Knowledge Outsourcing From a Consultant: Implications of Absorptive Capacity and Knowledge Reuse

Consider a client who has a problem she cannot solve by a given due date, and a consultant engaged to help. The consultant sets the price for knowledge outsourcing to maximize his profit. The client sets the quantity of knowledge outsourcing and the portion of the problem she solves in-house to minimize her cost. The client benefits from knowledge outsourcing only to the extent that she has absorptive capacity to understand and utilize that knowledge. In this context, absorptive capacity is driven by the client’s relevant knowledge and the working relationship between the client and the consultant. We examine how absorptive capacity impacts the key operational decisions of both the client and the consultant. Motivated by the experience of one of the co-authors, we introduce a deterministic model and two stochastic extensions that are critical in industries including semiconductor manufacturing. While we find that more absorptive capacity always reduces the client’s total cost; under certain conditions, the consultant’s profit may deteriorate. If project scope uncertainty exists, we find that, in some competitive environments, the availability of an outsourcing option can indirectly incentivize a client to take on more risk. If project completion time uncertainty exists, we show that a client employs a more experienced consultant and forgoes control of the project to lower her expected total cost. Surprisingly, in a time-based competitive environment, the more experienced consultant increases his price; whereas if time-based competition is limited, the consultant’s price is lower. Lastly, extensive numerical experiments are developed based on the synthesis of the deterministic and the two stochastic models. The numerical experiments demonstrate the robustness of the analytical results. Additionally, numerical results are obtained whereby, prior to the start of the game: (i) the client may invest to increase her initial knowledge or (ii) the client and the consultant may invest to improve their working relationship.