Strategies of Outsourcing: From De-Risking to Uncertainty

Abstract

This chapter investigates conditions when economic profit can be made from outsourcing. In order to have profit a firm must pursue strategies of cooperation while outsourcing business processes. Strategic interdependence between the client and the provider firms has led us to look into the maneuverability of one structure by the other. The client firm in order to de-risk its business from risks generated by its own structure outsources part of the business. The structure of the outsourced partner, described sometimes as the extended enterprise, together with the structure of its client generate endogenous demand for outsourcing. Structures are the sources of demand here. Boundaries of the two structures become fuzzy, and transactions in intermediate outsourced goods shift the management of coordination between the two firms to a novel platform. Now each firm forms an expectation on what the counterparty expects, and through this the parties evolve norm. Norm based transaction leads to uncertainty and this uncertainty is the source of an entrepreneurial profit. Outsourcing when undertaken strategically thus might lead to a profit solution.