The Limits to Outsourcing: Beware of the Consequences for Market Success!

By Masaaki Kotabe, Michael J. Mol, Janet Y. Murray & Ronaldo Parente

Over the past few decades, outsourcing, in particular offshore outsourcing, has become a widely used means for firms to improve their performance. Outsourcing helps lower the firm’s breakeven point and improve its return on investment. As a result, many firms have increased their outsourcing activities. In our studies we find that although firms may be able to improve their market performance through increased outsourcing, this is only true up to a point, beyond which market performance actually decreases. But we also find that firms that have a weak internal resource base or are facing strong competition can afford to outsource more. As a marketer you should be aware of the marketing implications of outsourcing strategy so that you can proactively shape your firm’s outsourcing strategy.

Outsourcing may be a good way to cut costs in the short run, but do you know how it affects the success of your firm in the marketplace over the long term? This is a question we have been trying to tackle. In this article we will share our insights with you and hope to provide you with guidance on how to achieve a balanced outsourcing strategy for your organization.

Outsourcing helps reduce fixed investment in in-house manufacturing facilities and thus lower the breakeven point, making an outsourcing company less susceptible to recessionary sales declines and potentially helping to boost its return on investment (ROI). Thus, if corporate executives’ performance is evaluated on the basis of their contribution to the company’s ROI, then they tend to have an incentive to increase outsourcing, especially in the current business environment where pressures for cost reduction are everywhere. This financial logic has appealed in particular to U.S. corporate executives who tend to be evaluated on relatively short-term results.

But marketers, at the other end of the value chain, and top executives, may not have considered the marketing consequences of outsourcing strategy to the same extent. So does an outsourcing strategy help sustain your firm’s competitiveness in the marketplace in the long run? Although the marketing performance impact of various strategic issues, such as market structure, brand equity, market share, and competitive strategies, has been widely studied, the outsourcing-marketing performance nexus has eluded executives’ attention.

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The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.