Outsourcing of Services by Service Firms: An Empirical Investigation

Abstract

The traditional “make-or-buy” decision has been widely studied in the context of the theory of the firm and vertical integration. One of the most popular frameworks for examining this strategic decision has been the transaction cost analysis (TCA) framework. However, much of past research has focused on the make-or-buy decisions of product manufacturing activities, to the neglect of services. The make-or-buy decisions of services and service activities, due to their inherent characteristics (i.e., intangibility, inseparability, heterogeneity, and perishability) and the unique nature of their “production” and “delivery,” necessitate modifying and revamping the existing framework. The authors develop and empirically test a conceptual framework that examines factors influencing a firm’s decision to use outsourcing or in-house sourcing for a service (service activity).