Relational versus structural embeddedness: the roles of uncertainty in information technology outsourcing

This thesis was submitted for the degree of Doctor of Philosophy and awarded by Brunel University.In response to uncertainty imposed on ITO business environments, it is reported that relational and structural embeddedness play an important role in safeguarding against opportunistic behaviour and improving long-term performance. A firm can outsource its IT services to a partner who is believed to be reliable and competent among existing parties for whom it has the outsourcing histories in the perspective of relational embeddedness. In contrast, from the viewpoint of structural embeddedness, a firm can collect information on multiple alternative candidates through the observation of their network linkages and the information transmission via third parties although it has no outsourcing histories for them. Also, based on this information, it can outsource its IT services to a new partner who could make better performance as well as who is considered reliable. However, the building and maintenance of new outsourcing relationships require resources which could be better used for the refinement of existing outsourcing relationships. Therefore, a firm faces the tension between the two types of embeddedness. Prior studies addressing relational and structural embeddedness in the context of ITO are mainly based on relational exchange theory and social capital theory respectively. They also provide a body of empirical evidence rooted in these theories. However, each ITO research stream on relational or structural embeddedness has mainly focused on its own advantages in response to uncertainty. That is, the conditional superiority of each type of embeddedness has not been investigated in ITO studies. Furthermore, although they have been compared in other research contexts, the main research focus has been on which is preferred at the high level of uncertainty rather than which leads to better performance according to the type and level of uncertainty. Therefore, this research aims at answering the following research question in the context of ITO: which of the two types of embeddedness is more appropriate in improving long-term performance in the presence of uncertainty of which the type and level are not uniform across a wide range of outsourced IT services? In particular, the following uncertainties from two different sources are introduced for the comparison between the two types of embeddedness: the uncertainty stemming from the unpredictability of technological requirements and the uncertainty originating in the difficulty in measuring performance. In this research, they are called “technological unpredictability” and “measurement difficulty” respectively. It is widely accepted that the two uncertainties discovered from transaction cost theory and agency theory increase the possibility of opportunism and threaten performance. Therefore, the different levels of technological unpredictability and measurement difficulty can create an ideal platform to investigate the conditional superiority of relational or structural embeddedness.In order to address the research question, an ITO network is simulated. Firms in this network perform the role of a coordinator or a partner in establishing ITO consortia to respond to outsourcing opportunities with the different levels of the two uncertainties. As coordinators, firms take the partner selection and control strategy based on relational or structural embeddedness, which is called “the relational strategy” or “the structural strategy” in this research. They also compete with each other to maximise their longterm profits. As partners, firms behave cooperatively or opportunistically. Their decision-makings and payoffs are modelled through a game-theoretic method. In addition, a full factorial design of experiments is applied for efficient simulation experiments and systematic analyses. Consequently, the simulation results show that the superiority of each type of embeddedness is different according the type and level of uncertainty. The research on relational embeddedness emphasises the advantage of trust and commitment generated by the repetition or long-term maintenance of outsourcing relationships with reliable partners as shown in the literature on long-term cooperative ITO relationships. The findings in this research support this argument when measurement difficulty is at the high level and technological unpredictability is at the low level. On the other hand, the study on structural embeddedness focuses on the use of (potential) partners’ network positions and information transmitters as revealed in the literature on network-based ITO relationships. The simulation results support this claim when technological unpredictability is at the high level regardless of the level of measurement difficulty. Especially, at the high levels of both uncertainties, structural embeddedness enables better performance. This research contributes to the literature in three research areas: (1) IT outsourcing, (2) network dynamics and (3) environmental adaptation. Firstly, this research examines the conditional superiority of each type of embeddedness at the different levels of technological unpredictability and measurement difficulty. Therefore, the findings resolve the tension between the two types of embeddedness in ITO studies. Especially,this resolution can provide possible theoretical answers to why an ITO partnership based on relational embeddedness fails in spite of its popularity in the industry and academia, and in which condition structural embeddedness is preferred in ITO business environments. Secondly, the simulation results reveal that some coordinators preferring relational embeddedness consolidate their existing network ties while others favouring structural embeddedness increase the number of network ties. Therefore, this research improves an understanding of how the strength and structure of network ties at the egocentric level can be changed by the type and level of uncertainty. Thirdly, the relational and structural strategy in this research focus on the utilisation of present partners and the search for alternative partners respectively. Therefore, the concepts underlying the two types of embeddedness are in line with those underlying exploitation and exploration. The examination on the relative advantage of each type of embeddedness can extend the general argument that more resources should be invested in exploration than in exploitation to adapt to uncertain business settings