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

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

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

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

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

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)

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

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

The Outsourcing Trap Price Cost Time Price Cost

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