Theoretical Explanation Of The Strategic Outsourcing

This paper is concerned with the ever increasing degree of corporate vertical dis-integration since the last decade of 1900s, of which outsourcing is a typical practice. While the question, why and how firms should outsource certain activities, is an increasingly relevant question for business practitioners, it is also a central question in the dominating theories of the boundary choice of the firm. The most influential theories in this field include transaction cost economics (TCE), resource-based view (RBV), and the dynamic perspective (dynamic capabilities theory in particular).The potential contributions to an understanding of outsourcing from these three perspectives are presented in order. Each is found to have provided some insights concerning the parameters of outsourcing decisions, the activities to be outsourced, the implementing process of outsourcing strategy, and the implications of outsourcing. TCE suggests that managers may consider shifting to external procurement if the reduction in production cost of the service consequent on outsourcing is not neutralized by the additional transaction cost. RBV delves into the gains for the outsourcing firm from the opportunities provided by different and better utilization of remaining resources. By contrast, dynamic perspective opens up a dynamic logic, in which the switching cost involved in outsourcing process, as well as the long-term consequences of outsourcing decisions on dynamic capabilities of the firm, is brought into focus.Using this framework, together with comparative analysis and case study of the three theories, the paper argues that each theory has its limitations in explaining the phenomenon of outsourcing. Though competitive, they are complementary and consequential to some extent. It is not to suggest that there is only one paradigm that has value in explaining, but that complex outsourcing practice is likely to benefit from insights obtained from all of these perspectives.The paper conclude that the general picture of outsourcing can be obtained by referring to transaction cost economics, resource-based view, and dynamic perspective altogether. In this way, both outsourcer and outsourcee can learn from the strategic implications of outsourcing decision so as to get a better understanding of their own situation.