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SO INDUSTRY INSIGHT
3,2
Sourcing, insourcing and two
times outsourcing
144 Four phases of procurement of
telecommunications services within the
Swedish public sector
Staffan Brege, Per-Olof Brehmer and Helena Lindskog
Division of Management and Engineering, Linköping University,
Linköping, Sweden
Abstract
Purpose – The purpose of this paper is to describe and analyze how and why the question of
outsourcing or insourcing within a specific empirical context, telecommunications services, has been
handled differently over time.
Design/methodology/approach – A longitudinal study on procurement of telecommunications for
the Swedish public sector’s organizations during the last 40 years. The empirical data were collected
from three case studies and one research project.
Findings – The paper identifies four phases: from a simple buying situations, via insourcing of
equipment in order to produce some services in-house, to outsourcing of telecommunications in a first
step and to outsourcing of combined data and telecommunications in a second step. Three major
contextual determinants are identified for the public procurement of telecommunications services:
de-monopolization, rapid technical development and pressure on public agencies from politicians,
citizens and others. In addition to low cost, core competence, control and flexibility, the paper
identifies business development as a new logic for outsourcing and insourcing.
Research limitations/implications – This study is limited to Sweden and public procurement of
telecommunications services. Therefore, it would be of value to test if the development of public
procurement of telecommunications in other countries passed through the same phases and with the
same determinants.
Practical implications – Many of the findings are valid for public procurement in other countries,
especially in the European Union due to the common legislative base for public procurement.
Originality/value – The paper fulfills an identified need to carry out a longitudinal study of
changes in public procurement of telecommunications through the different phases of in/outsourcing.
Keywords Public procurement, Telecommunications, Sweden, Outsourcing, Sourcing
Paper type Research paper

Strategic Outsourcing: An
International Journal
Vol. 3 No. 2, 2010
pp. 144-162
# Emerald Group Publishing Limited
1753-8297
DOI 10.1108/17538291011060358
1. Introduction
The make-or-buy or outsourcing question has been given much attention over the last 20
years both in industrial practice and among academic scholars. The literature identifies
several driving forces towards outsourcing such as cost reduction, operation/capacity
restraints and financial motives, which all focus on core competence and the utilization of
external resources (Nordigården, 2007). We define outsourcing as the transfer of activities
and control from internal to external actors. Quinn (1999) argues that specialization in
supply markets can result in greater knowledge, more investment in software and training
systems, higher efficiency, and therefore offer higher salaries and attract more highly
trained people than a few integrated companies. Gottfredson et al. (2005) identify a rapid
growth of outsourcing of products and services in a wide range of industries including
automotive, computer assembly, financial services, airlines and entertainment.
 Different theoretical approaches emphasize different driving forces and frames of Sourcing,
reference. In transaction cost analysis, much emphasis is put on the cost issue in
combination with the risk of opportunistic behavior among business partners (cf.
insourcing and
Williamson, 1975). In the resource-based view, the question of make or buy is discussed outsourcing
in terms of core competence and the availability of external resources (cf. Barney, 1991).
There are also contextual factors that differentiate between drivers to outsource, for
example, in different industries like the automotive, aircraft, public sector, etc. (Brandes
et al., 2008; Lonsdale, 1999; Kakabadse and Kakabadse, 2001).
145
In this article, the focus is on how the question of outsourcing or insourcing differs
over time within the same empirical context, namely telecommunications services
purchased by public agencies on the Swedish telecommunications market and how it
has developed over the last three decades. The development includes four phases from
simple buying decision from a monopolist to eventually full outsourcing of all data and
telecommunications services.
On the supplier side, the telecommunications market has undergone an
unprecedented development during the last 30 years passing from full monopoly via
partial de-monopolization with competition on equipment to full competition on any
segment of telecommunications including competing infrastructures, technologies and
solutions for the same requirement (Brege et al., 2009; Marshall et al., 2007). A myriad
of operators have been established operating locally, regionally or globally with a full
service portfolio or just specialized on one or a few services based on a special
technique or a combination of several techniques. The rapid and diverse technical
development and market changes coincided and accelerated the movement from one
solution to almost innumerable solutions for the users.
On the buyer side, the users including the public sector have over the years
broadened their demands on telecommunications. In the beginning it was primarily a
cost issue. Thereafter, it also included focus on productivity of internal processes and
ultimately on value added to customers. As more and more routine work is automated,
a lot of information is accessible 24 hours every day of the year and many types of
tasks such as applications can be filled in online; telecommunications become
indispensable for any well-functioning organization. This is particularly relevant for
the public sector with its multitude of contacts with citizens, enterprises and other
private or public organizations.

2. Purpose and methodology

The purpose of this article is to describe and analyze how the question of outsourcing or
insourcing within a specific empirical context, telecommunications services, is handled
differently over time. Even though the empirical context is the telecommunications
sector, the infrastructural and strategic determinants are changing over time – from
monopoly to a step-wise de-monopolization, from focus on simple services and
telecommunications equipment to integrated data and telecommunications services,
from a cost issue to business development of the purchasing public agency.
The study – a longitudinal case study – is based on procurement of
telecommunications for the Swedish public sector’s organizations during the last 40
years. In order to capture longitudinal change processes, the study follows the
methodology presented by Pettigrew (1985, 1990) on empirical longitudinal studies.
The research methodology is retrospective case descriptions for the three first phases
and case documentation in real time for the fourth phase. In this work we seek
answers to three dimensions of the change process:
SO (1) What? – The content of telecommunications in each phase.
3,2 (2) Where? – The context of the telecommunications procurement including
internal and external environment.
(3) How? – The process of implementing each telecommunication procurement
action.

146 Covering these three dimensions is according to Pettigrew and Whipp (1991) essential
for the study of change processes. The case descriptions cover both the development at
the industry level and specific procurement cases. Data collection in the retrospective
case studies consists of interviews combined with on-hand knowledge, especially of
one of the authors that had been gained through involvement in the development of
public procurement of telecommunications services during the 1990s, presented in
Lindskog (2008). Another important source of data is industry analysis covering the
change from phase two to phase three. The empirical data have been collected from the
following sources:
. STATTEL-de-legationen (1991-1996), a special governmental commission
responsible for procurement of telecommunications (data and telephony
services) for the Swedish public sector (STATTEL, 1992; Lindskog, 1993).
. SOTIP (Swedish government Open Telecommunications systems Interconnection
Profile), a requirement model of the needs of public agencies and their employees,
developed and first published in 1995 by STATTEL (STATTEL, 1995).
. The City of Stockholm procurement of integrated IT and telephony services; the
contract was signed in 2005 (Stockholms stad, 2005).
. KNUT (Electronic public procurement of telecommunications services) sponsored
by Vinnova (The Swedish Governmental Agency for Innovation Systems), a
research project to develop a portal to support both public agencies and suppliers
during the procurement and decision taking process from analysis of needs,
development of request for proposal, tender, to final contract (Vinnova, 2006).
The choice of the case study method is based on the complex nature of the development of
public procurement of telecommunications. Case studies are especially useful in
situations with high degrees of complexity and change and where no clear-cut cause-
effect relationships can be found (Gummesson, 1991). Gaining access to people both from
the supplier and buyer sides facilitates the collection of data from multiple informants,
which increases the quality of data collected (Eisenhardt, 1989). The phases are
documented in retrospective case studies on both industry and organizational levels
based on secondary data (partly written by one of the authors) and some 20 in-depth
interviews with key actors. The informants were chosen for their specialized knowledge
of and experience with telecommunications procurement in real-life settings. From the
first informants interviewed, we gained knowledge of other informants that could be seen
as knowledgably respondents. This increased our knowledge from different perspectives
within different organizations with influence on the procurement process. The fourth and
current phase is also documented in an ongoing research project – KNUT project that
uses practical inquiry as the main research method (Strauss and Corbin, 1998).

3. Frame of reference
There are different theories to increase our understanding of the make-or-buy decision
and if the solution is outsourcing or insourcing. The two major theoretical approaches
in strategy and marketing contexts are ‘‘transaction cost analysis’’ (cf. Williamson, Sourcing,
1975, 1979) and ‘‘core competence thinking’’ (cf. Prahalad and Hamel, 1990) with its insourcing and
academic roots in the resource-based view of the company (cf. Wernerfelt, 1984;
Barney, 1991). Some authors have presented more integrated perspectives combining outsourcing
the transaction costs and core competence (cf. Reve, 1990; Cox, 1996; Cox and Furlong,
1997). Four different logics for insourcing or outsourcing that are covered more or less
explicitly in the different theories are analyzed (cf. Nordigården, 2007). 147
3.1 The lowest cost logic
Cost is often considered the most important criteria for an outsourcing decision (cf.
Brandes et al., 1997; Lonsdale and Cox, 1997). A comparison is made between the cost for
in-house production and external sourcing (McIvor et al., 1997). However, different
theoretical perspectives emphasize different cost dimensions as the most important ones.
In his famous transaction cost approach, Williamson (1975, 1979) divides the costs
into production and transaction costs and thereafter he puts focus upon the latter. In
transaction cost analysis the company is primarily looked upon as a governance
structure and not a production unit. Transaction costs include a number of ex ante
costs such as drafting and negotiations and ex post costs in terms of monitoring and
enforcing agreements (Rindfleich and Heide, 1997). It is a trade off between transaction
and production costs. In-house control will typically involve lower transaction costs,
but at the same time the potential for economies of scale and the collective pooling of
resources, which could be improved by outsourcing, i.e. a market solution with one or a
few suppliers serving several customers, are sacrificed.
The analysis of the production function and production costs can be found among more
traditional industrial organization researchers such as Bain (1968), Caves (1998) and Sherer
(1971). The potential for economies of scale and scope are many times the most important
aspects when an outsourcing decision has to be made. Other factors such as availability of
raw materials and components, intellectual property rights and a favorable geographical
location are also of importance for the lowest cost logic (cf. Porter, 1981).

3.2 The core competence logic

The core competence logic emphasizes the issue of long-term competitiveness rooted in
the very unique core competence of the corporation. By definition the core competence
has complex and systemic properties with a lot of tacit knowledge and competences
embedded in organizational and cultural contexts (Prahalad and Hamel, 1990; Grant,
1991; Javidan, 1998). Organizational learning is important for the development of core
competence.
The rule of thumb from this perspective is that the core competence should be kept
in-house, the availability of important complementary resources in partnership
relationships should be secured and the suppliers of different kinds of commodities
should be found via the market mechanism (cf. Cox, 1996; Brandes et al., 1997).
Sometimes, there is also a need for increased competence in order to make outsourcing
decisions (Quinn and Hilmer, 1994; Harrison and Kelly, 1993).
The concept of core competence is intuitively very attractive. However, it is many
times difficult to unilaterally define this concept. It has many aspects in common with
Williamson’s concept of transaction costs. Core competence is not a simple skill or asset
(Hamel and Hene, 1994). Core competence can differ from what we do best to what
the customers value the highest (cf. Nordigården, 2007). Espino-Rodrigez and
SO Pardon-Robaina, (2006) state that the resource-based view perspective applied on
outsourcing has been the most vital development during the last decade.
3,2
3.3 The control logic
The control logic is based on the assumption that outsourcing should be avoided in
case of high risk for supplier opportunism, i.e. that the supplier would misuse its
position and, for instance, charges too high prices. Lonsdale (2001) points out that a
148 dominant supplier that has unique resources (high asset specificity) and an
information advantage (information asymmetry) can easily start to behave
opportunistically. It is not only a cost problem, that the supplier charges too high
prices, but the buyer could also loose control of lead times (time to market and time to
customer), quality and product development (Andersson et al., 2008).

3.4 The flexibility logic

In a very dynamic environment, flexibility is important in its own right. It is tempting
to try to transform fixed costs into variable cost by outsourcing (Greaver, 1999;
Abrahamsson et al., 2003; Carlson and Lind, 2005), especially when companies are
facing a need for investments in new machinery, factories or data systems. This can be
the trigger for outsourcing decisions. A combination of in-house production and
outsourcing can also be a viable solution (Nordigården, 2007). Furthermore, a high
degree of uncertainty regarding new technology could lead to outsourcing in order to
maintain flexibility and at the same time reduce risks.

4. Sourcing of telecommunications for the Swedish public sector

Going back to the 1980s, the context of the make-or-buy decision of telecommunications
has at least passed four phases. The major enablers of the change process have been
de-monopolization and fast technology development. Another major driving force has
been the demands (externally and internally) placed on the public agencies and how
telecommunications contribute to solve these problems (Brege et al., 2009). Outsourcing
is defined as transferring products and activities from in-house control of the buying
organization to external suppliers and insourcing as the opposite, when the buyers bring
new activities in-house (cf. Gilley and Rasheed, 2000; Ellram and Billington, 2001).
Insourcing as well as outsourcing of telecommunications demand strategic attention as:
. insourcing involves employment of new personal or training of already employed
staff in order to procure equipment, run and administrate own telecommunications
networks; and
. outsourcing involves overtaking of civil servants by private companies and/or
moving already employed staff to other functions as well as acquiring new skills
in order to carry out the service procurement.

4.1 Phase one – the sourcing phase under monopoly

In the monopoly situation up until the 1980s, in Sweden as well as in other countries,
the national telecommunications operator (in Sweden at that time Televerket) was the
supplier of telecommunications services. It had a homogeneous view of its customers,
treating them more like subscribers than clients. The responsibility for the bundling of
the offering was entirely in the hands of the supplier (PTS, 2003) and the same offering
was directed to all customers, which from a theoretical point of view could be looked
upon as an undifferentiated marketing approach (see Figure 1).
 The technical development was primarily an issue between the operators and their Sourcing,
suppliers, and the manufacturers of telecommunications equipment and systems. The
views of the end-users (the customers of the operators) were more or less ignored and
insourcing and
de facto seldom expressed at all. outsourcing
The users of the telecommunications services were facing a buying situation with
very little choice. They had to buy from a specific supplier (monopoly) and the
offerings were already bundled (homogeneous offerings). Therefore, buying
telecommunications services was looked upon as a simple administrative decision. 149
There was little room for an active negotiation with the monopolist and the only way to
keep down telecommunications cost was to reduce the number of internal users
(subscribers) and the amount of outgoing traffic from the public agency.
Phase one – Sourcing (up to 1980) can be summarized as a period with full
monopoly. A government-owned national monopoly provided telecommunications
services (Karlsson, 1998). The main logic for sourcing was the lowest cost and the way
to reduce costs was to reduce outgoing traffic by having fewer users and/or reducing
the number and duration of calls. The buyers had practically no choice and procuring
telecommunications was a relatively simple administrative task.

4.2 Phase two – insourcing of equipment

The introduction of partial competition in the beginning of the 1980s changed the rules.
Manufacturers of local switching equipment such as PABXs[1] could now, via their
distributors, offer equipment directly to the end-users. Competition between
manufacturers of telecommunications equipment was in place and sometimes quite
fierce since earlier they competed only for the monopolist operator’s contracts (see
Figure 2).
Each service had a separate technical solution, network/infrastructure and
designated terminal equipment. Service content was still determined by the operator
and users were treated as a homogeneous group (PTS, 2003).
Public agencies now had the possibility to choose between continue to buy
telecommunications as previously or to explore the new market situation. The latter
made it possible for the agencies to build and run own telecommunications networks in
competition with the monopolist by buying equipment and leased lines. There was an
extra incentive for local authorities to do so since they often owned ducts where it was
relatively cheap and easy to put optic fibers. Hence, local authorities could use their
own broadband infrastructure.
A local authority could compete with the monopolist operator in two ways. Firstly,
by being its own internal telecommunications operator. Secondly, by being a
distributor of broadband transmission capacity to other users. Statskontoret (the
governmental agency responsible for public procurement including the ICT

Figure 1.
Monopoly situation –
sourcing
SO
3,2

150

Figure 2.
Partial competition –
insourcing

(Information Communication Technology) sector at the time) started to procure

telecommunications equipment by framework contracts[2], which gave the local public
agencies better commercial conditions.
One example of this development is the introduction of broadband in Tranås
municipality, a local community with some 18,000 inhabitants. In 1996 Tranås community
decided to build a municipality-owned infrastructure (a municipal area network) in order
to enhance and make the local administration more efficient as well as to include the local
industry in a co-operative project. Public authorities, larger businesses and schools were
connected in the first phase. Thereafter, essentially all SMEs and inhabitants have
gradually been connected. Already in the autumn of 1997, some 50 companies were
connected and in November 2001, a little more than 200 companies and 1,700 households
were connected with optical fiber. The goal was that 92 percent of all companies and
households should have access to broadband connection (Lindskog and Johansson, 2005).
The public sector was in the vanguard of building own networks, including
transmission lines and of the change towards insourcing and being ones own operator.
The Data- and later IT-department dedicated some of their staff or more often employed
specialists to buy and run telecommunications networks. The major driving force for
insourcing was cost reduction. In spite of the fact that telecommunications was not
considered a core business of the public sector, agencies built their own networks as
insourcing was cheaper compared with the previous purely monopolistic situation. Still
another driving force was the possibility for the Data/IT-departments to gain more power.
Phase two – insourcing (1980-1996) can be summarized as a period with partial
competition (on equipment but not on fixed telephony). This enabled large buyers to
buy telecommunications equipment and to lease telecommunications lines in order to
establish private internal networks with internal traffic ‘‘for free,’’ The approach was
especially attractive for municipalities and local authorities. They set up their own
fiber networks, which could be extended not only to service the local public
administration, but also the local community at large (Lindskog and Johansson, 2005).
The main logics behind this development were the lowest cost and control.

4.3 Phase three – outsourcing (from equipment to service)

Some 15 years ago the Swedish government decided to completely de-monopolize the
telecommunications market ahead of all other European countries. In order to get
competition in place, it was not enough to change the legislation, but also to directly Sourcing,
attract operators from other countries to start their operations in Sweden and the
forming of new national players. Sweden was not seen as a big potential market due to
insourcing and
the strong position of its incumbent telecommunications operator, Televerket, and well- outsourcing
developed infrastructure with a high percentage of installed connections. The Swedish
government decided to establish a new commission, STATTEL-delegation, with the
task of procuring in competition telecommunications services on behalf of government
agencies (Lindskog, 2008).
151
At that time most of the non-monolith agencies had their own telecommunications
networks often for both voice and data, which had been established during phase two.
These networks were run by Data/IT-departments with considerable power and
sometimes with their own agendas. To run telecommunications networks was one of the
core activities for these departments. However, neither the management of the agencies,
nor politicians and the government considered telecommunications to be a core activity.
One of the directives to the STATTEL-delegation was that it should procure
telecommunications services. The delegation should also considerably reduce the total
cost of telecommunications by at least 25 percent. This implied the necessity of
outsourcing of own networks and buying services from telecommunications operators
instead of buying equipment from distributors and leasing lines. It was not possible to
accomplish this kind of cost reduction with the in-house solutions focusing on the cost
for outgoing traffic, since this cost was estimated to amount to only 17 percent of total
telecommunications cost (Lindskog, 1991).
Before STATTEL’s study, telecommunications was treated as a cost. Most efforts, e.g.
building own networks, concentrated on reducing the cost of outgoing traffic by having
the outgoing internal traffic for ‘‘free’’ and to pass all outgoing traffic as close as possible
to the destination site. Thus, often pay only local call charges. STATTEL’s study showed
that the incoming traffic was the main contributor to the overall telecommunications
costs incl. equipment and staff dealing directly with telecommunications. At the same
time, the cost of telecommunications compared with other costs such as employees, office
space or equipment is relatively small.
In order to outsource telecommunications in competition, it was necessary to create
the market. Possibly, this was the most important task for STATTEL. The successful
procurement of telecommunications services resulted in framework contracts and the
establishment of new players in Sweden. Two big procurements were carried out by
STATTEL: on data communications and telephony services. The newcomer on the
Swedish market France Telecom won the data communication frameworks contract in
full competition, and the incumbent Swedish operator Televerket (now Telia) lost. France
Telecom quickly established itself as a player on the Swedish telecommunications
market. In the telephony procurement it was decided to award two operators, and this
time Televerket together with France Telecom were chosen (Lindskog, 2008). After a
slow start, the Swedish telecommunications market became very attractive for domestic
and foreign companies, at least as a test market for competition on telecommunications.
De-monopolization became a fact only a few years after the introduction of competition.
Telecommunications were more and more included in the development of the major
internal processes to fulfill the overall missions of the agencies. In that respect,
telecommunications gradually became a strategic tool to achieve goal fulfillment,
internal effectiveness and also more and more to increase customer services. However,
at the same time as telecommunications became more and more important, it was still
not considered to be a core competence that should be kept in-house.
SO Phase three – outsourcing (1996-2003) was characterized by full competition on all
3,2 services, equipment and infrastructure locally and long haul. The main logics were
the lowest cost and core competence. Telecommunications were not seen as a core
business, but rather as a tool to achieve cost reduction through business process
re-engineering. Consequently, agencies started to outsource telecommunications
functions and began to re-bundle their demand for services (see Figure 3).
152 4.4 Phase four – outsourcing (from internal to external system integration)
The explosive technical development over the last decade or so introduced Internet,
mobility, broadband and the possibility to combine everything for everybody. Data and
telecommunications were integrated and a new phase started to take shape on the
Swedish telecommunications market. The process of re-bundling telecommunications
services started during phase three and turned into full bundling in phase four
integrating telephony and data communications. It was initiated mainly due to the
explosive technical development leading to the necessity as well as possibility to choose
between competing technical solutions and/or technologies for the same requirement,
and convergence as from the same terminal equipment it became possible to reach a
range of different services and applications that previously needed separate terminal
equipment and infrastructures. For example, we can use the PC for data, mail, storage,
voice communication, TV or radio. The mobile phone is also a watch, sender and receiver
of voice, image or text messages and receiver of radio, TV and local information. For the
public sector there were two main driving forces to continue outsourcing:
(1) To integrate all internal and external systems is an important but also more
complex task that requires more and more resources. Just to call off from
existing framework contracts and to coordinate and integrate with other
contracts and services already in place is quite complicated.
(2) To respond to political demands such as 24/7 open authority or to be able to
reach authorities by any available means and then coordinate internally the
same case.
One important example is the biggest single buyer on the Swedish market, the City of
Stockholm with 47,000 employees, which awarded in 2005 to the prime contractor,
TietoEnator, an eight years contract for delivery of IT and telephony services.
TietoEnator is responsible for providing system operation for around 30 applications,
system administration, helpdesk services (common Service Desk for data and
telephony for internal use and for the citizens), fixed telephony, mobile telephony,

Figure 3.
Full competition –
outsourcing (from
equipment to service)
IP-based telephony services, as well as operator and other telephony services and to Sourcing,
take an active part in the City of Stockholm’s development including integration of IT insourcing and
and telephony services towards citizens and businesses and rationalization.
TietoEnator coordinates a number of sub-suppliers. The estimated total order value is outsourcing
some SEK 2 bn (Knutsson and Lindgren, 2005; TietoEnator, 2005).
After the City of Stockholm’s procurement, several other agencies have considered
and implemented similar procurements. The relationship between the buyer and the 153
external systems integrator is dyadic with strong dependency on both sides. This type
of procurement and contract can be difficult to achieve through (standardized)
framework contracts.
Phase four – extended outsourcing (from 2003 on) can be summarized as a situation
with full competition not only between providers, but also between several solutions
(see Figure 4). The fourth phase has mainly been driven by the convergence of data and
telecommunications. The systems integration function has been brought over to
external suppliers. The buyers have more and more focused on the ICT as enabler to
increase customer value added such as the 24/365 service level within the public sector.
The main logics have been and are the lowest cost, core competence and flexibility. In
the uncertain situation with several competing technologies and solutions, outsourcing
of system integration provides the possibility to maintain flexibility.

5. Analysis – comparing the phases

Through the four phases of the development of the make-or-buy decision can be
followed from sourcing of less complex telecommunications solutions, via insourcing
of telecommunications equipment in phase two to increasing outsourcing as a first step
in phase three to procure fully integrated combined telecommunications and data
services from one systems integrator in phase four.
The major enablers for this development have been:
. de-monopolization of the telecommunications market;
. fast technical development; and
. increased demands that are put upon the public agencies from politicians,
citizens etc., which is guiding the business and operational development.

Figure 4.
Full competition –
outsourcing (from internal
to external system
integration)
SO Telecommunications have changed from being a cost issue during phases one and two
3,2 to also include the effectiveness of internal processes during phase three and demands
on increased customer/citizen services in phase four (see Figure 5).
During phase one, the sourcing phase, buying telecommunications service was a
simple administrative decision and the supplier risk was low in highly developed
countries like Sweden. The Swedish operator, Televerket, was considered as one of the
154 best operators in the world.
The cost comparison when going from sourcing during phase one to insourcing
during phase two was straightforward. Large public and private organizations with
geographically dispersed activities could extract a cost advantage by changing from
sourcing of a bundled service to designing and controlling their own private networks.
The cost of telecommunications consisted of three parts: cost for outgoing
telecommunications traffic, equipment including maintenance and staff. The risk
exposed to the public agencies was mostly a competence issue, to find the employees
who could build and maintain the local networks?
In phase two, the insourcing phase, the strategic importance of telecommunications
was enhanced but still low. The demands on the purchasing organization increased
and it was no longer a pure administrative decision. The need for incoming and
outgoing telecommunications had to be estimated, competing offerings for
telecommunications equipment and maintenance evaluated and compared taking
staffing issues into account. Buying telecommunications services from Televerket was
still an administrative issue, but buying equipment from a large number of distributors
was more business like. The products that were bought were of comparatively low
complexity and there were enough competing suppliers on the market to hold up
competition. Hence, the supplier market risk was still quite low (see Table I).
The transition from phase two to three was more complicated. The Swedish
government set out a target that the cost of telecommunications should be reduced by
25 percent. A more thorough analysis showed this to be impossible to reach in-house,

Figure 5.
From cost to business
development
 Phase one Phase two Phase three Phase four

Focus of the make-or-buy Sourcing Insourcing of equipment Outsourcing Outsourcing

decision of and leased lines From equipment to service From internal to external
telecommunications system integration
Bundling vs un-bundling of Fully bundled (non-complex Un-bundled Re-bundled Fully bundled
telecommunications offering offering)
Sourcing logic Low cost Low cost Low cost Low cost
Control Non core Flexibility
Flexibility End-user demands
End-users demands/ Not expressed Not expressed Mobility Convergence mobile, fixed,
requirements on Distance work data, anywhere, anytime,
telecommunications solutions unified messaging

Organizational demands/
requirements on
telecommunications solutions
Drivers of technical
development of
telecommunications solutions
Cost reduction on usage –
outgoing traffic
Manufacturers and operators
Cost reduction on Cost reduction through
telecommunications business process
re-engineering Cost reduction of internal
(telecommunications as a resources þ increased service
tool) level towards citizens
(equipment þ outgoing Requirements on service Requirements on single
traffic) interface and system
Requirements on integration
equipment þ own
networks
Manufacturers and Manufacturers and Manufacturers, operators,
operators operators in interaction users, and system integrators
with users
(continued)

telecommunications
solutions
sourcing of
Four phases in the
Table I.
insourcing and

155
outsourcing
Sourcing,

Table I.
Market situation when buying Monopoly
telecommunications solutions
Risks in buying
telecommunications solutions
3,2
SO
156
Phase one Phase two Phase three Phase four
Partial competition with Full competition Full competition in a
many distributors of converging market between
equipment telecommunications and data
Need to create a Limited number of system
functioning market at the integrators
beginning
No particular risks Need for new competences Not enough number of Supplier relation with high
to buy and run own operators mutual dependency
telecommunications Need for new competences Need for new competences to
networks to buy telecommunications procure from one single
Underestimation of services and follow up system integrator and to
complexity of data/IT service contracts follow up a contract
departments
since the potential for cost reduction was primarily to be found in the outgoing Sourcing,
telecommunications traffic and outgoing traffic only accounted for 17 percent of total insourcing and
telecommunications cost. Outsourcing could save costs for equipment, people and
office space and was the only viable alternative. outsourcing
With de-monopolization and liberalization of the Swedish telecommunications
market, agencies’ management realized that instead of running the telecommunications
function in-house, it could be outsourced and enables the agency to concentrate its 157
resources on core business activities.
During phase three, the outsourcing phase, the strategic importance of the
telecommunications services increased to a considerably higher level. It was still
considered as a non-core business of public agencies (even though the ICT-departments
considered it as a core competence). The purchasing organization now had to evaluate
how telecommunications could be used both to lower the overall cost and to improve
the effectiveness of internal processes. The market risk with several competing
operators was still low.
In phase four, the market situation represents a myriad of operators with competing
offerings, technologies and solutions and with the picture continuously changing. Just
to choose, co-ordinate and integrate as well as to administrate various contracts
becomes quite a tedious and difficult task. At the same time the political pressure on
agencies to use telecommunications in order to facilitate contacts between citizens and
agencies, by programs such as ‘‘24/7 authority,’’ increases. This leads to further
outsourcing of internal system integration to an external prime contractor for all
telecommunications (often IT and telephony) activities.
During the still ongoing phase four of extended outsourcing, the importance of
telecommunications has increased significantly. At the same time, to outsource all
telecommunications together with data communication to one single prime contractor
and system integrator can be more risky. The relationship between buyer and supplier
becomes very tight and it can be difficult to break it after signing the contract. There
can also be difficulties to find alternative providers since there are not many system
integrators available on the market, which is characterized by an oligopoly situation.
Telecommunications are still not considered core competence in spite of the fact that
virtually all the public sector’s internal and external activities depend on well-
functioning telecommunications.

6. Sourcing logics and public sector procurement of telecommunications

services
In our analysis we have identified three major contextual determinants for the
procurement of telecommunications services within the public sector:
(1) de-monopolization;
(2) rapid technical development; and
(3) different kinds of pressure on public agencies from politicians, citizens and
other, which have been transformed into operational and strategic change.
During this period competition has developed from non-existent to strong. Of course,
de-monopolization has played a major part in this development, but also the fast
technical development, not the least, the integration of data and telecommunications
during phase four. The procurement decision has also developed from a simple
SO administrative task, via a rather operational decision of cost comparison to a strategic
3,2 decision during phase four (see Figure 6).
In our frame of reference we introduced four different logics for outsourcing and
insourcing: lowest cost; core competence; control; and flexibility, based in somewhat
different theoretical perspectives. The telecommunications case presented above gives
rather consistent support to the lowest cost logic of insourcing and outsourcing as a
158 dominant logic, especially in the early phases (cf. Brandes et al., 2008; Lonsdale and
Cox, 1997; McIvor et al., 1997). The lowest cost logic is a driving force behind all
insourcing and outsourcing decisions. The cost that should be lowered has varied. In
phase one it was just outgoing traffic, in phase two the cost of the telecommunications
function, and in phases three and four – the overall cost of running a public agency.
The standard formula for outsourcing applies in phase three and phase four since
telecommunications are not considered being core competence (cf. Cox, 1996). However,
the core competence logic appears not to be as important as the lowest cost logic.
Possibly the relative importance and the agencies’ dependencies on the
telecommunications function have over the years made it more of a core function.
Further, from a normative point of view, the public agencies would, possibly, benefit by
regarding telecom services as more of a core competence.
The control logic appears to be the strongest in phase two when public agencies started
to build and run their own networks. The flexibility logic is most prominent as a driving
force for outsourcing in phase four due to the uncertainty of future dominating
technologies and solutions (but also of importance in phase three). These findings support
the strategic directions identified by Gelderman and van Weele (2003) as important for
maintaining or developing each of the four purchasing portfolio categories in the Kraljic
(1983) purchasing matrix. For example, to see purchases as strategic over time, they
suggest that the organization has to accept the de facto locked-in ‘‘partnership’’ with the
suppliers and put efforts into developing it as a strategic partnership. Our study supports
their findings, but the issue is more problematic to handle in public procurement
situations, which require strong commitment over time to the taken direction.
Finally, we would like to emphasize an additional, fifth, logic for insourcing and
outsourcing, namely the business development logic. It is somewhat of a paradox, that
phase four, when the integrated telecommunications/data solution is considered as
most strategic and when the supplier risks are considered as the highest, users choose
an even more extended outsourcing solution. One explanation could be that it is too

Figure 6.
The four phases of
sourcing, insourcing and
two times outsourcing
complex to handle in-house, but another explanation is that the need for business Sourcing,
development ‘‘forces’’ the public agency to take larger risks.
In phase four the combined data and telecommunications competence is becoming
insourcing and
more ‘‘core’’ for public agencies, because the fulfillment of its mission towards citizens is outsourcing
more and more dependent on well-functioning telecommunications services. But at the
same time the demands on competence are more and more complex and most public
agencies can no longer handle these difficult tasks in-house. The increased scope of
outsourcing supports the argument that increased complexity and demand on high 159
competence promote the outsourcing decision (cf. Quinn and Hilmer, 1994). This fifth
logic is also in line with the theoretical discussion of creating value in the so-called value
constellations or value networks (cf. Normann and Ramirez, 1993; Stabell and Fjeldstad,
1998), which implies that business development towards more complex offerings and
increased customer interaction is neither an issue for internal development nor a more
traditional development together with more ordinary suppliers in a supply chain.
Especially during phase four, it is of vital importance to the government agencies in
their role as customers to engage, after signing the contract, the data and
telecommunications suppliers as close partners, sharing different kinds of risk in
innovation and cost development. A cooperation/partnership of this kind is not easily
broken up (high switching costs). Hence, it is important that the customer tries to
safeguard himself from supplier opportunism (cf. Williamson, 1975, 1979). This
increased risk is not only about cost, but also about functionality, which could threaten
the customer’s business development efforts.

Notes
1. PABX, Private Automated Branch Exchange, is a system that enables several types of
communications in the same network without connecting to public phone network.
2. A framework is an agreement with suppliers to establish terms governing contracts that
may be awarded during the life of the agreement. In other words, it is a general
agreement that sets out terms and conditions for making specific purchases (call-offs).

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About the authors

Staffan Brege is the Professor of Industrial Marketing and head of the division of Industrial
Marketing at Linköping University. His research is mainly focused upon issues within the areas
of business-to-business marketing and business development, including topics such as
relationship marketing, value-added strategies, industrial services, outsourcing and functional
sales. Professor Brege is the author of ten books and some 25 articles in refereed journals. He also
works as a consultant in strategy and marketing and is at the moment a member five company
boards. Staffan Brege is the corresponding author and can be contacted at: staffan.brege@liu.se
Per-Olof Brehmer is a Associate Professor in Industrial Marketing and head of the
Department of Management and Engineering, Linköping University. He received his PhD in
Logistics Management from Linköping Institute of Technology. His research topics are value-
creation strategies, industrial services, ICT effect on competitiveness and especially strategies for
innovations and service development in knowledge-intensive industries that shift their
competitive power from products to services. He is currently working in a three-year research
project on service development and innovation in international companies. He has been research
leader for research project in collaboration with industry concerning value-creation strategies,
industrial services and industry competitiveness.
Helena Lindskog, PhD, is an expert and Senior Lecturer at the Department of Management
and Engineering, Linköping University, in Sweden. She has 25 years of experience in the field of
information technology and telecom within both the private and public sectors concerning issues
related to general advising, strategy, leadership, training and procurement. She has been
technical director for STATTEL-delegation (responsible for procurement of telecom for the
Swedish public sector), secretary in governmental commissions, Swedish representative to the
European Commission and standardization organization – ETSI, evaluator of research
programs, adviser to public administrations, business developer at Ericsson with the user
perspective always in focus and author of a book Time-rich and Time-poor: The New Classes of
the Society.

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