Selecting the services most suitable for sourcing partnerships is not nearly as easy as it seems.

Given that, there are some ideas that we're beginning to understand. U.S. companies tend to believe that knowledge is divisible. Out of curiosity, I went to Japan and did a study with executives there and found that they tend not to believe that knowledge is as divisible. Similarly, European executives also tend to think that knowledge is less divisible. If you look at it from an American point of view, Europeans and Japanese appear risk-averse.

We have yet to see the complete picture of what it means to contract out large parts of an organization. Emerson Radio was the first to try it, in the 1960s. The logic behind it then was as applicable as it is today: The company was under cost pressure and wanted to cut its manufacturing costs. It moved its manufacturing to East Asia, where labor costs were cheaper and regulations were less stringent.

Eventually, Emerson Radio sold off part of its equity; it began "phasing out." Little by little, the company sold off its subsidiary in East Asia to foreign investors and purchased products from what used to be its subsidiary — now an independent supplier. It reduced unnecessary assets and improved its return-on-assets position. Wall Street was happy. That's the financial side. But the company had changed dramatically.

Akio Morita, the founder of Sony, calls this "hollowing out." The Netherlands-based Philips has gone through a similar cycle. Sony has, too. The logic is always the same: The return on manufacturing is typically low while the returns on R&D and marketing are high, so cost pressure forces you to find cheap production locations.

Services Logic
In services, the same logic applies. But services are basically intangible. You can't inventory them. Production and consumption take place at the same time. I divide services into two categories: core and supplementary.

Core activities are the major reasons the company is in business, such as the fund management that a financial-services company offers. Therefore, core services are usually not subject to outsourcing.

Supplementary activities are add-ons that improve the core, such as a chauffeur service for wealthy customers. It's not required, but it helps maintain rich clients. Supplementary services can be outsourced.

The fundamental problem for services, whether core or supplementary, is that there isn't much tacitness: Once you can identify a service, you can imitate it. Yet choosing an overseas supplier can lead to far more complications than most companies first realize.

Take a call center. If you think technical support is divisible, and your company is under cost pressure, you outsource the task. The problem is the key concept of tacitness. Can the task be separated successfully from your main activities?

A leading computer manufacturer is the classic case of learning lessons from outsourced services. The company outsourced its call center to Bangalore, India. It lowered its costs, got rid of office space and improved its return-on-assets.

As it turned out, call centers do not simply receive calls and respond to questions from customers. The computer company learned there was much more to technical support. When the call center was integrated into the company's main buildings and considered a core function, its employees benefited from formal and informal interactions with workers in engineering and marketing. They learned how things worked. And the engineers and marketing officials learned about how their products actually performed, and failed, in the marketplace.

However, the call-center workers' offshore location isolated them from the casual and informal flow of product and engineering information that had occurred when the call centers were in-house. Because they had limited knowledge, the Indian workers were not quick to respond to issues being raised by customers.

Although the Indian call-center workers were trained to use and understand American accents, the issue of language became the scapegoat. More accurately, though, a large store of product and engineering knowledge was never transferred from the United States to India, so the company retreated from the extensive outsourcing and started in-sourcing tech support for the product. It had learned that outsourcing just because everyone else is doing it had negative consequences.

Managing the Relationship
The question for companies today is how to manage relationships with overseas suppliers and manufacturing partners. Most American companies are going too fast. Not only do they have the wrong idea of divisibility, but most are partnering in China for manufacturing and in India for services. Asians are fundamentally high-context people. Americans are typically what we call low context. Americans tend to believe they don't need trust if they have good legal contracts.

High-context people use legal contracts but they prefer to say, "if something happens, let's work it out." In general, Asians build their business on trust, and their concept of trust is different from ours. Asians want to be wined and dined and have you meet a broad range of managers to get to know the company as a family. The American concept of trust is, "I met you at a conference."

These lessons about high vs. low context were learned 20 years ago when American companies began working with Japanese firms, and everyone felt there was nothing more to learn. So we discarded the points as important ones to learn. We still use the American model of building a relationship on a contractual basis and a cost basis. To successfully work with overseas suppliers, though, we need to expand our definitions of partnership and trust.

Masaaki Kotabe is director of research at Temple University's Institute of Global Management Studies. He holds the Washburn Chair Professorship in International Business and Marketing at the university's Fox School of Business. Dr. Kotabe's research work has appeared in such publications as the Journal of International Business Studies, Journal of Marketing, Strategic Management Journal and Academy of Management Journal. His books include Global Sourcing Strategy: R&D, Manufacturing, Marketing Interfaces (1992) and Global Marketing Management (2004), among others, and he serves as the editor of the Journal of International Management. He also serves as an advisor to the Institute of Industrial Policy Studies’ National Competitiveness Report.