AGL Outsourcing IT To Tata Consultancy Services:
A Kogut and Zander’s Perspective
M.Sc. International Business and Management
Economic Analysis of The Multinational Enterprise (BMAN70191) Student ID Number: 8515642
Word Count: 3,276
The issues that have been explored in the following essay lie at the core of the evolutionary theory of the Multi National Enterprise (MNE) given by Kogut and Zander (1992). According to Kogut and Zander (2003), firms define a community consisting of a body of knowledge, which guides the cooperation and communication within the community. Boundaries of a firm are not defined by market transaction costs and market failures to protect knowledge, but it is the better ability of firms than the markets to transfer the social knowledge of individuals and groups within an organisation, which reflects its boundaries (Kogut and Zander, 1992). Boundaries reveal the extent of growth of a firm across its national borders either through internationalisation or through external contractual relationships (Ietto-Gillies, 2012). Thus it is not market failure but the relative efficiency of a firm in transferring knowledge, which guides its boundaries. Firms act as social communities and grow through the replication of current knowledge that facilitates the innovation of new knowledge (Kogut and Zander, 1993). Cooperation within the groups and individuals leads to learning and growth of capabilities in the social community. The above highlights a Kogut and Zander’s perspective to why a firm exists and how it grows across borders. This essay explains the case of AGL outsourcing its IT services to Tata Consultancy Services Limited (TCS) in line with the evolutionary theory. AGL is Australia’s largest energy retailer as well as the largest private owner, operator and developer of renewable energy assets with 3.2 million customers across Australia. The company is not only engaged in purchase and sale of electricity but also in the construction and operation of power generation. With a headquarter in North Sydney, AGL’s offices and operating sites are all around Australia (TCS limited, 2011). Due to myriad problems faced during internal performance of IT services, AGL finally outsourced IT to TCS in 2007. Established in 1968, TCS is among the top 10 technology firms in the world. Building on an experience of more than 40 years TCS aims to help its customers to achieve their business objectives by providing them with innovative, best in class consulting, IT solution and services (TCS limited, 2012a). The aim of this essay is to give a Kogut and Zander’s perspective to the problems faced by AGL and the solution given by TCS. The current scenario of their contract with a predictable future will be developed in line with the evolutionary theory. 2. BUSINESS SITUATION
AGL had implemented a System Application Program for Industrial Solution Unit (SAP IS-U) and a Customer Relationship Management System (CRM) to support and guide their business process and utility services. The inadequacy of the User Accepting Testing (UAT) being performed for the daily changes in production was a major issue for AGL. It was a result of the limited knowledge and inexperience of the Subject Matter Experts (SME) and the lack of a standardized testing process (TCS limited, 2011). This led to high management costs and less efficient operations.
3. KOGUT AND ZANDER’S PERSPECTIVE TO BUSINESS SITUATION
3.1 Experiences And Knowledge Creation
According to Kogut and Zander (1992), the capabilities of a firm rest on its organising principles that are shaped by the personal expertise and social knowledge of the individuals. Firms compete on the basis of their differential capabilities to expand and create knowledge. It is the superiority of information and know-how that enables a firm to get a competitive edge over its competitors. A firm achieves such superiority through experiential learning. Moreover the...
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