Information & Management 50 (2013) 275–284

Outsourcing capabilities, organizational structure and performancequality monitoring: Toward a fit model

Albert Plugge a,*, Harry Bouwman a, Francisco-Jose Molina-Castillo b

a Faculty of Technology, Policy and Management, Delft University of Technology, Delft, The Netherlandsb Dpto. De Comercializacion e Investigacion De Mercados, University of Murcia, Murcia, Spain

A R T I C L E I N F O

Article history:

Received 11 February 2012

Received in revised form 8 October 2012

Accepted 16 April 2013

Available online 9 May 2013

Keywords:

IT outsourcing

Fit

Capabilities

Organizational structure

Performance

Providers

A B S T R A C T

Provider IT services has grown substantially, since the advent of IT. However, research on it has been

limited and mainly qualitative. A recurring provider problem was identified: a lack of attention to the

performance of the IT they provide. Due to uncertainty or change in the client environment, the fit

between capabilities and organizational structure of outsourcing providers must be balanced. Here we

present the results of an exploratory quantitative empirical study among outsourcing experts involved

with three different types of IT outsourcing providers: domestic, offshore, and global.

We developed instruments that measured some core concepts such as outsourcing capabilities,

organizational structure dimensions, and performance monitoring. We then used these in analyzing data

gathered from three different types of IT outsourcing providers. We found that service providers who

establish a fit between their outsourcing capabilities and their customers’ organizational structures are

less susceptible to problems resulting from unexpected change in the clients’ environment.

Our results therefore extended our understanding of how critical determinants in provider

organizations are related to continuous quality monitoring of their performance.

� 2013 Elsevier B.V. All rights reserved.

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1. Introduction

Most research in outsourcing has focused on customer-relatedaspects. Since these aspects have a significant effect on serviceprovider organizations, regular communication between clientsand providers is necessary. Therefore, clients are likely to discussmarket developments and business needs with their serviceproviders regularly. However, few studies in the field of out-sourcing relations include the view of providers [3,5].

It has been noted that a lack of sustainability in serviceperformance; i.e., continuous delivery of high quality services overtime, has been a recurring problem that occurs due to do a lack ofcapabilities of IT providers and/or the way in that they areorganized [4]. A lack of provider performance will result in failureson the client side. When the quality of service delivery decreasesthe costs to overcome the resulting problems will increase. As aresult, the lack of provider performance may have a negativeimpact on the client as the time-to-market of products and servicesincrease. Therefore, performance monitoring and awareness of theimportance of high quality performance is of utmost importance.

We argue that IT providers who manage to establish a fitbetween outsourcing capabilities and their own organizational

* Corresponding author. Tel.: +31 152782794; fax: +31 152783741.

E-mail address: a.g.plugge@tudelft.nl (A. Plugge).

0378-7206/$ – see front matter � 2013 Elsevier B.V. All rights reserved.

http://dx.doi.org/10.1016/j.im.2013.04.006

structure are less susceptible to change in their clients’ environ-ment. Moreover, this requires continuous monitoring of provider’sperformance and thus IT providers who monitor their client’sdevelopments are likely to be able to adapt to changingcircumstances and provide high quality performance.

We decided to focus on how providers adapt their outsourcingcapabilities and organizational structure in order to deal with theuncertainties that their clients face and consequently increasetheir performance. The leading research questions were:

� How does a service provider adapt its outsourcing capabilities inorder to take into account uncertainties resulting from changesin their clients’ needs?� How do adjustments in service provider outsourcing capabilities

affect their organizational structure?� How does a service provider monitor the performance of an

outsourced project under uncertainty?

2. Theoretical framework

2.1. Contingency theory

The central theme of contingency theory is that all anorganization’s components must ‘‘fit’’ well together or it willnot perform optimally. Various types of fit include person-team fitand task-technology fit that links IS usage with individual

A. Plugge et al. / Information & Management 50 (2013) 275–284276

performance. The concept of fit can be used to examine if changesin the outsourcing capabilities of service providers occur whenthere are changes in the organizational processes and structure [7].A fit between a service provider’s capabilities and its organiza-tional structure will positively affect organizational performance.A misfit, however, may negatively affect the provider’s competitiveposition and result in failures on the client side. Here, we focusedon the fit between providers’ outsourcing capabilities and the waythey are internally organized.

2.2. Providers’ outsourcing capabilities

Uncertainty due to environmental change forces firms toallocate greater resources to retain high performance. Suchexternal contingencies are the major reason that a firm must beadaptable. Providers need to adapt their activities to interact easilywith their client in order to maintain effective outsourcing. Fromthe perspective of the provider an outsourcing capability is those‘IT capabilities that refer to an assembly of skills, techniques, andknow-how, developed over time, which enable an organization toacquire, deploy, and leverage IT investments in pursuit of businessstrategies’ [8]. Although provider capabilities are important therehas been little insight provided by empirical past research.Apparently research in providers outsourcing capabilities is stillvery limited, as was also concluded by Lacity et al. [9]. Theyshowed that research has been directed to IS human resourcemanagement capability; supplier’s IS technical and methodologi-cal capability, and domain understanding. In the StrategicManagement literature on outsourcing capabilities the interpreta-tion of capabilities is limited; system architecture, systemreliability, user training and consulting, value and quality ofproject management, and relationship management have beenseen as core capabilities [18]. In econometric analyses of ITknowledge transfer between providers and clients, IT knowledge isan important determinant of productivity [2,10].

However, the way in which capabilities are conceptualized isgeneric, and therefore we followed the view of Feeny’s et al. [4]who considered a capability for outsourcing as building on twelveprovider outsourcing capabilities related to three organizationalcompetences: delivery (which determines the extent to which aprovider is able to react to a customer’s day-to-day need foroperational services, including business management, domainexpertise, and behavior management), transformation (includingtechnology exploitation, process improvement, program manage-ment and customer development), and relationship (focusing onthe relationship between provider and client, including planningand contracting, organizational design, governance and leader-ship). Palvia et al. [16] developed a three level capability-quality-performance model. Their provider capabilities were relationship,contract and IT management. Ai et al. [1] discussed IT based skills(communication, cultural and collaboration related) for knowledgesharing, its coordination and expertise management.

However, in our effort we focused on providers outsourcingcapabilities and organizational structure with respect to perfor-mance, under uncertainty.

2.3. Providers’ organizational structure

Formal organizational structure and the roles that people play,including the competences and responsibilities involved, havebeen investigated extensively in organizational literature. Firmsselect their organizational structure to achieve internal coordina-tion, which is imperative in realizing value from an outsourcingcapability. Moreover, coordination is necessary in attempting toachieve effective activities, such as the delivery of day-to-day ITservices. Several factors have been shown to matter, such as the

degree of formalization, specialization, standardization, number oflayers in the hierarchy, horizontal integration, and professional-ism. The three generally considered important factors: the locus ofdecision-making (the degree to which decisions are made highversus low in the organization), level of hierarchy of a decision(whether the organization has many or few levels of management),and horizontal integration (the degree to which departments andworkers are functionally specialized versus integrated in theirworks, skills and training) were deemed relevant in our study. Theorganizational structure of an IT provider can be seen as amoderator of the relationship between the actions of the client andthe provider’s outsourcing capabilities that were designed tosupport the client. Therefore, we focused on examining the impactof the fit between the outsourcing capabilities and organizationalstructure and its effect on organizational performance.

2.4. Providers’ performance

Few studies have empirically examined the impact of the fitbetween client and provider’s organizational structures andorganizational performance. Capabilities and organizational struc-ture can be perceived as influencing factors on firm performance.Research on IS performance has suggested that the ability toleverage distinctive internal capabilities is related to environmen-tal dynamism of the firm’s organizational performance andultimately the provisioning of services [11,14]. Gaining a highquality of outsourcing performance should result in long-termbenefits for a provider. However, it is difficult to measure the effectof outsourcing capabilities and organizational structure on firmperformance. Ai et al. [1] used product success and personalsatisfaction as indicators for performance, but did not describetheir measurement tool.

In our work, we used a proxy for performance by looking intothe importance that is attributed to a performance measurement.This can be considered as an alternative to direct measurement.

2.5. Development of hypotheses

2.5.1. Relations between client environment and provider outsourcing

capabilities

The environment of organizations, such as their market,changes frequently. So it is of key importance for an organizationto know what changes take place in their environment, and whichresources and capabilities need to be modified. Lacity et al. [9]asserted that this is under-researched. Moreover, outsourcingliterature is more focused on provider competition than under-standing the competitive environment in which clients have toperform. According to Gottschalk and Solli-Saether [6] corecompetence management and provider resource managementare critical factors in outsourcing relations. Therefore, we arguethat IT outsourcing providers have to re-assess their outsourcingcapabilities regularly and strengthen them, as necessary, to adaptto the changing needs of their client. Therefore:

H 1a: The outsourcing service provider’s sensitivity to change and

uncertainty, which a client has to deal with, will lead to adjustment in

service provider outsourcing capabilities.

Thus providers have to manage their internal adaptabilityprocess to modify their capabilities. In doing so, adaptabilityprocedures can guide the internal adaptability processes that, inturn, require regular attention and investment. The outsourcingprovider’s responsiveness and the adaptability of their employees,is a condition for the adjustment of outsourcing capabilities [17].As Zhao et al. [19] argue uncertainties caused by a competitiveenvironment have to be mitigated, and therefore a company thatoutsources its IT function must adopt an aggressive outsourcingstrategy and requires an agile provider. Thus:

A. Plugge et al. / Information & Management 50 (2013) 275–284 277

H 1b: The outsourcing service provider’s internal focus on

adaptability will lead to adjustment in service provider outsourcing

capabilities.

Exogenous changes in the client environment may lead torefocusing of activities. Clients must adapt to their environmentregularly to innovate their business. Consequently, developmentsat the client side also affect the client’s relation with the serviceprovider, and providers have to adapt their outsourcing capabili-ties. This leads to:

H 1c: Exogenous client developments will lead to adjustment in

service provider outsourcing capabilities.

2.5.2. Relationship between providers’ outsourcing capabilities and

providers’ organizational structure

Based on the generic adaptive structuration theory applied to IS,we assumed that day-to-day practices lead to changes ininstitutional arrangements and organizational structures. Wetherefore argue that changes in outsourcing capabilities, likenew technological IT delivery and technology exploitation affectthe degree in which decisions are made and their outcomes areinfluenced. Depending on the extent of the change, providers mustdecide if the locus of decision-making is high or low in theorganizations. Therefore:

H 2a: Adjustment in service provider outsourcing capabilities will

have an effect on service providers’ organizational decision-making.

In the same way we argue that adjustment in service provideroutsourcing capabilities will influence the number of layers in theorganization. It is assumed that a shift in providers’ capabilitieswill also lead to an adaption of the way in which the provider isinternally organized. By adjusting from a hierarchical to a morelean and adaptive organization the provider finds it easier torespond to changes in the environment.

H 2b: Adjustment in service provider outsourcing capabilities will

lead to a reduction of service providers’ organizational hierarchy.

When the number of layers in hierarchy is reduced, it might beassumed that fewer people are involved in the provisioning of ITservices. The level of horizontal integration of departments andemployees are thus functionally integrated. To validate this wehypothesized:

H 2c: Adjustment in service provider outsourcing capabilities

will lead to horizontal integration within the service provider

organization.

We expect that the organizational structure of the providerwould have to be adjusted to focus on client developments.Managers design and evolve specific organizational arrangementsto meet their organization’s environmental (and strategic)imperatives. We propose that there is also an effect of theirclients’ external environment on the structure of providers. Theservice provider might have to adjust the way in which decision-making is made, the number of hierarchical levels, and their degreeof horizontal integration. Therefore:

H 2d: Exogenous client developments will lead to adjustment in

service provider organizational structure.

2.5.3. Relationship between organizational structure and

performance monitoring

Establishing a fit between outsourcing capabilities andorganizational structure is not enough; there is a need forcontinuous monitoring of provider’s performance. We argue,therefore, that IT providers who monitor their client’s develop-ments are likely to be able to adapt to changing circumstances andrealize a high quality monitoring of performance by changing theirorganizational structure [13]. Thus decision-making will befocused on relevant KPIs avoiding to provide organizational levelswith their own KPIs, which might be operational, or related tobusiness model or strategy [12]. We broke down the more generic

hypothesis that organizational structure directly relates toperformance into sub-hypotheses:

H 3a: Decision-making is positively related to the monitoring of the

performance of an outsourcing arrangement.

H 3b: Level of hierarchy is positively related to the monitoring of

the performance of an outsourcing arrangement.

H 3c: Horizontal integration is positively related to the monitoring

of the performance of an outsourcing arrangement.

We also expect that the outside-in capabilities of the serviceproviders’ employees would affect the performance of providersdirectly [15]. As a result of developments that occur on the clientside, the clients experience the effect of the providers’ employeeswillingness and ability to respond to developments and relate theoutcome to the providers’ performance. Using the monitoring ofperformance as a proxy, we hypothesized:

H 3d: Attention for client developments that an outsourcing service

provider has to deal with will be positively related to the monitoring of

the performance of an outsourcing arrangement.

In Fig. 1 we summarize the core constructs of the model thatforms the starting point of our research. We were aware that thecausality of some of the hypotheses might be in the oppositedirection of our proposed direction; therefore alternative modelswere tested using SEM.

3. Research methodology

3.1. Questionnaire

Data was collected between June and September 2008 bymeans of an online questionnaire. It was distributed to theemployees of three outsourcing providers. The survey wasavailable in two languages: Dutch and English, as participantswere working with a domestic, an offshore, and a global provider.In order to guarantee that the two versions of the questionnairewere identical, the questionnaire was translated from Dutch toEnglish and back again. Inconsistencies were discussed andresolved. The survey consisted of 11 parts, divided into four mainsections and it was included with a short cover letter thatexplained the purpose of the study. The first section addressed theextent to which the respondents perceived changing clientcircumstances. The second section investigated how changingclient circumstances affected the outsourcing capabilities of theservice provider. The third focused on how the capabilities wereorganized, while the fourth addressed the importance of theoutsourcing performance. The questionnaire was refined during apre-test and completed by 10 respondents that represented bothscientists and outsourcing professionals. While a vast majority ofthe questions remained identical, minor modifications were madeto fit the particular departments, vocabulary, terminology, andpractices of the service providers. Moreover, considering the needfor clarity, and preventing the terminology from being interpreteddifferently, a glossary of definitions was included.

The questionnaire was structured in such a way that, similarscales for client developments were used, but the framing thatpreceded their items was formulated in such a way that a directconnection was made between exogenous client developmentsand capabilities, exogenous client developments and organiza-tional structure, and exogenous client developments and perfor-mance. So the exogenous client developments were measuredthree times but with a different contextual framing. Therefore,three separate indicators were introduced in Fig. 2.

3.2. Unit of analysis, and sample

A major issue with regard to the analysis of the model is that theorganization is the unit of research. However, our research is a

Service

providers

outsourcing

capabili ties

H 1a

H 1b

Sensitivity

to change

Internal focus

on adaptab ility

Exogenou s clien t

developmen ts Horizontal

integration

Decision

making

Level of

hierarchy

Impo rtan ce of

Performance

mon itoring

Exog enou s clien t

developmen ts

Exogenou s clien t

developmen ts

H 1c

H 2a

H 2b

H 2c

H 3a

H 3b

H 3c

H 2d H 3d

Fig. 1. Research model.

A. Plugge et al. / Information & Management 50 (2013) 275–284278

component of a more extensive case study which focused on adomestic provider, an offshore provider, and a global provider. Weselected these three types of companies because we felt that theremight be differences in focus between them. The response for eachof the sub-samples was balanced (each had the same sub-sample ! N = 45). Then, we selected only those provider partici-pants that had relevant knowledge and experience within theprovider companies. Two profiles for respondents were sketched.Only participants that matched these profiles were asked tocomplete the survey. The first profile dealt with managers at theexecutive and middle management levels who were activelyinvolved in national or international outsourcing arrangements.The second profile was of provider employees who were involvedin outsourcing arrangements from an organizational, technical, orfinancial perspective. In total 248 invitations were distributed. The

Service

providers

outsourcing

capabili ties

Significant rela�onships

Non Significant rela�onships

R2=0.80

0.55 (7.49)

0.77 (6.97 )

0.78 (8.19)

0.37 (3.66 )

0.77 (7.63 )

Sensitivity

to change

Internal focus

on adaptab ility

Exogenou s clien t

developmen ts

Fig. 2. Main eff

sample contained 135 respondents, originating from four coun-tries, and three different providers. This was a response rate of 54%.Countries included in the sample were the Netherlands (114participants), the United Kingdom (10), Ireland (3 participants),and India (8 participants).

We decided to use a questionnaire and a sample of respondentsfrom the companies to test our hypothesis in a subjective way, asan addition to cases studies, focusing on the perceptions andopinion of the employees. We are aware that this created multi-level issues. Therefore, in order to control for possible bias betweenthe three providers, we used analysis of variance to establish if biastoward one of the providers occurred for the used sets. The ANOVAanalysis, making use of the Games/Howell procedure, showed thatthere were differences with respect to the sensitivity to change,and adaptability. There were no differences with regard to client

R2=0.40

0.44 (2.66)

0.26 (3.07)

Horizontal

integration

Decision

making

Exogenou s clien t

developmen ts Exogenou s clien t

developmen ts

Level of

hierarchy

Impo rtan ce of

Performance

mon itoring

ect results.

A. Plugge et al. / Information & Management 50 (2013) 275–284 279

developments. Outsourcing capabilities also showed significantdifferences between the three companies. With respect toorganizational structure concepts we saw differences in deci-sion-making and horizontal integration, but not with respect tolevels of hierarchy. We also saw differences with respect toperformance.

3.3. Measurement development

Most researchers agree that common method variance is apotentially seriously biasing threat in behavioral research. Weused several procedures to examine the possibility that commonmethod bias threatened the interpretation of our results: (1) theHarman one-factor test, (2) a confirmatory factor-analyticapproach to Harman’s one-factor test and (3) the single methodfactor approach. The rationale for the first test was that if commonmethod bias poses a serious threat a single latent factor wouldaccount for all manifest variables or one general factor wouldaccount for most of the covariance among the measurements. Inour case, the one factor model obtained using principal compo-nent analysis revealed several factors in its non-rotated factorsolution. However, this is considered a weak test. More recently,some researchers have used confirmatory factor analysis (CFA) asmore sophisticated. A worse fit for the one-factor model wouldsuggest that common method variance does not pose a seriousthreat. The fit was considerably worse for the uni-dimensionalmodel than for the measurement model, suggesting that commonmethod bias was not a serious threat. Despite its apparent appeal,there were several limitations in the previous procedure.Therefore, we used the single method factor approach. Thisinvolves adding a first-order factor with all of the measures asindicators, to the theoretical model. The fit was considerablyworse for the single method factor approach than for themeasurement model, suggesting that common method bias wasnot a serious threat in our study. Overall, we can conclude thatcommon method bias did not threaten the interpretation of ourresults.

3.4. Measurement model

To refine our measures, we conducted a confirmatory factoranalysis (CFA) using LISREL 8.8 to determine the validity andreliability of our measures. As can be seen in Table 1, the results ofthe ten factor model provided an acceptable fit (x2(305) = 443.22CFI = 0.97 RMSEA = 0.05 RMSEA range = (0.04–0.06). The factorloadings of each individual indicator on its respective constructwere statistically significant (p < 0.001) establishing convergentvalidity. With regard to the construct ‘Exogenous client develop-

ments’ we used three separate scales. The items were identical,however the framing of the three-item scales, e.g. for capabilities(items 5.1–5.3), organizational structure (items 9.1–9.3) andperformance (items12.1–12.3), was different for the three separatescales.

Since our work contained several multi-item reflective scales,we investigated their psychometric properties through thecomposite reliability index and AVE. Both indexes exceeded therecommended benchmarks of 0.60 and 0.50 respectively. Evidenceof discriminant validity among the dimensions was provided bytwo different procedures. First, the 95% confidence intervalconstructed around the correlation estimate between two latentvariables never includes value 1. Second, the comparison of thesquare root of the AVE, as shown in the diagonal of Table 2, with thecorrelations among constructs (i.e., off-diagonal elements)revealed that the square root of the AVE for each componentwas greater than the correlation between components, in supportof discriminant validity. Overall, these results provided adequate

evidence of convergent and discriminant validity as well asreliability.

4. Results

4.1. The structural model

We tested the structural model, (Fig. 2) and its alternativemodels in which the causality of the hypotheses was reversed. Thefit indices for the overall model yielded the best result. Theindicators collectively indicated that the structural model had anacceptable fit. Most hypothesized effects were significant. Thecoefficient on the paths from construct ‘Sensitivity to change’ andconstruct ‘Internal focus on adaptability’ to construct ‘Service

provider outsourcing capabilities’ is 0.55 (t = 7.49, p < 0.01) and0.77 (t = 6.97, p < 0.01) respectively confirming hypothesis 1a andhypothesis1b. The path from construct ‘Exogenous client develop-

ments’ to construct ‘Service providers outsourcing capabilities’ wasnot significant, thus hypothesis 1c was not confirmed. The R2

measure of construct ‘Service provider outsourcing capabilities’(0.80) can be indicated as robust. Similarly, the paths fromconstruct ‘Service provider outsourcing capabilities’ to ‘Decision-

Making’, ‘Hierarchical levels’ and ‘Horizontal integration’ were 0.78(t = 8.19, p < 0.01), 0.37 (t = 3.66, p < 0.01) and 0.77 (t = 7.63,p < 0.01) respectively. Thus, hypotheses 2a, 2b and 2c weresupported.

Only one of the three hypothesized antecedents of construct‘Importance of Performance monitoring’ was significant. Thus,hypothesis 3c that related construct ‘Horizontal integration’ withconstruct ‘Importance of Performance monitoring’ was significant0.44 (t = 2.66, p < 0.01). Explained variance for construct ‘Impor-

tance of Performance monitoring’ (0.40), can be indicated as solid.However, the paths coefficients from construct ‘Decision-making’and construct ‘Hierarchical levels’ to construct ‘Importance of

Performance monitoring’ were 0.08 (t = 0.53, p > 0.10) and 0.12(t = 1.30, p > 0.10) respectively failing to support these relation-ships, which mean that hypotheses 3a and 3b were not supported.Furthermore, the path from construct ‘Exogenous client develop-

ments’ to the set of construct ‘Decision-making’, construct‘Hierarchical levels’ and construct ‘Horizontal integration’ wasinsignificant 0.15 (t = 1.31, p > 0.10), which made us rejecthypothesis 2d. There is a decrease in explained variance in generalas one shift from left to right in our structural model. This isbecause the construct ‘Decision-making’, construct ‘Hierarchical

levels’ and construct ‘Horizontal integration’ were all factors thatrefer to organizational dimensions (the moderating variable in ourstructural model). As the relationship between construct ‘Decision-

making’, construct ‘Hierarchical levels’, construct ‘Exogenous client

developments’ and construct ‘Importance of Performance monitoring’were not significant, this result might affect the explained variancefor that specific construct (‘Importance of Performance monitoring’).Finally, the path from construct ‘Exogenous client developments’ toconstruct ‘Importance of Performance monitoring’ was significant0.26 (t = 3.07, p < 0.01) which supported hypothesis 3d.

The structural model explains 80% of the variance in ‘Service

provider outsourcing capabilities’. The structural model alsoexplains 40% of the variance in the final dependent variable‘Importance of Performance monitoring’. The results of the structuralmodel, indicate that ‘Service providers outsourcing capabilities’ fullymediated the relationship between the antecedents and con-sequences of ‘Service provider outsourcing capabilities’. Also‘Horizontal integration’ helped us explain the indirect effect of‘Service providers’ outsourcing capabilities’ on ‘Importance of

Performance monitoring’.This study meets the generally accepted tests of statistical rigor,

while at the same time providing a parsimonious model.

Table 1Measurement model including constructs, items, loadings and reliability estimates.

Construct code Items and

questions

Description SCR AVE Standardized l

C 1 Item Sensitivity to change 0.88 0.71

Q 2.1 Provider monitor changes in client circumstances 0.90

Q 2.3 Changing client circumstances are discussed with clients 0.75

Q 2.4 Assessment of changing client circumstances on IT service provisioning 0.87

C 2 Item Internal focus on adaptability 0.80 0.58

Q 2.6 Provider encourage internal cooperation between working groups in

different countries

0.67

Q 2.8 Provider encourages employees to take a proactive attitude 0.69

Q 2.12 Management stimulates employees to deal with customer requirements 0.90

C 3 Item Exogenous client developments on outsourcing capabilities 0.78 0.54

Q 5.1 Sourcing strategy 0.59

Q 5.2 Innovation 0.73

Q 5.3 Required flexibility 0.86

C 4 Item Service providers outsourcing capabilities 0.86 0.67

Q 4.2 Continuous improvement 0.74

Q 4.4 Adaptability to changing clients needs 0.79

Q 4.6 Capability improvement by training 0.61

C 5 Item Decision-making 0.80 0.67

Q 7.1 Management is experienced in organizational change 0.91

Q 8.5 Activities are carried out by cross-functional teams 0.64

C 6 Item Level of hierarchy 0.83 0.62

Q 8.1 Provider is a lean organization 0.84

Q 8.2 Communication between different levels in hierarchy within our company

is easy

0.71

Q 8.7 Hierarchical layers in the provider organization 0.78

C 7 Item Horizontal integration 0.76 0.70

Q 7.2 Provider facilitates employees with training to work in cross-functional teams 0.70

Q 8.9 Management has expertise to lead various cross-functional teams 0.73

C 8 Item Exogenous client developments on organizational structure 0.83 0.62

Q 9.1 Sourcing strategy 0.78

Q 9.2 Innovation 0.79

Q 9.3 Required flexibility 0.81

C 9 Item Importance of Performance monitoring 0.85 0.67

Q 11.1 Performance of IT services is monitored 0.89

Q 11.2 Performance of IT services is assessed 0.93

Q 11.6 Performance of the delivered IT services is durable over time 0.55

C 10 Item Exogenous client developments on performance 0.82 0.61

Q 12.1 Sourcing strategy 0.74

Q 12.2 Innovation 0.76

Q 12.3 Required flexibility 0.84

X2 (305) = 443.22, CFI = 0.97, RMSEA = 0.05, RMSEA range = (0.04–0.06).

SCR: scale compose reliability.

AVE: average variance extracted.

A. Plugge et al. / Information & Management 50 (2013) 275–284280

In order to provide greater confidence in our modelspecification, we tested our theoretical model (MT) against analternative model (MA). This procedure was carried outconsidering the relationship between capabilities and perfor-mance as well as the direct path to performance from sensitivity

Table 2Correlation matrix with AVE.

Constructs Mean SD C 1 C 2

C 1 Sensitivity to change 4.59 1.22 0.84

C2 Adaptability 4.65 1.24 0.64 0.76

C 3 Client developments 3.61 0.80 0.29 0.32

C 4 Sourcing capabilities 4.67 1.21 0.72 0.70

C 5 Decision-making 4.31 1.35 0.55 0.72

C 6 Level of hierarchy 4.20 1.42 0.30 0.41

C 7 Horizontal integration 4.10 1.36 0.62 0.75

C 8 Client developments 3.10 0.89 0.40 0.34

C 9 Performance monitoring 5.09 1.14 0.57 0.55

C 10 Client developments 3.46 0.81 0.15 0.14

AVE: average variance extracted. The numbers on the diagonal are the square root of

to change, adaptability and client developments. However,results suggested that these alternative paths did not improvethe overall adjustment of the theoretical model significantly.Therefore, our results confirm the mediating role of organiza-tional structure and the direct effects.

C 3 C 4 C 5 C 6 C 7 C 8 C 9 C 10

0.73

0.33 0.82

0.25 0.58 0.82

0.13 0.37 0.34 0.80

0.31 0.70 0.68 0.33 0.84

0.47 0.44 0.30 0.15 0.36 0.79

0.29 0.55 0.54 0.35 0.55 0.27 0.82

0.44 0.21 0.08 0.06 0.12 0.50 0.27 0.78

the AVE. Off-diagonal elements is correlations among constructs.

Table 3Summary of the results.

Hypotheses Results

H 1a The outsourcing service provider’s sensitivity to change and uncertainty, which a client has to deal with,

will lead to adjustment in service provider outsourcing capabilities.

Supported

H 1b The outsourcing service provider’s internal focus on adaptability will lead to adjustment in service provider

outsourcing capabilities.

Supported

H 1c Exogenous client developments will lead to adjustment in service provider outsourcing capabilities. Rejected

H 2a Adjustment in service provider outsourcing capabilities will have an effect on service providers organizational

decision-making.

Supported

H 2b Adjustment in service provider outsourcing capabilities will lead to a reduction of service providers

organizational hierarchy.

Supported

H 2c Adjustment in service provider outsourcing capabilities will lead to horizontal integration within the

service provider organization.

Supported

H 2d Exogenous client developments will lead to adjustment in service provider organizational structure. Rejected

H 3a Decision-making is positively related to the monitoring of the performance of an outsourcing arrangement. 1Rejected

H 3b Level of hierarchy is positively related to the monitoring of the performance of an outsourcing arrangement. Rejected

H 3c Horizontal integration is positively related to the monitoring of the performance of an outsourcing arrangement. Supported

H 3d Attention for client developments that an outsourcing service provider has to deal with will be positively related

to the monitoring of the performance of an outsourcing arrangement.

Supported

A. Plugge et al. / Information & Management 50 (2013) 275–284 281

5. Discussion

The two core constructs, ‘Service provider outsourcing capabili-

ties’ and the organizational structure dimension, ‘Horizontal

Integration’, were related, suggesting that fit is an important issue.Moreover both constructs are directly and indirectly related to themonitoring of performance, our proxy for provider performance.The relationship between ‘Decision-making’, ‘Hierarchical levels’and relevance of ‘Importance of Performance monitoring’ were notfound to be significant. Moreover, the relationship of exogenousclient developments proposing direct effects on both capabilitiesand organizational structural dimensions were not significant.However there was a direct effect on performance relevance. Asummary of the findings is depicted in Table 3.

The findings of this study demonstrate that outsourcingcapabilities and organizational dimensions are perceived to becritical factors in achieving quality performance, and that a fitbetween them is paramount.

Also the two hypotheses related to client developments werenot supported and the result of hypothesis 1c was only marginallymeaningful and thus not significant.

The construct ‘Exogenous client developments’ did not reflectindividual developments and this underscored more specific clientdevelopments. Also the relationship between client developmentsand organizational structure (hypothesis 2d) was not significant.The outcome of our study demonstrates that the outsourcingexperts perceived that the client’s need was less important ininfluencing organizational structure. This is contradictory toresults reported in prior literature.

6. Conclusion

In our effort we focused on the fit between the provider’soutsourcing capabilities and its organizational structure, andtheir impact on outsourcing performance relevance. Althoughdirected on model testing, this research is highly exploratory. Ourresearch contributes to the field of outsourcing in the IS/ITdomain.

Our study has important implications for research. Ourresults partially support the research model and constitutea start for further theory formation. We paid attention tothe development of multidimensional measurement andtested hypotheses empirically. In addition, we developed ameasurement tool for concepts that discuss the contributionof providers in outsourcing arrangements. Our research revealedthat various contingences may affect the organizationalstructure.

This research has implications for practitioners and particu-larly for providers. Our results suggest that monitoring andassessing changing client circumstances regularly is a prerequi-site for providers to be an agile organization. Consequently, theymust be willing and able to adapt their outsourcing capabilitiesand organizational structure to achieve high quality perfor-mance and thus to remain competitive. We suggest that theprovider’s ability to adapt should be part of the outsourcingdecision process of clients. During both the outsourcing strategyand the tender selection phase, clients should determine theextent to which an outsourcing partner will cater for environ-mental uncertainty.

Appendix A. Appendix

QuestionnaireSection: Changing client circumstancesFirst we want to focus on the changing client circumstances like the impact of globalization, market dynamics, innovation and

expanding legislation your outsourcing client has to deal with. We are wondering how your company is dealing with these changing clientcircumstances. Changing client circumstances can be described as developments that arise within client environment and the way theseaffect your organization. Please, could you assess the statements, as you perceive it on a seven-point scale?

Number Question Strongly

disagree

Disagree Slightly

disagree

Neither agree

nor disagree

Slightly

agree

Agree Strongly

agree

2.1 {Provider} will monitor changes in

client circumstances regularly.

O O O O O O O

2.2 {Provider} will identify changes in

client circumstances regularly.

Important changing client

O O O O O O O

2.3 Circumstances are regularly discussed

with the client. Changing client

circumstances are

O O O O O O O

2.4 Regularly assessed on their effect on IT

services your company is providing.

Changing client circumstances

O O O O O O O

2.5 Affect {provider’s} provisioning of

services. {Provider} encourage internal

O O O O O O O

2.6 Cooperation between working groups

who are located in different countries.

O O O O O O O

2.7 {Provider’s} business strategy is based

on customer intimacy.

O O O O O O O

2.8 {Provider} encourages employees to

take a proactive attitude. {Provider} has

mechanisms for

O O O O O O O

2.9 Developing new ideas to stimulate

innovation. Creating innovative IT

services

O O O O O O O

2.10 Forms a part of our company’s business

strategy. {Provider} is effectively

organized in

O O O O O O O

2.11 Order to cater to flexibility

requirements of client’s. Management

stimulates

O O O O O O O

2.12 Employees to deal with customer

requirements. Are there any other

issues with

O O O O O O O

2.13 Regard to customer circumstance and

your companies response that you

might like to mention?

Section: CapabilitiesTo support clients internationally, {provider} has specific capabilities in order to deliver IT services. Examples of capabilities are:

business market knowledge, the knowledge and experience on managing IT infrastructure and applications, and on supporting adequategovernance processes. The following questions regards to {provider’s} capabilities to deal with changing client developments and needs.Please, could you assess the statements as you perceive it on a seven-point scale.

Number Question Strongly

disagree

Disagree Slightly

disagree

Neither agree

nor disagree

Slightly

agree

Agree Strongly

agree

4.1 Present capabilities are regularly

assessed in order to match client’s

business needs.

O O O O O O O

4.2 We at {provider} improve our

capabilities continuously.

O O O O O O O

4.3 {Provider’s} capabilities are regularly

discussed with clients.

O O O O O O O

4.4. We continuously adapt our capabilities

to client shifting needs.

O O O O O O O

4.5 Within our company we know how to

adapt our capabilities.

O O O O O O O

4.6 Changing client circumstances have an

impact on the courses and training that

are provided to {provider} employees.

O O O O O O O

4.7 Overall, {provider} accumulates

relevant knowledge to effectively adapt

to clients changing circumstances and

needs.

O O O O O O O

4.8 Our management has expertise in

coordinating capabilities required to

offer services that fit the client.

O O O O O O O

Can you assess in what degree the capabilities within your department are affected by the following changing client circumstances.

A. Plugge et al. / Information & Management 50 (2013) 275–284282

Number Question Not at all Slightly To some degree In a high degree Very strong

5.1 The sourcing strategy (e.g. sole sourcing, multi

vendor sourcing,

O O O O O

5.2 Client’s need for innovation. O O O O O

5.3 The required flexibility of your clients (e.g.

start a project on a short notice, deploy

additional resources).

O O O O O

6.1 Are there any other issues with regard to

customer circumstances and your companies’

capabilities that you might like to mention?

Section: Organizational structureTo support clients internationally, the organizational structure of {provider} facilitates the provisioning of IT services. Please, could you

assess the statements as you perceive it on a seven-point scale.

Number Question Strongly

disagree

Disagree Slightly

disagree

Neither agree

nor disagree

Slightly

agree

Agree Strongly

agree

7.1 Our management has expertise in

reorganizing our company to adapt to

customers circumstances and needs.

O O O O O O O

7.2 Our company facilitates employees with

training to work in cross-functional teams.

O O O O O O O

7.3 Written rules and procedures improve the

quality of IT services effectively.

O O O O O O O

7.4 Overall, decision-making is highly

decentralized.

O O O O O O O

7.5 We can quickly adapt the numbers of

hierarchical layers.

O O O O O O O

7.6 Overall, written rules and procedures are

observed conclusively.

O O O O O O O

7.7 Our company stimulates employees to work

in cross-functional teams.

O O O O O O O

7.8 Our managers are supportive of the decisions

made by work teams.

O O O O O O O

7.9 {Provider} encourages handling job-related

problems by ourselves.

O O O O O O O

7.10 Written rules and procedures guide O O O O O O O

Number Question Strongly

disagree

Disagree Slightly

disagree

Neither agree

nor disagree

Slightly

agree

Agree Strongly

agree

8.1 {Provider} is a lean organization. O O O O O O O

8.2 Communication between different levels in

hierarchy within our company is easy.

O O O O O O O

8.3 Written rules and procedures enable

employees to make suggestions for changes.

O O O O O O O

8.4 Overall, employees are authorized to correct

problems when they occur.

O O O O O O O

8.5 Important tasks and activities are carried out

by cross-functional teams. Overall, strategic

decisions are

O O O O O O O

8.6 quickly passed on to relevant employees. O O O O O O O

8.7 Overall, there are few hierarchical layers in

our company.

O O O O O O O

8.8 Our employees can easily meet and

communicate with top management.

O O O O O O O

8.9 Our management has expertise to lead various

cross-functional teams.

O O O O O O O

8.10 Overall, among managers the communication

is intensively.

O O O O O O O

Can you assess in what degree the organizational structure within your department is affected by the following changing clientcircumstances.

Number Question Not at all Slightly To some degree In a high degree Very strong

9.1 The sourcing strategy (e.g. sole sourcing, multi

vendor sourcing, offshoring) of your clients.

O O O O O

9.2 Client’s need for innovation. O O O O O

9.3 The required flexibility of your clients (e.g.

start a project on a short notice, deploy

additional resources).

O O O O O

10.1 Are there any other issues with regard to

customer circumstances and your

organizational structure that you might like to

mention?

Section: PerformanceThe following questions refer to {provider} delivered performance of IT services toward clients.Please, could you assess the statements

as you perceive it on a seven-point scale.

A. Plugge et al. / Information & Management 50 (2013) 275–284 283

Number Question Strongly

disagree

Disagree Slightly

disagree

Neither agree

nor disagree

Slightly

agree

Agree Strongly

agree

11.1 The performance of {provider} IT services is

regularly monitored.

O O O O O O O

11.2 The performance of {provider} IT services is

regularly assessed.

O O O O O O O

11.3 The influence of capabilities on the

performance is significantly.

O O O O O O O

11.4 The influence of organizational structure on

the performance is significantly.

O O O O O O O

11.5 The fit between capabilities and their

organizational structure has dramatically

increased our performance.

O O O O O O O

11.6 The performance of the delivered IT services

toward clients is durable

O O O O O O O

Can you assess in what degree the performance of the delivered services toward clients is affected by the following changing clientcircumstances.

Number Question Not at all Slightly To some degree In a high degree Very strong

12.1 The sourcing strategy (e.g. sole sourcing, multi

vendor sourcing, offshoring) of your clients.

O O O O O

12.2 Client’s need for innovation. O O O O O

12.3 The required flexibility of your clients (e.g. start a

project on a short notice, deploy additional

resources).

O O O O O

13.1 You have answered all the questions and

statements which are related to {provider’s}

performance. Does this give any additional

suggestions or remarks?

A. Plugge et al. / Information & Management 50 (2013) 275–284284

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Albert Plugge is a senior research fellow at theInformation and Communication Technology Section,Faculty of Technology, Policy and Management, DelftUniversity of Technology, The Netherlands. He holds aMBT degree in telecommunications and a PhD inoutsourcing. He lectures on information systems,information technology and strategic sourcing. Hisresearch interests are IT outsourcing, offshoring, andgovernance in general and impacts on organizationalperformance in particular (see www.albertplugge.-com).

Harry Bouwman is appointed by The Finnish Academyof Science as Finnish distinguished professor at IAMSR,Abo Akademi University, Turku, as well as YuvaskylanUniversity, Yuvaskylan, Finland and an associateprofessor at ICT Section, Faculty Technology, Policyand Management, Delft University of Technology, TheNetherlands. His research is focused on ICT andorganizations; ICT Management; strategy, businessmodels, and enterprise architecture; and on mobilecloud computing and mobile services.

Francisco-Jose Molina-Castillo is an associate profes-sor of marketing at the University of Murcia, Spain. Hehas been a visiting professor at Delft University ofTechnology (2005) and Michigan State University(2008). His research interests include new productlaunch activities as well as electronic marketing. Hiswork has been published in Journal of the Academy ofthe Marketing Science, Journal of Product InnovationManagement, International Journal of Electronic Com-merce, Electronic Markets, the International Journal ofInformation Management, and other journals.