Managing interdependence: The effects of outsourcing structure on the performance of complex projects

The outsourcing of complex activities has become a common organizational practice. Yet very little research has focused on the implications of how these activities are divided up among outsourcing partners. Drawing on structural contingency theory, we argue that: (1) because activities within stages of complex projects are highly interdependent, outsourcing structures where owner firms do not maintain high levels of dominance over the activities that are performed will pose control and coordination challenges, leading to poor project performance; (2) the adverse effects of poorly structured outsourcing arrangements will spill over to subsequent project stages when activities are interdependent across project stages; and (3) dividing activities among large numbers of contractors or distributing work evenly among contractors exacerbates coordination and control problems further contributing to poor project performance. Our empirical analysis of 323 capital facility construction projects supports our predictions. Overall, these results provide strong evidence that some outsourcing structures are more costly than others and that because of the nature of complex projects the detrimental effects of poorly structured outsourcing are often not completely observable at the time activities are completed. We discuss the implications of our findings for capital construction and for outsourcing more generally.