Outsourcing: practice in search of a theory

Abstract

Organisations need to innovate continuously in order to remain competitive. Innovation is often a consequence of specialisation1 because it is difficult to innovate if one is engaged in a broad range of activities. While organisations today are trying to specialise and focus on a few activities, they also need to conduct a host of other activities in order to address product-market needs. They would need to purchase these activities from the market. Thus, specialisation, i e, focusing on a few activities, and outsourcing, i e, purchasing activities from the marketplace, are complementary business imperatives in the present age of innovation-driven competitiveness. In seeking to understand which of the organisation’s activities should be conducted within its boundaries and which should be sourced from the market, managers need to understand the costs and benefits of both options. This paper presents a model that would inform and enrich a manager’s understanding of the business phenomenon of outsourcing. The first three sections, respectively, identify the different reasons why organisations outsource critical organisational activities, point out the risks involved in outsourcing decisions and derive a decision model that managers can use to validate their decisions for outsourcing or conducting an activity within the organisational boundary. The fourth section identifies the exceptions to the decision rule while the fifth explains ‘reputation capital’ as a strong mitigator of risks associated with market based transactions. The paper concludes with a discussion of the contributions of the model and its possible uses.