The supplier's side of outsourcing: Taking over activities and blurring organizational boundaries

IMM-06987; No of Pages 11 Industrial Marketing Management xxx (2014) xxx–xxx

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Industrial Marketing Management

The supplier's side of outsourcing: Taking over activities and blurring organizational boundaries Enrico Baraldi a,1, João F. Proença b,⁎, Teresa Proença c,2, Luís Mota de Castro d,3 a

Uppsala University, Division of Industrial Engineering & Management, Box 534, S-751 21 Uppsala, Sweden ADVANCE, ISEG, University of Porto, Faculty of Economics, Rua Dr. Roberto Frias, 4200-464 Porto, Portugal CEF.UP, University of Porto, Faculty of Economics, Rua Dr. Roberto Frias, 4200-464 Porto, Portugal d ADVANCE, ISEG, University of Lisbon, Rua Miguel Lupi 20 — Gab.201, 1249-078 Lisboa, Portugal b c

a r t i c l e

i n f o

Article history: Received 17 March 2013 Received in revised form 24 October 2013 Accepted 11 December 2013 Available online xxxx Keywords: Business relationships Mutual dependence Organizational boundaries Outsourcing Value co-creation

a b s t r a c t Since most of the literature on outsourcing focuses only to the buying (outsourcing) company, this paper aims to highlight the supplier's side from a relational perspective. The paper stresses the importance of business relationships between suppliers of outsourced activities and their customers. The paper's purpose is specified in two research questions: (1) how is value created within outsourcing and (2) how does the supplier interact with the outsourcing company? Our method relies on an in-depth qualitative case study of Logoplaste, a Portuguese packaging company which supplies large consumer goods manufacturers through complex outsourcing activities. Our analysis identifies three key dimensions of outsourcing relationships: (1) value co-creation via inter-firm coordination (as opposed to unilateral externalization of activities); (2) mutual dependence between supplier and customer due to the supplier's taking over activities; and (3) the blurring of organizational boundaries because of mutual dependence. These dimensions manifest themselves, even though in different degrees, after the initiation of any outsourcing relationship: these variables are new to the literature on outsourcing, which focuses on the ex ante dimensions that influence the customer's pre-relational choices such as “make or buy” and relationship type. © 2014 Elsevier Inc. All rights reserved.

1. Introduction Since the 1990s outsourcing has become a widespread phenomenon (Quinn & Hilmer, 1995; Rodríguez & Robaina, 2006). This practice can be defined as “…the external contracting of determined non-strategic activities or business processes necessary for the manufacture of goods or the provision of services, by means of agreements or contracts with higher capability firms to undertake those activities or business processes…” (Rodríguez & Robaina, 2006: 52). The activities being outsourced range from IT services (Mahnke, Overby, & Vang, 2005) to healthcare provision (Roberts, 2001) and from manufacturing to logistics (Ram, Sriram, & Ravi, 2010). The growing body of research on outsourcing (for a review see Araujo & Spring, 2006; Contractor, Kumar, Kundu, & Pedersen, 2010; Holcomb & Hitt, 2007; Rodríguez & Robaina, 2006) focuses on the outsourcing company and analyses such issues as its “make or buy” decisions and selection of suppliers (see De Fontenay & Gans, 2008; Tate & Ellram, 2009; Tate & Ven der

⁎ Corresponding author at: Faculty of Economics, University of Porto, Rua Dr. Roberto Frias, 4200-464 Porto, Portugal. Tel.: +351 225571100. E-mail addresses: [email protected] (E. Baraldi), [email protected] (J.F. Proença), [email protected] (T. Proença), [email protected] (L.M. de Castro). 1 Tel.: +46 18 471 3091. 2 Tel.: +351 225571100. 3 Tel.: +351 96 0225474; fax: +351 21 3922 808.

Valk, 2008; Verwaal, Commandeur, & Verbeke, 2009) or of offshoring countries (Demirbag & Glaister, 2010). As Contractor et al. (2010: 1430) point out there is a dearth of studies that focus on the “other side” of outsourcing, namely the supplier (see for an exception Yuan, Zelong, & Yi, 2010). There are even fewer studies that explicitly focus on the buyer–seller relationship (Anderson, Håkansson, & Johanson, 1994; Håkansson & Snehota, 1995) between outsourcing companies and their suppliers (for two exceptions see Tate, Ellram, & Brown, 2009; Zineldin & Bredenlöw, 2003). The purpose of this paper is to (1) highlight the supplier's perspective on outsourcing, and thereby to approach this phenomenon from the supplier's side; and (2) stress its relational and inter-organizational nature. In order to accomplish this purpose we conducted an in-depth case study centred on Logoplaste, a firm supplying packaging operations via factories located wall-to-wall with customers, via close and longterm buyer–supplier relationships. The Logoplaste case provides a good empirical setting to investigate how suppliers provide complex outsourced services and how the boundaries of the supplier's organization become diffuse as a result of the ongoing relationship. Large investments and adaptations, in the form of mini-factories fully tailored to each customer, reduce Logoplaste's flexibility. However, this type of outsourcing relationship and its physical proximity provide a drastic reduction in distribution and inventory costs for both parties, and enable continuous interactive processes for solving operational problems on both sides of the relationship.

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Please cite this article as: Baraldi, E., et al., The supplier's side of outsourcing: Taking over activities and blurring organizational boundaries, Industrial Marketing Management (2014), http://dx.doi.org/10.1016/j.indmarman.2014.02.012

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Therefore, this case study suggests two specific questions that further specify the paper's purpose and help penetrate the supplier's perspective on outsourcing: (1) How is value created within the frame of outsourcing; and (2) How does the supplier interact with the outsourcing company? The first question focuses on the re-distribution of activities between the two involved parties, stressing that suppliers “take over activities” from the outsourcing company (Dubois, 1994). The second question focuses on the business relationship between the supplier and the outsourcing company (Ford, 2002; Håkansson & Snehota, 1995), and namely the mutual high dependency and the “blurring of organizational boundaries” that it implies. Our analysis contributes to the outsourcing literature in two major ways: (1) expanding the focus from the unilateral setting of organizational boundaries by and within the outsourcing company (cf. Contractor et al., 2010) to what actually happens between the boundaries of the outsourcing company and of its supplier; (2) identifying three key dimensions of outsourcing relationships (value co-creation via inter-firm coordination, mutual dependence due to interlinked activities, and blurred organizational boundaries), which become salient after the initiation of such relationships, while the outsourcing literature focuses on the choices (including the selection of relationship types, Mudambi & Tallman, 2010) made by the outsourcing company before their initiation. The remainder of this paper is arranged as follows: the next section reviews the literature on outsourcing and business relationships. Then we discuss our method and present the Logoplaste case. The case is then analysed and discussed in order to extract three propositions related to our research questions. The paper concludes with suggestions for further research and managerial implications. 2. Theoretical review Our literature review starts from established theories on outsourcing and stresses how they focus on the outsourcing company while neglecting the supplier's perspective. Therefore, we introduce a theoretical frame that accommodates this perspective by stressing the importance of buyer–seller relationships, namely the IMP (Industrial Marketing and Purchasing) view. We then discuss how outsourcing blurs the boundaries of the firms involved and entails simultaneously externalizing and taking over activities, while linking them in new ways. 2.1. From outsourcing decisions to building business relationships According to Rodríguez and Robaina (2006: 52), outsourcing implies divesting resources and capabilities applicable to perform important value-creating activities as other firms can perform them better. Such improvements include economies of scale or operations in low-cost countries that can reduce product cost (Dabhilkar, Bengtsson, von Haartman, & Åhlström, 2009). Most studies agree that outsourcing impacts the boundaries of the firm because some activities are acquired externally (Rodríguez & Robaina, 2006). Therefore, the literature has focused on the discrete decisions on how to set the boundaries of the firm through “make or buy” choices. Several authors (e.g., Holcomb & Hitt, 2007) point out that transaction cost economics (TCE, cf. Williamson, 1986) dominates as an explanation for outsourcing and boundarysetting decisions: low uncertainty, low transaction costs and low risk of opportunism make it more cost-efficient for a firm to perform transactions on the market rather than in-house activities (Coase, 1937). However, whereas TCE focuses on transaction-specific “make or buy” decisions, the issue of boundary setting should be viewed in a broader and dynamic context, embracing both the historical development of a firm's internal capabilities and their connections to those of external counterparts (Mota & de Castro, 2004). There are accordingly also other theoretical approaches to analysing outsourcing, including the resource-based view (RBV), knowledge-based perspectives and industrial networks (Mota & de Castro, 2004; Holcomb & Hitt, 2007;

Marshall, McIvor, & Lamming, 2006; Mols, 2007; Mudambi & Tallman, 2010). For instance, Contractor et al. (2010) suggest that, after identifying “true core activities” in the value chain of a firm, non-core and “essential” activities can be outsourced, especially those with a high degree of knowledge codification and standard interfaces (Contractor et al., 2010: 1427). Mudambi and Tallman (2010) apply both RBV and TCE to identify ex ante factors that influence the choice not only between “make or buy”, but also between different types of outsourcing relationships, namely contract-based and institutional (JV) ones. These authors find that besides typical RBV factors (e.g., tacit knowledge) and TCE factors (e.g., transaction-specific investments), the co-specialization between supplier and customer favours institutional relationships (Mudambi & Tallman, 2010: 1452). Marshall et al. (2006) apply also both TCE and the RBV and find that inter-organizational collaboration and political motivation have more impact on outsourcing than transaction costs. Similarly, Rodríguez and Robaina (2006) focus on the impact of outsourcing on the level of vertical specialization of a firm's activities, which may modify the firm's boundaries in relation to specific counterparts: outsourcing can entail a stable, long-term relationship in which the supplier becomes a partner in a complex exchange of activities, and not simply an arm's-length provider of standard solutions. The IMP (Industrial Marketing & Purchasing) perspective provides a conceptual framework to analyse specifically this type of long-lasting relationships: we therefore chose to apply it to the phenomenon of outsourcing. Since the 1980s, a large body of IMP research (e.g., Anderson et al., 1994; Araujo, Dubois, & Gadde, 1999; Brennan & Turnbull, 1999; Ford, 1980; Ford & Håkansson, 2006; Gadde & Mattsson, 1987; Gadde & Snehota, 2000; Håkansson & Snehota, 1995; Johnsen & Ford, 2006; Medlin, 2004) has shown that buying and selling is not a series of independent transactions but is rather part of a pattern of long-lasting and complex relationships (LaPlaca, 2004). Håkansson and Snehota (1995) and Ford (2002) emphasize that business relationships include complex exchange processes and especially mutual adaptations between firms, which increase mutual dependence, while they also enable handling risk via mutual trust. Buyers and sellers often have convergent interests: gain access to each other's resources, while accepting mutual dependence (Håkansson & Ford, 2002). Håkansson and Snehota (1995) analyse business relationships by breaking them down into the three layers of activities, resources and actors forming the so called “ARA” model, where the substance of a business relationship can be described by the activity links, the resource ties and the actor bonds connecting the two companies together. In turn, these connections between the two counterparts are embedded in a broader structure defined as the network, whereby each single relationship is affected by (and affects) other relationships to direct and indirect counterparts (Håkansson & Snehota, 1995; Axelsson & Easton, 1992). Thus, the IMP perspective provides new theoretical insights applicable to outsourcing for three reasons: (1) it enables viewing outsourcing not only from the perspective of the outsourcing company, that is, the “buyer” of external activities, but also from that of the other party in an outsourcing relationship, namely, the “seller” of external activities; (2) it stresses the fact that any ex ante outsourcing decision implies building some form of ex post relationship with the supplier to whom a given activity is outsourced (cf. Gadde & Håkansson, 1993, 2001); and (3) the “activity layer” of the ARA model (Håkansson & Snehota, 1995) is particularly relevant for analysing the externalization of activities, typical of outsourcing, in an interactive perspective. 2.2. Blurred organizational boundaries in outsourcing relationships While Chandler (1992) and Grossman and Hart (1986) stress the clear-cut nature of the firm's boundaries, defined by formal administrative control over employees (Rubery, Carroll, Cooke, Grugulis, & Earnshaw, 2004) or legal asset ownership, the IMP view stresses the fluid nature of these boundaries. For instance, according to Araujo,

Please cite this article as: Baraldi, E., et al., The supplier's side of outsourcing: Taking over activities and blurring organizational boundaries, Industrial Marketing Management (2014), http://dx.doi.org/10.1016/j.indmarman.2014.02.012

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Dubois, and Gadde (2003), boundaries both separate and connect the firm to its context: they exist not only just to be “protected,” but also to enable a firm to interact with external actors. Boundaries have therefore a bridging function that links actors, as well as their relationships with other actors. Therefore, for the supplier, the boundaries of the outsourcing company are not barriers, but rather entry points across which to connect its activities and resources to those of the customer. The resources found inside a firm are combined into unique “resource collections” and utilized in order to perform its internal activities, forming a firm-specific “activity structure” (Håkansson & Snehota, 1995). Depending on how a firm combines its resources they will be utilized in particular activities, providing a variety of services which create value to the firm (Penrose, 1959). Next to these internal combinations of resources to perform activities and create value, the network perspective of IMP stresses external combinations of one firm's resources with those of other firms, which accordingly generate activities and values that can be shared by and involve several companies simultaneously (Araujo et al., 1999; Håkansson & Ford, 2002; Håkansson & Snehota, 1995). Therefore, the boundaries that traditionally would separate firms by defining their legal and administrative control over resources (cf. Chandler, 1992; Grossman & Hart, 1986) become blurred. As firms need to constantly access the resources (e.g., knowledge or machinery) of, for instance, a supplier of outsourced solutions to have some of its activities performed, concurrently it may have to allow the same supplier to access its own resources (e.g., facilities or personnel) to perform those activities. Richardson (1972) provides a stringent economic explanation showing that when two activities are “dissimilar” (i.e., rely on divergent capabilities/resources, which unlikely are owned by the same company) and “closely complementary” (i.e., require specific adaptations and detailed coordination) the most efficient coordination mechanism is a close business relationship as opposed to a market mechanism (the traditional “buy” option) and a hierarchy (the traditional “make” option). Therefore, outsourcing is not simply the result of an ex ante decision between “make” (vertical integration) and “buy” (free market exchange), but the very “buy” decision opens for at least a further decision between a cooperative and an arm's-length, market-based relationship (cf. Contractor et al., 2010: 1420; Mudambi & Tallman, 2010). Therefore, there are situations where, in order to create value and achieve efficiency, outsourcing requires close coordination and causes high inter-dependence between the outsourcing company and the supplier who performs the outsourced activities. The consequences of a business relationship can be far-reaching on the boundaries of the supplier of an outsourcing company. Relationships are not simply an alternative coordination mechanism to the market and hierarchies (see Baraldi, 2008; Powell, 1990), but an organizational form of their own (Håkansson, 1997), or at least “quasi-organizations” (Blois, 1972) characterized by shared resources, goals and activities between the supplier and the customer. The boundaries between these two companies then become highly blurred as some resources may be jointly owned or controlled, decisions may be jointly made and activities may be jointly performed for the sake of value creation. Even if this multiple “jointing” appears only in extreme cases of particularly strong resource ties, actor bonds and activity links (Håkansson & Snehota, 1995), a relationship always makes the boundaries of each company more permeable and fluid, depending on the degree of techno-economic interdependence and mutual influence. Boundaries become blurred because the ties between the resources of the supplier and those of the customer make it difficult changing resources independently, that is, on just one side of the relationship, without causing consequences on the other side (Håkansson & Snehota, 2002). Similarly, when the activities of two companies become highly adapted to each other and tightly connected, the emerging activity links further blur the boundaries between the two firms because the great need for coordination tends to create information and control processes that stretch across and join the two companies, as in the case of

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just-in-time supply (Gadde & Håkansson, 1993) or vendor-managed inventory (Baraldi, 2008). Applying a relational perspective on outsourcing, defined in terms of externalizing activities (Rodríguez & Robaina, 2006: 52), entails stressing also the other side of the equation: if a company externalizes an activity, there needs to be another company, a supplier, who takes over that activity. It is therefore pivotal to understand how the supplier connects the activities it takes over to its own other activities and to those of the outsourcing customer. This connection is manifested firstly throughout the entire relationship emerging between the two parties involved in an outsourcing deal, and secondly especially in the activity links within this relationship. In fact, such links will need to be created between the remaining activities of the outsourcing company and the “new” activity that the supplier has just taken over and will perform in its own way within a new organization, together with the other activities in its own activity structure (Håkansson & Snehota, 1995). Put differently, outsourcing entails changing activity links or creating them for the first time. In summary, our IMP-based theoretical frame stresses the relational nature of outsourcing: a supplier takes over the activities externalized by the outsourcing company and engages in a business relationship wherein it jointly creates (or co-creates) value with the customer by closely coordinating its activities with the customer's (via activity links). Two important consequences of this relationship are that the supplier and the outsourcing company become more mutually dependent and their organizational boundaries become blurred. 3. Research methodology Our methodology relies on a single, in-depth case study design (Byrne & Ragin, 2009; Ragin, 1992; Yin, 2003) centred on Logoplaste, a provider of outsourced packaging activities to large international consumer-goods companies. The choice of a qualitative methodology was appropriate given the nature of our research questions, namely unveiling two complex processes: how value is created and how suppliers interact with outsourcing customers. We employed the case study method as it enables investigation of a complex phenomenon in its context through multiple sources of evidence (Byrne & Ragin, 2009; Ragin, 1992; Yin, 2003), so as to make the “hidden” processes and structures visible. Moreover, we chose to employ a single case study as it allows penetrating deeper the events and structures of the phenomenon under scrutiny (Dubois & Araújo, 2007), a key aspect for theory development (Dubois & Gadde, 2002). Several authors argue that a single case study is justified or even preferable to multiple cases (Easton, 2003; Siggelkow, 2007) if one aims to show the impact of many, powerful and contingent interactions working in particular ways. Easton (2003) also claims that connecting the empirical material with existing theory is important, but when little theory exists or if such theory is viewed as insufficient to grasp a phenomenon – which we argue for a relational view on outsourcing – then one case can be enough to begin to develop a new theory. Which case to employ was pivotal to able us developing new theoretical insights. Our first encounter with the Logoplaste case made it clear that it could vividly illustrate structures and dynamics of outsourcing relationships that were neglected in the extant literature. Moreover, our case sampling criterion was not finding an exception to the norm presented by the literature on outsourcing (a so called “outlier”), but a specific situation that would call for a re-examination of the “norm” in outsourcing, by revealing new or previously neglected dimensions of this phenomenon — namely its interactive nature and the importance of the business relationships discussed in our theoretical review. Our purpose is not to achieve a statistical generalization of our findings, but an analytical generalization (Yin, 2003) applying the same concepts and constructs we develop from our analysis to other cases of outsourcing relationships. Even if the outsourcing relationships orchestrated by Logoplaste turned out to be absolutely novel and unique (which we

Please cite this article as: Baraldi, E., et al., The supplier's side of outsourcing: Taking over activities and blurring organizational boundaries, Industrial Marketing Management (2014), http://dx.doi.org/10.1016/j.indmarman.2014.02.012

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believe they are not), the particular case we selected still allows us to discuss and to advance the theory on outsourcing relationships. The Logoplaste case illustrates outsourcing as a relational phenomenon, stressing the supplier's perspective, and shows how the boundaries of the firms involved become blurred, while activities are reallocated between them as a way to create value together. Reflecting an abductive approach to case studies (Dubois & Gadde, 2002), several versions of this case have been written, with analytical angles varying from purchasing/supply management to new business models. Writing the various versions of the case enabled us to confront the empirical material with several theoretical concepts and identify which ones are more appropriate to explore and account for the examined processes and structures involving Logoplaste and its customers. The present version of the case was developed when the empirical material was explicitly combined with the ARA model (Håkansson & Snehota, 1995), which also required collecting additional material via interviews to specifically cover the activity layer of the relationship between Logoplaste and major customers. We conducted a total of 8 interviews and one observation of Logoplaste's production activities, between 2009 and 2011. We interviewed Logoplaste's CEO twice and the Managing Director for Central Europe on one occasion to get an overview of the multinational organization, its evolution and managerial principles. We also visited a Logoplaste factory located inside a customer's production facility, a so called IPU (Integrated Production Unit). During this visit we observed the packaging activities at the Logoplaste unit and the filling activities at the customer facility. There we interviewed the Managing Director, the Production Director and an employee of the Logoplaste unit, as well as a production manager at the customer filling unit. These interviews gathered data about the combination of the activities, resources and actors between the IPU and the customer. A follow up interview was conducted with Logoplaste's Managing Director for Central Europe. The interviews were based on open-ended, semi-structured and structured questions. They were tape-recorded and transcribed. A content analysis was performed jointly by two of the authors to capture the idiosyncrasies of Logoplaste's operations and specifically their relationships with customers. The main themes analysed were ‘business model’, ‘activities’ (coordination), ‘resources’ and ‘actors’, ‘mutual dependence’, and ‘organizational boundaries’. Secondary materials from Logoplaste – brochures, annual financial reports, statistics, press releases, etc. – were also collected and analysed.

4. The Logoplaste case Founded in 1976, Logoplaste is a Portuguese firm specialized in producing packages for Fast Moving Consumer Goods (FMCG) customers who have decided to outsource packaging operations. Logoplaste's production units (IPUs) are located on the clients' premises, wall-to-wall or even inside their factories and they provide a complete in-house service integrated into the customer's operations. Presently, Logoplaste manages more than 60 factories spread across 4 continents (16 countries) and is in the top 5 largest European rigid plastic converters. Logoplaste is Brazil's largest rigid plastic converter and first in hole-in-the-wall operations in Europe and Brazil (Table 1). Logoplaste processes more than 270,000 tonnes of raw material and around 11,000 million plastic packages, with a track record of uninterrupted growth through a series

of industrial start-ups and acquisitions in new markets. The CEO presents proudly their customer portfolio: “… we have some of the biggest and well known firms in the beverage market and customers from a variety of industries”.

4.1. Logoplaste's business model Supplying customers with key outsourced activities is the result of Logoplaste's proposal of medium to long-term partnership contracts. If customers wish to outsource their packing and filling operations, Logoplaste creates specialized production units, known as “IPUs” wall to wall or most often inside their factories. Occasionally, Logoplaste agrees to take over the customer's production equipment and staff (usually blue collar workers and some middle managers) involved in those activities in order to facilitate the start-up of the outsourced operations. Typically, IPUs are planned and designed from scratch so as to fit the customer's product, process and pace, thereby creating a deeper supplier–customer relationship. By engaging in this type of outsourcing relationship, both Logoplaste and its customers become highly dependent on each other, which diminishes their flexibility to choose other counterparts in the market. Logoplaste's strategy of creating a web of mini-factories tailored to each customer's idiosyncrasies provides important values, such as a drastic reduction in distribution and inventory costs, both to the buyer and the supplier. However, to reach these efficiencies, the relationship needs to be long-lasting, considering the necessary adaptations, learning processes and the investments Logoplaste has to make in each mini-factory. The contracts are in fact long-term (5 to 10 years) and regulate the relationship in terms of minimum quantities to exchange, quality obligations, payback period, etc. Most of the current contracts are 7 to 11 years old, and some have endured 20 years or more. Logoplaste's relationships are based on a common formal contract for all customers, supplemented by customer-specific features: “…each customer has specific needs and we have a close dialog to adapt to each one of them …” (Logoplaste CEO). Logoplaste faces the need for both local responsiveness to specific customers and central coordination of its global operations. This led to a decentralized organizational structure where subsidiaries are given a high degree of operational autonomy. The need to collect and monitor information on technology and competitors in different countries and the high investment in R&D, all demand strategic integration and coordination among the various subsidiaries. A national/regional management team, led by a country/region Managing Director also coordinates all functions: finance, technology, management control, purchasing and raw materials, accounting, and long-term planning with each customer. In Fig. 1, Logoplaste's headquarters are represented by the star in the middle, with connections to all the various local Logoplaste companies (LL) around the world, and their IPUs, all located wall-to-wall to the customers. Fig. 1 also illustrates the management structure in the LLs, highlighting the role of the Plant Manager who is responsible for every IPU, whose structure is represented by a dotted triangle. Country/regional Managing Directors also have the responsibility of finding potential new customers, and when this happens the new customer will be supplied by an autonomous operating

Table 1 Logoplaste's features (Logoplaste, 2012). Turnover

No employees Services provided

€450 million 2000

Industries supplied

Countries with Logoplaste IPUs

Package/container (CAD-CAM, quick prototyping, Foodstuffs, beverages, personal care, Portugal, Spain, France, Italy, UK, Czech Republic, Belgium, Russia, Netherlands, Ukraine, US, Brazil, Mexico, Canada, moulding and packaging design), production (JIT); household, oil and lubricants, Vietnam, Malaysia PET pre-moulding quality control, technical advice

Please cite this article as: Baraldi, E., et al., The supplier's side of outsourcing: Taking over activities and blurring organizational boundaries, Industrial Marketing Management (2014), http://dx.doi.org/10.1016/j.indmarman.2014.02.012

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LL UK

LL Central Europe

5

LL France

IPU 1 LL Spain

LL Brazil

Technical

1

HR

R&D Board of Directors

Purchasing /IT

Financial

C u s t o m e r

C u s t o m e r

IPU 2

Commercial

LL n

Headquarters Portugal

C u s t o m e r 2

IPU n Managing Director

n

Finance D.

Legend: LL – Local Logoplaste (country or region) IPU – Integrated Production Unit

Quality M.

Plant M.

Prod. M.

Technical D.

…

Fig. 1. Logoplaste's organization for supplying outsourcing solutions.

organization located on its premises. To enable the global learning necessary to manage vertical, horizontal and diagonal relationships (intra-country, inter-country and inter-functional), the CEO has enlarged the Headquarters Executive Committee to include several Managing Directors, so as to increase their participation and involvement. 4.2. Activities and value creation in Logoplaste's relationships The activities of Logoplaste and its customers are strongly interconnected. Upstream activities involve product development services that Logoplaste provides to its customers, which start with the customer's marketing team explaining to Logoplaste's R&D team their product concept, its applications and functions. Logoplaste's R&D team then develops a proposal, interacting several times with the customer's marketing team until they arrive at an accepted and manufacturable technical and design solution. As stated by the Managing Director of Central Europe, the solution may rely on an existing package or be completely new and customized: “This industrial design activity may take from two weeks to two months and it is often a free service for the customer. In fact, the cost of product development is typically charged to customers only if the product is not industrialized, while it is covered by Logoplaste if the

industrial process goes ahead and a long-term contract is awarded to Logoplaste. When Logoplaste needs to test materials for developing the product, the materials cost is charged to the customer”. A second important cluster of upstream activities is cost accounting, that is, the definition of the cost of the package, which includes an analysis of the project costs (labour, raw materials, energy, technology investment, interest rates, and equipment depreciation). The cost structure of Logoplaste's project investment is completely transparent to the customer: “We need to clarify all, or almost all our cost, so that they can understand our needs…” (Managing Director of Central Europe). Sales forecasts are then formulated jointly with the customer's purchasing team so that Logoplaste and the customer will evaluate together whether Logoplaste's project investment is viable or not. If the customer considers Logoplaste's cost proposal to be too high, Logoplaste may decide to develop another one, aiming at a proposal which is acceptable to both. Purchasing of materials is another important value-creating activity: the negotiations with suppliers may be led either by Logoplaste or by the customer, depending on the customer's size, the importance for Logoplaste and the length of their relationship, and also on the quality

Please cite this article as: Baraldi, E., et al., The supplier's side of outsourcing: Taking over activities and blurring organizational boundaries, Industrial Marketing Management (2014), http://dx.doi.org/10.1016/j.indmarman.2014.02.012

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of the customer's relationships with suppliers. Purchasing is an important issue because raw materials represent a high percentage of packaging costs. Large multinational customers tend to decide which suppliers to source materials from, and Logoplaste will simply place purchase orders with them. However, Logoplaste also develops relationships with all major raw material suppliers, further strengthening its position in terms of know-how and bargaining power compared to most of Logoplaste's customers. As for HRM activities, closer interactions happen when a new plant is to be started in order to align compensation policies (salaries, parking spaces, canteens and other benefits) and the cost of labour in the price structure. When customers decide to sell their packaging production line to Logoplaste, Logoplaste may re-hire the dismissed employees. Logoplaste's pay scale is similar to the customer's because it cannot pay its employees more or less than the customer's employees who work side by side. Downstream activities in Logoplaste's customer relationships involve quality control and outbound logistics. Logoplaste and the customer's routines for quality control are often very similar, so they may decide to unify their quality control systems. This may occur after some time, allowing customers to gain confidence in the industrial process and service level that Logoplaste delivers. Unified quality control can provide significant cost savings. As pointed out by a Logoplaste Production Manager: “The packaging and the filling lines are highly automated, as well as the control of the package delivering process at Logoplaste and the customer, therefore, it is very easy to agree on the numbers”. Fig. 2 shows these links between the two parties' activities, as well as the actors involved in the relationship. Upstream activities are performed by actors (namely various Logoplaste teams) represented in Fig. 2 by the small circles inside Logoplaste. These activities are in turn coordinated with various functional areas of the customer (the double-headed arrows) or jointly performed by Logoplaste and the customer in relation to third parties (the single-headed arrows). The packaging factory (the smaller dotted rectangle) includes the downstream activities coordinated between Logoplaste and the customer, typically in an IPU wall-to-wall to the customer. The boundaries of Logoplaste (the larger circle) and of the customer (the larger rectangle) are represented by dotted lines to indicate a very close interaction which blurs these boundaries. Co-creation of value is higher when Logoplaste and the customer find ways to improve activity coordination, which increases efficiency and reduces costs: “It is the way in which activities are performed and connected which creates the aforementioned values for customers: lower costs and increased efficiency” (Managing Director of Central Europe).

4.3. Mutual dependence and blurred boundaries between Logoplaste and its customers

Logoplaste and its customers become even more mutually dependent in economic terms, as the Managing Director explains: “Firstly,…we draw up an agreement according to which the customer lends Logoplaste the premises where the latter will carry out its activities. Secondly, our agreement regulates the pricing issues, which includes a variable and a fixed component. The variable component aggregates the variable costs incurred by Logoplaste's IPUs to produce the packages (maintenance and other variable overheads, such as energy costs and a particular profit margin). The fixed component of the price consists of the fixed costs of the IPU (the maintenance and other fixed overheads, such as labour costs, depreciation and interest, based on the investments made). Then the price is revised at the beginning of each year in order to reflect changes in the cost of inputs and annual volume adjustments”. Moreover, if new products are added or new investments are made, the price is changed and updated accordingly. In particular, raw material costs are monitored tightly and the price can be revised monthly to reflect changes in these costs. A Production Manager explains that: “Additional requests by the customer, such as for the inclusion of new products, colours, raw materials or any other situation or event such as changes in market conditions, may increase the complexity of production activities at the Logoplaste IPU and imply price renegotiations.” The same Plant Manager also clarifies that at year-end the quantities sold are compared with forecasts at year-start, because different production volumes can strongly influence unit production costs and hence Logoplaste's margins: “If the price paid by the customer is higher than the amount that should have been paid, then Logoplaste reimburses the difference. If the price paid is lower than what should have been paid, then the customer must pay Logoplaste the difference. In order to reduce the amounts to be paid or reimbursed at the end of each calendar year, the price may also be adjusted every month in accordance with the updated forecast volumes for the period.” However, the outsourcing contract allows customers to research market prices or search for alternative manufacturers and suppliers of similar products under similar conditions (specifications, quality and quantity). If the customer can produce evidence of a lower price, based, for instance, on the use of more advanced technologies, then

Marketing

Raw materials suppliers

Finance R&D team

Purchasing

Every local start-up firm emerges from Logoplaste–customer interactions and creates a reconfigured version of the supplier that fully matches the customer's particular needs. The resources and activities of the customer as well are reconfigured through interactions with Logoplaste, which creates high mutual dependence. According to the Managing Director, mutual dependence comes with long lasting contracts. Logoplaste's technical quality, industrial skills and performance are the main reasons for the longevity of these outsourcing relationships. Moreover, with longer contracts, Logoplaste is better able to reduce prices. Despite more aggressive contracts demanding more cost gains, Logoplaste can boast a history of almost full renewal of contracts (over 90% according to Logoplaste CEO). On the few occasions that contracts have been terminated, external factors, such as the customer stopping production, were responsible.

Production

Packaging Factory Quality control

HRM

Customer

Raw material gatekeeper

Financial team

Improvement team

HR

Logoplaste

Fig. 2. Activity links and actors involved in outsourcing relationships.

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the parties engage to find new production methods or make new investments in order to meet that price. “Several pressures and external changes may arise, but the continuing dialogue and continuous evaluation is important to strengthen the relationship” (Logoplaste CEO). This common search and joint investments bring Logoplaste and the customer closer together and blur their boundaries. Logoplaste's customer relationships also go through a learning process, where changes in one relationship may be transferred to other relationships whenever innovations result in mutual benefits, particularly those related to costs and productivity, or logistics. Most of the turbulent periods in relationships are related to the economic dimension of the contract, namely to the cost of the goods exchanged or to the cost and the productivity implications of the production and logistic processes. However, the CEO of Logoplaste stresses that “we never lose a contract due to economic issues” which reveals their commercial flexibility, willingness to cooperate and openness to sustain and adapt to all types of relationships. In order to keep a positive atmosphere in the relationship it is crucial that Logoplaste opens its books to its customers, unveiling its cost structure. Moreover, an improvement team, which includes people from various functions and activities on both sides, meets quarterly, and proposes action plans for potential savings and potential efficiency increases: “We look for opportunities in the electricity, the logistics, the work processes, the package design, etc.” (Logoplaste CEO). “A team is established on the first day of the contract and forms a “task force” composed of people from both Logoplaste and the customer. The target of the team is to reduce annual conversion costs, which are to be shared equally by the parties.” (Logoplaste Plant Manager). Moreover, Logoplaste is expected to propose improved technologies as soon as they become available. After investment depreciation, any other cost benefits that may arise from improvements in production efficiency are shared on an equal basis between the parties. The joint customer–Logoplaste team assesses the cost/benefit for Logoplaste's production from introducing any new projects such as new formats, colours or raw materials. The team also monitors any sudden increase in customer line efficiencies, or any other event that increases efficiency and/or causes extra complexity compared to the initial operating parameters. Particular challenges appear in human resource management, because the wholly integrated way in which Logoplaste coordinates its activities with those of customers blurs the control boundaries between the two parties. The customer's operations and the routines

of its managers and blue collar workers impinge on production and logistics by Logoplaste, and vice versa. Therefore, the employment relationship does not follow the traditional pattern “one employer–one employee”. Logoplaste's industrial employees work side-by-side with the customer's employees, often on the very same production line, sometimes sharing the same canteen and other social spaces. Such proximity and blurred boundaries influence workers' identity and commitment to organizational goals on both sides of the outsourcing relationship. Logoplaste's employees socialize within the customer's culture by being present at their social gatherings, for instance at Christmas parties. So, these employees' commitment and identity partly cut across organizational boundaries. Logoplaste also tries to offer the same levels of salary increases that the customer's workers receive. Job security, for Logoplaste employees too, depends on the specific outsourcing relationship: as most customers renew the contract, the jobs of the workers assigned to those customers' contracts are safe. It is technological improvements that usually account for reductions in the number of employees assigned to a specific contract, in which case redundant employees are often reassigned to another Logoplaste contract or even hired by the customer itself. Also, the customer stands for safety in the physical work context, and health and safety training is provided in association with the customer. Fig. 3 summarises the sources of mutual dependence and blurred boundaries between Logoplaste and its customers. All in all, Logoplaste's outsourcing relationships do not imply a straightforward externalization (i.e., “getting rid”) of activities by the customer, but the latter remains engaged in Logoplaste's processes, as much as Logoplaste constantly adapts to the customers' internal activities in order to be able to meet contract requirements in terms of quality, volumes and prices.

5. Analysis and discussion This section first highlights the importance of cooperation and interaction in outsourcing, that is, the need to account for the existence of a business relationship (Ford, 1980; Håkansson & Snehota, 1995) behind the phenomenon of outsourcing. Stressing this relational view is both one of our research purposes and an important starting point for approaching our other research purpose, namely highlighting the supplier's perspective on outsourcing. Our discussion then moves to providing explicit answers to our two research questions, namely how value is created and how the supplier interacts with the outsourcing company. In addressing these two questions, we extract three propositions, one related to the first question and two related to the second. These three propositions are meant to identify three key dimensions which can be assessed in any outsourcing relationship.

Fully customized plants

Flexible and transparent pricing

Long-term contracts (regularly renewed)

7

Mutual dependence and blurred boundaries

Improvement teams and other joint teams

HRM policies

Fig. 3. Sources of mutual dependence and blurred boundaries in Logoplaste's relationships.

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The Logoplaste case illustrates that outsourcing requires the supplier to closely cooperate with the outsourcing company. Subsequently, the parties make reciprocal investments and become mutually dependent. Cooperation, reciprocity and mutual dependence (Håkansson & Snehota, 1995) have been largely neglected as features of outsourcing, but our case demonstrates that they are fundamental to creating additional value, which would be more difficult or uncertain to obtain internally (vertical integration) or with alternative partners in an open market (cf. Richardson, 1972). In fact, Logoplaste's customer relationships have withstood the pressure of market prices. Logoplaste can rely on the relationship lasting around 10 years, during which time, together with the customer, Logoplaste devises new technical solutions to beat market alternatives. Thus, outsourcing can be based on complex coordination mechanisms between supplier and customer, which challenge the classic Coasian dichotomy (Coase, 1937) between market and hierarchy (cf. Powell, 1990) and the idea of clear-cut boundaries around firms (Chandler, 1992; Grossman & Hart, 1986). Relationships like Logoplaste's are by no means surprising from a perspective such as the IMP, which focuses on industrial markets instead of traditional “atomistic” markets consisting of a large number of more or less anonymous customers with whom suppliers deal at arm's length (Ford, 2002). IMP stresses the deep, complex and long-term interactions between parties, which lead to the emergence of stable business relationships (Ford, 2002; Håkansson & Snehota, 1995). Logoplaste's relationships display precisely these characteristics and can also endure “noise” or “stress” periods (as shown also by Gadde & Mattsson, 1987; Proença & de Castro, 2004, 2005). Having established the importance for outsourcing of cooperative relationships, we now turn to our first research question: how is value created within outsourcing? This question can be tackled by penetrating the activity layer of the relationship between Logoplaste and its customers, looking at their activity links (Håkansson & Snehota, 1995). These links were presented in Fig. 2, which shows complex connections between many activities of both companies, ranging from quality control to purchasing, and from product development to packaging operations. Logoplaste's activities are closely complementary to those of the customer, and as such they require the supplier to coordinate them in very detailed ways with those of the customer (Richardson, 1972). Information exchanges, meetings and joint teams between Logoplaste and the customer clearly indicate this type of sophisticated coordination. The empirical material also indicates that, even if the supplier Logoplaste now performs the outsourced production activities, the customer still remains highly involved in these activities. Customers obtain reduced distribution and inventory costs and other efficiencies not by simply “getting rid” of activities and their costs, but thanks to increased coordination between their remaining activities and those taken over by the supplier. Therefore, the provision of Logoplaste's services is accompanied by a strong customer engagement, which implies that value is co-created by both parties thanks to closer dialogues and coordination (Forsström, 2005; Payne, Storbacka, & Frow, 2008; Ramirez, 1999; Vargo & Lusch, 2008a). In this sense, externalizing an activity is not enough to create value: the supplier also needs to coordinate the overtaken activity with all others, which entails extensive mutual adaptations (e.g., joint teams, or co-location of wall-to-wall operations). Increased coordination and mutual adaptations are indeed preconditions for the outsourcing company to be able to exploit the specialization of the supplier's activities and competencies (Loasby, 1998). The supplier, in turn, becomes specialized in certain activities by performing them for several other outsourcing customers (via inter-customer learning and scale economies), but it must remain so flexible to adapt to each single customer if value is to be cocreated with the latter. All in all, the Logoplaste case shows that value creation in outsourcing is not simply a linear or unilateral process as in a value chain, but that it entails a more complex pattern of mutual and deep coordination between the involved parties (cf. Möller & Rajala, 2007; Normann & Ramirez, 1993; Ramirez, 1999). We can accordingly formulate our first proposition:

Proposition 1. Outsourcing does not create value simply by externalizing activities, but the supplier and the outsourcing company jointly co-create value via increased activity coordination. Moving to our second research question – how does the supplier interact with the outsourcing company? – the first answer derived from the Logoplaste case is that they interact within a complex, durable and deep business relationship (Ford, Gadde, Håkansson, & Snehota, 2003; Håkansson & Snehota, 1995). Moreover, the emergence of this type of relationship is accompanied by two specific interaction patterns, which are consequences of the supplier taking over the activities of the customer and of the increased coordination leading to the cocreation of value (Proposition 1). These two consequences are: (a) high mutual dependence between the two parties, and (b) the blurring of the organizational boundaries between the two parties, caused by this interdependence. We now discuss each of these two interaction patterns specifically. If outsourcing was simply a matter of cutting costs by getting rid of an activity to a supplier who can perform it at a lower cost, one would be surprised by the high costs, such as switching costs (Lam, Shankar, Erramilli, & Murthy, 2004), that Logoplaste's relationship would entail for its customers due to external dependence. However, at the same time, the supplier also becomes strongly dependent on each specific customer. In other words, the supplier and the customer become dependent on each other: the customer becomes totally dependent on the sole supplier Logoplaste for a critical part of its process (packaging), while each IPU is totally dependent on a single customer, without whom it would have no reason to exist. In this sense, Logoplaste offers its customers the possibility of not only simply de-integrating the packaging activity, but also of “integrating” at the same time the resources and skills of a stable supplier via a deep and long-term relationship (Håkansson & Snehota, 2002: 89). This quasi-integration or quasi-de-integration is centred on the creation of a quasi-organization (Blois, 1972), which is the business relationship that binds the supplier and the outsourcing company. The supplier, Logoplaste, creates several interdependencies with the customer: joint investments, co-location, and common costs that need to be allocated among the parties. Moreover, the quality and prices achieved by Logoplaste's IPUs become closely dependent on the customer's production volumes, rate of new products, existing equipment and workforce skills. In turn, the customer's overall costs become strongly dependent on the supplier's human resource management, central R&D, purchasing power and capability. A supplier taking over the activities outsourced by a customer makes adaptations and customer-specific investments in order to achieve efficiency in relation to that particular customer. This high dependence of the supplier is, however, counterbalanced by the fact that the customer is also highly dependent on a sole supplier who has created a unique, tailored solution for a core activity. Our second proposition can, therefore, be formulated in the following terms. Proposition 2. Outsourcing implies high mutual dependence between the supplier and the customer as the supplier takes over and performs in unique and tailored ways the customer's activities. The presence of strong mutual dependence between the supplier and the outsourcing company has important implications for how control is exerted, indeed shared (Håkansson & Snehota, 2002) by these companies, and hence for how the boundaries between the two organizations are defined. Strong interdependencies induce Logoplaste and customers to agree on an extensive “open book accounting” (Mouritsen, Hansen, & Hansen, 2001), whereby Logoplaste's operations become very transparent to the customer. While this practice opens the boundaries of an IPU for the customer, the boundaries also need to be open on the customer's side. Logoplaste literally performs its activities on the customer's premises or is co-located with the customer, and

Please cite this article as: Baraldi, E., et al., The supplier's side of outsourcing: Taking over activities and blurring organizational boundaries, Industrial Marketing Management (2014), http://dx.doi.org/10.1016/j.indmarman.2014.02.012

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employees from both companies continually work side-by-side, sharing the facilities, cultures and routines of both companies. Logoplaste accordingly manages human resources jointly with its customer, defying the linear pattern of “one employee–one employer” (Rubery, Earnshaw, Marchington, Cooke, & Vincent, 2002) as its boundaries towards the customer's organization are open (Rubery et al., 2004). At the same time, the commitment of the workers involved in the outsourcing relationship may shift from one organization to another (Guest, 1998), also depending on how they construct these boundaries themselves (Barley & Kunda, 2001). Next to the creation of a new company which is fully integrated in the customer's location and has a determinant impact on its operations and workforce, there are other practices that further blur the boundaries between Logoplaste and its customers: joint teams are created with personnel from both companies. These teams have open access to both sides of the relationship in their search for efficiency opportunities and if savings and benefits are achieved, the supplier shares them with the customer. The Logoplaste case also illustrates how capabilities can cross the firm's formal boundaries and emerge from the interaction between supplier and customer, who constantly learn from each other (Håkansson, Havila, & Pedersen, 1999). It becomes difficult, therefore, to set the boundaries of any of the two firms simply based on their proprietary assets (Grossman & Hart, 1986), employees (Rubery et al., 2004) or capabilities (which incidentally are clearly co-developed together with the counterpart). A firm's boundaries are not simply the result of unilateral discrete make-or-buy decisions on individual items or activities, as some literature on outsourcing would suggest (e.g., Contractor et al., 2010), but indicate how a firm relates to other actors (Araujo et al., 2003; Mota & de Castro, 2004) through inter-firm relationships. Reflecting the findings of Powell (1990) and Ritter (2007), Logoplaste's relationships to its customers entail a mix of coordination instruments, namely price (both contractually specified and market-related), authority (visible in the company hierarchy and employee relations) and trust between partners, which blur the boundaries between the supplier and the customer (Håkansson & Snehota, 2002). Therefore, boundaries are more about connecting a supplier to its outsourcing customers rather than separating it from them (Araujo et al., 2003). Within the frame of outsourcing, the boundaries of the outsourcing firm expand as it accesses the capabilities and resources of a supplier through an interfirm relationship. However, at the same time the boundaries of the supplier expand inside the outsourcing firm since the performance of the outsourced activities entails strong interdependencies between the two firms, as in the Logoplaste case. We can thus conclude our discussion by formulating our third proposition:

Proposition 3. High mutual dependence between supplier and outsourcing company makes their organizational boundaries become blurred so that the supplier can more easily perform activities, and have its capabilities accessible, for the customer.

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activities, mutual dependence arise which can eventually blur their organizational boundaries. These three features appear in varying degrees in all supplier–buyer relationships (Håkansson & Snehota, 1995), but become more salient in very close outsourcing relationships of the type examined in this study. Even though the three propositions are generated from a specific case, they hold an analytical generalizability in the sense that they unveil three main dimensions that can be assessed in any outsourcing relationship, but whose level will vary from case to case. These three dimensions are: (1) the degree of value co-creation via inter-firm coordination (which can be high or low depending on the specific outsourcing relationship, exactly like the other two dimensions), (2) the degree of mutual dependence between supplier and outsourcing company, and (3) the degree of blurredness of their organizational boundaries. Identifying and highlighting these relational dimensions of outsourcing are the main contribution of this research. Whereas the Logoplaste case features outsourcing relationships that score very high on all three dimensions, they are relevant in all outsourcing relationships and measuring their strength can help identify both challenges and possibilities in handling such relationships, both for the supplier and the customer. Recognizing the relational nature of outsourcing and the three dimensions above also implies different conclusions than the extant literature on key issues such as boundary setting: for instance, standardized interfaces between activities may well influence customers' “make or buy” choices (Contractor et al., 2010) before initiating an outsourcing relationship; but standard interfaces become less relevant in the working relationship, when a supplier's customer-specific adaptations create several unique interfaces necessary for co-creating value. The inter-firm coordination and mutual dependence dimensions of outsourcing can also add to the literature on offshoring, which focuses on ex ante drivers of supplier location decisions (see Demirbag & Glaister, 2010): geographically (and culturally) distant suppliers may appear as a good choice ex ante, but distance-related problems in the working relationship may hinder coordination and thereby jeopardize value creation, making also mutual dependence harder to handle constructively. This suggests the existence of relational limits to offshoring to low-cost countries, as problematic supplier–customer interactions may negatively affect flexibility, speed and innovation (cf. Dabhilkar et al., 2009). Finally, our findings complement the literature focusing on customers' ex ante choice between different forms of outsourcing relationships (e.g., Mudambi & Tallman, 2010): by focussing on what happens after that choice, that is, during a working relationship, we could show that the boundaries between supplier and customer can become blurred as in contractual relationships, despite the parties retaining juridical independence. As illustrated by our case-study (a typical contractual alliance), what drives boundary setting is not so much the ex ante choice of juridical form (supply contract vs equity JV), but the daily interaction between the parties, their resources and their activities. Contractual outsourcing relationships enable handling tacit knowledge and high risk of opportunism by blurring de facto, rather than legally, interorganizational boundaries.

6. Conclusion 6.1. Further research By analysing the Logoplaste case this paper developed three propositions which also identify three key dimensions of outsourcing, especially if this phenomenon is viewed from a relational perspective and from the point of view of the supplier. The propositions concern these three issues: (1) value co-creation via increased supplier–customer coordination, instead of simply externalizing activities; (2) high mutual dependence due to supplier's taking over activities; and (3) blurring of organizational boundaries because of high mutual dependence. The three dimensions are also related to each other, and describe important consequences of the relational nature of outsourcing. In fact, when the supplier closely interacts with the outsourcing company to create value together and thereby increase the coordination among their

Our findings rely on a single case study and therefore need further research in order to become fully transferable to other settings. First of all, other cases of outsourcing with higher and lower degrees of the three dimensions identified above deserve to be investigated. This investigation should ideally lead to a typology of outsourcing relationships, with single types characterized by different degrees and combinations of the three dimensions. In order to facilitate comparisons across various instances of outsourcing, a second avenue for further research is to develop more elaborate constructs or scales to measure the three dimensions of “value co-creation via increased coordination,” “mutual dependence,”

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and “blurred boundaries.” A direct suggestion derived from this study is to start from the indicators and practices that appear in our empirical material: for instance the strength of activity link (for the first dimension), joint investments and pricing methods (for the second), open book accounting, joint teams and complex employment situations (for the third). Finally, further research should investigate how the particular features of the relationship (e.g., age, depth and volumes), as well as of the single counterparts (e.g., their size, organizational structure and strategies) specifically affect value creation in outsourcing. 6.2. Managerial implications Our implications are addressed to suppliers of “strategic outsourced services”, such as packaging and related activities. In brief, Logoplaste established a business model based on providing services to industrial customers through tailor-made fully integrated production units that operate in strict coordination with the customer's activities and blur the boundary between the two organizations to a point that these units develop, grow and decline with the customer's operations. The success of this business model is proven by the high value created for customers and Logoplaste's considerable growth, even if the model has also transformed a manufacturing firm into a service provider. In fact, at the core of this business model lies not the physical product being delivered (i.e., the package), but three other key elements: (a) the heavy investments in infrastructure made by the supplier, (b) the activities and processes performed for and with the customer to co-create value, that is, the service provided (Grönroos, 2007; Ramirez, 1999; Vargo & Lusch, 2004, 2008b), and (c) the business relationship (Håkansson & Snehota, 1995) between the supplier and the outsourcing company. The shift of manufacturing firms to extend the service dimension of their offer has already been highlighted by several authors (CampbellKelly & Garcia-Swartz, 2007; Chesbrough & Rosenbloom, 2002; Oliva & Kallenberg, 2003; Reinartz & Ulaga, 2008; Teboul, 2006). However, the concomitant trend of customers outsourcing more of their strategic processes (Rodríguez & Robaina, 2006) and increasing their procurement of services (Van der Valk, 2008) makes business relationships even more relevant for co-creating value (Grönroos, 2011; Vargo & Lusch, 2008a). Moreover, when outsourced services and business relationships become the core of a company's business model, a new set of managerial issues arise, which are related to the three propositions and dimensions identified in this paper: (1) The firm becomes a “solution provider”, instead of a “producer of goods”, and as such it has to focus on deeply understanding customer processes, activities and needs in order to develop value propositions together (Ramirez, 1999; Vargo & Lusch, 2004, 2008b). (2) The productive infrastructure of the firm is not valuable per se, that is, as an investment, but only to the extent that it can be utilized by the outsourcing company and by the supplier as a tool to create solutions and value specific to that customer. (3) A long-term perspective in the interaction between supplier and outsourcing company is necessary because of the large joint investments required to mutually adapt both companies' activities, and hence the longer pay-back times. (4) A particular challenge for suppliers lies in winning the customer's resistance to becoming more externally dependent on specific providers, while accepting themselves to become more dependent on specific customers, which requires efforts for developing trust among the counterparts (cf. Baraldi, 2008: 119–21). (5) A further challenge for both the supplier and the outsourcing company is to accept giving up absolute control on internal activities and resources as a consequence of their blurred organizational boundaries (Håkansson & Snehota, 2002). Conceding to

the requests of counterparts (Ritter & Ford, 2004) can present an opportunity to influence their activities and resources as a way to achieving higher coordination and creating unique values.

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