Most companies are faced with the competing challenges of being innovative while also remaining competitive. Cost reduction measures often result in companies choosing to outsource functions, such as multimedia, market research and web-design. Apart from cost reduction, companies outsource skills to access a greater pool of knowledge than is available in-house, to increase the speed and flexibility with which they can access new technologies and/or to allow them to focus on their core competencies.
However, outsourcing is not without risks, with potential for problems concerning quality control, company loyalty and strategic alignment. While companies need to weigh up the potential costs and benefits of procuring services externally, recent research reveals that outsourcing decisions can also influence innovation.
The Irish Community Innovation Survey, collected by the Central Statistics Office, measures the level of innovation activity among companies in Ireland. It covers industry and selected services companies employing 10 or more people. The 2008-2010 survey comprised a special module that asked 3,245 companies if they employed individuals in-house with distinct skills, or obtained these skills from external sources during the period. With this dataset my Cork University Business School colleagues, Dr Justin Doran, Dr Geraldine Ryan, Dr Frank Crowley and I, undertook a study examining which skills Irish companies choose to "outsource" and how outsourcing particular functions can complement innovation.
We found considerable variation in which skills or functions Irish companies choose to procure externally. For instance, 43 per cent of companies procured external web designers, while only 10 per cent look to source specific mathematics, statistical or data management skills from external providers.
This is not altogether surprising. Functions that can be easily replicated are best suited to outsourcing; those that require specialist knowledge or that may be crucial to a firm’s competitive edge are less so.
More than one in three Irish companies outsource software development functions, as well as graphic design and advertising. This contrasts with functions such as product design and engineering/ applied sciences, which companies are more likely to develop in-house.
Wealth of knowledge
A large proportion of companies choose to outsource particular skills, and no doubt, many of these companies have built up a wealth of knowledge and experience in this regard. We can assume that companies which outsource functions weigh up the potential costs, risks and benefits of procuring such services from external providers. However, to what extent, do they consider the impact of outsourcing decisions on their innovative activities? Our research shows that certain types of skills are particularly suited to different types of innovation and that choosing to source them in-house or externally could impact on the effectiveness of the skill to help produce successful innovations.
Our analysis reveals that the external sourcing of expertise in graphic design and advertising will have a positive effect on all types of innovation – product, process, organisational and marketing – within a business. If developed and sourced in-house, it will be effective only at stimulating marketing innovation, with no significant impact on other forms of innovation. Procuring web-design services externally also positively impacts the development of new products, with little benefit to product innovation if sourced internally.
This is not to say that procuring skills externally always leads to superior outcomes. Our research demonstrates that sometimes the positive relationship between a particular skill-set and successful innovation exists regardless whether those skills are provided in-house or externally.
For instance, software development skills benefit both process and organisational innovation, regardless of whether these skills are developed in-house or sourced externally. We also see the importance of marketing research across a range of innovation measures. However, whether marketing research skills are provided internally or externally is of little significance.
Then there are some functions which it appears should not be outsourced where innovation is an important strategy for a firm.
By way of example, success in developing new products hinges on having engineering and applied sciences skills within the business rather than procuring them externally. From the perspective of product innovation, it is advisable to use internal skills in the design of objects or services, market research, and engineering/applied science while using externally sourced skills in graphic design, advertising, web design, and market research. There are also advantages to developing database management skills in-house, particularly in relation to process and marketing innovations.
In relation to organisational innovation, outsourcing skills is of greater importance than developing the necessary skillsets in-house. This may be due to organisational rigidities relating to change. As organisation innovation involves changing the structure of the organisation, the effectiveness of internal skills may be restricted due to resistance to change.
Outsourcing is an important source of skills and services for many companies. However, the relationship between outsourcing and innovation is conditional on particular skill-sets and the type of innovations that companies which to implement.
Dr Jane Bourke is senior lecturer in economics, Department of Economics, Cork University Business School, University College Cork. The research paper “In-house or outsourcing skills: how best to manage for innovation?” is published in the International Journal of Innovation Management.
