Modularity and innovation in knowledge-intensive business services: IT outsourcing in Germany and the UK

Drawing on an empirical study of IT outsourcing in the UK and Germany, this paper explores the lessons for modularity that can be drawn from the outsourcing of knowledge-intensive business services (KIBS). Because of the inseparability of information and production technologies, IT outsourcing is frequently accompanied by wider transformations in clients' production technologies. This results in the need for knowledge and organisational coordination in the form of the transfer of staff from the client and the retained IT organisation. Modularity is often presented as a design strategy that stimulates innovation. Our research findings challenge the generalisability of this claim when examining KIBS outsourcing. We show that intangibility of services exacerbates the conflicts between clients and suppliers, which may present obstacles to innovation. © 2005 Elsevier B.V. All rights reserved.