**6. Managing tacit knowledge in strategic outsourcing relationships**

The sub-consciousness of tacit knowledge and the difficulty of expressing it are commonly found as the main problems in tacit knowledge diffusion. It is not only that we have difficulty expressing and articulating what we know; we may not even be conscious of what we know or how tacit knowledge connects to our explicit knowledge. In this section we present some of the most influential elements that effective management of tacit knowledge in strategic outsourcing relationship has to overcome.

The most important elements of managing tacit knowledge in strategic outsourcing relationship are:


120 New Research on Knowledge Management Models and Methods

by Webster's Dictionary (1999), where *cooperate* is described as "to act, work or associate with others especially for mutual benefit" and *participate* is described as "to engage or have a share in something in common with others". Indeed, a difference exists between participative and cooperative relationships; a relationship could be participative but noncooperative or both participative and cooperative at the same time. Cooperative participation occurs if all participants have a common benefit. In non-cooperative participation, individuals do not cooperate to achieve a mutual benefit, but rather an

A successful strategic outsourcing relationship requires both parties (client and the service provider) "to be on the same page" (Karen & Black, 2004). The most significant obstacles

Cooperative participation presumes information exchange. Cooperation is impossible if participants do not share their internal information (Rebernik & Mulej, 1999). According to this process, bounded rationality, information asymmetry, and opportunistic behavior (Williamson, 1983; Barney & Ouchi, 1986) become influential. The concept of bounded rationality indicates that the human mental capabilities are limited and humans cannot rationally define and solve complex problems. For this reason, we have to cooperate because individually we are not capable of solving complex problems on our own. Information asymmetry means that two parties involved in a transaction do not have equal information about things that are important for the transaction. Between the two contracting parties, information asymmetry means that one party has private information, which brings about

Information asymmetry can cause pre- and post-contractual opportunistic behavior. Precontractual or ex-ante opportunistic behavior is also known as adverse selection (Akerlof, 1970). It shows up when one party in a potential transaction owns private information about something that can cause damage to the other party in the course of contract implementation. Post-contractual or ex-post opportunistic behavior is known as the moral hazard. It shows up when one of the contractual parties, because of its own benefit, does not undertake the agreed activities and the other party in the transaction cannot control the contract implementation in its entirety. If we observe participation in strategic outsourcing as an information sharing or exchange, it can imply the chance of both the moral hazard and

Cooperation needs to include sufficiently shared, common (public) information, making the platform for cooperation able to be initiated in the first place. In the case of cooperative participation, every participant will make available all required private information. Some participants may behave in an opportunistic way and disclose less private information than the others do; they may not own the information, or they may be only fictitious team members. They may also tend to hide their private information because they expect to attain

An important learning objective is to prevent the outsourcing partner from possible opportunistic behavior. In business relationships, it is impossible to foresee every relevant possibility or incident that could happen during a relationship. It is reasonable to be prepared for possible opportunistic behavior. This does not mean that participants

individual one—even at the loss of other participants (Rebernik & Mulej, 1999).

that could prevent an efficient (principal-agent) outsourcing arrangement are:

1. misunderstanding of client's objectives, policy and culture; 2. client disagrees with the provider's objectives and policy;

3. communication and monitoring problems; and

4. both sides controlling.

the so-called information rent.

adverse selection.

some information rent.


By successfully managing these elements, partners in a strategic outsourcing relationship create the platform for the disclosure of tacit knowledge and can jointly create a common knowledge thesaurus that can be shared. A conceptual framework of managing tacit knowledge in strategic outsourcing relationships to create and share the thesaurus and achieve sustainable outsourcing partnership is provided in Figure 3.

The consumption of time that the internalization of tacit knowledge requires is the first element to be considered in the sharing process. In today's business world, time is a scarce resource, and the internalization of new experiences or knowledge is a process over time (Halding-Herrgard, 2000, p. 361). The dimension of time is attributed to personal tacit knowledge as well as to more organizational forms. In the strategic outsourcing relationship parties face time-consuming constraints regarding the reflection of gained experiences. For both parties, the time allotted for the introduction of such experiences is often insufficient. The rapid rate of change in today's business environment calls for continual learning as well as unlearning. However, few organizations reserve sufficient time for these processes to jointly create a common knowledge.

We should also point out the problem of powerlessness. Knowledge is a basis for power and respect, and people are often hesitant to share knowledge lest their power decreases. Moreover, sharing knowledge requires that time be taken away from other responsibilities that have a higher priority. People are hesitant not only to share what they have, but also to use the knowledge of others. This has been referred to as the "not invented here" syndrome. Perhaps, the most important step toward harnessing the tacit knowledge of individuals and teams is to allow it to flow from the pull of emotional commitment and deep personal

Managing Tacit Knowledge in Strategic Outsourcing 123

important issues, ambiguous messages, and distorted information. Avoiding these phenomena is critical for developing a culture that values openness, tolerates failures, encourages questioning of the way in which things are conducted, and permits workers to challenge their superiors (Lubit, 2001, p. 175). The limited efficacy of most knowledge management efforts has come about because they have overwhelmingly focused on creating electronic means to capture and store information and improve communication. Far more attention needs to be given to the task of convincing people to effectively use the

Further constraints in managing tacit knowledge in the strategic outsourcing relationship stem from the distance. Social interaction is often seen as a necessity for the diffusion of tacit knowledge. As such, the globalization, diversification, and virtualization of business that obstruct face-to-face interaction are a threat to tacit knowledge diffusion. Tacit-to-tacit exchanges are greatly enhanced through close personal contact, which is why physical colocation and face-to-face interaction can be important catalysts for innovation (Nonaka & Takeuchi, 1995; Holtshouse, 1998; Mascitelli, 2000, p. 193). Modern ways of doing business that have become completely intertwined with global and outsourcing networks do not improve the conditions for the exchange of tacit knowledge. In the "flat world" (Friedman, 2007) with overnight global deliveries, there is no time for sharing tacit knowledge. This is contrary to the popular notion that information technology can eliminate barriers to knowledge exchanges across oceans and time zones. However, if we accept the concept that tacit knowledge is fundamentally based on bodily experiences and emotional involvement, it is hard to imagine that something so personal can be digitized and downloaded. This is not to say that groupware and intranets are not essential tools for strategic outsourcing; their effectiveness in the sharing of explicit knowledge is undeniable. Rather, we are suggesting that simple steps can be taken to achieve important results in this regard. The frequent use of brief "stand-up meetings" for example, can help ensure continuous interaction among team members and

The authors of the book *Enabling Knowledge Creation* (Von Krogh et al., 2000) go even further in their discussion about effective knowledge creation within an organization. They argue that groups of people working together are more than just teams; they are microcommunities of knowledge. This is an important distinction because "larger communities of knowledge can share certain practices, routines and languages, but for new tacit knowledge to emerge through socialization, the group must be small" (Von Krogh et al., 2000, p. 162). These teams are in a better position not only to create competitive position-enhancing knowledge, but also to communicate and integrate this knowledge back into their own areas and across the organization. One major challenge is that these micro-communities are typically not stable or perpetual. Unfortunately, through the dissolution of such microcommunities, most tacit knowledge gained and developed by them is lost. This knowledge can be retained only through the interactions that exist within the micro-community itself,

Finally, the implementation of new knowledge and best practices must be measured and rewarded, supported by the culture and recognized by promotion decisions. Without attention to the implementation of knowledge, people are likely to learn information, but

In the strategic outsourcing relationship, the nature of the relationship is based on knowledge sharing; participants take a more active role and assume more responsibility and risks in developing the relationship. The successful strategic outsourcing relationship

encourage socialization and collaboration in outsourcing relationship.

not through documents or manuals (Allred, 2001, p. 162).

then fail to change their behavior in beneficial ways.

information system (Lubit, 2001, p. 173).

involvement (Glynn, 1996, as cited in Mascitelli, 2000, p. 185). Therefore, the challenge for managers is to inspire, guide, excite, encourage, and shape without overwhelmingly imposing arbitrary structures that might destroy the fragile essence that has to be built and nurtured in strategic outsourcing relationship.

Fig. 3. Conceptual model to manage tacit knowledge in strategic outsourcing relationship

For example, managers can foster the genuine commitment of design team members on three different levels (Mascitelli, 2000, p. 187) by:


Another element for encouraging knowledge sharing is procedural justice in decision making. Research (Lubit, 2001, p. 175) has shown that, when managers feel strategic decision-making processes are fair, they tend to cooperate voluntarily. Procedural justice has three aspects: engagement, explanation, and clarity. When these three aspects of procedural justice are fulfilled, company employees are most likely to both share their ideas and carry out decisions that are made.

Effective knowledge management includes dealing with the defensive mechanisms that impede communication. Common defensive mechanisms include avoiding the discussion of

involvement (Glynn, 1996, as cited in Mascitelli, 2000, p. 185). Therefore, the challenge for managers is to inspire, guide, excite, encourage, and shape without overwhelmingly imposing arbitrary structures that might destroy the fragile essence that has to be built and

Fig. 3. Conceptual model to manage tacit knowledge in strategic outsourcing relationship For example, managers can foster the genuine commitment of design team members on

2. establishing a strong sense of group identity, importance, and purpose among project

3. creating a generative environment for knowledge sharing, in which learning—as well

Another element for encouraging knowledge sharing is procedural justice in decision making. Research (Lubit, 2001, p. 175) has shown that, when managers feel strategic decision-making processes are fair, they tend to cooperate voluntarily. Procedural justice has three aspects: engagement, explanation, and clarity. When these three aspects of procedural justice are fulfilled, company employees are most likely to both share their ideas

Effective knowledge management includes dealing with the defensive mechanisms that impede communication. Common defensive mechanisms include avoiding the discussion of

nurtured in strategic outsourcing relationship.

three different levels (Mascitelli, 2000, p. 187) by:

team members; and

as unlearning—occurs.

and carry out decisions that are made.

1. crafting a "culture of innovation" for the company as a whole;

important issues, ambiguous messages, and distorted information. Avoiding these phenomena is critical for developing a culture that values openness, tolerates failures, encourages questioning of the way in which things are conducted, and permits workers to challenge their superiors (Lubit, 2001, p. 175). The limited efficacy of most knowledge management efforts has come about because they have overwhelmingly focused on creating electronic means to capture and store information and improve communication. Far more attention needs to be given to the task of convincing people to effectively use the information system (Lubit, 2001, p. 173).

Further constraints in managing tacit knowledge in the strategic outsourcing relationship stem from the distance. Social interaction is often seen as a necessity for the diffusion of tacit knowledge. As such, the globalization, diversification, and virtualization of business that obstruct face-to-face interaction are a threat to tacit knowledge diffusion. Tacit-to-tacit exchanges are greatly enhanced through close personal contact, which is why physical colocation and face-to-face interaction can be important catalysts for innovation (Nonaka & Takeuchi, 1995; Holtshouse, 1998; Mascitelli, 2000, p. 193). Modern ways of doing business that have become completely intertwined with global and outsourcing networks do not improve the conditions for the exchange of tacit knowledge. In the "flat world" (Friedman, 2007) with overnight global deliveries, there is no time for sharing tacit knowledge. This is contrary to the popular notion that information technology can eliminate barriers to knowledge exchanges across oceans and time zones. However, if we accept the concept that tacit knowledge is fundamentally based on bodily experiences and emotional involvement, it is hard to imagine that something so personal can be digitized and downloaded. This is not to say that groupware and intranets are not essential tools for strategic outsourcing; their effectiveness in the sharing of explicit knowledge is undeniable. Rather, we are suggesting that simple steps can be taken to achieve important results in this regard. The frequent use of brief "stand-up meetings" for example, can help ensure continuous interaction among team members and encourage socialization and collaboration in outsourcing relationship.

The authors of the book *Enabling Knowledge Creation* (Von Krogh et al., 2000) go even further in their discussion about effective knowledge creation within an organization. They argue that groups of people working together are more than just teams; they are microcommunities of knowledge. This is an important distinction because "larger communities of knowledge can share certain practices, routines and languages, but for new tacit knowledge to emerge through socialization, the group must be small" (Von Krogh et al., 2000, p. 162). These teams are in a better position not only to create competitive position-enhancing knowledge, but also to communicate and integrate this knowledge back into their own areas and across the organization. One major challenge is that these micro-communities are typically not stable or perpetual. Unfortunately, through the dissolution of such microcommunities, most tacit knowledge gained and developed by them is lost. This knowledge can be retained only through the interactions that exist within the micro-community itself, not through documents or manuals (Allred, 2001, p. 162).

Finally, the implementation of new knowledge and best practices must be measured and rewarded, supported by the culture and recognized by promotion decisions. Without attention to the implementation of knowledge, people are likely to learn information, but then fail to change their behavior in beneficial ways.

In the strategic outsourcing relationship, the nature of the relationship is based on knowledge sharing; participants take a more active role and assume more responsibility and risks in developing the relationship. The successful strategic outsourcing relationship

Managing Tacit Knowledge in Strategic Outsourcing 125

Participants involved in outsourcing activities not only learn from each other, but they also need to unlearn obsolete knowledge and skills contained in procedures, routines, and ways of doing business from the pre-outsourcing period. Sharing tacit knowledge is a demanding task, but its unlearning is far more difficult. In the era of ever-increasing globalization and transcontinental outsourcing, the management of knowledge—especially its tacit dimension—is becoming one of the key drivers of competitiveness. To overcome the perpetual elusiveness of tacit knowledge, we presented a conceptual model that could help manage the outsourcing relationships and contribute to the creation of a common knowledge thesaurus for outsourcing partners. In any relationship where information asymmetry exists, opportunistic behavior can arise. Policy makers and strategy developers should pay attention to such a possibility; otherwise, no sustainable relationship can be

Investigating strategic outsourcing in light of managing tacit knowledge raises many issues that future research should examine, especially in the area of opportunistic behavior in the outsourcing relationship and the creation of appropriate policy measures and strategic moves to prevent such behavior. The unlearning is another field in which appropriate models for immediate use in business practice still have to be developed. There is also a lack of empirical research on tacit knowledge, which could prove a number of findings and

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**8. References** 

pdf

2, Malden, US

depends on forging strong links among the management, system, and process functions that lead the organization to cooperate. The collaborative relationship is closer and broader with more teams working together on a wide range of functions; as a result, the contract is typically longer. Managing an effective strategic outsourcing relationship requires commitment from all included parties. The success of the relationship depends on cooperation among participants, who must share their business information and knowledge; otherwise, cooperation is not possible. In this process bounded rationality, information asymmetry and opportunistic behavior manifest. Viewing cooperation as information sharing implies the possibility of both the moral hazard and adverse selection. As we have already underscored, cooperation needs private information and a requisite minimum of shared, common, public information, making the platform establish cooperation. In the case of cooperative participation, every participant will also make his or her private information available. There is always a possibility that some participants may behave in an opportunistic way and put less private information on the table than others, they may not own it, pretend to be team members, or tend to hide their private information because they expect to benefit from it later in the process.

As in strategic outsourcing, the ownership of intangible assets of cooperating companies can be challenging to define; thus, it is important that cooperating parties "contractually specify who will have control over each dimension of each asset in each particular future contingency" (Grossman & Hart, 1986, p. 716). A theory of the firm provides a conceptual background for understanding the strategic outsourcing relationship. A successful relationship requires that the outsourcer and the provider disclose all information to ensure mutual benefits. To make the relationship efficacious, all parties need to exchange all relevant information. A provider is not only a performer of services, but also a partner who is included in the joint development of processes and products in both companies.
