement—are essential for enhancing the firm's core knowledge base and creating new value. By drawing logical connections tolink strategic resourcemanagement literature andDLE perspective positionedwithin the language of organizational design,we derivea nuanced analysis of how firms can strategically manage their resources to create new value through the offshore outsourcing. Wehope that the analysis presented here represents a step forward in understanding this important topic.

Acknowledgement

An earlier version of this paper was presented at Academy of International Business, Washington D.C., 2012. We are grateful tothe special issue editors for their insightful comments and guidance on this paper.

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