A Commitment-Based Explanation for Outsourcing Multiple Tasks†

Over the last two decades, there has been a considerable increase in outsourcing of products and services in the manufacturing and information technology (IT) arenas with the objective of reducing costs and improving efficiency and quality (see Willcocks, Lacity, and Fitzgerald 1995; Earl 1996; Bryce and Useem 1998; Costa 2001; Kakabadse and Kakabadse 2005; Weeks and Feeny 2008). A few observations on the trend in outsourcing practices are noteworthy. In the early years buyers and clients outsourced production-related tasks and induced vendors to improve production technology or quality (see Minahan 1998b; Y. Hwang, Rangtusanatham, and Pei 2006; Shi 2007; Y. Hwang, Erkens, and Evans 2009). In recent years clients have increased the number of tasks outsourced by including design-related tasks as well (see Minahan 1998a; Carbone 2000; Natovich 2003; Kakabadse and Kakabadse 2005). However, the increase in the price has not been commensurate with the direct costs of the additional tasks (see Earl 1996; Minahan 1998b; Milligan 2000). While the trend in increased tasks being outsourced is rationalized by the improved ability of vendors (Minahan 1998b; Shi 2007), the trend in prices not increasing to cover the direct costs of additional tasks is rationalized by the higher bargaining power of clients (see Minahan 1998b; Dyer 1996; Crook and Combs 2007). Our objective is to provide an alternative rationale based on agency issues for the outsourcing trend of increased tasks without a corresponding increase in price. We consider an agency problem with one client and one vendor. There are two actions: the design action and the production action. The client can observe the vendor’s production action, but it is not contractible. If the client observes the vendor exerting an undesirable production action, then the client can help the vendor out with an intervention action. Knowing