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1 ABSTRACTThis paper investigates the strategic considerations involved when outsourcing decisions are made, by critically reviewing the key tenets of resource based view (Penrose 1959, Wernerfeld; 1984, Barney, 1991) and the related dynamic capabilities view (Teece, 1997). It investigates IT functions as the unit of analysis, to understand how decision maker�s considerations during the boundary decision process and explores the factors that contribute to the competitive capabilities of a firm (Prahalad and Hammel, 1990; Barney, 1994).IT outsourcing decisions have traditionally been based on transaction based tenets and primarily motivated by cost advantage. The recent adoption of more strategic paradigms is connected to more competency related thinking such as the adaptation of disruptive technology shifts or dynamic capabilities emerging markets (Baden-Fuller et al. 2000). Firms sometimes need to buy-in capabilities to stay in the competitive contest, because the essential technologies required to fulfill customer needs are fluid and subject to rapid iterative changes and it has become unfeasible to possess highly developed resource and capabilities in all capacities. Scholars have established a relationship between outsourcing and cost economies from the selection of more ef?cient governance mechanisms (e.g. Cachon and Harker, 2002; Walker and Weber, 1984). However, there is insufficient focus and understanding of the role that internal and external capabilities play in strategic IT outsourcing decisions. The paper suggests that strategic IT outsourcing creates value within ?rms� IT supply chains beyond those achieved through cost economies and identified three primary key drivers to outsource IT, (1) unclear economic value of their IT function (Brynjolfsson, 1993; Brynjolfsson and Hitt, 1998), (2) a generic shift of corporate strategy towards core business (Prahalad and Hammel, 1994) and (3) to address disruptive technologies (Christensen and Raynor, 2003; Christensen, 1997).

1 INTRODUCTION1.1 INTRODUCTION1.2 BACKGROUND Porter (1996) defines strategy as the creation of a unique and valuable competitive position. Unless IT components hold core-competencies, offering long-term competitive advantage, they could be outsourced (Quinn and Hilmer, 1994). Yet, outsourced IT competencies must be capable to support the strategic intent of the firm, for example, allow rapid market entry of new innovations and support changes in business processes. Management has a central role in fitting human and technological resources into the activities of an organization, with the objective of achieving the best possible outcome (Porter, 1996). According to the resource based view (RBV) of strategy, organizations need to identify core internal capabilities (Barney, 1991) and complement those with external resources and capabilities (Aldrich, 1976). The pervasive impact of business computing has made information technologies (IT) an indispensable part of business operations and has become a key enabler of competitive success. However, in fast-evolving business and technology environments, it is not feasible for a given organization to develop all IT capabilities and resources that are needed. Firms actively seek complimentary IT capabilities using external partnerships in factor markets (Barney and Hesterly, 2008), to obtain IT services needed for achieving business objectives such as lower costs, better IT performance, improved services and innovation. IT outsourcing has continuously evolved since the landmark IT outsourcing decision by Eastman Kodak more than two decades ago (Lacity and Hirscheim, 1994), moving from a sole economic focus towards the inclusion of strategic management objectives (Barney and Hest

erly , 2008; Conner and Prahalad, 1992). IT outsourcing decisions are essentially strategic, stating an attempt to improve a firm�s competitive position, either by improving a firm�s cost base or alternatively augmenting or differentiating their competitive capabilities (see Porter, 1984). Various Authors (McIvor, 2008; Barney, 1991; Baden-Fuller et al. 2000, Prahalad and Hammel, 1980) advocate a shift away from economic towards resource based deliberations, when making organizational boundary decisions. Transaction costs economics strongly influenced some of the approaches proposed in the in evaluating boundary decision (Williamson 1985, Vining and Globerman 1999), where many of the quantitative models have placed considerable emphasis on evaluating the costs associated with the decision, which involves attempting to measure all the important costs associated with the two alternatives: make or buy (Gambino 1990, Ellis 1992).Outsourcing frameworks in the IT operations area tend to focus on the costs implications of the outsourcing decision. Early approaches on outsourcing in a manufacturing context, the make-or-buy decision, were principally concerned with applying quantitative models to evaluate the decision (Higgins 1955). Establishing ?rm boundaries requires understanding of more than how internally- and externally-sourced production activities affect performance and competitive advantage (Araujo et al., 2003). It also requires an understanding of the bridging function that IT outsourcing performs in linking ?rms� IT activities with factor markets (McEvily and Zaheer, 1999). Accordingly, this study argues that a more complete understanding of the organization of economic activity requires a greater sensitivity to the interdependence of IT capabilities, business activities, dynamic abilities and their relationship to competitive advantage that emerge from boundary decisions. 1.3 FRAMEWORK AND THEORYOne of the key issues in strategic management has been to understand sustained competitive advantage (SCA) and unravel the way it can be systematically created (Powell, 2001). The resource-based view of the firm (RBV) (Wernerfeld, 1974; Barney 1984) has become one of the most widely accepted theoretical perspectives for understanding the origins of competitive advantage and superior firm performance (Powell, 2001; Priem and Butler, 2001; Rouse and Daellenbach, 2002; Bingham and Eisenhardt, 2007). However, the usefulness of the RBV as a theoretical framework has remained a subject of debate (Barney, 2001; Hoopes, Madsen, & Walker, 2003; Priem & Butler, 2001a, 2001b; Williamson, 1999), due to the inherent difficulties in operationalizing the key tenets of the theory. Despite being conceptually strong, the RBV has little value as an analytical tool to solve practical business problems (Priem and Butler, 2001; Newbert, 2007). The theory offers a compelling logic that may be readily understood and accepted, but there is little evidence that it has been applied in practice. Further, its empirical support has been weak: for example, a review of 55 empirical tests of the RBV suggests that little more than half (53%) of tests support the RBV and that the degree of support varies considerably with the independent variable used (Newbert, 2007). Armstrong and Shimizu, (2007) and Newbert, (2007) established that empirical RBV research has generated only modest support, implying other factors must be considered when explaining SCA. The key explanation for these inconclusive results has been attributed to the inherent difficulties of operationalizing RBV variables and a clear logical treatment of its key propositions (Nothnagel, 2008).Most empirical studies on the RBV have primarily adopted a variance approach with a set of resources and capabilities as independent variables and enterprise performance as the dependent variable. The usage of aggregate dependent variables (i.e. stock performance) is subject to being obscured by multiple causes (Conner, 1991). Although, much research using the RBV has focused on an aggregated dependent variable, namely, firm performance, this may not be the best way to test the RBV (Ray et al., 2004). Independent RBV variables, resources and capabilities, do not occur in static isolation, rather in bundles which are difficult to identify, define and to measure (Penrose, 1959; Wernerfeld, 1984). Such research applies a �black-box� approach towards the processes by which resource

s and capabilities are deployed. Exploring this black-box requires the set of empirical research methods to be extended towards the process-based approaches (e.g., Groen, Wakkee, & De Weerd-Nederhof, 2008; Van de Ven, 2007; Van de Ven & Polley, 1992). Only by combining various approaches will we be able to understand which resources and capabilities are sources of SCA and how some firms are able to perform better than others (Holcomb, Holmes Jr., & Connelly, 2009; Mahoney, 1995).Most prior research over-emphases on the ownership of individual resources, and only insufficiently acknowledges the importance of bundling resources and of the human involvement in assembling, orchestrating and creating bundles of value. Scholars have not sufficiently captured the essence of competitive advantage, neither statically nor dynamically. The sheer possession of resources and capabilities is insufficient, and must be deployed in a way so that SCA can be attained (Makadok, 2001b; Peteraf & Barney, 2003). The absence of �deployment capabilities� in form of activities causes the RBV to fall short as a full explanation for SCA. Ray et al. (2004) proposed examining the effectiveness of business processes as a way to test the RBV logic and suggests a process-oriented approach to overcome these confounding problems. The locus of impact, that is, the business process (i.e. activities), should be the primary level of analysis, to overcome these problems when studying business values within the RBV. (Subramaniam & Shaw, 2002). The paper contributes to the discourse and criticism in RBV based research, by offering alternative means to observe latent or tacit resources and capabilities. Accordingly, it argues that the notion of �activities as the commonplace occurrence of resource bundles� makes resources and capabilities relatively easy to comprehend, identify and measure; and may possibly offer new insights and perspectives on the validity of the resource based theory. ? The phenomenon of IT outsourcing has become an accepted business practice and is now a key strategic decision that attracts large interest from practitioners and organizational scholars (Aubert, Rivard and Party, 2004; Barthelemy and Geyer, 2005). Although there is a rich body of knowledge on IT outsourcing, much of it has viewed IT outsourcing as means to achieve economic benefits in isolation and outsourcing decisions are rarely taken from a thorough strategic perspective (Willcocks, XXX). Many firms adopt a short-term viewpoint that is primarily motivated by the search for short-term benefits, where outsourcing is seen as a governance-choice that concentrates on the need to delivery of IT services more cheaply than could be done in-house. Decision makers are frequently not realizing their indented value from their outsourcing initiatives, because they failed to balanced their predominantly economic decision paradigms with a more strategic perspective (Lacity and Willcocks, 2001; Zhu, Hsu and Lillie, 2001).Outsourcing providers and client organizations are under increasing pressure to exhibit the value of their outsourcing efforts, by focusing on intangible factors (i.e. relationships, complementarity, knowledge transfer between firms), which has been suggested as the best way to meet this challenge (Teece, 1997). Despite these efforts, there are still unaddressed weaknesses, given that intangible factors cannot be easily incorporated into supply contracts.Not all work is suitable to outsource, depending on the nature and characteristics of the business activities in question. If practitioners were to focus solely on profit maximization, by applying purely economic imperatives, they may draw attention away from strategic concerns, such as competitive advantage, organizational knowledge and other competency deliberations. IT outsourcing research has strongly focused on transaction cost economies, resulting from more ef?cient governance mechanisms to consider value that is created. As technological uncertainty increases, internal economies of specialization deteriorate in relation to the external economies of specialized ?rms (Teece, 1980). Accordingly, conventional IT management effort such as improving service quality, controlling IT costs, rationalizing applications and IT infrastructure, and adopting best operational practices will no longer suf?ce for long-run competi

tive success. Nor do traditional scale economies in IT operations always have the differentiating power they may once have had. More than scale and scope advantage are needed. As such, strategic IT outsourcing needs to not only provide scale economies during periods of technological uncertainty, but may also act as a coping strategy helping to deal with risk. From this perspective, strategic IT outsourcing provides more predictable and orderly patterns of exchange within and between ?rms when ?rms leverage the specialized capabilities that IT outsourcing relationships provide. In this way, firms may accrue value beyond the cost economies available when selecting governance mechanisms. The study relies on both transaction (TCT) and resource-based logics (RBV, DCV, KBV) to explain the emergence of strategic IT outsourcing arrangement in which ?rms rely on factor markets to provide specialized capabilities that supplement existing capabilities used in IT service provisioning. It aims to offer a more concise explanation of strategic IT outsourcing that extends transaction-based logics and considers value created when ?rms more effectively leverage the specialized capabilities that IT outsourcing relationships provide.The study augments transaction-based arguments with resource-based perspectives to sharpen the focus on conditions that might favor the use of external specialized capabilities. An important peculiarity introduced in this study is how ?rms� understand their internal capabilities and those of factor markets affect their decision to strategically outsource.The study seeks to explain how a �dynamic capabilities view� better informs the discourse about the IT outsourcing choices that ?rms make. Success in a fast evolving technology environment requires the creation of new systems, services and processes; and may include the evolvement of new organizational forms and business models, driven by an intensely entrepreneurial genre of management (Malter, 2011), constantly �refining the evolutionary and entrepreneurial ?tness of the enterprise� (Teece, 2009, p. 58). Factor markets that provide specialized capabilities emerge as disruptive industry conditions promote and intensify the partitioning and fragmentation of production.There is an increasing range of conceptual elaboration about dynamic capabilities but empirical support is limited, which equally applies to the �static� RBV. Newbert (2007) noted that the theoretical work did not start until Teece et al. (1997) and development is still in progress. There may also be a lack of evidence, because capabilities have been poorly specified, and hence researchers may not know what to look for. Lastly, there may be little empirical research, because it is a concept �which has thus far proven largely resistant to observation and measurement� (Kraatz and Zajac 2001, p. 653). As such, the study answers Ambrosini and Bowman, (2009) call for more fine-grained case studies of firms who have sustained advantage in dynamic environments.

1.4 OUTSOURCING DECISION FRAMEWORKS IN LITERATUREThis this section reviews the theoretic concepts that have been applied to analyse the outsourcing phenomenon, focusing on those that provide the rationale for this research such as TCE and RBV commonly used in outsourcing research. Transaction Cost Economics Outsourcing decision frameworks are most often approached with theoretical starting points taken from transaction cost economics (TCE) or the resource-based view (RBV), either singularly or combined (Busi and McIvor, 2008). These two perspectives have two contrasting points of departure for outsourcing (McIvor 2008). While TCE considers economic rationales for companies to organise some transactions in either in-house or external governance (Williamson, 1979, 1985), the RBV argues that ?rms� speci?c assets are heterogeneous, meaning they become competitive by focusing on resources that are rare, highly valuable for customers, and imperfectly imitable (Barney, 1991; Grant, 1991; Peteraf, 1993). Using TCE in outsourcing frameworks highlights the �make-or-buy� question from a cost perspective. The key deciding factors in these frameworks are capability positioning as well the question of what is core and what is non-core (see Table 2). Supplier-related risks are mainly considered from an opportunistic behavioural perspective (cf.

Holcomb and Hitt, 2007; McIvor, 2008, 2011). Based on this view, the outsourcing decision appears to be a rather linear process with an �in or out� outcome. According to TCE, decision makers should choose a governance structure that result in the least amount of production and transaction costs. According to Williamson (1991, 2008), three dimensions de?ne a transaction: (1)asset speci?city, which is the degree to which an asset can be redeployed to alternative uses without a decreased productive value; (2) uncertainty of the transaction�that is, the frequency of disturbance; and (3) the frequency with which the transactions occur. Williamson (2008) asserts that, of these three factors, asset speci?city holds the most explanatory value because it creates dependency for both parties. When asset speci?city is high, hierarchy is preferable. If a transaction has low asset speci?city, these transactions could be governed by a market or hybrid. Hybrid agreement is preferable in cases of medium asset speci?city, but only when the uncertainty is relatively low. If transaction uncertainty is high, the degree of asset speci?city will decide which of the two polar modes is preferable (Williamson, 1991, 2008). Holcomb and Hitt (2007) suggested that considering cost motives alone (TCE) limits outsourcing analysis. Instead, they suggested a theoretical outsourcing model in which TCA arguments are complemented by RBV in terms of gaining access to specialised capabilities, which should help ?rms ensure value beyond ef?cient cost mechanisms. McIvor is one of the most diligent publishers in the outsourcing area and has developed his decision frameworks since the mid- 1990s. His latest publications (2008, 2009, 2011) have moved away from a more linear model to create a 2 2 matrix framework that combines two RBV dimensions (contribution to competitive advantage and relative capability position) with a supplier opportunism dimension from TCA. Adding supplier opportunism to the framework is not new. For example, Quinn and Hilmer (1994) referred to TCA and suggested the need to consider the strategic vulnerability that could arise when outsourcing (for example, having a weak supplier, and loss of control of the supplier).�TCE is widely regarded as a classic contribution to the study of organisations, economics, and law and, in particular, to sourcing decisions� (Aubert and Weber, 2001 p. 4). It uses �transaction costs� as the subject by which to analyse the cost between internalizing and externalizing business activities. Transactions are described as the exchange of goods or service between economical actors across organisation, inside and/or outside the organization (see Cheon et al., 1995 based on Williamson, 1981). Thus, in TCE the cost (or financial risks) for buying a service or good (using the market) is compared with the cost (or financial risks) of producing within the firms hierarchy. TCE acknowledges that the market is imperfect. As a consequence, using the market will always lead to a certain amount of conflict. TCE explicate this by two behavioral assumptions; (1) bounded rationality and (2) opportunism. A significant literature of criticism towards transaction cost theory and its underlying assumptions has been established. The enthusiasm for the transaction cost theory has almost been matched by the strength of its criticism (Heide and John, 1992). Arguably, TCE reduces the firm to nothing more than a governance structure in which the key strategic decision is to assess the relative efficacy of alternative means of contracting amongst potential suppliers of goods and services--both internal and external. TCE implies a reliance on sunk costs as the defining criteria for asset specificity. If firms must react quickly and responsively to changing technologies and competitive market pressures, the decision about whether to undertake transactions in-house or externally cannot be tied to a view of asset specificity that is based on the sunk costs of past transactions (Cox, 1996). This implies relationship between transaction costs and asset specificity leads to the conclusion that firms could become inflexible in changing structures, operating procedures and loose agility in reacting to market forces and competitive conditions. Hui and Beath (2002) postulate that there is an over application on TCE in outsourcing research and transaction costs have not added to the understanding of why outsourcing decisions are made. TCE does not consider capabilities or resource constraints and only contributes a single dimension of profit maximization towards the outsourcing decision.

2 THE RESOURCE BASED VIEW OF THE FIRMIn her book, Penrose (1959) argued that a firm should be understood, first, as an administrative framework that links and coordinates activities of numerous individuals and groups; and second, as a bundle of productive resources. According to Penrose (1959), the growth of the firm is limited by the number of productive opportunities that exist as a function of the bundles of productive resources controlled by the firm; where the administrative framework of activities is used to control these resources. In a similar notion, Wernerfelt (1984) supposed that the portfolio of product market positions that a firm takes is reflected in the portfolio of resources it possesses or controls.The basic premise is that firm heterogeneity does not simply occur, but is an essential condition for firms to be competitive (Porter, 1985; Wernerfeld, 1984). It is firmly grounded in early economic models of monopolistic competition (Chamberlin, 1933) and its focus on firm heterogeneity departs from neoclassical microeconomics and Bain/Mason industrial organization which characterize the behavior of the representative firm (Hill and Deeds, 1996). The RBV challenges the neoclassical microeconomic model of perfect competition. In perfect competition there are no �profits� and all firms are identical. The RBV explains why firms differ; that is, what aspects of the perfect competition model most plausibly do not apply. Different firms possess different (heterogeneous) resources and are (somehow) capable of maintaining these valuable differences (Barney 1991; Foss 1997). As a consequence, according to the RBV, successful firms are able to earn �rents.�Mahoney, (1992b) holds that resource-based theory includes a set of related theories such as the resource-based view (Rumelt, 1984; Wernerfelt, 1984), capabilities and competence-based theory (Eisenhardt & Martin, 2000), commitment and first mover advantage (Ghemawat, 1991; Lieberman & Montgomery, 1998), dynamic capabilities theory (Teece, 1997) and knowledge-based theory (Madhok, 1996; Spender, 1996), and argues that the resource-based view effectively sustains the conversation within strategic management and between strategic management and branches of economics. Although there have been incremental improvements by various scholars, there has been little conclusive empirical validation of the key tenets of this theory, despite numerous attempts (Newbert, 2007). The key reason for these inconclusive results has been the inherent difficulties of operationalizing the variables of the RBV and a clear logical treatment of its tenets. 2.1 RBV AND COMPETITIVE ADVANTAGESustained competitive advantage is understood as the level of superior performance which firms achieve when formulating and executing value chain-enhancing strategies that are not pursued by competitors at the same time (Barney. 1991). Porter (1980) defines sustainable competitive advantage as a deliberate set of activities to deliver a unique mix of value and positioning over time. Porter further proposes three generic strategies of cost advantage, product differentiation and market focus to characterize the strategic position, where cost leadership could be argued as presenting a differentiation strategy by itself. The competitive advantage of a firm is determined by its managerial and organizational processes, which are shaped by the firm's asset positions and the evolutionary paths it has adopted or inherited, meaning the current technology and intellectual property, customer base, possible increasing returns and strategic alternatives available for the firm. If and how the competitive advantage erodes over time depends on the stability of market demand and the ease of internal replicability and outside imitability (Teece, Pisano and Shuen 1991).2.2 GAPS IN RESOURCE BASED THEORYGiven that the RBV is one of the most widely accepted theories of strategic management (Powell, 1999; Priem and Butler, 2001), it is surprising that empirical support for this theory is only marginally. Newbert (2007) in his review of empirical RBV literature finds that little more than half (53%) of tests support the key tenets of the RBV. Furthermore, the degree of support varies with the independent variables chosen. Most prior research attempts to single out a static resource or capability and test a relationship with an aggregate construct, such as

firm performance or competitive advantage, as the dependent variable. Contrasts between TCE and RBV2.3 RESOURCE BASED CONSIDERATIONSThe use of the RBV in outsourcing frameworks raises the question of what should be considered a core competency and kept in-house (for example, Quinn and Hilmer, 1994). Other peripheral activities can be outsourced in order to lower costs and access world-class innovation capabilities (for example, Quinn, 2000; Baloh et al., 2008). The RBV is especially helpful for understanding the link between outsourcing, resource allocation, and the resulting performance (McIvor, 2009). From a resource-based perspective, the organisation is more than a portfolio of products; it is also a portfolio of different competencies (Wernerfelt, 1984; Hamel and Heene, 1994; Long and Vickers-Koch, 1995; Javidan, 1998). The RBV stresses that ?rms are fundamentally heterogeneous in terms of their internal resources (Peteraf, 1993). Only resources with the characteristics of heterogeneity and immobility (that is, a low degree of transferability between ?rms) can offer a basis for sustaining competitive advantage (Barney, 1991). According to the RBV, an analysis of a ?rm's competitive advantage potential should begin by identifying its internal strengths (Barney, 1991). A ?rm should de?ne its businesses based on the strength of its own resources, rather than trying only to establish strong positions in attractive industries. Therefore, the RBV on strategy represents the �inside-out� perspective because it focuses on the competitive advantage and returns a ?rm can generate, by having unique skills and resources (McIvor, 2005). Accordingly, what the ?rm can accomplish in the market is more important than the markets in which it operates. This approach can be compared with the Porterian market-based view, which starts an analysis by considering the attractiveness of the industry and competitiveness in the speci?c market (see, for example, Porter, 1981, 1998). According to Barney (1991),a competitive advantage can only be sustained by resources that are (1) valuable for customers in contexts in which the ?rm operates, (2) rare compared to those of competitors, (3) dif?cult to imitate, and (4) have no equivalent substitutes available. In line with Barney's(1991)view on developing unique resources, Prahalad and Hamel stated that a core competence must (1) provide access to markets, (2) provide customer value, and (3) be dif? cult for competitors to imitate.From an outsourcing perspective, RBV is often connected with a core competence approach and the question of which resources should be prioritised and which should be kept in-house. 2.4 COMBINED THEORY APPROACHEach of the theories discussed above (insert cross reference) explain some aspects of the outsourcing phenomena and each is capable to solve a different problem. In this section the study will analyze the two theoretical approaches are most widely applied with regards to the determination of boundary decisions and propose an integrated model for determining organizational boundaries through outsourcing in IT management, the TCE and RBV. There are many respects in which the competence and transaction cost perspectives are congruent: both are bounded rationality constructions, and both maintain that organization matters. They deal with partly overlapping phenomena, often in complementary ways (Williams, 1999). Transaction cost economics informs the generic decision to make or-buy while the competency approach brings in particulars (Williams, 1999). On one hand TCE determines the economic feasibility such as capital appropriation (sunk cost) and effort involved when changing organizational boundaries, while the RBV considers the strategic implications of such a decision.2.5 COMPLEMENTARY TIME PERSPECTIVEThe recommendations of transaction cost economics and the core competencies approach of the RBV have strong similarities. In many ways, the approaches complement each other perfectly. The requirements for strategic IT resources � being non-imitable and non-substitutable �are fulfilled in particular if they are firm-specific� (Dierickx et al., 1989). Hence, there is a direct link between asset specificity from TCE and the concept of rare (thus specific) resources from the RBV (Dibbe

rn, Güttler & Heinzl, 2001). On the one hand, TCE is a short-term (i.e focus on present context), cost focused approach, while RBV takes long-term strategic objectives into consideration. Thus the more short term operative cost aspects of TCE and long-term strategic aspects may be brought together with the more long term strategic perspectives (e.g. importance and contribution) of an activity. 2.6 ASSET SPECIFICITY AND RARITYThe RBV works on the assumption that the firm must possess unique resources that enable it to achieve competitive advantage. Resource based logic claims to explain �why firms are different.� In some cases, firms may have lower costs of logistics and transacting for production inputs in comparison to their competitors (e.g., Dell). Other firms may have unique abilities to learn and apply that learning to the development of new technologies (e.g., IBM). Indeed, firms may possess enduring uniqueness for a wide variety of reasons. This uniqueness can be seen in TCE terms of specificity (Williamson 1991) or scarcity in the external market or, in RBV terms, rarity. According to the logic of TCE, when activities based on specific (TCE) or rare (RBV) capabilities are outsourced, the firm�s performance can be negatively affected, since the risk of opportunist behavior increases, and the contracting parties have incentives to appropriate rents by using post-contractual power or the threat of terminating the contract (Klein et al., 1978).From the RBV�s point of view, outsourcing decisions depend on the extent to which a given activity permits the exploitation of different knowledge, capabilities and routines within the organization to appropriate rents. The greater the access to a set of valuable routines and processes and specific skills, the greater the likelihood of influencing competitive advantage and the lower the cost of their perpetual evolution will be (Ray et al., 2004). In other words, when both theories look at specific or rare resources, the RBV is concerned with strategic matters while TCE has a pure cost focus, together however, they provide a much more complete assessment then when each are considered in isolation.

Figure 2:Outsourcing framework for IT activitiesusing RBV and TCE Adopted from Langlois (1992) and (Dibbern J., Guttler W. et al. 2001).Figure 2 graphs a curve ?C as the normalized per-unit cost premium the firm must pay for the output of a particular activity if it integrates into that activity, measured relative to the per-unit cost it would incur by obtaining the output on contract from a distinct firm. Whenever this premium is negative, there is a cost advantage to internal organization and to X as human asset specificity. 0A implies a cost advantage of the market and AA1 lower in-house costs of the firm and based on TCE price mechanism A would be the point of delimitation between market and hierarchy, and A1 01 represents non-tradable core competencies which must be integrated at all cost, indicating that TCE do not apply to outsourcing decision making when core competencies are involved, regarding of cost economicsThus, when an activity to be outsourced comprises of idiosyncratic (rare, heterogenic distributed) resources, the development and governance of an external service provider may be very costly. In that case, both perspectives, RBV and TCE, determine the organizational boundaries (i.e. outsourcing versus internalization), depending on the possession of specialized assets, equipment or routines, and specific skills (Conner 1991), although they differ in their approaches.Barney and Clarke (2007) hold that both theories emphasize the importance of transaction specific investments as independent variables that explain different independent variables. From the resource based view, transaction specific or firm�specific investments can be thought of as resources that have the most likely potential to generate economic rents (Barney, 2001a). From a TCE perspective, transaction specific investments create opportunistic problems that must be created through governance choices. Teece (1980) holds that resources based theories and transaction cost theories constitute a theory of corporate diversification.As firms increase idiosyncrasies in form of knowledge and human resource specificity, they create �organizing principles� in form of shared language, routines and know-how that enhance internal coordination (Kogut and Zander 1992). Asset speci

ficity and �higher organizing principles� present with complementary aspects in that hierarchies have the advantage of authoritarian control (fiat) and the higher propensity to curb opportunism and moral hazard. In summary, asset specificity is closely related to strategic importance and has complementary properties when viewed from different theoretical perspectives. The same attributes that causes a product, service or activity to be �costly to copy�, �difficult to imitate�, �un-substitutable� or hold �causal ambiguity� also causes market frictions in form of �uncertainty�, �bounded rationality� and be prone to �opportunistic behavior�. Thus asset specificity, if it includes intangible specificities such as human capital, knowledge or culture, possess properties that are similar to the resources and capabilies that contribute to competitive advantage and it can be argued that industrial economics and strategic management pursue similar phenomena, although from different theoretical platforms.3 CHAPTER 5: RESEARCH DESIGNThis section describes the qualitative methodology design applied for conducting semi-structured interviews to investigate the motivational paradigms and strategic outcomes associated with outsourcing decisions. MethodologyThe research design included a single, exploratory, in-depth pilot case study followed by a more explanatory, cross case analysis of ten informants who have no association to each other. Limitations and issues identified in the exploratory pilot case study provided valuable insights into the structure, topology and flow of the case study protocol. Multiple case studies were employed in this research with the primary goal being to investigate the role of competitive advantage in outsourcing decisions and confirming factors and conditions identified in a preceding quantitative survey and from the literature review.

Figure 11: Case study work flowThe choice for multiple cases is appropriate given Yin�s (1993) argument that multiple-case studies should follow a replication, not sampling logic. This means that two or more cases should be included within the same study precisely because the investigator predicts that similar results (replication) will be found. If such replication are indeed found in cases, more confidence can be given to overall results. The development of consistent findings, over multiple cases, can then be considered a robust finding.Multi-case studies are applied to mitigate the risks of relying on a single case and allow literal or theoretical replication and cross-case comparison. Yin (2003) points out that in the perspective of statistical generalization each case is a single sampling point, and therefore a single case is insufficient for statistical generalization (Yin 2003). Yin (1994, p. 50) suggests that �more replications give greater certainty, but that in some situations, for example where rival theories that are very different are being tested, fewer replications may be advisable�. Eisenhardt (1989) suggests that between four and ten cases are desirable for theory building using case study research. A semi-structured interview method, as described by Gall, Gall and Borg (2003) has been selected for this study. According to Gall et. al. (2003), the semi-structured interview method reduces researcher bias within a study, particularly when the interviewing process involves multiple participants. It is structured in terms of the sequence and wording of the questions, where participants are always asked identical questions, although the questions are worded in a way so that responses are open-ended. This approach is likely the most popular form of interviewing used in research studies because of the nature of the open ended questions, allowing participants to fully express their viewpoint and experiences. Although the data provided by participants are rich and thick, it may be a more cumbersome process to sift through narrative responses in order to fully and accurately reflect an overall perspective of all interview responses through the coding process. According to Gall et.al. (2003), the method reduces researcher bias within a study, particularly when the interviewing process involves many participants. Hence, it can be quite challenging for researchers to extract similar codes or themes from the interview transcripts as they would from less open-ended responses.

Research on Resource based theory have been mostly based on case studies (Newbert, 2008). Given the scarcity of extant literature associated with the focal research topic, an empirical study may bene?t from the employment of the case study methodology (Hitt et al., 1998; Brownell and Eisenhardt, 1989).The data was collected via face to face interviews with six experts in the field of IT outsourcing mostly in Australia, seeking insights for governance mode selection for IT activities, when boundary decisions are made.Following, the questionnaire was assembled into a pilot interview protocol and iteratively tested with two subject matter experts to provide the researcher with some experience with the interview flows and informant behavior during the interview process. The protocol was subsequently modified based on this experience. The finalised interview protocol was employed to govern the flow, ensuring that all key areas (or themes) are covered (Robson, 2002) and was used as a checklist during and at the end of the interview to ensure that all topics or themes have been addressed adequately. The fieldwork was in form of interviewing, using semi-structured questions with participating informants. Purposive sampling was used in this research as a sampling strategy selected based on the knowledge of a population and the purpose of the study. Informants were selected on the basis of the researcher�s individual judgment where on the ground that they could provide the necessary information needed for the research. Selected Informants from the writers professional network, working as a practitioner and consultant in the field of IT management and strategy. Ten experts were selected as informants for interviews, based on their extensive experience in the field under study and potential ability to provide much insightful information. All Informants were involved with IT outsourcing practices of their company as consultants, managers or senior executives, each holding a minimum of two years' experience in that position and overall experience as management practitioners of more than six years. They had significant experience within large companies in the field of outsourcing, and were able to provide insights about outsourcing practices and decision making of mostly Australian firms. In addition, it was expected that they had larger variety of insights and experiences than multiple individuals working for a single firm. For confidentiality reasons, the names of the Informants withheld. Equally, names of firms used in the case were given anonymous identifiers (i.e., BigMed, LargeTV, etc.). As well as interviewing and observing, the fieldwork included analysis of documentary sources for each firm. Documents were collected from the inter net, individual record, company reports, company newsletter and other printed that were made available for the purpose of the research.Purposive sampling was used in this research as a sampling method. The names of respondents were initially determined by the management of each organization based on their roles, job responsibilities, position and involvement in the subject studied. However, respondents were also selected on the basis of the researcher�s individual judgment where permitted on the ground that they could provide the necessary information needed for the research. Most of the fieldwork involved interviewing, using semi-structured questions, with respondents from the participating organizations. As well as interviewing and observing, the fieldwork included analysis of documentary sources in each organization. Documents were collected from the organizations� intra net, individual record, company reports, company newsletter and other printed that were made available for the purpose of the research.The choice of semi-structured rather than structured interview was employed because it offers sufficient flexibility to approach different respondents differently while still covering the same areas of data collection. The interviews were recorded to secure an accurate account of the conversations and avoid loosing data since not everything can be written down during interview. And every USB memory stick was numbered and labeled with name of Informant in order to avoid complication.

4 CROSS CASE ANALYSISThe analysis of transcripts involved a thorough review of the contents in order to identify common themes and was coded in NINIVO and summarized in form of six interview summaries (below). To detect patterns or logics of interview data, the interview data were aligned to the categories based on the interview topics in the case protocol. The interpretation of the transcripts, was iterative, and included two stages. The first stage related to obtain an understanding of each transcript. The second stage was to identify emerging themes from amongst a number of narratives, involving a search for emerging themes, first within an interview and then across a series of interviews. This process began with a careful reading of the transcripts, where noteworthy phrases or sentences were captured in NIVIVO. All data collected during the field work in this study was organized in NVIVO, where all relevant documents were added to the data store. Passages that seemed conceptually linked were then combined and descriptions of the theme or pattern were developed, also known as �open coding� (Strauss and Corbin, 1990). As more interviews are conducted categories are identified with supporting concepts, supported by data within the transcripts. Subsequently, the transcripts were re-read to identify further evidence that supports or challenges the emerging themes. This second pass triggered the identification of new themes, or a reclassification of existing themes

4.1 OUTSOURCING AS AN ECONOMIC TRANSACTION AND VALUE FUNCTIONOutsourcing is a function of the unclear value delivered by IT (Brynjolfsson and Hitt, 1998). BigBrand, BigTelco and LargeTV had no firm basis for evaluating the make or buy decision other than cost, where senior executives viewed IT as an overhead � an essential cost but one to be minimized nevertheless. Organizations often base their decision to outsource �on the particular set of circumstances they face� (Watjatrakul, 2005 p.390), such as adverse economic conditions as it was the case at LargeTV, BigTelco, BigMed and to some extend at BigMedia. Lonsdale and Cox (1997) have found that many firms make outsourcing decisions primarily on the basis of reducing headcount and costs. The reason for this trend appears to be the cost disadvantages associated with a �make'' strategy, owing to rapid changes in the market and the lack of flexibility that characterises in-house production (Hayes and Abernathy, 1980). In this broader context, outsourcing is the result of a complex change in the cost boundaries facing firms when they choose between inside and outside production. Whether an activity can be performed well internally depends on an organization's internal resource endowment and these resources are measured against business related valuation metrics, which are often finance related. In the cases of BigBrand, BigTelco, LargeTV and BigMed, it was found that if an activity is perceived as only providing a negligible (if any) competitive advantage to an organization, it is more likely to be outsourced outright and managed through a third-party relationship capability.4.2 IT OUTSOURCING USING RESOURCE BASED REASONINGThe make-or-buy decision within LargeTV, BigBrand and BigTelco were pursued as an accounting or financial exercise, at least at the inception of these initiatives. Although financial analysis and to choose the lowest cost exchange remained important, the imperatives and potential risks of outsourcing core capabilities became apparent in the later phases of the decision process.The prominence of IT outsourcing is largely a consequence of a shift in business strategy. Many companies have abandoned their diversification strategies in the new millennium � once pursued to mediate risk � to return back to a corporate focus on core competencies (Gottfredson, Puryear and Phillips, 2005). Senior executives at BigBrand, LargeTV, BigMed and BigTelco have come to believe that the most important sustainable competitive advantage is strategic focus by concentrating on what an organization does better than anyone else while outsourcing the rest (Dibbern, Goles, Hirschheim and Jayatilaka, 2004). As a result of this focus strategy (Kroes and Ghosh, 2010), IT came under scrutiny. Decision makers at LargeTV, BigMed and BigBrand viewed the entire centralized IT function as a non-core activity, and believed that IT vendors possess econo

mies of scale and technical expertise to provide IT services more efficiently than internal IT departments. They did however acknowledge the need to maintain unique IT capabilities associated for the direct enablement and support of their firms� ability to compete in their respective markets (Bharadwaj, 2000). The study identified capabilities that were clearly considered as unique competitive advantages that were deemed essential for the firm�s sustainable competitive position in their competitive environment. BigMed�s L&W (logistics and warehousing) and ICE (isolated computing environments), LargeTV�s broadcasting function, BigTelco�s BigMedia and BigBrand�s dynamic management capabilities and StartUps� end-user support functions were deemed as non-tradeable (Dibbern et al, 2004), even in adverse economic conditions. In the cases of BigTV and BigMed, where extreme cost cutting and head count reduction were the primary motivation to outsource as part of an enterprise-wide survival strategy, these core related IT functions were retained. These capabilities were considered fundamental to a company's long- term strategic position as they underpinned their ability to compete and therefore must be retained and developed (Collis, 1991). 4.3 FOCUS ON DYNAMIC CAPABILITIESA key findings of the paper is the high importance of dynamic capabilities and their contribution towards competitive advantage (Wade and Hulland, 2004). Dynamic capabilities are typically applied by an organization to secure advantages over its competitors (Teece et al., 1997) and can be placed into two categories: internal and external (Day, 1994; Hulland et al., 2007; Goh et al.,2007). In all cases studies, the retained competencies of the core IT function were associated with dynamic capabilities.Internal dynamic (Inside-out) capabilities tend to be internally focused (e.g. technology development and cost controls) and represent the ability to execute within enterprises, including the capabilities for managing internal relationships (Hulland, Wade et al. 2007). According to Valorinta (2011) the alignment between information technology and business functions is a vital enabler for effective use of IT and organizational performance in general. Organizations that have aligned their IT capabilities with strategic plans and organizational processes hold enhanced abilities to leverage new information technologies, optimize IT spending, and achieve competitive advantage (Reference, XXX). BigMed, BigTelco and BigBrand retained their internal dynamic capability in managing internal relationships, IT planning and governance to enhance the capabilities of intra-?rm operations. They were applied to enhance of internal controls capabilities, strengthening cooperation performance between the departments. These dynamic capabilities were expected to improve the business alignment of their system, management of internal relationships, IS Planning, management skill, and IT experience (Kraaijenbrink, Spender and Groen, 2009). In the case of LargeTV, the significance of internal dynamic capabilities was ignored and the firm experienced severe difficulties in coordinating, controlling the IT functions and their alignment with business requirements, hence subsequently had to adjust their outsourcing arrangement at a later stage. Previous studies propose factors such as strategic ?tness that argue the alignment between IT and business strategy can enhance ?rm performance (Li and Ye, 1999; Palmer and Markus, 2000; Weill, 1992).In contrast, external dynamic (outside-in) capabilities are externally oriented and focus on the ability to adapt to an external environment. This includes the ability to work with external partners (such as upstream and downstream suppliers and manufacturers) for cooperation and information sharing and the capacity of addressing market and customer needs promptly. They enable ?rms to manage customer relationships and to work with suppliers and partners by supporting collaborative product development (Bharadwaj, 2000; Feeny and Willcocks, 1998) and are mainly concerned with partnership management, market response and organizational agility (Hulland, Wade et al. 2007).The retained external dynamic capabilities at BigMedia held a pivotal strategic importance for the firm�s sustained viability and focused on the ability to adapt to a volatile external environment. In particular the ability to work with external partners for market cooperation, often including revenue sharing models and

the capacity co-create customer needs became the foremost purpose of the IT function. These capabilities empowered media firms to establish eco-systems essential for collaborative product development (Bharadwaj, 2000; Feeny and Willcocks, 1998). BigTelco�s key outsourcing motivation was a reaction to major changes in their external competitive landscape and the resulting retained IT organization had the central purpose of addressing the rapid changes of its external environment (Wade and Hulland ,2004; Hulland et al. 2007). Similarly, one of BigBrand�s motivation to outsource was to obtain the capabilities to engage consumer and to establish new marketing channels using digital business methods (Bharadwaj et al., 2013). The findings correlate with most cited strategic business benefits of outsourcing in the extant literature include ?exibility (Wade and Hulland, 2004; Lee and Choi, 2003), agility (Sambamurthy et al., 2003), quick response (Palmer and Markus, 2000) and strategic ?tness (Chan, Huff et al., 2003). 4.4 DECISION MAKING AND UNIT OF ANALYSISThe study found that outsourcing is a choice that lies in the corporate policy area, not just business or technology strategy, as it modifies the firm�s boundaries as a legal entity and generally involves top management decision makers. In the cases of BigTelco, BigMed, LargeTV and BigBrand, the outsourcing decisions involved several divisions and the decision makers where business executives such as CFOs or CEOs (not CIO�s) who pursued company-wide resource allocation policies, asset management practices and marketing strategies. The outsourcing initiatives were primarily initiated by business executives from outside the IT department, including CFOs, CEOs and board members, often without the involvement of the CIO. The CIOs of BigBrand, BigMed and Large TV who were reluctant to outsource, had either been fired or had their jobs marginalized when their IT functions have failed to demonstrate value for money (Lacity & Hirschheim, 1993). LargeTV did not use a structured process based on strategy and ended up with a position where short-term decisions were made without consideration to the long-term strategic impact to the enterprise. In fact, many companies have no basis for making make or buy decisions: decisions are rarely taken with a strategic approach but rather with a short-term perspective and by default (McIvor, 2000).4.5 LEGACY SYSTEMSTraditionally BigMed, BigBrand, BigTelco and LargeTV leveraged proprietary technologies that their competitors lacked to gain a competitive edge. Legacy applications were often highly customized and featured high complexity, with only a limited available resource pool at premium cost. Despite the general agreement among researchers that legacy related knowledge and skills may be a source of competitive advantage, some argue that the advantage is not sustainable because of high resource mobility (Mata et al., 1995), while others argue that sustainability may stem from resource complexity, causal ambiguity, context dependence, and reliance on time consuming educational activities (Dehning & Stratopoulos, 2003), drawing on configurational theory to establish the importance of congruence among IT capabilities. Over the past decade, firms began to replace or supplement proprietary business software with packaged, web-based, and outsourced technologies. This shift essentially represents a disintegration of capabilities to take advantage of market based innovation and favourable total cost of ownership (TCO), as development efforts can be shared with a wider market. This has resulted in a reduction in the potential advantage that organizations can expect to gain from internally developed technology (Sena and Sena, 2012). At the same time, these systems may still contain valuable data and business rules that firms need to leverage, rather than rebuilding from scratch.These rigidities in form of aging information systems may even represent serious competitive disadvantage, because they�re unable to evolve technological, regulatory or adapt business needs. In the cases of BigBrand, BigTelco and LargeTV, the uniqueness of software and their associated capabilities signified negative competitive value, especially if they did not contribute to revenue generation or enhance or augment enterprise business capabilities or efficiencies when compared

with industry competitors. Users may be squandering valuable time and introducing inconsistencies by entering data into multiple systems that don�t communicate with each other or have limited use for analytical purposes.In today�s complex and competitive business environment, legacy systems pose a serious challenge to the competitive advantage of companies. Legacy systems make it hard for companies to reduce the cost of ownership by decreasing technical complexity and standardizing interfacing requirements with other applications. Firms find it particularly difficult to find developers who can provide break-fix support and remain agile by adding new business features and functionality to remain competitive at competitive cost. The commitment to resources resulting from speci?c investment should be clearly differentiated from commitments evolving when practicing capabilities. This differentiation accordingly implies a separation of resource-based inertia and capability-based rigidity (Gilbert, 2005).5 DISCUSSION Although companies outsource IT for many reasons (Willcocks and Fitzgerald, 1994), the study identified three primary key drivers to outsource IT, (1) unclear economic value of their IT function (Brynjolfsson, 1993; Brynjolfsson and Hitt, 1998), (2) a generic shift of corporate strategy towards core business (Prahalad and Hammel, 1994) and (3) to address the risks and threads associated with disruptive technologies (Christensen and Raynor, 2003; Christensen, 1997). Outsourcing decisions are driven by multiple variables, are rather the product of interactions of those factors and are not made according to the independent behaviour of these variables. Several factors are at work simultaneously that are likely to increase outsourcing: * Economic adverse conditions, * Rapid technological change and the search for flexibility to adapt to disruptive technologies, * Greater emphasis on core corporate competencies, and * Globalisation.Firms can outsource a significant portion of the IT environment and still retain aspects such as critical R&D support (BidMed) or vertical capabilities (LargeTV) that are viewed as strategic. A number of firms in this study have outsourced the majority of their IT operations, yet retained components deemed as being strategically important and serving as a sustainable differentiator. If outsourcing parts of the IT organisation is cheaper than undertaking it internally, it is a clear case for outsourcing � provided it does not compromise the firm�s core competencies. This enables organizations to not only make efficiency gains but also allows them to focus more clearly on those activities that it can better perform in-house (Hendry, 1995).This capabilities perspective suggests that organizations retain those activities for which they have superior capabilities, ensuring ef?cient production (Espino-Rodríguez and Padrón-Robaina, 2006). Alternately, ?rms outsource those activities for which they lack capabilities. Senior executives often consider the IT function a commodity service as best managed by a large supplier and disintegrated activities that are not perceived to provide primary core value to the organization. If executives do not see a strategic role for IT, then IT outsourcing is often viewed as a means of conserving managerial effort thus allowing them to focus on areas with greater strategic potential (Sena and Sena, 2011, 2012). In other words, rather than spend time and resources building an internal computing infrastructure, many senior executives believe that effort should be concentrated on the effective use of technology and whatever other targeted functionality IT can generate to improve management�s responsiveness to market changes (Teng, Cheon et al., 1995).There is overwhelming consensus in the literature about the existence of �technological� reasons for IT outsourcing (Loh and Venkatraman, 1992; Arnett and Jones, 1994; Grover, Cheon et al., 1994; Lacity, Hirschheim et al., 1994; McFarlan and Nolan, 1995; Palvia, 1995; Teng, Cheon et al., 1995; Slaughter and Ang, 1996). Due to rapid technological advances, a firm�s IT department may lack or at least lag behind in �IT capabilities� such as the analytics, social networking or mobility, as found in the BigBrand, StartUp and BigMedia cases. IT outsourcing, in this

cases was used to create or augment an IT capabilities without substantial capital investments.Technology that realized competitive advantages at the outset, may degrade into strategic and economic disadvantages over time. This is clearly shown in several of the case studies (BigTelco, BigBrand, BigMedia and LargeTV), where outmoded legacy systems posed a serious challenge to the competitive advantage of companies. Despite endowing significant competitive advantages in the past, legacy systems make it hard for companies to reduce the cost of ownership by simplifying technical complexity and standardizing interfacing requirements with other applications. In addition, firms find it particularly difficult to find developers who can provide break-fix support for aging technology and remain agile by adding new business features and functionality to remain competitive at sustainable costs. A positive effect of valuable IT resource and capabilities may depend on dynamic capabilities, such as resource complementarity and social competencies. Resource complementary argues that the integration of different complementary resources, outside the IT department, can generate synergies that can lead to improved enterprise performance (Wade and Hulland, 2004; Melville et al., 2004; Karimi et al., 2007; Zhu, 2004). Dynamic capabilities are becoming stewards of business agility and change, and promote IT organizations to serve as the primary engine for implementing these changes (Ptak, et.al, 2010). For CEOs this means generating strategies to use their IT organizations as key enablers of business differentiation.Prahalad and Hamel (1990) argue that the real sources of competitive advantage are to be found in management's ability to consolidate corporate-wide technologies and production skills into competencies that empower businesses units to adapt rapidly to changing business opportunities. In most of the case studies, the retained capabilities of centralized IT departments were almost exclusively concerned with dynamic capabilities. This requires social capabilities in form of interpersonal and management skills of IT personnel to interact with and manage others; and the knowledge of IT organizations about the overall business environment and specific organizational context.Technological innovations in the macro environment can be a driver of a firm's decision to outsource an activity that was previously performed in-house. In certain industries outsourcing may often by the only viable business model, either for all firms or for a subgroup of firms. Case in point is the practice of the media and entertainment industry. The transition from linear value chain thinking towards collaborative value network thinking renders ?rm boundaries increasingly permeable, fuzzy and short lived (Dyer & Singh, 1998; Nenonen & Storbacka, 2010). Market actors can be viewed as open systems, �effectively depending on the resources of others to survive� (Vargo, Maglio and Akaka, 2008, p. 149). Whether an activity adds to a firms's competitive advantage, must be measured in the marketplace (Sena and Sena, 2011).A particularly interesting development is the decreased importance of ownership or possession of resources (Storbacka, Frow and Nenonen, 2012). Speci?cally, access to resources is becoming more important than ownership. A typical illustration is the increased interest in business models that �transform products to services�. Examples of these are, for instance, �software as service� (SaaS) � a software business model in which the software is hosted centrally and accessed by client companies using a web browser, and charged by utilization (i.e. transactions). �When the locus of technological innovation shifts from users to vendors, as it has with software, it becomes ever harder for companies to distinguish themselves� (Carr 2004, p. 48).This model is also applied in consumer markets, with a proliferation of business models where consumers pay a monthly fee to acquire access to various resources, such as music (e.g. Spotify). Prahalad and Ramaswamy (2000) describe the evolution of customers from �passive audiences� to �active players�. Firms do not exist in order to distribute value along a value chain, but rather to support customers in their value-creating processes (Gronroos, 2000; Storbacka and Lehtinen, 2001). Thus, customers are not to be viewed as extensions of ?rms� production processes. R

ather, ?rms need to be viewed as extensions of customers� value-creating processes (Korkman, Storbacka, & Harald, 2010).New information technologies and methodologies are adopted, while old ones are dismantled or upgraded. The emergence and subsequent ubiquity of digital technologies such as smart phones, mobile-commerce, social media, phone apps, tablet computing, business analytics, big data, location based services and cloud-based computing (Jaska, Johnson, Nalla, Reddy, & Tadisina, 2010) requires firms to focus on the development of external capabilities. Corporate IT departments at BigMedia and BigBrand were struggling with choosing which of these technologies to adopt and how to adopt them both effectively and efficiently (Giles, 2011; Hinchcliffe, 2011). In the digital economy the CEO must realize that IT is the foundation for doing business. Companies are discovering that how they manage IT is crucial to their competitiveness. IT determines whether the company�s dealings with customers and suppliers are efficient, scalable and timing.Product and process lifecycles are steadily growing shorter, thereby forcing firms to develop almost continuous streams of innovation (Fine, 1998; Loudon, 2001; Piachaud, 2000). But at the same time, it is becoming increasingly difficult for any one company to support an IT development agenda single-handedly. Many firms have accordingly turned to their supply networks as a source of current practices and innovation. Perrons and Platts (2005) provide evidence that it is of advantage for companies to rely to some degree on their supply network for new ideas.TCE and RBV help explain why make or buy takes place, but also help decision makers understand what to outsource and what not to � the so-called ��what�� � question (Wasner, 1999). External environment, competitive advantage, capability and the total cost picture are some of the factors that the two theories bring forward as important considerations before making the decision (Jennings, 2002; McIvor, 2000). These factors effect on their contribution to the decisions are crucial considerations.6 CHAPTER � 6: CONCLUSIONThe research conducted semi-structured interviews with practitioners, purposely selected for their advanced expertise in outsourcing, either as decision makers or facilitators in IT service procurement decisions. Although, ten interviews were conducted, only six were deemed suitable, where four interviews were discarded for reasons that (1) the informants were either not in possession of pertinent information (depth or breath) and (2) the scope of the case was not sufficiently topical. Qualitative analysis observed several themes that are directly influence IT sourcing decisions:� Primary focus on transactional cost savings� Secondary focus on core capabilities� Systems of competitive disadvantage� Dynamic Capabilities� Disruptive Technologies6.1 FOCUS ON TRANSACTIONAL COST SAVINGSThe most important consideration when firms think about outsourcing are the financial benefits that the firms could attain. Outsourcing "firms benefit from cost savings, strategic "fitness, improved management effectiveness, technology upgrade, and the service quality of IS. Senior executives consider IT as a commodity service that is best managed by a large supplier and to disintegrate activities that are not perceived to provide primary core value, in form of differentiation, to the organization. If executives do not see a strategic role for IT, then IT outsourcing is often viewed as a means of conserving managerial effort thus allowing them to focus on areas with greater strategic potential (Sena and Sena, 2011, 2012). In other words, rather than spend time and resources building an internal computing capability, many senior executives believe that effort should be concentrated on the effective use of technology and whatever other targeted functionality IT can generate to improve management�s responsiveness to market changes (Teng, Cheon et al., 1995).

6.2 SYSTEMS OF COMPETITIVE DISADVANTAGE (LEGACY SYSTEMS)Uncompetitive IT systems are the result of overreliance on previously achieved competitive advantages for too long. When a firm's management diminishes its improvement efforts, technological innovations and advancements obsolete its competitive advantage. Technology that helped to realize competitive advantages at the outset may degrade into strategic and economic disadvantages, yet even �core rigidities� (Leonard-Barton, 1992) over time. Despite upholding significant competitive advantage in the past, legacy systems make it hard for companies to reduce the cost of ownership by simplifying technical complexity and standardizing interfacing requirements of other, more modern, applications and systems. This is clearly shown in the majority of the case studies (BigTelco, BigBrand, BigMedia and LargeTV), where outmoded (legacy) systems posed a serious challenge to the competitive advantage of companies. In addition, firms find it particularly difficult to find resources who can provide maintain (i.e. break-fix) and support aging technology and remain agile by adding new business features and functionality to remain competitive at sustainable costs. 6.3 DYNAMIC CAPABILITIESIn most of the case studies, the retained capabilities of centralized IT departments were almost exclusively concerned with dynamic capabilities. Most cases displayed an emphasis on collaborative capabilities of the retained IT functions, often in form of interpersonal and managerial skills and the knowledge of IT organizations about the overall business environment and specific organizational context. Prahalad and Hamel (1990) argue that the real sources of competitive advantage are to be found in management's ability to consolidate corporate-wide technologies and production skills into competencies that empower businesses units to adapt rapidly to changing business opportunities. The study concludes that positive effect on the competitiveness of IT resources and capabilities may depend on the availability of dynamic capabilities that facilitate resource complementarity and social competencies. Resource complementary argues that the integration or combination of technology with other resources, often outside the IT department, generate synergies that can lead to improved enterprise performance (Wade and Hulland, 2004; Melville et al., 2004; Karimi et al., 2007; Zhu, 2004). Dynamic capabilities are agents of business agility and change, and promote IT organizations to serve as the primary engine for implementing these changes (Ptak, et.al, 2010). For CEOs this means generating strategies to use their IT organizations as key enablers of business differentiation.6.4 DISRUPTIVE TECHNOLOGIESNew information technologies and methodologies are perpetually adopted, while old ones are dismantled or upgraded. Due to rapid technological advances, IT department may lack or at least lag behind in �IT capabilities� such as analytics, social networking or mobility, as found in the BigBrand, StartUp and BigMedia cases. The emergence and subsequent ubiquity of digital technologies such as smart phones, mobile-commerce, social media, phone apps, tablet computing, business analytics, big data, location based services and cloud-based computing requires firms to focus on the access to external capabilities (Jaska, Johnson, Nalla, Reddy, & Tadisina, 2010). There is overwhelming consensus in the literature about the existence of �technological� reasons for IT outsourcing (Loh and Venkatraman, 1992; Arnett and Jones, 1994; Grover, Cheon et al., 1994; Lacity, Hirschheim et al., 1994; McFarlan and Nolan, 1995; Palvia, 1995; Teng, Cheon et al., 1995; Slaughter and Ang, 1996). Corporate IT departments at BigMedia and BigBrand were struggling with choosing which of these technologies to adopt and how to adopt them both effectively and efficiently (Giles, 2011; Hinchcliffe, 2011). IT outsourcing, in these cases may be used to create or augment an IT capabilities without substantial capital and intellectual investments. 6.5 ECOSYSTEMSWhether an activity adds to a firm�s competitive advantage, must be measured in the marketplace (Sena and Sena, 2011). Technological innovations in the macro environment can be a driver of a firm's decision to outsource an activity that was previously performed in-house. In certain industries, outsourcing may often by th

e only viable business model, either for all firms or for a subgroup of firms. Case in point is the practice of the media and entertainment industry. The transition from linear value chain thinking towards collaborative value network thinking renders ?rm boundaries increasingly permeable, fuzzy and short lived (Dyer & Singh, 1998; Nenonen & Storbacka, 2010). Market actors can be viewed as open systems, �effectively depending on the resources of others to survive� (Vargo, Maglio and Akaka, 2008, p. 149). A particularly interesting development is the decreased importance of ownership or possession of resources (Storbacka, Frow and Nenonen, 2012). Speci?cally, access to resources is becoming more important than ownership. A typical illustration is the increased interest in business models that �transform products to services�. Examples of these are, for instance, �Software as a Service� (SaaS) � a software business model in which the software is hosted centrally and accessed by client companies using a web browser, and charged by utilization (i.e. transactions). �When the locus of technological innovation shifts from users to vendors, as it has with software, it becomes ever harder for companies to distinguish themselves� (Carr 2004, p. 48).This model is also applied in consumer markets, with a proliferation of business models where consumers pay a monthly fee to acquire access to various resources, such as music (e.g. Spotify). Prahalad and Ramaswamy (2000) describe the evolution of customers from �passive audiences� to �active players�. Firms do not exist in order to distribute value along a value chain, but rather to support customers in their value-creating processes (Gronroos, 2000; Storbacka and Lehtinen, 2001). Thus, customers are not to be viewed as extensions of ?rms� production processes. Rather, ?rms need to be viewed as extensions of customers� value-creating processes (Korkman, Storbacka, & Harald, 2010).6.6 TCR & RBV COMBINATIONA combination of theoretical lenses of TCE and RBV not only help to explain why make or buy takes place, but also help decision makers understand what to outsource and what not to � the so-called ��what�� � question (Wasner, 1999). External environment, competitive advantage, capability and the total cost picture are some of the factors that the two theories bring forward as important considerations before making the decision (Jennings, 2002; McIvor, 2000). These factors effect on their contribution to the decisions are crucial Managerial implications and contributionsGaining an appreciation of the sources of value, and how resources and capabilities combine in valuable ways, has obvious significance to managers. The RBV suggests that the role of senior managers within an organisation is to leverage valuable corporate resources and accumulate, develop, and protect such resources to be competitive in the future marketplace (Prahalad & Hamel, 1990; Tyler & Steensma, 1995; Tyler, 2001). Therefore, to be able to identify what are valuable organisational resources and capabilities, and how they are connected, becomes critical to senior managers successfully completing their role. This researcher echoes comments from other researchers (such as Tyler (2001)) who encourage outsourcing decision makers and executives to understand their organisational resources and capabilities. This is an important task for managers because it is widely noted that a firm is not able to effectively outsource organisational processes and practices which they do not understand (e.g., Teece et al., 1997; Tyler, 2001). Furthermore, if managers and executives do not have an appreciation of where they are currently at, it is difficult to make plans for the future of the organisation and compare the two,In the digital economy the CEO must realize that IT is the foundation for doing business and companies are discovering that the way they manage IT is crucial to their competitiveness. IT determines whether the company�s dealings with customers and suppliers are efficient, scalable and timely. Product and process lifecycles are steadily growing shorter, thereby forcing firms to develop almost continuous streams of innovation (Fine, 1998; Loudon, 2001; Piachaud, 2000). But at the same time, it is becoming increasingly difficult for any one company to support an IT development agenda single-handedly. Many firms have accordingly turned to their supply networks as a source of current practices and innovation. Perr

ons and Platts (2005) provide evidence that it is of advantage for companies to rely to some degree on their supply network for new ideas.The RBV sees the firm as a whole, comparing the resources available internally to those available in the market, seeking the few firm resources that lead to a long-term competitive advantage. In addition, RBV leads to a resource-by-resource analysis of internal performance compared to the market or to other firms while seeking the best form of governance for a given activity or functional unit. TCE analyses transaction by transaction, seeking the governance structure that minimizes transaction costs and thereby increasing the efficiency of the firm in the short term. A recommendation of this research is to combine both theories revealing that outsourcing activities by firms should be decided in two stages. First, at the strategic level, firms must clearly decide which functional IT units should be performed internally, and by implication, which activities may be subject to outsourcing, in line with the policies that Porter (1985) and Grant (2005) advocate. At this strategic level, firms are studied as a whole to identify which activities are associated with those core competencies that must be performed internally (Prahalad and Hammel, 1990; Quinn and Hilmer, 1994). This first stage is based on the RBV theory.After firms strategically determine non-tradeable activities that must remain integrated, they may proceed to the second stage of analysis, transaction by transaction, to determine which activities are economically feasible to be outsourced. At this stage, firms must compare the strengths and weaknesses of their skills with those available in the marketplace, outsourcing those activities in which the firm holds disadvantages (Poppo and Zenger, 1998; Mayer and Salomon, 2006). Further, they must verify whether outsourcing can result in a loss or transfer of strategic knowledge, weakening of related core competencies (Teece, 1986; Liebeskind, 1996). If so, these activities should be retained. Finally, they must compare the transaction costs arising from idiosyncratic investments and the uncertainties related to outsourcing with internal costs. If the outsourcing costs are higher than internal costs, the activity should not be outsourced (Williamson, 1985; Amaral, Billington and Tsay, 2006; Ellram; Tate and Billington, 2008). This second stage combines RBV and TCE theories. Both, the qualitative and quantitative results make important contributions to managerial practice and may provide a platform for developing IT sourcing strategies with a stronger emphasis on strategic objectives, in addition to the conventional economic imperatives. An implication of this research is that decision paradigms must take both, the competitive and economic circumstances of firms as well as the external frame conditions of their respective industries into consideration.6.7 LIMITATIONS OF THE RESEARCH The quantitative research used cross-sectional data, hence studied the relationships between variables at a given point in time. All the variables are measured based on the perceptions of the respondents at the time of responding to the survey. Therefore, causality between the variables cannot be established in this study. Time studies need to be made in this context. Kern & Willcocks� (2000, 2001, 2002) evaluation of IT outsourcing in a series of case studies shows that the IT relationship changes over time. Hence it is important to understand the impact of IT outsourcing decisions over time as well.

Recommendations for further researchThe unit of analysis of the conceptional model developed in the quantitative research of this study was too granular to be applied at the operative process level. Although the construct was able to identify competitive value of IT activities to some extend, it did not correlate boundary related properties as advocated by the resource based theorem. Quantitative analysis attributed this observation to decision maker�s the bounded rationality of operational processes and confirmed that functional units are the unit of analysis in boundary decisions. Decision makers applied functional units, which are more aggregated unit of analysis, consisting of several activities, to assess competitive value at a functional level in the decision process. The conceptional model may be reapplied, by aggrega

ting the unit of analysis to a higher level of functional capabilities such as IT Service Operation, IT Service Delivery, IT Service Transition or IT Service Development. This approach may hold the propensity to assess IT bundles on their strategic value on a more aggregated level to guide practitioner in boundary decisions. APPENDIX 3: CASE INTERVIEW PROTOCOL

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