Knowledge Supply Chain: Issues and remedies for knowledge outsourcing

14 March 2019

Due to rapid changes in technology, science and the marketplace, many firms lack internal knowledge necessary to successfully reach their innovation goals such as creating new component designs or improving manufacturing yields. Increasingly, firms outsource knowledge to obtain a portion of the scientific, engineering, analytical and technical expertise needed. Knowledge outsourcing can be defined as a contractual agreement for knowledge development between a knowledge recipient (buyer, she) and a source (supplier, he), who do not compete in the same market. Under the contract, the supplier independently performs knowledge development tasks and the buyer subsequently integrates and utilises the outsourced knowledge from the supplier.

Because knowledge is an intellectual resource as opposed to a physical output, a knowledge buyer faces the challenge of understanding and applying the knowledge purchased from a supplier, which is referred to as absorptive capacity. It is known that a buyer having a larger amount of existing knowledge is better able to understand and apply the outsourced knowledge received from a supplier. If the buyer is highly motivated to accept the outsourced knowledge (as opposed to displaying the “not invented here syndrome”) then she is better able to benefit from the knowledge provided by the supplier. Moreover, the buyer’s ability to benefit from outsourced knowledge improves if the buyer and the supplier have well-established methods of communication (such as shared terminology or technology) or a high level of trust based on prior collaboration.

Unlike physical components, once developed by either the buyer or the supplier, knowledge is not consumed and can be reused. Specifically, the buyer leverages her existing knowledge directly to fulfil her required project scope and indirectly as a key element of her absorptive capacity. In the same way, to meet the needs of the current buyer, the supplier may leverage related knowledge he produced to meet the needs of prior clients. While knowledge reuse reduces a firms R&D cost, it also raises challenges regarding knowledge leakage, which might be a critical cause of losing core capabilities.

Observing these new opportunities and challenges, scholars suggest that firms should well understand how they could actually implement activities at each stage of the knowledge outsourcing process. A clear commitment is essential when a buyer initiates a knowledge outsourcing project. For planning, the buyer should take challenges including uncertainty, information asymmetry and competition into account in making decisions such as supplier selection. When executing, the buyer should employ suitable controlling mechanisms to reduce the impact of knowledge leakage and the supplier’s opportunism. In the utilisation stage, the buyer actually generates value from knowledge outsourcing. To reduce any negative impact on the buyer’s integration and utilisation of outsourced knowledge, the buyer should explore the impact of critical drivers including absorptive capacity and NIH (Not-Invented-Here) syndrome. When evaluating the outcomes of knowledge outsourcing, the buyer should examine how knowledge reuse and path-dependency are associated with her knowledge acquisition strategies in the future.


Jaeseok Lee
University of Auckland Business School