Outsourcing and transaction cost analysis

1. Outsourcing and transaction cost analysis MBA-ProMa Industrial Marketing Staffan Brege, Professor

2. Outsourcing • Strong financial driving forces • Globalisation and diversification towards customer • Trottle and brake strategy regarding assets • High potential but also high risk • How to transform old companies

3. Outsourcing logic • Core competence internally • Complementary competence - partnership relationships • Standard components - arms length

4. Outsourcing - the Analysis Strategic analysis - core competence + expansion Risk for supplier opportunism Outsourcing-calculation + +

5. Transaction Cost Analysis • Total cost = production cost + transaction cost • Transaction costs ex ante: searching, drafting, negotiation • Transaction costs ex post: monitoring, enforcing agreements

6. Transaction Cost Analysis cont • High degree of asset specificity = highly specialised assets • Bounded rationality among us humans = as rational as possible within human limitations • Uncertainty in deliveries and technology • Bounded rationality -> incomplete contracts between buyer and supplier -> potential for opportunism (= seller misuse of power position)

7. Transaction cost Keep our business inhouse when: • High degree of asset specificity, • high degree of uncertainty, • few potential suppliers, • high risk for supplier uncertainty.

8. Outsourcing - the pros • Expansion without expanding the balance sheet • Time to market - TTM • Strategic flexibility • Better quality • Lower costs • Fight the NIH syndrome

9. The Outsourcing Trap Price Cost Price Cost Time

10. Outsourcing - the cons • Destroys core competence and complementary competence • Supplier power • Longer TTM and TTC • The supplier vs the end user • No internal restucturing • Too small value added