OUTSOURCING AND FINANCIAL TRANSACTION:
A NEGATIVE CURVILINEAR EFFECT
Firms face intense competitive pressures due to factors like technological change and globalisation. In response to these concerns, companies, both large and small, are increasingly outsourcing their activities by shifting what they traditionally handled in-house to external suppliers. There has been so much outsourcing in areas like IT that scholars are now starting to ask whether some of that outsourcing will be reversed, in the form of backsourcing (Whitten and Leidner, 2006). Outsourcing commonly refers to the purchase of a good or service that was previously provided internally (Lacity and Hirschheim, 1995; Rothery and Robertson, 1995). In line with this broad notion, we define outsourcing in this paper as the transfer of activities to an external source. According to Coase (1937), the existence of organisations can be attributed to market failure that induces transaction costs. Thus firms are constantly weighing the total costs, including transaction and production costs, of the market and hierarchy modes. In the transaction costs line of research, Williamson (1975, 1981) made important theoretical contributions, which have been empirically justified by various others (e.g., Hennart, 1988; Walker and Weber, 1984). In recent years resource-based arguments have been added to the explanation of outsourcing (Barney 1999; Leiblein, Reuer, and Dalsace, 2002; Marshall, McIvor, and Lamming, 2007) as have real options (Leiblein, 2003), agency (Holmström and Roberts, 1998) and industrial organisation arguments (Shy and Stenbacka, 2005). Thus a fairly good understanding has emerged as to what drives the decision to outsource, or integrate, a specific activity. Yet in the empirical reality we observe that firms outsource some but not all of their activities. As extreme examples they for instance retain in-house outsourcing decisions and 2 supplier management and externalise auditing activities and the production of electricity. This leaves room for theoretical grounding of the outsourcing phenomenon at the firm level. Any value chain needed to produce products for a customer can be seen as a bundle of activities governed by a nexus of treaties and these activities are performed either internally or externally (Aoki, Gustafsson, and Williamson, 1990; Williamson, 1995). So for every individual activity a governance choice must be made (make or buy) and the sum of all governance choices determines a firm‘s overall level of outsourcing, which will differ for every individual firm.
REFERENCE:
http://wrap.warwick.ac.uk/3254/1/WRAP_mol_110610-outsourcing_and_financial_performance_v_jpsm_final.pdf
Firms face intense competitive pressures due to factors like technological change and globalisation. In response to these concerns, companies, both large and small, are increasingly outsourcing their activities by shifting what they traditionally handled in-house to external suppliers. There has been so much outsourcing in areas like IT that scholars are now starting to ask whether some of that outsourcing will be reversed, in the form of backsourcing (Whitten and Leidner, 2006). Outsourcing commonly refers to the purchase of a good or service that was previously provided internally (Lacity and Hirschheim, 1995; Rothery and Robertson, 1995). In line with this broad notion, we define outsourcing in this paper as the transfer of activities to an external source. According to Coase (1937), the existence of organisations can be attributed to market failure that induces transaction costs. Thus firms are constantly weighing the total costs, including transaction and production costs, of the market and hierarchy modes. In the transaction costs line of research, Williamson (1975, 1981) made important theoretical contributions, which have been empirically justified by various others (e.g., Hennart, 1988; Walker and Weber, 1984). In recent years resource-based arguments have been added to the explanation of outsourcing (Barney 1999; Leiblein, Reuer, and Dalsace, 2002; Marshall, McIvor, and Lamming, 2007) as have real options (Leiblein, 2003), agency (Holmström and Roberts, 1998) and industrial organisation arguments (Shy and Stenbacka, 2005). Thus a fairly good understanding has emerged as to what drives the decision to outsource, or integrate, a specific activity. Yet in the empirical reality we observe that firms outsource some but not all of their activities. As extreme examples they for instance retain in-house outsourcing decisions and 2 supplier management and externalise auditing activities and the production of electricity. This leaves room for theoretical grounding of the outsourcing phenomenon at the firm level. Any value chain needed to produce products for a customer can be seen as a bundle of activities governed by a nexus of treaties and these activities are performed either internally or externally (Aoki, Gustafsson, and Williamson, 1990; Williamson, 1995). So for every individual activity a governance choice must be made (make or buy) and the sum of all governance choices determines a firm‘s overall level of outsourcing, which will differ for every individual firm.
REFERENCE:
http://wrap.warwick.ac.uk/3254/1/WRAP_mol_110610-outsourcing_and_financial_performance_v_jpsm_final.pdf
