Why Should Managers Look beyond Cost When Making Outsourcing Decisions? Outsourcing Driven Innovation as a Form of Open Innovation

Abstract

Outsourcing scholars have used transaction cost economics to explain outsourcing decisions predominantly as a means of reducing costs and increasing profits. However, mounting empirical observation reveals that outsourcing to suppliers with the ability to assemble diverse expertise can provide critical strategic benefits to outsourcing firms in terms of the timing and cost efficiency of innovation. This study extends the traditional outsourcing paradigm to incorporate potential innovation benefits from outsourcing and proposes strategic outsourcing as an additional aspect of open innovation. Our perspective differs from traditional outsourcing and open innovation studies in two important ways. First, we outline how firms can gain the benefits from the potential innovation from outsourcing and argue that managers should take these benefits into account in their strategic outsourcing decisionmaking. Second, we show that by allowing some degree of spillover to other firms such benefits are a type of open innovation. Our theoretical framework provides new insights into organizational outsourcing decision-making and presents an extension of outsourcing as a strategic mechanism driving innovation beyond firm's boundary.