GEOGRAPHY OF OUTSOURCING: NORWEGIAN FIRMS' BUSINESS SERVICE PROVISIONS

GEOGRAPHY OF OUTSOURCING: BUSINESS
SERVICE PROVISIONS AMONG FIRMS IN
NORWAY
GRETE RUSTEN
Foundation for Research in Economics and Business Administration (SNF), Breiviksveien 40, N-5045
Bergen-Sandviken, Norway. E-mail: Grete.Rusten@snf.no
Received: March 1999; revised November 1999
ABSTRACT
This paper examines how business service provision partly relies on user firms' internal
resources, strategies and location depending on what can be obtained locally or is feasible to
import elsewhere. Empirical evidence from small- and medium-sized firms in three manu-
facturing industries in Norway shows that strategies searching for suitable suppliers can be
divided into different categories, including one in which choice of service providers reflects a
policy commitment to buy locally. A second type of strategy is when the choice of subcontractor
is a result of a wide professional search process across regions in order to find the best
alternative. A third is where service relations are co-ordinated by a parent company or entail
purchased goods. Finally, there is a group of firms that have left the matter of choice of service
suppliers to brokers. These results add new elements to the discussion about the competitive
role of industrial relations.
Key words: Manufacturing industry, SMEs, outsourcing, business services, Norway, proximity
INTRODUCTION
International competition in complex and
customised products is based on advanced
competence, for which firms seldom entirely
cover themselves. Several recent studies have
discussed business service purchasing, dis-
integration and performance (O'Farrell et al.
1993; Illeris 1996; MacPherson 1997; Bennett
& Robson 1999; Wernerheim & Sharpe 1999).
However, Bryson (1997) and Bryson and
Daniels (1998) are among the few that at firm
level have empirically analysed the relation-
ship between sourcing strategies and geography.
Bryson and Daniels (1998) found that greater
effort in searching mainly concerns larger
firms with the necessary internal capacity
and competence to give such tasks priority,
whereas small- to medium-sized enterprises
(SMEs) carry out a far more limited search
before a final decision is made.
This study has been motivated by two
concerns. First, to show empirically how
different industrial activities rely on each
other. Second, to examine SMEs' choice of
business service partners, focusing on the
interplay between internal and external re-
sources, strategies and location.
The chief focus is a discussion on differ-
ences in use of external service links. For
instance, do SMEs residing in rural areas with
less favourable service conditions have other
supply solutions than those located in urban
areas with more service suppliers to choose
from? A discussion on outsourcing strategies
also reflects differences between firms ap-
preciating geographical nearness and firms
searching widely for service suppliers.
The paper begins with a brief overview of
the literature and a conceptual discussion
focusing on outsourcing. The empirical evi-
dence is based on three different sources.
Tijdschrift voor Economische en Sociale Geografie ± 2000, Vol. 91, No. 2, pp. 122±134
# 2000 by the Royal Dutch Geographical Society KNAG
Published by Blackwell Publishers, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden MA 02148, USA

A census of business services of 1994, broken
down by industrial subclass and type of
location measured by centrality, portrays some
details of population and geographical dis-
tribution of business services. Firms engaged
in activities belonging to different groups are
classified by largest activity by total value
added.
The outsourcing issue is among others
empirically approached by using data from a
telephone interview survey which took place
in autumn 1996, and includes 416 manufac-
turing firms across the country. A stratified
random sample in three chosen sectors is
based on Dun & Bradstreets' register. This
statistical analysis first investigates the share of
firms buying different business services, show-
ing internal characteristics giving respectively
lowest and highest purchasing probability.
A following analysis includes location and
distance measurements between buying firms
and service suppliers. Finally, the kinds of
business services based exclusively on external
supplies and internal service resources are
investigated. The third set of empirical data
explains some of the reasons why sourcing
strategies differ. It is based on a case study
including another 32 firms (from in-depth
interviews with senior staff).
The case study shows in detail why some
firms favour a business service partner geo-
graphically near, while others are more
flexible to location of potential suppliers.
The paper closes with some concluding re-
marks.
THEORETICAL AND CONCEPTUAL
FRAMEWORK
The outsourcing concept, including synony-
mous terms such as `externalisation', `con-
tracting out', sometimes neglects firms'
different sourcing histories. In some cases
firms have obviously changed activities from
internal to external during a specific time
period. Firms may also use external sources on
a more permanent basis. Finally, some pre-
vious indoor activities have changed status to
independent profit units. Several authors, in
discussing outsourcing, do not specify cases
where individual firms have themselves ex-
perienced these shifts (Baro & Soy 1993;
MacPherson 1997). Van Geenhuizen and
Van der Knaap (1997, p. 315), avoid this
definition problem altogether by using the
term `bought-in'.
Finally, the conceptual discussion on out-
sourcing should consider the regulation of
the relationship between the parties. Marshall
(1994, p. 41), uses the term `contracting out',
indicating a formal agreement. Applying the
same term on SMEs may be misleading. In
fact, empirical evidence from this and other
studies has shown that local relations espe-
cially can be a result of informal agreements
where long-term relationships, trust and
shared values count (Bryson 1997, pp. 4±5,
Rusten 1997a, p. 182).
Changes in the way individual firms arrange
service supply needs should also be related to
the period taken into account. Shifts from
internal to external sources during a four-year
period (up to 1996) for the firms included in
this study did reveal high degree of stability.
Logically, the outsourcing term is used here
in a broad sense, covering all registered sup-
plies external to the firm. Discussing sourcing
strategies implies awareness of certain struc-
tural characteristics. This paper has mostly
been concentrated on the situation of SMEs.
Circumstances surrounding the outsourcing
of business services in larger companies seem
different, as larger companies often comprise
an altogether different base of internal re-
sources and are thereby more capable of
finding good sourcing solutions. Size, usually
in combination with more advanced organisa-
tional, technological or marketing settings,
makes larger companies the most interesting
customers. Consequently, these companies
will usually receive more attention from the
service sector than SMEs. O'Farrell et al.
(1993) and Bennett and Robson (1999) found
a greater ability of larger firms to use business
services. Our empirical results also show that
size (measured by employment) counts.
The term `producer service' is widely used
to denote the type of service firms that
primarily sell to commercial firms and public
institutions rather than private consumers.
The definition is, however, not consistent in
the literature (Wernerheim & Sharpe 1999).
Business services, in addition to insurance,
finance and real estate, are usually still
GEOGRAPHY OF OUTSOURCING 123

included. The study focus on the business
service industry, which is a much narrower
class, comprises professional, information
and intellectual services (Illeris 1996, p. 59).
Table 1 specifies the business service sub-
classes included in this survey.
What is gained by choosing external sup-
pliers will partly be dependent on the nature
of the firm. Slimming internal operations to
improve performance as emphasised by Mar-
shall (1994, pp. 42±47), is no doubt a common
strategy among large companies. However,
SMEs with an already lean administration
usually have fewer possibilities of reducing
staff or work-task arrangements.
Another and more relevant outsourcing
motive for SMEs is access to specialised
knowledge in order to rapidly adapt to chang-
ing economic and technological conditions.
Service support is often needed to gain ben-
efits from the latest technologies without the
expense and risks of acquiring new systems
and staff. Internal diseconomies of scope,
scale or infrequent use are additional expla-
nations. Involving a `neutral' third party to
solve internal organisational problems that
may lead to solutions unpopular with the staff
is another outsourcing motive.
What are the alternatives for remotely
located firms in cases where local service
supplies are missing? Several studies have shown
that business partners prefer face-to-face
communication (Illeris 1996, pp. 111±115).
Recent studies like Bryson (1997) and Rusten
(1997a) stress the point of geographical and
cultural proximity between buyers and sellers.
Personal contact, including confidentiality,
trust, frequent and informal communication,
seems to be highly appreciated. Some firms
even have a local trade commitment, when-
ever possible, to help keep local business alive.
Word-of-mouth recommendations, the ability
to repeat own or others' previously successful
assignments, reduces the risk of making an
unsatisfactory decision. The importance of
these more or less informal elements limits
the motivations searching for long-distance
alternatives. This observed `narrowness' in
choice of business partners suggests that the
competitive role of agglomerations can some-
times be overplayed. Many local links are
simply formed by convenience.
METHODOLOGY
The findings in this paper are based on two
linked research methodologies. A telephone
interview survey from autumn 1996 includes
416 firms across Norway. The sample frame
size compared with the number of firms
included gives a rate of coverage of nearly
45% of the total population, according to
official statistics of registered businesses in the
sectors and size range that was chosen. Names
of firms, addresses and telephone numbers
were from Dun & Bradstreets' register, based
on information collected from the Brùnnùy-
sund Registration Centre (the Norwegian firm
and tax registration authority).
The sampled firms were selected from three
manufacturing sectors representing rather dif-
ferent types of production in relation to material
input and work-force competence structure.
The three sectors chosen (EU-standard NACE
rev. 1) were: 15±16, Food manufacturing; 29,
Manufacture of machinery and equipment;
30±33, Electronic and optical equipment
manufacturing.
A logistic regression model was used to test
which characteristics were of most importance
in describing the surveyed firms' purchasing
behaviour. The independent variables were
respectively three values of each of the vari-
ables: industry, firm size and location. The
coefficients were transformed into percent-
ages and reported by showing combinations
for respectively the lowest and highest pur-
chasing probability.
Another 32 firms were part of a supplemen-
tary case study based on personal interviews
with senior staff. Both samples were stratified
to be broadly representative according to the
target population, seeking a balance between
the type of industry and location.
The selected firms in both samples had
20±250 employees. Seventy per cent had 20±50
employees, 18% 51±100, and 11% 101±250.
(Employment information was missing for five
firms). Fifty-one per cent were independent
firms, and the rest were subsidiaries of large
companies.
According to status in 1995 only 8% of the
firms had foreign ownership (majority of
shares), and 48% reported export activity.
Thirty-seven per cent of the food manufac-
GRETE RUSTEN
124

turing firms were located in large urban areas,
whereas 54% of the machinery manufacturing
industry and as much as 62% of the electronic
manufacturing firms had this location. An
important observation is that the latter in-
dustry had only one rural firm, and therefore
in general was located in more favourable
service surroundings than the two other
industries.
Note that each firm has only been asked
about the most important trade partner for
each category. Consequently, the data does
not show how much each type of service is
used, nor how many different suppliers are
actually involved, nor the exact trade off
between external and internal resources.
THE GEOGRAPHY OF BUSINESS
SERVICES
Current data collection methods complicate
the estimation of business service employ-
ment. Official statistics in Norway classify firms
by their most important activity. Conse-
quently, service employment within manufac-
turing firms is classified as manufacturing
employment. Service activities are in reality
performed in all kinds of industries. The
service industry comprises firms where service
is the final product, while service `workers'
produce independently of whatever the final
product of the particular workplace is. Aggre-
gate statistics thus underestimate business
services employment and the overall role of
the economy. By collecting firm information
from primary sources concerning service
provision, valuable insight about manufac-
turing and services dependencies is gained.
(A more comprehensive presentation of the
taxonomy of services is found in Dahlstro
Èm
(1991, pp. 7±28), Illeris (1996, pp. 11±30) and
Wernerheim and Sharpe (1999).)
Official Statistics in Norway, based on 1995
figures, showed that the public and private
service sector employed 950,000 people. This
makes a share of 46% of total employment
when including all sectors, while about 91,000
of this employment comprises business service
firms (Official Statistics of Norway 1997a).
Skilled labour demand and the need to be
geographically close to customers are elements
that explain why business service firms are
mainly concentrated in large urban areas. Im-
portant customer groups are larger companies
head offices and the service factor itself.
Trade relations will often take advantage of
proximity, as many situations require intel-
lectually intensive and frequent face-to-face
interaction between clients and providers
(Mackun & MacPherson 1997, p. 660). Ways
of communication for long-distance cus-
tomers are personal meetings combined with
contact via post, telephone and information
and communication systems. Business services
found in small urban areas or rural districts
are usually more standardised and mainly
serve the local market.
Table 1 includes data showing location of
business service firms by status in 1994, broken
down by industrial subclasses and type of
municipality measured by centrality (unpub-
lished data from Statistics Norway 1997). The
general pattern is that there are only minor
differences between supply in large urban
areas, comprising Norway's six largest towns
including surrounding suburbs with the ag-
gregated group containing all other urban
areas. The level of local presence is consider-
ably lower in municipalities in rural districts. A
closer examination of the different service
types shows that only three groups have a
national coverage of more than 50% of all
municipalities, with accounting, book-keeping
services and auditing topping the list.
Employment agency services, located in
10% of all municipalities, have the poorest
coverage of all and are hardly present outside
urban areas. These services apply mainly to
the office sector, which explains why low
demand and occurrence is small outside large
urban areas. In addition, the employment
base in rural districts is usually not large
enough to comprise necessary skills to estab-
lish this type of business. The fact that muni-
cipalities officially classified as `rural' (for
more details see Official Statistics of Norway
1994) are located more than 45 minutes
travelling time from the nearest urban area,
is another explanation of why few firms have
the possibility of using this type of temporary
workforce. Other types of business services
showing relatively low distribution figures are
hardware-related computer services and mar-
keting services.

THE GEOGRAPHY OF OUTSOURCING
O'Farrell et al. (1993) showed that business
size and exporting activity are important
explanatory variables of which firms externa-
lise business services. An investigation of the
relationship between firm characteristics and
purchasing behaviour has also been a topic in
this study.
Tables 2±4 and Figure 1 are all based on
the results from the telephone survey. The
empirical analysis first shows characteristics of
most importance, describing firms' purchas-
ing activity. Combinations showing lowest and
highest purchasing probability for each service
category are reported. The analysis goes on to
present figures ranking purchasing frequency
and indicating the distance between trade
partners. The data finally shows how com-
position of indoor and outdoor sourcing
strategies varies with type of location.
The results of the logistic regression model
in Table 2, where the range between the
minimum and maximum values, in combi-
nation with a level of significance is well within
0.05, indicate a statistically strong level of
explanation for the characteristics related to
employment agency services and infrastruc-
ture related technical service. A medium level
of explanation was found for all other business
service categories except for process-/product-
related technical services, together with busi-
Table 1. Business services in Norway, status 1994, measured by the number of firms specified by the industrial subclass
and location measured by coverage rate of municipalities for national total and divided into centrality groups. (Statistics
for Norway 1996 ± not previously published).
Industrial subclass (NACE)
Firms
All
municipalities
(N=435)
Large
urban areas
(N=104)
Other
urban areas
(N=128)
Rural
districts
(N=203)
Business, management and tax
consulting services
764 30 46 43 14
Marketing services 166 15 23 23 5
Legal services 661 26 40 39 11
Accounting, book-keeping
and auditing services
2,373 88 91 91 84
Advertising, secretarial-translation
and office related support systems
2,372 51 68 62 36
Computer services (software
related)
891 34 58 41 14
Computer services (hardware
related)
267 15 30 27 9
Technical services (infrastructure
related)
1,809 47 61 59 33
Technical services (process-/
product-related)
1,887 52 74 63 34
Employment agency services 125 10 17 (18) 20 1
Total 11,315 ± ± ± ±
Note: The figures include NACE classes 71.33, +72 through 74.15 (not including 74.15). Municipalities in
large urban areas which are Oslo, Kristiansand, Stavanger, Bergen, Trondheim and Tromsù with suburbs.
Norway has 435 municipalities, in which 104 are classified as belonging to large urban areas, including
Oslo, Kristiansand, Stavanger, Bergen, Trondheim and Tromsù with suburbs, 128 were part of what is
defined as other urban areas, and 203 constituted municipalities in rural districts. More details on the
above centrality classes found in this table and location maps, are documented in Rusten (1997b).
GRETE RUSTEN
126

Table 2. Firm characteristics giving respectively the lowest and highest purchasing probability reported in percentage for each service category.
Combinations of variables with lowest
purchasing probability
Combinations of variables with highest
purchasing probability
Service category
Variable
combinations
Percentage
probability
Number of
observations
Variable
combinations
Percentage
probability
Number of
observations
Business, management and tax consulting services S-U-M 49.8 28 L-L-E 30.7 7
Marketing services S-U-M 59.3 28 L-L-F 11.3 12
Legal services S-U-M 84.8 28 M-L-M 47.2 17
Advertising, secretarial, translation and office related
support services
S-R-E 80.9 1 L-U-M 32.9 10
Computer services (hardware related) S-U-E 88.6 23 L-L-F 52.9 12
Computer services (software related) S-R-M 86.9 18 L-U-F 61.6 6
Technical services (infrastructure related) S-L-E 78.6 39 L-R-F 16.0 3
Technical services (process/product related) S-L-M 59.6 62 L-R-E 34.2 0
Employment agency services S-R-M 86.3 18 L-L-E 2.3 7
Note: Column for variable combinations, in which first character indicates firm size: S = small; M = medium sized; L = large. Second character indicates
centrality: L = large urban; U = other urban; R = rural. Third character indicates type of industry: F = food manufacturing; M = machinery manufacturing;
E = electronic manufacturing.

ness, management and tax consulting services,
for which the model has a low explanatory
capability. These figures clearly show a positive
relationship between purchasing and firm size
for a majority of the services included (i.e.
larger firms are more likely to purchase than
smaller firms). Furthermore the data shows
that for small firms an urban location usually
maximises the probability for purchasing.
Exceptions are the two kinds of technical
services for which a rural location gives the
highest score. For all but two service categories,
firms belonging to the food manufacturing or
electronic industry sector are the most active.
Small firms comprise those with lowest purchas-
ing probability. Further, this low-purchasing
category includes rural or urban locations
from all industries but the food manufactur-
ing sector.
An interesting point to note is that an
analysis comparing purchasing behaviour be-
tween firms engaged in exports with those
based in a home-market did not reveal signifi-
cant differences between the two groups. This
result differs from O'Farrell et al. (1993), which
found exporters purchasing more services
than others. Neither did considerable differ-
ences occur when measuring how many dif-
ferent services an average firm buys (four in
both groups), or measuring the number of
purchasers for each service category.
The analysis has so far shed light on how
internal characteristics and location may
influence outsourcing. Table 3 indicates dif-
ferences between the type of business service
in sensitiveness to distance. The local trade
category contains those cases where business
relations are between any two local partners.
Regional trade comprises cases where the
partners are located in different municipali-
ties in the same region. Provisions based on
supplies from other parts of Norway or abroad
are covered by the label national/inter-
national trade. (Only 20 firms were registered
as having any business service trade abroad.)
Another column shows the number of cases
where trade is registered without information
about the address. A further column shows the
number of firms reported trading for each
business service category.
Table 3. A measure of distance by percentage based on a comparison of location of 416 small- and medium-sized
manufacturing firms and their main suppliers specified by service category.
Industrial subclass (NACE)
Local
trade
Regional
trade
National/
international
trade
No
information
about trade
partner's
address No.
Computer services (software related) 45 (133) 42 (122) 4 (11) 9 (27) 293
Computer services (hardware related) 45 (126) 42 (116) 8 (23) 5 (13) 278
Legal services 41 (105) 47 (119) 8 (21) 4 (10) 255
Advertising, secretarial, translation and
office related support services
49 (113) 28 (63) 10 (23) 13 (30) 229
Technical services (process/product
related)
37 (64) 30 (53) 17 (30) 16 (27) 174
Technical services (infrastructure related) 47 (72) 38 (58) 8 (12) 8 (12) 154
Business, management and tax consulting
services
40 (59) 48 (72) 6 (9) 6 (9) 149
Employment agency services 63 (71) 21 (23) 6 (7)* 10 (11) 112
Marketing services 36 (38) 32 (34) 15 (16) 17 (18) 106
All business services 45 (781) 38 (660) 9 (152) 9 (157) 1750
Note: * are supplying firms that have addresses near a `border' between two regions.
GRETE RUSTEN
128

Most business services purchased were
located in the same municipality as the buying
firm (Table 3). The only two exceptions were
legal services and the joint category including
business management and tax consulting
services, for which regional rather than local
trade was more common. An analysis of where
firms choosing not to use the local lawyer
revealed that as much as 63% (of 73 firms) did
business with Oslo solicitors.
Technical services (process-/product-related),
together with marketing services, had the
highest volume of trade between different
parts of the country or abroad. Relatively
speaking, employment agency services, to-
gether with business management and tax
consulting services, in addition to software
related computer services, had the lowest
number of cases of trade involving a supplier
outside the purchaser's own region. For the
first two mentioned categories, sensitiveness
to distance is probably an important expla-
nation for why so few cases of long-distance
trade occur. For software-related computer
services, local or at least regional alternatives
often stem longer-distance trade (Table 1).
Most service trade taking place between
local parties implies that they often already
know each other. This is probably also why
many arrangements can be based on in-
formal agreements rather than being regu-
lated by detailed contracts. The two types of
computer industries received the highest
rank. According to Illeris (1996, p. 201) these
service categories are often co-produced
internally and externally. External computer
support is needed to keep track with con-
stantly new developments in this field. Few of
the firms are of a size that justifies an entirely
internal ICT resource base. Nor is it usually
possible to recruit expertise outside large
urban areas. Details from the case studies
have, however, shown some examples of these
types of services traded on a long-distance
basis.
Another type of business service with a rela-
tively high number of buyers is legal services.
Firms not reporting legal service trade were
often among the larger, and sometimes part
of an, enterprise headquartered elsewhere.
Instead such services were usually based on
external sources. The type of business service
that, according to the empirical evidence,
had fewest purchasers was marketing services.
Earlier distribution figures (Table 1) revealed
that marketing services show a rather poor
geographical coverage. A rather poor supply
situation, lack of tradition using this type of
service, or reliance on internal resources,
explains the low demand.
The survey had, in all, very few firms that
have externalised services previously carried
out in-house. When asked whether the present
outsourced services (status for 1996) were part
of firms' internal arrangement 3±4 years ago,
in fact only 11% answered that such changes
had taken place. The types of business services
with the highest number of such changes were
computer services (software) with 13 cases,
and business and management consulting
services with 12. All other service categories
had six or less each. The number of changes
included too few cases to uncover any possible
variation between industries or type of loca-
tion. Finally, seven firms had changed one or
two previous internal activities into indepen-
dent profit centres.
Table 4, including data that aims to show
whether the type of sourcing strategy (i.e.
internal/external) varied by location, con-
firms that many firms base marketing on
internal resources. It should be mentioned
that a small majority of firms in rural locations
chose internal instead of external supplies as a
source for advertising, secretarial, translation
and office-related support services. However, a
small number cannot exclude the fact that this
is caused by statistical coincidence. Finally, a
comparison of the internalisation values for
the two groups of firms in the same table only
shows significant differences when comparing
the two categories for advertising, secretarial,
translation and office-related support services,
as well as marketing services. For marketing
services, the internalisation rate is higher for
rural firms, which in most cases is probably a
compensation for not having favourable local
access.
For all other types of services the variations
in internalisation values were quite marginal.
The two columns including firms without
registrations do not confirm that rural firms
use any less business services than those
located in large urban areas.

Table 4. Small- and medium-sized firms located in municipalities of large urban areas and rural districts, showing registered strategies for the use of business services,
percentage shares. Real numbers are shown in parentheses.
Firms in large urban areas (N=203) Firms in rural districts (N=62)
Industry Externalised Internalised No
registration
Externalised Internalised No
registration
Business management and tax consulting services 34 (69) 27 (55) 39 (79) 32 (20) 32 (20) 35 (22)
Marketing services 24 (49) 45 (92) 31 (62) 23 (14) 55 (34) 23 (14)
Legal services 60 (122) 12 (25) 28 (56) 68 (42) 15 (9) 18 (11)
Advertising, secretarial, translation and office
related support services
49 (99) 24 (49) 27 (55) 31 (19) 35 (22) 34 (21)
Computer services (hardware related) 66 (133) 20 (40) 15 (30) 65 (40) 19 (12) 16 (10)
Computer services (software related) 63 (127) 16 (32) 22 (44) 61 (38) 15 (9) 24 (15)
Technical services (infrastructure related) 29 (59) 12 (24) 59 (120) 44 (27) 11 (7) 45 (28)
Technical services (process/product related) 32 (64) 22 (45) 46 (94) 44 (27) 21 (13) 35 (22)
Employment agency services 39 (79) 0 61 (124) 5 (3) 0 95 (5)
All business services 44 (801) 20 (362) 36 (664) 41 (230) 23 (126) 36 (201)

SEARCH STRATEGIES AND TRADE
RELATIONS ± A CASE STUDY APPROACH
Outsourcing for business services may enable
the firm to increase flexibility, gain expertise
and reduce expenses (Marshall 1994, pp. 41±42).
Outsourcing can also be used as a method to
become aware of real costs. Some firms evalu-
ate internal service costs by alternatives bought
on the market. Case study evidence revealed
how these projects are sometimes organised by
asking for internal bids against external
vendors, before searching for alternatives.
The different search strategy categories are
shown in Figure 1 and discussed below. No
significant urban rural contrast concerning
strategies has been observed among firms
included in the case study.
The empirical results based on the tele-
phone survey have already shown that business
service trade often engages firms located in
the same or neighbouring municipality. Rel-
evant factors for making such a choice men-
tioned by the case study firms were:
. A simplified searching process.
. Use of local alternatives gives an advan-
tageous access, which minimises trans-
action costs.
. The parties can easily communicate with
each other, as they are part of a common
local culture.
. The choice of suppliers is based on
acquaintances and informal agreements.
. Basing the choice on the firms' own or
others' previous experience is a away of
avoiding too much going wrong.
. A local commitment to keep local busi-
nesses alive.
Few firms seem to have adopted the same
strategy when choosing between service sup-
pliers, as when searching for suitable suppliers
of goods. Managers explained that service
trade strategies were given lower priority. This
explains the occurrence of rather few cases of
`advanced searchers' among our cases.
A few firms get service supplies outside their
own region because this is co-ordinated by a
parent company located elsewhere. Common
service categories provided in this way are legal
services, accounting and auditing, marketing
and computer services. Those who trade with
profit units either within their own organis-
ation or with freelancers that used to be a part
of the firms' own staff can also be classified in
the same category and defined as `defensive'
searchers. Some of the case firms were rather
Figure 1. A diagram based on the case studies, showing the firms' dominating search strategies preceding their out-
sourced service agreements. A line crossing columns indicates strategy combinations.
Local patriotism Wide search Defensive search Third-party search
via
parent company
Entailed
goods Broker
Trade
organisation
12
1 ÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐ 1
2 ÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐ 2
1 ÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐ 1
1 ÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐÐ 1
7
1 ÐÐÐÐÐÐÐ 1
1 ÐÐÐÐÐÐÐÐÐÐÐÐÐ 1
2 1
2
17 8 5 2 4 2

defensive in the process of choosing service
sources, as services was offered along with
purchased goods. Examples are test labs for
food, or expertise in finding individual tools
or machinery adjustments. In some cases these
agreements functioned quite well. However,
there were still concerns about the real costs,
as the price of the services was not specified.
The services were, in fact, paid for in cases
were they had not been used. In addition
some firms found it difficult to terminate
these type of contracts as so many elements
were involved.
Small- and medium-sized firms as indi-
viduals have obviously limited market power.
Some food manufacturing firms admitted this
weakness by leaving the choice of service
supplies to a third party, i.e. a broker. A broker
is a type of business management adviser,
dealing with suppliers on behalf of several
paid-membership firms. Delegating such deci-
sions to brokers with nation-wide coverage will
logically loosen up local suppliers. However,
these contracts have often concerned more
standardised forms of services than what is
usually known as business services. Insurance
and travel agency services are two examples.
Still another variant of letting a third party
take the responsibility of finding the best
offers is making use of trade organisation
arrangements. Agreements dealing with com-
puter service supplies were found among the
cases. The case study also showed examples of
trade organisations offering legal advice and
expertise on marketing surveys.
Stability of contracts varies considerably by
type of service. Apparently, complex services
with substantial switching costs will probably
result in a higher degree of long-lasting
contracts than more standardised services,
which can more easily be evaluated through
tender procedures.
The occurrence of geographical nearness
between the observed trading parties has
already been explained. There are, however,
examples where firms prefer geographical
distance. The case study revealed that some
firms avoided the nearest legal advice because
local solicitors were not considered indepen-
dent enough from local community events.
Wrong field of competence, was a further
explanation. Several managers also share the
impression that law firms in the capital in
general are of a better standing than else-
where. Hermelin's (1997, p. 155) business
service study from Sweden suggests that a
prestigious down-town address in the capital
signals a legal firms' authority and success.
The overall impression from the case
studies, especially for computer services, was
that the firms had usually used relatively few
resources on searching for and evaluating
different alternatives. Nor did many have
analysis that included price comparisons.
Complaints followed by changes of partners
seem more common for computer services
than for other service categories. Still, switch-
ing computer service sources can sometimes
be considered risky economically and techno-
logically. Some customers are in reality trapped
by already invested technology. A further chal-
lenge has to do with lack of competence in
judging whether a change of supplier will
represent an improvement before it actually
has been tried out.
CONCLUSION
The data first of all suggests a positive re-
lationship between outsourcing activity and
firm size. These provisions will probably rein-
force larger companies' competitive position,
whereas smaller firms, especially those in rural
areas, will often have difficulties or may not
even be aware that they are not updated, are
paying too much or receive services of lower
quality standards.
Empirically, this study has included three
manufacturing sectors, and shown some varia-
tions in purchasing probability. It seems
relevant, however, to ask how an outsourcing
study based on other industries, such as the
service industry sector itself, would influence
the results concerning geographical distance
between the involved parties.
A consequence of a `narrow search' process
is that small- and medium-sized firms easily
turn to local service suppliers. This common
strategy gives a somewhat revised impression
about the motivating force and quality of agglom-
erations or geographically concentrated clusters.
Ways of choosing partners also question the
assumption that repeating business signals
quality. Due to priorities ± limited internal
GRETE RUSTEN
132

resources ± the case studies have instead re-
vealed that rather few SMEs thoroughly evalu-
ate service suppliers. Managers being resistant
to change can be a further explanation of why
many stick to existing agreements.
What are the business and regional impli-
cations of these results? Insufficient quality
or expensive nearby service alternatives can
obviously weaken firms' competitive positions.
Firms in rural areas especially, with a general
poorer service infrastructure compared to the
situation in larger cities at least, risk involving
service suppliers that certainly are not among
the `best'. The present tight labour market
situation in Norway also indicates that rural
firms will have difficulties strengthening an
internal resource base. Nor is influx of tem-
porary labour usually an alternative resource
base for firms in rural areas, simply because
this service category hardly exists outside
larger urban areas. A general service demand
increase, due to a more fierce and compli-
cated competitive situation, can therefore
further increase the rural/urban economic
contrasts.
Even if geographical proximity is still often
appreciated from a communicative point of
view, the data has shown that it is possible to
use distant service suppliers. The few observed
cases where the whole issue about geographical
distance between the involved party is more
open are usually firms that either have the
necessary internal resources to search geo-
graphically more widely than their own com-
munity, or those that have left the whole
matter of searching to others. A more sophis-
ticated use of ICT-systems might be an import-
ant tool to those firms that do not necessarily
want to use local suppliers. The alternative of
using service brokers and other third party
sourcing arrangements can be a way out for
firms with internal limited resources. This also
signals demand for further empirical evidence
on service broker activity and regional effects.
Acknowledgements
Thanks are due to Odd Sta
Êle Dalslaaen for assisting
in the project. Also thanks to Arild Aakvik for giving
statistical advice and Torstein Nesheim for academic
comments. This study is financially supported by the
Research Council of Norway (TYIN-Programme).
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