Two theses are prominent in the second part of this book. The first one is that we have no reason to believe a priori that an experimental result applies (or does not apply) to nonexperimental circumstances. The second thesis then follows quite naturally: successful external validity arguments are empirical and can be constructed only by appropriately combining experimental and field evidence. I have also tried to specify what counts as “appropriate” in this context, or what sort of requirements a strong external validity inference should satisfy.

In a way, at this stage I consider the important job to be done, but not because everything has been said on how experimental and field data can be used to draw external validity inferences. On the contrary, the analysis in Chapters 8 and 9, being so tightly linked to concrete example, is almost certainly incomplete. However, having discussed two paradigmatic examples and having sketched a broad theory of inference based on eliminative induction, I consider the definition of more sophisticated strategies an exciting research agenda for the future. In what remains of this book, then, I would like to elaborate on the image of experimental economics that emerges from the discussion so far.

It is important, for example, to realize that by endorsing the above two theses, one subscribes to a very specific view of experiments and their role in scientific discovery.

The attempt to ground inductive support on the predictive success requirement faces some serious objections. Such a project seems to miss a crucial element in confirmation, namely the background conditions (Ki) that allow us to forge a tight link between the evidence (e) and the hypo-thesis under test (H). Unless we model the Ki in the relation of inductive support, our theory of induction will be unable to explain the advantages of controlled experimentation over nonexperimental methods of investigation. In experimental science, the Ki can be systematically checked and thus possible sources of error eliminated. In this chapter, I further elaborate this idea and illustrate its virtues using the example of preference reversals.

Subjective Bayesianism

I have said repeatedly that a satisfactory philosophy of experiment should account for the privileged status of controlled experimentation among the various methodologies that scientists use. It might be instructive then to start with an approach that recognizes the importance of background assumptions for induction, but fails to draw a sharp distinction between experimental and nonexperimental evidence. It is the subjective (or “personalist”) Bayesian approach, which during the eighties was on the verge of becoming the standard view of inductive inference in philosophy of science. Economists should be familiar with its main characteristics, because agents' beliefs and preferences in standard economic models are represented in subjective Bayesian terms. But whatever its virtues for modeling economic agents, this approach is not adequate for a theory of scientific inference.

In this chapter, I introduce a second important model of scientific method: the perfectly controlled experimental design. By doing so, I get at a deeper level in the analysis of experimental methodology than that which is allowed by the HD model of testing. The gain in detail will be paid for by a loss in generality, however: not all experiments are based on the perfectly controlled design. But the move is worth making for at least two reasons. First, a great number of experiments (perhaps the majority) are indirectly related to the perfectly controlled design. As we shall see, this model identifies in an abstract fashion the best possible conditions for the testing of causal hypotheses, and many experiments are indeed devoted to investigating causal relations. Second, the perfectly controlled design will turn out to be extremely useful later on (especially in Chapters 5 and 6), when I tackle issues of inductive inference and return to the Duhem-Quine problem. By looking at the sort of evidence that is provided by the perfectly controlled design, it is fairly easy to articulate more generally the requirements that a piece of evidence should satisfy in order to count as truly confirmatory for a given hypothesis. On top of that, the perfectly controlled experiment will help me introduce some basic features of causal reasoning that will turn out to be useful later in the book.

Before we get into the heart of the matter, it is worth putting on the table an example of experimental research in economics. I shall focus on an experiment that I know very well, because I was personally involved in it. Because the experiment as a whole is too complicated to be fully described here, I'll just focus on part of it. The part I shall look at is a typical example of a replication. Replicating someone else's results is not the sort of thing that will win you a Nobel Prize in economics. Fame and prestige derive from revolutionary results that affect the direction of research in the discipline. However, replications are not without importance and in fact constitute a large part of everyday work in experimental science.

Replications

A common reaction, when people first hear about experimental economics, is to say that of course people are not the sort of thing you can experiment with. Behind this reaction lies the thought that human beings are quite different from, say, atoms or molecules: they possess that elusive capacity that philosophers call “free will.” So, the argument goes, their behavior does not obey laws, as does the behavior of physical entities. What's the point of experimenting then?

This argument takes several sophisticated forms in the social science literature, and even a cursory discussion would take away more space than required for my purposes. But the above worries can be easily dismissed: as any experimenter knows, human behavior is highly predictable.

Introduction

This case study focuses on a telecommunications equipment manufacturer. The telecommunications industry has been characterised by extensive outsourcing by original equipment manufacturers (OEMs) over the last few years due to issues such as shortening product cycles and time to market pressures. Many OEMs in this industry have increasingly become ‘systems integrators’; namely specialists in the management and co-ordination of production and service providers. This case study identifies the drivers that have influenced outsourcing in the telecommunications industry. The case organisation has outsourced many activities to suppliers including assembly operations, manufacturing, logistics and design. A central part of this strategy has been the adoption of more collaborative relationships with its key suppliers in order to reduce the risks associated with outsourcing. The company will be referred to as Telco for purposes of confidentiality. The implications of the outsourcing strategy are drawn from an analysis of this company and three cases of outsourcing evaluation and management over an 18-month period. These three case studies are related to the stages in the outsourcing framework presented in this book in order to illustrate both its explanatory and prescriptive nature. A critical evaluation of Telco's experience with outsourcing is carried out and in particular, its attempts to develop collaborative buyer–supplier relationships. The implications of the case organisation adopting a modular approach to the arrangement of its supply base are examined. Some of the issues developed in this case study are for illustrative purposes only.

Introduction

This chapter provides an overview of the theoretical perspectives that have influenced the development of the framework for outsourcing evaluation and management. The framework draws upon a wide body of literature from a number of areas including business strategy, economics and inter-organisational relationships. This chapter outlines the characteristics and limitations of a number of theories from these areas including transaction cost economics (TCE), the resource-based view of the firm (RBV), the industry view (IV) and the relational view (RV). The analysis of the literature in these areas has had a major influence on the development of the outsourcing framework, which includes a number of aspects from each theoretical standpoint. It is argued that there are a number of inter-dependencies with each of the theoretical perspectives that can assist in outsourcing evaluation and management. The framework recognises the importance of the business strategy and inter-organisational relationship literature to an understanding of outsourcing. There is a growing emphasis in the business strategy literature of the importance of managing beyond the boundaries of the firm as well as within them. This chapter serves as a preface to the following chapter, which provides an outline of the practical problems with outsourcing and an overview of the stages in outsourcing evaluation and management.

Transaction cost economics

The most influential theory on outsourcing has been Williamson's theory of transaction cost economics (1975).

Introduction

The objective of this book has been to summarise and integrate the latest research in outsourcing into a comprehensive framework for understanding the process of outsourcing evaluation and management. It has been shown that where outsourcing is evaluated and managed effectively it can be a very powerful vehicle to enhance the competitive position of an organisation. The trend towards outsourcing is set to continue as organisations are expected to do more with fewer resources. Outsourcing is not limited to the peripheral areas of the business but is increasingly impacting business areas that can contribute significantly to competitive advantage. It has been shown how organisations can benefit from accessing the supplier capabilities and employ supply relationships to enhance their own skills and capabilities. This book has also illustrated the consequences of outsourcing failure and has argued that outsourcing evaluation and management requires considerable effort and resource. Indeed, outsourcing can involve considerable risk through the loss of key skills and a failure to evaluate all the costs associated with the outsourcing process. Considerable emphasis has been placed on the issues that should be considered in evaluating whether outsourcing is appropriate for organisational activities. This involves aligning outsourcing evaluation and management with the overall strategy of the organisation. Approaching outsourcing strategically involves gaining an in-depth understanding of the competitive environment, organisational capability, supplier capability, and supply market risk.

A key issue to have emerged for many organisations has been the growing importance of outsourcing. The drive for greater efficiencies and cost reductions has forced many organisations to increasingly specialise in a limited number of key areas. This has led organisations to outsource activities traditionally carried out in-house. Outsourcing involves re-drawing the boundaries between the organisation and its supply base. Although, the term outsourcing has become in vogue in the last few years, organisations have always made decisions on determining the boundary of the organisation. However, the increasing prevalence of outsourcing has led to the concept receiving a significant amount of attention from both academia and practitioners. Outsourcing has progressed from involving only peripheral business activities towards encompassing more critical business activities that contribute to competitive advantage. On the one hand, outsourcing can involve the transfer of business support functions such as cleaning or security to external suppliers in order to obtain higher levels of performance at a lower cost with relatively little upheaval for the organisation. On the other, it can lead to major organisational change that involves dismantling the traditional structure of the organisation, transferring staff to external suppliers, re-defining staff terms and conditions and altering the expectations of the employees that remain within the outsourcing organisation. As a result, outsourcing has become an increasingly important and complex issue for many organisations.

Outsourcing often provokes contrasting reactions from a range of organisational stakeholders including business leaders, unions, employees, politicians and governments.

Introduction

This stage in outsourcing evaluation involves determining the level of importance of the activities that have to be performed in order to satisfy customer needs. It is crucial for an organisation to determine which activities are critical to competitive advantage. Identifying critical activities involves understanding the major determinants of competitive advantage in the markets or the industries in which the organisation competes or might wish to compete. An analysis of the competitive environment and customer needs can have an important role in identifying which activities are critical for success in the business environment. Critical activities will enable an organisation to differentiate itself from its competitors in the way in which it serves its customers. An understanding of critical activities is central to outsourcing evaluation. For example, if an organisation possesses a superior capability in a critical activity relative to competitors or suppliers, then it should continue to perform that activity internally. The organisation must also have a clear understanding of how sustainable this position is over time. Alternatively, where possible, activities that are not key influences on the ability of the organisation to achieve competitive advantage should be outsourced. Critical activities are those that can be used to build sources of advantage that are difficult and costly for competitors to replicate. Focusing attention on customer needs and competitive advantage will involve the organisation applying its distinctive capabilities to meet the needs identified.

Introduction

This chapter provides an overview of the stages involved in evaluating and managing the outsourcing process. Background information outlining the stages in the development of the outsourcing framework is presented. The initial analysis in the development of the framework revealed a number of problems encountered by organisations in their efforts to both evaluate the suitability of outsourcing for their organisation and the management of the outsourcing process. These problems stemmed from the lack of a structured step-by-step approach to the evaluation and management of outsourcing. In addition, it was found that many organisations were misinterpreting the core competence approach, which has had a major influence on outsourcing both in theory and practice. It is shown how the outsourcing framework is influenced by a number of the theoretical perspectives discussed in the previous chapter including transaction cost economics (TCE), the resource-based view (RBV) of the firm, the industry view (IV) and the relational view (RV). An outline of the issues that should be considered in the key stages of the outsourcing framework is presented. This section also provides an outline of the structure of the book in the following chapters. Finally, the theoretical implications of the outsourcing framework are discussed.

Practical problems with the outsourcing process

There is evidence to suggest that organisations have not been achieving the desired benefits from outsourcing.

Introduction

The increasing prevalence of outsourcing has led to it being considered central to the strategic development of many organisations. Outsourcing is increasingly being employed to achieve performance improvements across the entire business. For example, one particular growth area has been the externalisation of Information Technology (IT) with a recent report showing companies outsourcing 38% of their IT functions to external providers (Barthelemy, 2001). Another area of the business that is also increasingly being outsourced is the human resource function. An American Management Association survey found that 77% of firms surveyed in the US had outsourced a number of human resource activities including training and development, executive recruitment and payroll management (Anonymous, 1997). The outsourcing decision can often be a major influence on the profitability and competitive position of the organisation. However, many organisations possess a limited understanding of outsourcing and in particular the potential benefits and risks and how they should be managed. This chapter provides an overview of the outsourcing concept. It outlines a number of key developments in the business environment that have occurred including globalisation, advances in information technology, reforms in the public sector and more demanding consumers. These changes have forced organisations to be more flexible and responsive to customer needs. As a result, many hierarchically controlled organisations that have previously performed the majority of business activities internally have been forced to create more network-oriented organisational structures, which involves outsourcing activities to specialist suppliers.

Introduction

A major part of outsourcing evaluation is determining whether an organisation can achieve superior performance levels internally in critical activities on an on-going basis. Clearly, if the organisation can perform the activity uniquely well, then this activity should continue to be carried out internally. However, many organisations assume that because they have always performed the activity internally, then it should remain that way. In many cases, closer analysis may reveal a significant disparity between their internal capabilities and those of the world best suppliers and competitors. Organisations considering outsourcing must rigorously evaluate their capabilities in relation to both their suppliers and competitors. Analysis from an activity perspective is important given that organisations are increasingly positioning themselves in specific parts of the value chain in order to gain competitive advantage. In effect, each organisation is in competition with all potential suppliers of each activity in its value chain. In the case of a critical activity, each point in the value chain relevant to providing the activity should be assessed. Again, this analysis is concerned with identifying the disparity between the sourcing organisation and potential external sources. This analysis can identify sources of competitive advantage that can be exploited more fully by further developing certain activities. It also assists in revealing weaknesses that need to be addressed – either through internal improvement or outsourcing – to become more competitive.