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An oPERATions REsouRCEs PERsPECTivE on PRoduCT And sERviCE dEvEloPmEnT 301
Design resources will be easy to control if they are kept in-house because they are
closely aligned with the company’s normal organisational structures, but control
should be relatively loose because of the extra trust present in working with familiar
colleagues. Outsourced design requires greater control and, because it has to be applied
at a distance, contracts – often with penalty clauses for delay – may be needed. However,
penalty clauses and contracts do not help to build long-term partnership relationships.
In-house design has an advantage here because of its strong familiarity with the rest
of the company’s product or service range, operations processes, materials and market
requirements. In contrast, outsourcing design can mean a weaker understanding in the
short term, though if long-term relationships do develop, product and service familiar-
ity will become stronger. The underlying capabilities built up through the development
activity are generally assumed to be highly accessible when the development is done
in-house. It is more difficult to provide access to tacit knowledge when it is housed
outside the organisation. One motive behind companies investing heavily in common
computer-aided design systems with their design suppliers is to ensure better accessibil-
ity. The overall cost of in-house versus outsourced development will vary, depending on
the firm and the development project. An important difference, however, is that exter-
nal development tends to be regarded as a variable cost. The more external resources are
used, the higher the cost will be. In-house development is more of a fixed cost. Indeed,
a shift to outsourcing may occur because fixed development costs are viewed as too
great. Paradoxically, though, as external sourcing of development becomes an integral
part of a company’s strategy and relationships become stable, costs tend to be more or
less fixed. Finally, a major driver of this decision can be the risk of knowledge leakage.
Firms become concerned that experience gained through collaboration with a supplier
of development expertise may be transferred to competitors. Again, there is a paradox
here. Companies usually outsource development primarily because of the supplier’s
capabilities that are themselves an accumulation of specialist knowledge from work-
ing with a variety of customers. Without such knowledge ‘leakage’, the benefits of the
supplier’s accumulated development capabilities would not even exist.

Involving suppliers in development
The nature of the relationship with suppliers of product or service design services is not
the same as when a supplier (even the same supplier) is providing product or services
on an ongoing basis. For example, a component manufacturer, asked by a customer to
design a new part, is providing a service rather than making a physical product. Even a
supplier of services, in designing a new service for a customer, is engaged in a one-off (or
at least relatively infrequent) exchange with its customer, in which its own knowledge
is embedded in the design. In fact, a development relationship between customer and
supplier is very similar to that between professional service firms, such as lawyers or
consultants, and their clients. When choosing suppliers of design and development
knowledge, companies often use criteria such as experience, trust, technical knowledge
and ‘relationship’ – a very similar list to that used to select their accountancy firm and
their legal representatives.
Characterising development relationships as professional services has practical
implications, especially for suppliers. First, it emphasises the importance of customer
perception of the ‘process’ of development, as well as the final design that emerges
from the process. Frequently demonstrating expertise during the development pro-
cess allows suppliers to build their ‘technical’ reputation. Second, just as professional
services, such as accountants, keep ‘client files’ that detail all contacts with individual

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