Abstract
The dominant view is that outsourcing is driven by efficiency considerations. We demonstrate that a different path to outsourcing originates from critical internal resource shortages. These shortages pose a critical dilemma; on the one hand outsourcing is a reasonably durable approach to solving resource shortages. On the other hand, the same resource shortages complicate the management of outsourcing and may create knowledge and evaluation problems. We empirically examine this dilemma and thereby add to the limited work on the enabling effects of outsourcing under resource constraints. We employ two rich and unique panel datasets of Australian firms observed over five-year periods, to test dynamic change models if firm-level financial and competence constraints induce outsourcing, and if this in turn enables internal process improvement. The results show that outsourcing indeed is associated with both financial and competence constraints, although the impact of these constraints differs over time. In turn, we find that increased outsourcing relates positively to contemporaneous and future process improvement. These findings thus shed a positive light on how outsourcing can enable firms to overcome constraints and realize internal process improvement.
Highlights
The dominant view on outsourcing, the contracting out of work and activities, as espoused by for example transaction cost analysis, is that firms make outsourcing choices driven by efficiency through the lowest possible combination of production and transaction costs
Whilst much is known about efficiency reasons to outsource, our results show that outsourcing can play a key role as enabling approach that facilitates firms in dealing with financial and competence constraints
These adverse conditions create the dilemma of whether resource constraints are countered by outsourcing, enabling better performance, or whether they complicate the management of outsourcing and reduce performance
Summary
The dominant view on outsourcing, the contracting out of work and activities, as espoused by for example transaction cost analysis, is that firms make outsourcing choices driven by efficiency through the lowest possible combination of production and transaction costs (cf. Geyskens, Steenkamp, & Kumar, 2006). IBM touts that its outsourcing services enable agility, lower cost and simplified management.1 These enablement benefits are tightly linked to the resource-based view of the firm, which considers boundary decisions and performance differences between firms as relating to resources and capabilities in the form of skills, competences and know-how (Barney, 1999; Wernerfelt, 1984). While prior research has examined a wide range of antecedents relating to the decision to outsource, Tsay et al (2018) document that over the various levels at which drivers of outsourcing may be found (including the activity/product/process, firm, transaction, environment and decision maker), few are examined at the firm level Of those studies that consider firm level influences, none that we are aware of focus on how firms' internal resource constraints impact outsourcing. We discuss the results and the implications of this study
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