Strategic Sourcing: Theory and Evidence from Economics and Business Management

This report, originally prepared as an annotated briefing, discusses the recommendations of the economics and business management literatures on issues related to outsourcing. It is found that organizations should outsource those activities that can be most effectively managed externally, so that senior managers can devote their attention to activities best managed internally. The economics literature emphasizes that activities involving transaction-specific assets should be managed internally, whereas the business management literature recommends that organizations retain internal control of their core competencies. Organizations can often gain access to superior performance at equal or lower cost by outsourcing other activities. Therefore, it seems prudent for the Air Force to focus its outsourcing efforts on activities that are neither core competencies nor involve great asset specificity, although the business management literature suggests that the Air Force could outsource activities that do involve asset specificity, such as the provision of complex services, if it develops longer-term partnerships with suppliers rather than treating them as arm’s-length vendors. Also, past performance information could be used to advantage in outsourcing to develop longer-term relationships and encourage transaction-specific investments.