Journal of International Management 13 (2007) 22 – 37

International outsourcing of services:

A partnership model
Ben L. Kedia ⁎, Somnath Lahiri
Robert Wang Center for International Business Education and Research, The University of Memphis,
Memphis, TN 38152, USA

Received 16 December 2005; received in revised form 30 May 2006; accepted 18 September 2006
Available online 5 February 2007

Abstract

The business landscape is currently witnessing widespread migration of service functions from
developed nations like the U.S to several foreign destinations as India, China, Ireland, Philippines etc. This
happens as more and more firms engage in international outsourcing of services (IOS) to survive in today's
highly competitive business environment. Despite increase in IOS, the nature of partnerships involved
between clients and their overseas providers have not received adequate attention in the scholarly literature.
In this paper, we develop a conceptual model that explains three possible types of IOS partnership. We
discuss how these partnerships vary in the way they are conceived and implemented. Propositions are
offered after elaborating on each type of partnership. We conclude by discussing the academic and practical
implications of our model.
© 2007 Elsevier Inc. All rights reserved.

Keywords: International outsourcing; Services; Tactical, Strategic, Transformational

1. Introduction

“My advice to you is: Girls, finish your homework — people in China and India are
starving for your jobs” (Friedman, 2005: 237).
First came manufacturing, now companies are farming out R&D to cut costs and get new
products to market faster. Are they going too far? (BusinessWeek, March 21, 2005: 84).

⁎ Corresponding author. Tel.: +1 901 678 4044; fax: +1 901 678 3678.
E-mail address: bkedia@memphis.edu (B.L. Kedia).

1075-4253/$ - see front matter © 2007 Elsevier Inc. All rights reserved.
doi:10.1016/j.intman.2006.09.006
 B.L. Kedia, S. Lahiri / Journal of International Management 13 (2007) 22–37 23

Welcome to the world of international outsourcing of services (IOS). If there is a single

business issue that has constantly merited the attention of practitioners, academicians,
consultants, policy makers, politicians and common public in the last few years, it is the
increasing regularity with which firms have been migrating service functions to providers in
offshore destinations. The initial euphoria and debate having subsided, it is now largely
recognized that this growing trend is practically unstoppable and should, therefore, be considered
as a standard business practice that has potential to result in manifold gains at the firm level. But
how firms contemplate partnerships with overseas providers? Are all partnerships same? Our
purpose in this paper is to elucidate the types of partnership possible in IOS.
IOS refers to handing over of service functions (that were done in-house) by firms to providers
(i.e., vendors) located in a (or several) foreign country(ies) where the former does not have
ownership, authority or direct control (Stack and Downing, 2005). (The spectrum of IOS also
includes the practice of firms setting up their own centers in foreign countries and maintaining full
control, a practice commonly referred to as captive offshoring. However, for this paper we like to
focus on the former notion of IOS which is also referred to as independent third-party offshore
outsourcing in the extant literature). IOS is not restricted to the Fortune 500 or large European or
Japanese firms, but is also common in many small and mid-size businesses (Carmel and
Nicholson, 2005). The phenomenon has been referred to as “controversial national issue”
(Weidenbaum, 2005: 311) and is observed to be “on the increase at an increasing rate” (Jain
Palvia, 2004: 1).
Despite its current and anticipated future growth, the practice of IOS has not received adequate
attention in the scholarly literature (Mol et al., 2004; Stack and Downing, 2005). For example, a
clear understanding of the fundamental dynamics of various partnerships involved in IOS is still
elusive. IOS partnerships are critical because they are complex to plan and execute, and have
ramifications for organizational performance, competitiveness and sustenance (Gainey and Klaas,
2005; Lee and Kim, 1999; neoIT, 2003). Moreover, the associated intricacies of such partnerships
have “been relatively unexplored” (Oza and Hall, 2005:1). Our primary intention in this paper is
to offer a model that will help understand various types of IOS partnership, and the factors that
clients (i.e., firms that outsource service functions to foreign providers) need to focus on to enable
them enhance the quality and duration of their partnerships. We use partnership as a general term
to mean cooperative behavior between clients and providers.
The paper proceeds as follows. A brief overview of IOS is provided first to underline its
significance as an important research domain. In the next section, predominant types of IOS
partnership (tactical, strategic, and transformational) are elaborated through development of a
conceptual model. Thereafter, two factors (trustworthiness and cultural distance) are discussed
as having implications for influencing the strength and longevity of partnerships. The final
section highlights how our model may aid future theory building and improve managerial
practice.

2. Overview of IOS

2.1. The growing phenomenon

That international outsourcing has been referred to as one of the drivers that have made the
world “flat” (Friedman, 2005) in recent times speaks volumes about the importance of this
phenomenon in the domain of research in international management. The prevailing wisdom
driving clients toward IOS is that certain service functions can be performed cheaper, better, and
24 B.L. Kedia, S. Lahiri / Journal of International Management 13 (2007) 22–37

faster by overseas providers (Clott, 2004; Pfannenstein and Tsai, 2004). Thus clients, mainly
from the U.S, Europe and Japan, have been increasingly partnering with providers in India, China,
Philippines, Ireland, Russia etc. to benefit from the latter's expertise without having to make
substantially new investments. However, IOS is not always a win–win situation—instances of
failure abound (Niederman et al., 2006: 60; Sullivan and Ngwenyama, 2005).
The growing trend of IOS has indeed altered the way business is conducted (Doh, 2005;
Kotabe, 1998). This is primarily because the manifestations of this practice profoundly
influence the interests and prospects of organizational stakeholders in different ways
(Niederman et al., 2006). The wide array of business functions that IOS has gradually
brought under its fold is almost unending. The list includes software development, varied
digitized business processes as order processing, insurance claims and billing, customer
service, accounts and payroll, telemarketing, medical transcription, tax preparation, legal
services, and even research and development (R&D) (Erber and Sayed-Ahmed, 2005; Stack
and Downing, 2005).
With increase in international outsourcing, the sourcing debate has moved from what and how
to outsource to what and where to outsource (Venkatraman, 2004). IOS has emerged as a suitable
means through which clients have been able to enhance business value (Bryce and Useem, 1998).
This is possible as outsourcing has been often known to reveal the inner business strengths that
are normally not possible to sight amidst day-to-day operations. The sources of value for the
clients include cost savings, better quality and faster delivery of services, greater concentration on
the business core, better re-allocation and utilization of saved resources, increased risk sharing,
greater business flexibility, and increased overseas market. Likewise, providers are also able to
augment their value through IOS partnerships by improving firm level capabilities, individual
skills, and increasing partake in global business. Although much academic interest has revolved
around what activities to internationally outsource and which nations to consider for potential IOS
partners, the nature of possible IOS partnerships, including varying value considerations therein,
have largely remained unaddressed.
Significant attempts have been made by scholars to explain the practice of outsourcing and
IOS utilizing various theoretical perspectives (Cheon et al., 1995; Doh, 2005; Graf and Mudambi,
2005; Gurung and Prater, 2006). Broadly, the conceptual pillars of IOS seem to rest on insights
drawn from the domains of strategic management, international business, and economics. In this
regard, we concur with Niederman et al. (2006) that it is practically impossible to understand IOS
through the use of a single theoretical lens. Therefore, our conceptualization of different types of
IOS partnership that we elaborate in the next section is based on three different theoretical
perspectives.

3. IOS partnerships

To sum up the extant understanding, IOS may be conceived as a practice through which clients
partner with international providers in the quest of executed service functions and, in the process,
develop their own valuable resources that are meant to promote future competitiveness, flexibility
in operations, and overall value enhancement. However, businesses possess different goals and
perform differently even if they operate within the same competitive environment. Therefore, not
all clients will have the same kind of motivation that drives partnership with their providers. Does
this imply that different kinds of IOS partnerships are possible? If yes, what is their nature? How
do they vary among themselves? Unfortunately, these issues have not been suitably addressed in
the current literature on IOS.
 B.L. Kedia, S. Lahiri / Journal of International Management 13 (2007) 22–37 25

We argue that although IOS is commonplace with many firms, the nature of client–provider
partnership is not uniform in all cases. Thus, whether to consider providers as just cost reducers or
value enhancers, opportunistic agents or helpful stewards, suppliers of services or active
collaborators—will depend on the nature of relationship that clients develop and maintain with
their partners. The core of our conceptualization is shown in Fig. 1. We suggest that the three
possible types of IOS partnerships – tactical, strategic, and transformational – represent value
propositions and nature of involvement with providers in different ways.

3.1. Tactical partnership

In tactical partnership, clients aim at generating cost savings, preventing future investments
or reducing staffing burden. Thus operational cost reduction is a primary driver for this type of
partnership. Such partnerships stem from clients' need to address specific problems like
requirement for higher quality of service development than is possible to achieve (i.e., make)
in-house or procure (i.e., buy) from providers functioning within the same geographic nation.
In-house factors may be lack of resources to undertake developmental expenditures or dearth of
management capability and individual skills (Brown and Wilson, 2005: 21; Graf and Mudambi,
2005). Broader factors may include shortage of talented manpower in the extant workforce.
(For example, a report prepared by the U.S chamber of commerce noted that the nation has
shortage of health care providers, auto mechanics, security firm workers, construction firm
workers etc. (Special report, 2004)). Tactical partnerships do not foster any kind of strategic
relationship with the providers as they are generally short term in nature and essentially task
based. In short, this type of partnership is used as a tactical tool by clients i.e., to get the job
done at a lower cost.
A large number of IOS partnerships are tactical in nature and limited in scope and value-
creating potential. Primarily these arrangements are initiatives that include value propositions as
cost savings from labor arbitrage, and higher work quality from knowledge arbitrage arising out
of wide pool of inexpensive skilled labor with the providers. As is widely known now, jobs of

Fig. 1. Different types of IOS partnership.

26 B.L. Kedia, S. Lahiri / Journal of International Management 13 (2007) 22–37

programming, coding, transcripting, X-ray plate reading etc. can be done in many offshore
locations at a fraction of costs than in the U.S (see Garner, 2004: 13 for a tabular comparison).
Moreover, such jobs are usually performed by college graduates who possess better technical
skills than their western counterparts who often happen to be high school diploma holders with
limited commitment to work (Ramachandran and Voleti, 2004).
The essence of this type of partnership being transaction aimed at cost reduction, transaction
cost economics (TCE) (Williamson, 1981; Gainey and Klaas, 2003; Geyskens et al., 2006) seems
to be the dominant theoretical perspective to conceptualize its tactical nature. According to this
perspective, clients engage in tactical IOS partnership based on the realization that the transaction
costs associated with partnering is relatively lower than internalizing certain activities into their
own hierarchical structures. TCE views the firm as a governance structure. Therefore, adopting
market mechanism of governance appears to be favorable in tactical partnership than continuing
to produce the services internally at higher cost.
As shown in Fig. 1, the nature of involvement with providers in this type of partnership is
arm's length, i.e., exchange is purely rule-based or contract oriented. This kind of pure buyer–
seller relationship may be explained on the basis of TCE. As per TCE, clients are limited in their
rational thinking and decision making ability (aka bounded rationality). This constraint tends to
prevent the clients from entering into long-term contracts with their providers and developing any
strategic relationship. Further, providers may be opportunistic in their behavior meaning they
might resort to cheating, distortion of information, shirking of responsibility or other forms of
dishonest behavior (Williamson, 1985). Therefore, so long the clients' needs for cost reduction
and higher work quality are satisfied there will be no propensity to engage into partnerships that
are deeper relationship-oriented.
As shown in Fig. 1, tactical IOS partnerships are characterized by relatively lower value
proposition than the other two types. This is so because lowering of costs remain the primary
motive of clients. As per TCE, clients tend to be wary of the issues that can safeguard their
transaction costs arising from ex ante and ex post reasons involved in contracting, coordinating
and enforcing activities. An essential argument in TCE is uncertainty that may arise because of
environmental reasons (changes in the broader business landscape) and behavioral reasons
(unpredictable provider actions). Therefore, clients will continue to favor tactical IOS so long
the benefits derived from tapping into the inexpensive- and high skilled labor pool of the
providers outweigh the costs arising out of market transaction and control associated with such
partnerships.
In sum, tactical partnerships allow clients to benefit from better service for less capital
expenditure i.e., by doing more with less (Gilley and Rasheed, 2000). The U.S banking industry is
an example in this regard. It saved annually $6 billion to $8 billion by outsourcing functions to
India (Pfannenstein and Tsai, 2004: 73). Another example is the case of Claimpower Inc., a New
Jersey based medical billing service provider. By outsourcing some of its routine work overseas,
Claimpower achieved cost leadership by charging U.S doctors less than what its competitors
managed to do. As a result, within a time-period of just more than 2 years, the firm's client list of
doctors rose from 10 to 41, and the firm's annual revenue increased seven-fold (Karmin, 2004).
Based on the above elaboration, we propose
P1. The higher the clients' need for cost reduction and higher work quality, the higher the
likelihood to engage in tactical IOS partnership.
P2. The higher the availability of inexpensive and high skilled labor pool with providers, the
higher the clients' likelihood to engage in tactical IOS partnership.
 B.L. Kedia, S. Lahiri / Journal of International Management 13 (2007) 22–37 27

3.2. Strategic partnership

Strategic partnership is primarily driven by increasing tension experienced by clients to remain

locally responsive as well as be globally integrative, and the growing need to concentrate more on
business core in order to develop sources of current and future competencies. Owing to
globalization, firms have been experiencing increased competitive pressures to survive and
prosper in an environment where business models are being invented at an ever-quickening pace
(D'Aveni, 2002; Dess et al., 1995). This has resulted in greater need to look inside for sources of
competitive advantage and concentrate on what forms core of firms' survival (Barney, 1995).
Given these drivers, more clients have been using IOS as strategic tool for improving business
performance.
Often referred to as the second generation of outsourcing (Brown and Wilson, 2005), the
fundamental shift in thinking from cost reduction towards value enhancement has called for
executives to contemplate IOS as business partnership having strategic implications, and not just
a buyer–seller contract aimed at slashing of operational expenditures. Value creation in strategic
partnership occurs through building long-term relationships with a few best-in-class integrated
service providers (Quinn, 1999).
To initiate and continue with this kind of partnership, clients chiefly rely on two attributes of the
providers—cumulative experience and learning scope. (Feeny et al., 2005; Kedia et al., 2005;
Kotabe and Murray, 2001). IOS logic suggests that functions that are outsourced by the clients
form core competencies of their providers. In being able to pool useful resources, primarily skilled
professionals at lower costs, and executing the same services repeatedly for various clients over the
globe, providers in India, China, Philippines or Singapore have been able to move up the learning
curve and generate cumulative experience through scale and scope economies (Auguste et al.,
2002). Precisely these factors that result in better, varied and faster services at lower costs have
inspired western firms to engage in strategic partnerships with their providers. Such accrual of
advantages would not have been possible had the clients executed the activities in their own
premises.
Another factor that drives clients to engage in strategic IOS partnerships with their providers is
the scope to learn from such involvements. Learning refers to processes through which
organizations acquire knowledge from experience. Organizations can learn not only from their
own direct experience, but also from the experience of other organizations (Levitt and March,
1988). Organizational learning has been suggested as a fundamental strategic process and a
sustainable advantage for the future (Wu and Cavusgil, 2006). In case of strategic IOS, learning
may include greater understanding of the sources of value destruction like incompatible activities
or processes, better comprehension of IOS competitive dynamics, deeper insights of the functions
and behavior of providers, increased knowledge of core competencies and business processes,
and greater assessment of customer needs.
Cumulative experience and learning scope constitute useful organizational resources and can
be potential sources of competitive advantage. Therefore, the perspectives of resource-based
theory (Barney, 1996; Peteraf and Barney, 2003) may be used to shed light on strategic IOS
partnership. According to this theory, a firm may be viewed as a collection of imperfectly imitable
resources and capabilities that forms the basis of its successful competition against other firms
(Wernerfelt, 1984). These resources may be physical, human, or organizational. By utilizing
various resources and capabilities, firms are able to capitalize on environmental opportunities and
minimize the effects of threats that exist and are, thereby, able to obtain competitive edge over
other firms that do not possess useful resources or are unable to capitalize on them.
28 B.L. Kedia, S. Lahiri / Journal of International Management 13 (2007) 22–37

To sustain competitive pressure arising from fast changing business models on a global scale and
to enable increased focus on business core, clients need to benefit from the assets possessed by their
providers who are deemed to be experts in their operations. Through strategic partnership, clients
benefit from the useful resources (cumulative experience and learning scope) of their providers
without having to invest in possessing them. Tapping into the wide experience of providers enables
their clients to fill in the resource-voids of their businesses (Cheon et al., 1995: 212). This also
enables the clients to devise means to neutralize the threats arising out of newer business
philosophies thrown open by close competitors as the hassles of executing routine activities are no
longer part of their value chains but are instead taken care of by the providers. Further, organizational
learning that results from this partnership renders the clients to new ways of doing business by
focusing attention and resources more narrowly on the business functions they do best.
Resource-based theory proposes that a firm can achieve sustained competitive advantage if its
resources possess four attributes—value, rareness, imperfect inimitability and non-substitutabil-
ity. Therefore, for a client to gain advantage out of a strategic IOS contract, increased focus on the
core should ideally lead to the development of these four attributes to the essential resources of its
value chain such that they form bases of future competitiveness. The long-term nature of strategic
partnership provides a context whereby learning takes place gradually and the clients are able to
utilize their deep involvement with providers in developing best resources and capabilities.
Two examples will make our arguments clear. First is the case of Qatar Airways that has
strategically partnered with India-based Kale Consultants and outsourced its revenue accounting
and recovery processes. This helped the airlines company to concentrate on flying—its core
business function (Johnson, 2006). Second is the example of ABN AMRO of the U.S that used
strategic partnership with its India based provider Patni Computer Systems Ltd. In the words of
Bruce Jacobs, Executive Vice President, ABN AMRO Services Company Inc.
“ABN AMRO Services Company values the relationship we have built with Patni over the
last two years. Patni's personal approach and the support of its senior leadership team has
been instrumental in helping us grow our outsourcing efforts. Specifically, we value
Patni's demonstrated flexibility and adaptability in working within our environment while
continuing to use its methodologies, tools and best practices to bring benefits to the Bank.
We look forward to this relationship growing into a strong partnership over the years” (c.f.
http://www.patni.com/about-us/testimonial.htm, accessed 09 /07/ 06).
Based on the above discussion, we propose
P3. The higher the clients' experienced competitive pressure and need to focus on core
competencies, the higher the likelihood to engage in strategic IOS partnership.
P4. The higher the cumulative experience and learning scope enabled by providers, the higher
the likelihood of clients to engage in strategic IOS partnership.

3.3. Transformational partnership

This form of partnership has been referred to as third generation outsourcing (Brown and
Wilson, 2005: 24). Transformational partnership implies a rapid, step-change improvement in
enterprise-level performance of clients (Linder, 2004a). The motivation here is to use IOS for the
purpose of redefining existing businesses. The partnership nature may be viewed as powerful
force for change for the clients, and the providers may be considered as allies in the battle for
market share and competitive advantage. Firms as Procter and Gamble, DuPont, Cisco Systems,
 B.L. Kedia, S. Lahiri / Journal of International Management 13 (2007) 22–37 29

ABN Amro, Unilever, Rockwell Collins, and Marriot have engaged in such partnerships worth
billions of dollars (BusinessWeek, January 31, 2006: 55). The major drivers of this type of
partnership include need for increased risk-sharing and flexibility, and business transformation
(Czinkota and Ronkainen, 2005; Doh, 2005; Linder, 2004a,b).
Increasingly IOS has resulted in business risks being shared with providers on account of
reduced need for capital expenditure on infrastructure- and manpower development. Risk sharing
refers to the clients' realization that they may not ever need full in-house ownership of a particular
activity. For example, the decision of Swiss International Airlines and Austrian Airlines to
outsource revenue and traffic accounting, passenger interlines billing, and frequent flyer program
administration to AFS (of Tata Consultancy Services in India) was meant to share business risks
(World Investment Report, 2004, Chapter IV).
In a globalized business environment, firms need to respond faster to industry demands, comply
with changed regulations, adjust to increasing business competition and respond to changing
customer tastes, i.e., in short, remain flexible (Czinkota and Ronkainen, 2005). In general, IOS
partnerships enable increased flexibility by freeing valuable staff resources to do what may be
required best at a particular business juncture and relocating business capital to procure/develop
valuable resources. Flexibility is further enhanced through 24/7 (i.e., round-the-clock all week)
operating hours that ensure continuous support through integrated in-house and offshore based
staff in other time zones (Ramachandran and Voleti, 2004). For example, PC-maker Dell generates
business flexibility by relying on multiple providers for supply of component design and
innovation, and this enables the firm management to concentrate on maintaining and developing
support systems related to customer service and supplier relationships.
Finally, IOS partnerships have provided opportunities for clients to redefine their businesses
through transformation. A typical transformational partnership may work as follows:
“Genpact, Accenture, IBM services, or another big outsourcing specialist dispatches teams
to meticulously dissect the workflow of an entire human resources, finance, or info tech
department. The team then helps build a new IT platform, redesigns all processes, and
administers programs, acting as a virtual subsidiary. The contractor then disperses work
among global networks of staff ranging from the U.S to Asia to Eastern Europe”
(BusinessWeek, January 30, 2006: 78).
Such transformation of entire business processes are often aimed at overhauling old business
operations, turning around dying businesses, or speed up organizational innovation. These
transformations result in radical business models meant for achieving competitive edge through
growth without investing for capacity enhancement in the client's own nation.
What factors on the provider side inspire clients to engage in transformational partnership? These
are availability of global innovative talent, and reliance on world class delivery model. Providers
now have competency in catering to a wide array of services in the areas of audiovisual and culture,
business, computers and allied areas, higher education and training, finance, health, internet related,
and various professional services (World Investment Report, 2004). To do this, huge amounts of
investments are being undertaken in recruiting suitable talents, and imparting them required business
skills in the areas of effective communication, negotiation, leadership, team-building, technology,
and business analysis through in-house or overseas training (Kumra and Sinha, 2003). At the firm
level, providers are acquiring required licenses and certifications that enable them to develop global
delivery model in order to provide their clients with seamless solutions. As a result, technology
giants like Philips, Motorola, Dell etc. have decided to outsource even their R&D functions to
providers operating in many Asian countries (BusinessWeek, March 21, 2005: 87).
30 B.L. Kedia, S. Lahiri / Journal of International Management 13 (2007) 22–37

From a theoretical perspective clients, therefore, need to consider their providers more than
active collaborators or alliance partners possessing valuable resources and capabilities. The
involvement of clients with providers is much more intense in transformational IOS than the above
two types of partnership and the value creating potential is also the highest (Fig. 1). A useful way to
conceptualize this form of partnership is through the lens of resource-dependence theory. This
theory focuses on how firms manage to deal with the effects of broader environmental attributes in
order to compete effectively.
According to resource-dependence theory, firms are actively involved in their broader
environments and are dependent on other organizations for supply of critical resources (Murray
et al., 2005; Pfeffer and Salancik, 1978). A recommendation of this theory is that a firm should
attempt to reduce its dependence on other organizations for resources and should strive to adjust its
boundaries in order to overcome the environmental uncertainties and thereby improve performance.
IOS clients are very much part of today's business environment that is dynamic and uncertain
in several ways (Garg et al., 2003) and calls for the need to remain flexible and less prone to risks.
Therefore they are dependent on their providers to supply critical resources in the form global
innovative talent and world class delivery model. The former enable clients to benefit from their
providers' high-end skill base, cumulative domain expertise, and industry-specific knowledge
that result in integrated, innovative solutions. World class delivery model of providers benefit
clients to receive focused solution to their particular objectives, challenges and needs, and also
ensures compressed delivery timeframes. Such resources help clients to initiate rapid improvising
changes or bring turnarounds of failing businesses. Clients resort to this type of partnership
because they are not able to generate these solutions on their own and so are dependent on their
foreign partners. In the process, they manage to overcome the environmental uncertainties and
boost performance levels as a result of transformation in business.
Like any other form of partnership, transformational IOS is not without risks. For example,
there may be cases of ruining of entire business agenda, loss of control over functions, risk of
disrupting operations, and loss of focus (Linder, 2004a,b). Resource dependence theory places
considerable stress on the strategic choice exercised by managers for they are the actors who can
manipulate the environment in firm's favor or disadvantage (Hrebiniak and Joyce, 1985; Pfeffer
and Salancik, 1978). Therefore, in order that clients gain the desired benefits through
transformational IOS partnership, decision-makers need to exercise their judicious choices in
overcoming uncertainties and engage in intense involvement with their providers to result in the
highest form of value creation (Farrell, 2004).
The above three drivers (need for risk sharing and flexibility, and business transformation)
have indeed spurred the adoption of transformational IOS partnerships by clients. However, in
addition to all the dramatic potential benefits, there are flip sides to this type of partnership that we
mentioned earlier. In addition, specifying the required performance level of the providers in such
partnerships is almost impossible. Moreover, the success of transformation requires that the
innovation (brought about by the provider's help) be industry leading. Thus to achieve successful
transformation through outsourcing, executives must “go beyond ‘making deals’ and instead
design business models that will work” (Linder, 2004b: 30). Based on the foregoing discussion,
we propose
P5. The higher the clients' need for increased risk-sharing and flexibility, and business trans-
formation, the higher the likelihood of engaging in transformational IOS partnership.
P6. The higher the availability of global innovative talent and world class delivery model with
providers, the higher the likelihood of clients to engage in transformational IOS partnership.
 B.L. Kedia, S. Lahiri / Journal of International Management 13 (2007) 22–37 31

Table 1 encapsulates salient features of the three types of IOS partnership based on what has
been discussed in the preceding sections.

4. Moderating factors

Looking beyond the direct considerations in deciding to engage in IOS partnership often
enables gathering insights on factors that might affect the drivers–partnership linkage as argued in
the earlier sections. What critical issues need to be considered in order for cooperative behavior
between clients and providers to emerge as stable and enduring partnerships? We discuss two
relational factors – trustworthiness and cultural distance – in the next section that may potentially
moderate the partnership dynamics. Our main thesis here is that engaging and continuing on
effective IOS partnerships is not a one-way (i.e., client specific) consideration, but that there is
need to consider relevant aspects that have implications for the providers as well. This is akin to
the observations of Liang and Parkhe (1997) who posited that international exchange
considerations should include both exporters and importers who represent two sides of the
same coin.

4.1. Trustworthiness

Research in management has stressed that trust and commitment are essential features for
ensuring quality and success of interfirm relationships, collaborative ventures or alliances between
overseas partners (Cullen et al., 2000; Jeffries and Reed, 2000). In fact trustworthiness has been
referred to as a source of competitive advantage (Barney and Hansen, 1994). If IOS partners need
to benefit from their partnership, it is required that they trust each other and appear mutually
trustworthy. Clients need to trust their providers with regard to desired quality and timing of
service delivery, maintenance of confidentiality and security of inside information, and non-

Table 1
Salient features of IOS partnerships
Parameter Tactical IOS partnership Strategic IOS partnership Transformational IOS
partnership
Generation First Second Third
Basis Transaction-based Cost-based with strategic Value-based
implications
Relationship Buyer–seller Long-term business Powerful forces
with provider partners of change
Required provider Delivery Relational Transformational
competency
Time-frame Short-term Long-term Long-term
Value proposition Low High Highest
Involvement Arm's length Deep Intense
with provider
Dominant theoretical Transaction cost economics Resource-based theory Resource-dependence
anchor theory
View of provider Enabler of market mechanism Bundle of resources and Reducer of clients'
for execution of services capabilities i.e., assets, dependence on external
skills, and expertise environment
Example US Banking Industry; Qatar Airways; ABN AMRO Procter and Gamble;
Claimpower Inc. Services Company Inc Cisco Systems
32 B.L. Kedia, S. Lahiri / Journal of International Management 13 (2007) 22–37

display of opportunistic behavior that might lead to loss of control over the outsourced activity or
even double outsourcing (Clott, 2004: 165) that involves subcontracting work elsewhere for
additional profits. Likewise, providers need to trust their clients in the matters of demand stability,
timely payment of contract amounts, release of promised incentives, and adherence to ethical and
legal standards particularly when disputes arise.
As evident in our earlier examples, it is virtually impossible to embark upon and continue with
IOS partnerships if clients do not have adequate trust towards their providers. Likewise, no
provider can execute services in favor of its clients for long if it cannot trust its overseas partners
in the first place. However, the effect of trust on outsourcing partnership has not been examined
adequately (see Gainey and Klaas, 2003; Langfield-Smith and Smith, 2003 for exception). Trust
is a multi-dimensional concept and can take different forms (Das and Teng, 2001; Mayer et al.,
1995).
In the present context, the idea of competence trust as proposed by Das and Teng (2001)
seems to apply to tactical IOS partnership. This form of trust relies on the expectation of
partner's role performance based on technical competence arising out of the possession of
diverse resources and capabilities. The arm's length involvement in tactical partnership gives
rise to the expectations that the respective partners will have the ability to fulfill their com-
petent roles in a relatively short-term period. We mentioned earlier what are the possible
expectations of IOS partners from each other. In short, trust in this case tends to be more
calculative and is less affect-based.
At the other extreme, the notion of goodwill trust (Das and Teng, 2001) seems to apply to
transformational IOS partnership where the involvement between partners is intense. As argued in
the literature, this form of trust is based on the expectation that partners will tend to fulfill their roles
while exhibiting fair and faithful behavior, and care for each other's welfare. Further, goodwill
trust has been argued to develop over time, reduce perceived likelihood of opportunism and
contribute to lower transaction costs. Therefore, this type of trust is more relevant for
transformational IOS partnership that is more long-term in nature than the other two types and
has the highest potential in creating value.
In between the two extremes of competence and goodwill, trust in strategic IOS
partnership may be mid-range in nature that is more on the side of goodwill trust having
lesser calculative component involved than in the tactical type but certainly possessing high
considerations of competence. Overall, it is logical to presume that, ceteris paribus, greater
feelings of trustworthiness between IOS partners will encourage them to engage into strong
cooperation and continue partnerships on a long-term basis. On the contrary, more the
clients feel that their providers are not high on trustworthiness (and vice versa) or more the
partners consider each other to be less than trustworthy, there will be lesser chances of
engagement in strong cooperation and continued partnership on a longer time-frame. We,
therefore, propose

P7. Trustworthiness of partners will moderate the effects of drivers (client side and provider side)
on the quality and longevity of IOS partnerships such that increased trustworthiness will foster
strong and continued partnership.

4.2. Cultural distance

IOS partners may be located in nations with very dissimilar national cultures (as Germany-
based Siemens and China-based I.T. UNITED) or may possess varying organizational cultures.
 B.L. Kedia, S. Lahiri / Journal of International Management 13 (2007) 22–37 33

Extant literature on cross-cultural variations has noted how cultural distance (i.e., extent of
cultural dissimilarity) may negatively influence relationship between partners in the realm of
international business decisions, collaborative learning, cross border knowledge- and technology
transfer, and alliance performance (Bhagat et al., 2002; Cui et al., 2006; Kedia and Bhagat, 1988;
Sirmon and Lane, 2004). Such arguments are based on the logic that cultural differences manifest
in the form of differing employee values and norms, attitudes towards technology, customers,
interpersonal contact and interaction, and overall role perception. Based on this understanding,
scholars have underscored the influence of cultural distance – national and organizational – as
being important in partner selection and partnership continuance (Gurung and Prater, 2006;
Parkhe, 2001).
Apart from India, China, Philippines, Ireland, and Russia, clients today have a wide number of
locations to choose their providers from like Mexico, Romania, Argentina, Costa Rica, Vietnam,
Poland, Nicaragua, Botswana, Sri Lanka, South Africa, Malaysia, Jordan, Ghana, Tunisia and
others (BusinessWeek, January 30, 2006: 62, 64). These nations represent a wide array of national
cultural patterns that may not be known well to clients across the globe. Further, several of the
above destinations represent economies in transition characterized by changing market
institutions and business environments, and development of newer organizational practices.
This begs the question of how western clients need to devise business strategies to conform to the
inherent cultural patters of these nations and of the providers embedded within these cultures
(Khanna et al., 2005; Peng and Luo, 2000).
Based on the nature of partnerships described in this paper, the effect of cultural distance
will tend to be lesser in tactical IOS partnerships because of their inherent transactional- and
short-term nature of involvement. But the effects of cultural dissimilarity will be higher in the
strategic IOS and highest in the transformational type as these partnerships represent in-
creasingly greater degree of involvement among partners over greater time periods that
necessitates enhanced understanding and tolerance of differing organizational practices, and
deeper norms and values. It is, therefore, logical to argue that all things being equal, increased
cultural distance will deter partners' willingness to engage into and continue with IOS part-
nerships. Contrarily, any IOS partnership that is characterized by lesser cultural distance (i.e.,

Fig. 2. Model of IOS partnership.

34 B.L. Kedia, S. Lahiri / Journal of International Management 13 (2007) 22–37

increased proximity) between partners is likely to be strong and continued on a long-term basis.
Our final proposition is

P8. Cultural distance between partners will moderate the effects of drivers (client side and
provider side) on the quality and longevity of IOS partnerships such that increased distance will
deter development of strong and continued partnerships.

Our partnership model is shown in Fig. 2.

5. Conclusions and implications

IOS is a growing phenomenon. However, the current state of research suggests that theoretical
and empirical scholarly works has a long way to go before the conceptual and practical
underpinnings of IOS can be adequately fathomed. Partly to fulfill this research gap we have
elaborated in this paper what constitute IOS partnerships. Overall, this paper has made several
important contributions towards extension of our general understanding of IOS partnerships and
forwarding a broader research agenda.
First, our discussion on IOS partnerships has clarified that all forms of cooperative behavior
between clients and providers are not the same in terms of value proposition and degree of
involvement. Although decreasing business costs and increasing value have been discussed in the
existing literature, the question of how such considerations differ on a continuum has not been
adequately addressed before. Conceptualizing the true nature of relationship between outsourcing
partners is yet to capture attention of scholars. This paper is first to offer such an understanding.
Second, this paper has shown that there are several factors that may influence how IOS
partnerships may continue to be beneficial to the clients and providers. It is true that there may be
other issues that can impact partnerships and their continuity. But our attempt was to include those
effects that appear to be most relevant in the context of IOS partnerships. The moderating effects
of trustworthiness and cultural distance as discussed here has reinforced the notion that enabling
and promoting drivers of IOS do not automatically foster quality partnerships.
Our discussion has several implications that can inform and guide managerial practice. First, it
helps one to understand the nature of IOS in general, and what makes it an important practice to
contemplate and embark upon. Also it helps to caution that ill-planned IOS partnerships may lead
to business downturns. Second, executives may find the discussion on the types of IOS
partnership indeed helpful. The salient attributes associated with each type of partnership, as
highlighted in Table 1, may help them to plan and implement their moves better. Third, our model
informs the practitioner that several additional factors need to be considered in order to heighten
the quality of partnerships or to ensure longevity. It is necessary to tie up with overseas partners
who can be trusted and whose trustworthiness will continue during the currency of contract.
Executives should also endeavor to remain trustworthy to their partners particularly in the matters
of timely payments, incentives, and demands for too much deviation from contact clauses. Also
both the partners need to ensure how their ongoing partnership may help to mutually move up the
respective value chains, and minimize the incompatibilities in behavior and actions that may arise
owing to cultural differences.
Future theorizing work need to consider Doh's (2005) observation that IOS is likely to present
challenges not only for firms but also for societies and stakeholders for a long time to come.
Therefore, how IOS partnerships impact domains beyond the firm level will present significant
theorizing opportunities to researchers. Scholars also need to build on the suggestion offered by
 B.L. Kedia, S. Lahiri / Journal of International Management 13 (2007) 22–37 35

Gilley, McGee, and Rasheed (2004) “that the development of a general theory of outsourcing
should include both internal and external antecedents of outsourcing” (2004: 120). IOS part-
nerships may start with simple buyer–seller transactions but may gradually develop into deeper
long-term relationships based on continued trust-based partnership over time. Examination of
such partnership evolution for a particular network of client and its providers will provide fertile
grounds for future theorizing on and empirical testing of IOS partnership types.
Since IOS involves services (and not tangible products), any theory building needs to take into
account the nature of services per se. In this regard relevant insights need to be drawn from the
marketing literature, which IB scholars have not adequately done so far. For example, services are
differentiated from goods in terms of archetypal characteristics as intangibility, inseparability,
heterogeneity, and perishability (Vargo and Lusch, 2004). Pertinent questions that arise in this
context are: how do considerations of these attributes alter the conceptual boundaries of
international outsourcing that was originally based on manufacturing activities? At the
operational level, how does disaggregating services value chain and reassembling the outsourced
service functions differ from practices that involved manufacturing i.e., products outsourcing?
These issues, and many others, need to be addressed by scholars interested in developing future
theories of IOS.
To conclude, this paper has provided an understanding of IOS partnership that has potential to
stir academic interest and improve current and future practice. Our discussion will, hopefully,
benefit researchers with new thoughtful insights. Practitioners may gain newer perspectives on
how to best deal with the wider implications of IOS partnerships. In sum, this paper has elements
to aid comprehending the next practices of IOS.

Acknowledgements

We are grateful to the Temple University CIBER for its financial support to present an earlier
version of this paper at the 7th Annual International Business Research Forum. We are thankful to
editor Masaaki Kotabe, guest editor Arvind Parkhe, anonymous reviewers, and participants of the
forum for their helpful comments on this paper.

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