Many observers mark the beginning of the contemporary surge of company outsourcing with Eastman Kodak’s decision in 1989 to source out its entire information management to IBM, Businessland, and Digital Equipment Corp. Since this deal’s execution, outsourcing has become a standard management device at many US firms, and corporate expenditures on it have rapidly accelerated.
Outsourcing can yield longer-term gains and immediate payoffs. When a product or service costs less, it frees up capital for alternative uses. When the less costly service is deployed in value-creation, savings from sourcing should accrue to investor longer-term wealth. Still, lower costs can yield better margins and improved cash flows in the short run, and higher earnings per share and stock price.
Some analysts contend that an important source of user value is the firm’s access to economies of scale and the unique expertise that a large provider can deliver. Since providers are typically servicing many clients, they often achieve lower unit costs than can any single company. Specialist providers can also afford to invest more in new technologies and innovative practices than can many user enterprises.
Firms enter sourcing agreements for strategic gain as well. Fresh value may come from an outsourcing contract if it provides for good complementarity between a user’s and a provider’s capabilities; if it allows the user to stay abreast of fast-changing technologies; and if it allows the user to draw on the results of capabilities it could not develop itself. Company value can also be enhanced when management attention is more focused on strategic issues and less on daily operational problems or organizational conflicts.
Studies on outsourcing value might best follow one or more of the following research agendas:
Outsourcing announcements: With a representative sample of major outsourcing announcements, and good data on the firms involved and other events of the period that could affect stock price, a study could seek to isolate the impact of announced agreements on the stock price of both users and providers.
Strategic cases: If the prior research agenda relies upon statistical analysis of a cross-section of companies, it can be equally instructive to go to the other end of the methodological spectrum. Depth case studies of the strategic payoff of major outsourcing decisions in two or three companies where it has worked well could help identify the specific ways that outsourcing, when effectively implemented, contributes to competitive advantage.
Best practices: A still different approach is to examine the experience of a dozen diverse companies where outsourcing in its most varied forms has been in place for sometime. By investigating what has worked well and what has not, this research agenda could help identify the better or best practices for ensuring that outsourcing leads to enhanced company value.
Where it works: A fourth research agenda is to ask where outsourcing works best. With a representative cross-section of firms and reliable information on which have outsourced, what has been outsourced, and when they met success, this study would provide guidance on the more specific issue of the conditions under which outsourcing should or should not be utilized.
Outsourcing and options: A fourth study worth considering is to place outsourcing decisions into a broader context of management options. Here the research agenda would be to ask such questions as when it is better to outsource an activity, enter a joint venture to achieve the activity, or bring the activity in-house through acquisition.
All of these studies face formidable problems of conceptualization and data collection, but all are needed. The challenge is to identify those that are of greatest priority for managers facing critical decisions on the outsourcing frontier—and those that are of greatest feasibility for the researchers who would then face the critical decision on the research frontier.
Globalization challenges: Most outsourcing contracts are for domestic or even just regional operations, but companies are increasingly globalizing their operations, and ownership markets are becoming more international as well. A final study agenda could be to examine whether global sourcing—which faces an additional set of challenges not encountered in the home market, ranging from unpredictable currency fluctuations to the absence of providers in many foreign markets—adds air pressure to a company’s stock price.
Dr. Ben Chouchaoui
Operations Manager
WIDL Inc.
April 1, 2023
Monday – Friday
8:00 am – 5:00 pm
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Dr. Chouchaoui and WIDL do not do engineering services regulated by PEO (Professional Engineers Ontario). If you need services as such please contact PEO for referrals to an engineer who does such.
