The Process of Vertical Dis-Integration: An Evolutionary Perspective on Outsourcing

It is argued that an evolutionaryperspective on firm boundaries with its strongfocus on knowledge, as well as processes ofsearch, learning and capability development isinstrumental in developing a theory of firmboundaries that is close to managerialconcerns. Building on insights in evolutionaryeconomics, propositions are developed regardingscope, speed, and switching costs in theprocess of vertical dis-integration of whichoutsourcing is a particular instance. Currenttheories of firm boundaries give indication whycertain activities might be candidates foroutsourcing by stressing efficiency gains interms of transaction and production costs. They overlook, however, that ``technologicallyseparable interface'' between activities might notbe available in codified form, and neglectlearning dynamics that lead to strategicconsequences in terms of capability developmentand adaptability in competitive environments ofvarying dynamics. An evolutionary perspectiveon vertical dis-integration recognises thatfirms make contractual commitments and partlytacit capabilities develop in a path-dependentmanner. The fact that the firm's past casts ashadow on current governance options, andpossibilities to realise them, complicates theprocess of governance change and imposesswitching costs that impact the scope and speedof vertical dis-integration. An evolutionaryperspective on vertical dis-integration alsosuggests considering long-term consequences ofoutsourcing decisions on the dynamiccapabilities of the firm. Copyright Kluwer Academic Publishers 2001