The perception of what value creation actually is, is constantly
changing. Whereas companies in the 1990s were following the approach of
standardizing product ranges in order to be more effective and to
achieve lower unit costs, after the millennium a newly focused business
model and a cost-oriented reduction of in-house production resulted in a
new understanding of processes and customers (Davenport/Short,1990).
Since then, customer orientation and process optimization have moved to
the fore in the mass production and service provision of companies
(Betsch, 2005 and Frohmuller, 2008).
By identifying its individual core competences and adapting its
operating activities towards these, a company is empowered to
differentiate on the market. Due to the complete outsourcing of
secondary functions (e.g. IT), in-house production or service provision
continue to decrease in relation. As a consequence, traditional company
business models of integrated value creation are being substituted by
the networked, cross-company provision of goods or services (Speek,
2008). It is understandable that companies attempt to limit the
complexity of their business activities by focusing on particular areas
of their value-creating activities and particular business units, and
concentrating on their strengths (Flesch, 2005 and Voigtlander, 2002).
It is imperative that companies face up to the concept of
"sourcing" so that they can specialize in particular core
processes and can allow less efficient processes to be carried out by
other providers. Companies have a variety of sourcing options open to
them. Figure 1 provides an overview of a systematization, the approach
and terminology of which are adhered to in this analysis.
[FIGURE 1 OMITTED]
The types of sourcing can be differentiated according to their
coordination and charted on a scale of different coordination types
ranging between hierarchy (where the coordination instrument is the
issuing of directives) to market (where the coordination instrument is
the price). As a generic term, sourcing covers all the different
varieties of product and service procurement. Outsourcing refers to the
utilization of external resources for fulfilling in-house functions and
insourcing is where a company provides products or services for external
third parties. Further sub areas are co-sourcing, where the product or
service is jointly provided in cooperation between employees of the
outsourcing company and external resources. There is also the (classic)
own production. Own production, co-sourcing (also known as cooperation)
and outsourcing are all various ways of procuring a product or service
for a company's own use. On the other hand, insourcing involves a
company producing goods or services in-house but for other companies
Any sourcing decision must be carefully considered because it is a
key factor for a company to ensure sustainability (Langhans, 2007).
However, it is often the case that where decisions of this kind are
made, a theoretical foundation is lacking, and a potential cost-saving
is deemed to have priority. This is backed up by the literature (Best/
Weth, 2005 and Accenture/International Bankers Forum, 2003). However,
only in a few cases do the expected cost advantages ensue, which
demonstrates that basing sourcing decisions on this particular aspect is
not satisfactory (Best/Weth, 2005 and Grum et al., 2008). Additionally,
substantial problems with quality can occur. It is estimated that around
80% of the outsourcing deals made at the onset of the millennium have
not resulted in the success that managements had hoped for
(Computerwoche, 2002 and 2004). The consequence of this was that some
decisions--in some cases very cost-intensive ones--were revised and a
lot of managers developed a certain degree of reservation against
decisions to outsource (Engstler/Vocke, 2005). On account of the high
costs, usually substantial strategic consequences, and also the
sometimes enormous operational impacts owing to interfaces and
interactions of processes (Davenport, 1993), exact knowledge of
processes on the one hand and on the other hand a focused theoretical
foundation for assessing sourcing decisions are called for if past
mistakes are to be avoided in future.
In this paper, we follow on from the conclusion that many of the
sourcing decisions made up to now can scarcely be described as having
had a theoretical foundation, and that this deficiency has led to
considerable disadvantages during practical implementation in a lot of
cases. Aided by various theories, we will develop a sound framework of
reference which will facilitate more well thought through sourcing
decisions. It is not a case of formulating a new mathematical model,
since sourcing decisions are much too complex for that. Furthermore,
they involve a great deal of qualitative influencing variables that
cannot be adequately accounted for or determined in the practical
implementation of such a model. We are more interested in identifying
features which are particularly important when it comes to making
sourcing decisions. First, with the help of a perspective matrix for
sourcing deliberations, various relevant theories, approaches and
framework conditions are compiled to provide a holistic framework for
sourcing decisions. Following on from that, the individual theories and
approaches are examined with regard to the contribution they make
towards a basis for sourcing decisions. Furthermore, existing models for
an integrated application of several theories are taken into
consideration. The ensuing results are brought together in a
three-dimensional form--the Sourcing Cube--comprising 8
"boxes" (or "octants"). Depending on the dimension
on the three axes, that is, depending on the octant to which a process
is attributed, a particular course of action is recommended.
2. RELEVANT APPROACHES TO ASSESSING SOURCING DECISIONS
First of all it is important to identify the perspectives which are
important with regard to the deconstruction of value creation and the
resulting sourcing decisions (Schober, 2004), in order to then relate
them to the relevant theories and aspects.
Doubtlessly, there are various possibilities for structuring this
problem. The approach selected here involves as a first step the
strategic perspective (i.e. taking into consideration the impact on a
company as a whole) on the one hand and an operative perspective on the
other (e.g. for examining changes to concrete processes). Furthermore,
sourcing decisions do not necessarily only impact on internal conditions
(e.g. on the company structure) but also on external ones (e.g.
positioning of a company on the market), so that it makes sense as a
second step to observe these perspectives individually and in detail.
Using this rough breakdown, various factors which are discussed in
relationship to sourcing decisions, and also applied theories, can be
identified and brought into context. The resulting perspective matrix is
shown in Figure 2.
[FIGURE 2 OMITTED]
The theories named here cannot be attributed to the perspectives of
the matrix in any clear-cut manner. Rather, this type of depiction shows
how they mutually impact on each other and arranges them according to
how they usually find application in the literature on sourcing. The
legal framework conditions hold a particular position, since they do not
constitute an explicative theory but rather a country-specific
limitation to the practical implementation of sourcing activities. Their
impact, then, cannot be weighed against contradictive theories in the
sense of economic advantages; rather it represents a form of
"veto". However, in this paper we shall not be examining legal
issues, but rather we shall adopt an economic perspective. We merely
wish to point out that different countries have substantially different
regulations with regard to labor laws, laws of partnership and
corporations, fiscal laws and data protection. It must be checked
whether these regulations have been adhered to following the selection
of an economically optimal strategy and before its implementation.
Figure 2 shows that a large area of the spanned perspectives is
covered by the various theories. There are other theories in existence,
of course, which deal with impacts on sourcing decisions. Thus, apart
from the form of cooperations as a potential sourcing decision, Game
Theory and Resource Dependence Theory are also possibilities (e.g.
Schober 2004). But this poses no disadvantage for the model which is to
be developed, because it sheds light on the most important core aspects
of sourcing decision-making, whilst leaving room for new ideas,
modifications, or case-specific adaptations. However, even if further
models were to be considered, it would not be possible to completely
illuminate all the "dark corners" of the perspective matrix,
since theoretical models cannot fully depict reality. Models are, on the
other hand, meant to simplify and contain those structures which are
considered to be relevant (Bastian, 2004).
3. THEORETICAL FOUNDATIONS OF A FRAMEWORK OF REFERENCE FOR SOURCING
In the previous section we brought together various applied
theories and we displayed these in a perspective matrix (cf. Figure 2).
In order for sourcing decisions to be rendered more transparent and well
grounded by each theory or viewpoint that flows into the frame of
reference, we observe in the following the Cost-Accounting Approach, the
Transaction Cost Theory, Benchmarking, the Market-Based View and the
Resource-Based View--including the derived Core Competence Approach and
the Principal-Agent Theory, to ascertain their value and significance
for sourcing decisions. Finally, these strands from the various
approaches are woven together into a "whole".
3.1 Cost-Accounting Approach
A look at the costs was, until now, always one of the key criteria
for sourcing decisions (Hellinger, 1999 and Rebouillon/Bauer, 2001). The
fact that processes are outsourced means that the outsourcer can
transform fixed costs into quantity-dependent variable costs and thus
reduce the risk of fluctuations in capacity. In addition, future
investments can be avoided or at least kept to a minimum. Linked to this
are expectations of increased reliability on the one hand and savings of
up to 30% on the other. However, the emphasis has to be on "up
to" because, as already mentioned, poorly planned sourcing can be
very detrimental to expected cost savings. By variabilizing costs, a
company can utilize the financial resources thus saved in order to focus
on its core activities and concentrate more on its core competences. The
insourcer, on the other hand, profits mainly from specialization and
cost advantages stemming from economies of scale (Wernthaler, 2004,
Herrmann et al., 2001, Eichelmann et al., 2004, Rebouillon/Bauer, 2001,
Graband/Wand, 2003). However, these economies of scale are only possible
for the insourcer if processes are standardized to a high degree and
very similar across companies (Pohler, 2004).
From a cost-accounting perspective, processes should be outsourced
precisely at the point where the cost of buying in from another company
plus the costs of discontinuing at one's own company are lower than
the costs for own production (Buhner/Tuschke, 1997). Pinpointing the
costs of outsourcing is seen as relatively simple: these consist of the
price to be paid to the company providing the service or product plus
additional costs such as transport costs (Seichert, 1990). The transport
costs for companies providing services are usually low because such
services are not usually 'physical' but implemented via
electronic means, so that IT costs are more likely to be incurred than
actual transport costs. However, care should be taken if costs are
compared, since some product/service providers are guilty of "bid
dumping": an initial first price is submitted but--at a later date
when the outsourcer is dependent on the good or service--prices are
increased (Schneider, 1996). Although cost-accounting approaches do not
take opportunistic behavior into consideration when sourcing decisions
are being evaluated, the following Principal-Agent Theory does do so.
The costs of a company's own production can be established by
looking at the corresponding accounts (Buhner/Tuschke, 1997), but the
question is: which costs are actually relevant for sourcing decisions?
Amongst others, the maturity and the degree of utilization of the
capacities are important (Hellinger, 1999).
With short-term sourcing decisions, it is sufficient to compare the
variable costs with the costs of the outsourcing, since from a
short-term perspective, the fixed costs are "sunk costs" and
thus not relevant for this type of decision making situation. For
longer-term planning horizons, however, fixed costs should be included
in any deliberations (Heyd, 1998 and Fischer, 1993). Johnson and Kaplan
(1987) suggest that for cost observations the length of the observation
period should be generally extended in order to be able to treat all
costs as variable ones. One reason for this is that in most companies,
fixed costs are on the increase and are thus increasingly relevant for a
cost-based decision. Although the percentage of direct labor costs for
banks is, on account of the enormous significance of the "human
resources" resource, much higher than in industrial production, the
general costs have also increased in the latter case (Moormann et al.,
2006). Here, we share this view, in particular because the outsourcing
of core processes is not done on a short-term basis. Rather, the focus
is on a long-term modification of the value chain.
The degree of capacity utilization has to be taken into
consideration in those cases where the product or service provider is
currently fully utilizing his capacities, but where capacities would
become available if outsourcing were implemented, which could then be
used for other bottlenecks. The potential future increase in production
would have to be marked up as opportunistic costs against the costs of
own production (Deyhle, 1996). An application of the Net Present Value
Principle enables a comparison of current investments with future
savings or additional costs, so that comparability is possible over a
longer time period (Moerler/Uwer, 2004). From a cost-accounting
perspective, insourcing is profitable if the costs of the product or
service ordered by the outsourcer are lower than the price that the
outsourcer is prepared to pay. Here, it is particularly important that
the impact of the before mentioned economies of scale and the
specialization effects are included in the costs of the insourcing. In
addition, costs for the expanding of a company's own capacities are
particularly relevant from a long-term perspective (Seichert, 1990).
Apart from this, the costs are similar to those of own production, since
insourcing is fundamentally own production being carried out for another
A problem with the Cost-Accounting Approach is primarily the
difficulty of the accountability of the general or fixed costs for
individual processes. This difficulty can, however, be alleviated
through detailed process cost accounting (Buhner/Tuschke,1998).
Additional problems are (1) decision making based on an isolated
observation of the variable costs and ignoring the fixed costs, as this
often leads to a decision against outsourcing or for insourcing because
a company overrates its own cost situation (Hellinger, 1999) and (2) the
lack of consideration of other forms of service or product provision
(Benkenstein, 1994) apart from own production and outsourcing, and (3)
the relevant company departments "playing down" their costs
We can see, then, that costs considerations--and thus the
Cost-Accounting Approach--are very relevant for sourcing decisions,
because low costs coupled with the same turnover lead to increased
profit--the goal of practically every company. For this reason, the
findings from the cost-accounting perspective will be allocated a
superior position when it comes to creating a framework of reference.
However, the Cost Accounting Approach entails several problems, so that
a sourcing decision made solely on this basis is not meaningful. In
particular the fact that costs which are not easily captured by an
accounting system are not given due consideration speaks against a
holistic sourcing decision. It is exactly at this point that Transaction
Cost Theory comes into its own. Furthermore, this theory expands the
spectrum of forms of outsourcing through additional possibilities (e.g.
through cooperations), which are becoming increasingly important
nowadays (Benkenstein, 1994). On the other hand, it completely neglects
strategic considerations, which is why it is imperative that such a
perspective is additionally incorporated into a frame of reference
3.2 The Transaction Cost Theory
This is one of the most frequently implemented theories when it
comes to creating a basis for sourcing decisions. Transaction Cost
Theory strives to explain why specific transactions, such as that of a
good or a service or a legal right (Williamson, 1990 and Williamson,
1989), are more organized and more often implemented in some
institutions than in others (Ebers and Gotsch, 2006). The determining of
a transaction requires identifiable interfaces between the transaction
processes (Williamson, 1990 and Commons, 1934). Following on from this,
it is necessary that precisely those forms of institution should be
chosen where the total sum of the before-mentioned production and
transaction costs is the lowest (Williamson, 1990).
However, the implementation of transactions always entails costs.
If these costs are included in an analysis together with production
costs, it becomes clear that companies have a "right to exist"
if--with the same production costs, transactions can be implemented more
cheaply within the company than on the market (Coase, 1988). If,
however, the transaction costs are higher within the company, then the
good or service should be obtained on the market, i.e. should be
outsourced. The transaction costs may be divided into fixed and variable
costs on the one hand, should they be incurred in the course of specific
investments in the facilities of the institution or depending on the
number and scope of the transactions (Richter/Furubotn, 1996). On the
other hand, external transaction costs are distinguished from internal
ones, depending on whether the transaction is undertaken inside a
company (e.g. for regulating the transactional relationships between the
members of the organization) or via the market (Krakel, 2007 and
Richter/Furubotn, 2003). In addition, the external transaction costs are
divided up into ex-ante and ex-post (Ebers/Gotsch, 2006 and Picot,
1999). The internal transaction costs can also be broken down
further--as Figure 3 shows.
WILLIAMSON (1990) goes a step further by denoting three key
environmental characteristics of a transaction that have a big impact
(particularly on the extent of the external transaction costs: (1) the
extent of the transaction-specific investments that the transaction
partners must carry out, (2) the uncertainty related to the transaction,
and (3) the frequency of the transaction. Later, the characteristic
"strategic significance" was added in order to cover strategic
aspects in the Transaction Cost Approach. A more detailed insight will
not be undertaken at this point (see, rather, e.g. Picot, 1990).
If transaction-specific investments are implemented outside of the
relationship between service/good provider and service/good buyer, they
lose value the more specific they are (Picot/Hardt, 1998). The extent of
the specificity is the most important influencing factor for transaction
costs (Picot, 1999). A person who has to carry out specific investments
is in a less favorable position because negotiating a change of business
partner cannot be done without incurring considerable new costs. Since
the Transaction Cost Theory assumes opportunism for business partners
and opportunistic behavior is regarded to be one of the biggest risks of
outsourcing (Matiaske/Mellewigt, 2002), there is the danger of
renegotiation of contracts to the detriment of the investor. This risk,
on the other hand, results in higher negotiation and controlling costs
in order to prevent precisely this scenario occurring
(Wintergerst/Welker, 2007). Consequently, with growing specificity due
to this mutual dependency, the tendency to engage in longer-term
contracts entailing a greater degree of vertical integration increases
(Riordan/Williamson, 1985). Figure 4 shows how the transaction costs
behave in various forms of sourcing, depending on the degree of
[FIGURE 4 OMITTED]
The second influencing factor on the transaction
costs--uncertainty--indicates that it is very expensive and practically
impossible to completely specify a decision. Williamson (1975)
differentiates here between parametric uncertainty, which includes
situation-dependent uncertainties relating to the transaction, and their
future developments, and behavioral uncertainties that arise from the
risk of opportunistic behavior of a transaction partner based on
asymmetrical information dissemination (Williamson, 1990). The
transaction costs increase ex ante with increasing uncertainty, since
more contingencies have to be included in the outsourcing contract.
Nevertheless, the contracts remain incomplete owing to the assumption of
limited rationality. With increasing uncertainty, the likelihood of
renegotiation in order to adapt to changing conditions increases, as do
the ex-post transaction costs (Ebers/Gotsch, 2006). For high uncertainty
in conjunction with long-term specific investment, the coordination
advantages of vertical integration will predominate. Thus,
company-internal implementtation of the transaction would be the
preferable choice. Of course, changes in internal transaction costs must
also be considered, because the margin for internal opportunism
increases with specificity and uncertainty (Baur, 1990). However, it is
believed that internal transaction costs do, in general, change less
than external ones (Kappich, 1989).
The frequency of transactions describes how often a good or service
is provided per time interval within a transactional relationship
(Nolting, 2006). Its impact on the extent of the transaction costs is
not autonomous, though, but occurs in connection with the other
influencing factors, moving towards the profitability of specialized
coordination structures, such as hierarchies. This is demonstrated by
the fact that even if high safety measures and standardization of a good
or service are required, a very high rate of frequency of the
transaction does not necessarily mean that the service or good should be
acquired from within a company's own facilities. One only needs to
think of standard products, such as payment transactions in the banking
sector. Amongst other reasons, this dependency on other factors often
means that the frequency of transactions is not considered to be
particularly relevant. High frequency leads to fixed cost degression and
thus helps to amortize the "set-up" costs that occur in
particular in the case of internal transaction costs. Only a high degree
of specificity coupled with high uncertainty results in the frequency of
transactions also being relevant (Baur, 1990).
These three environmental characteristics have the greatest impact
on the extent of the transaction costs. However, the before mentioned
behavioral assumptions of limited rationality and opportunism together
with the transaction atmosphere are also relevant. The last mentioned
involves all the related social, legal and ethnological frameworks which
impact on the various coordination and motivation tools (Picot et al.,
2003). Finally, the question of the quantifiability of the transaction
costs must be given attention. There are various approaches to doing
this. For the search costs, for example, the cost savings from the
search for a provider of a product or service who is less expensive than
the average could be used as a measurement. The company-internal
transaction costs could be measured as the percentage of the general
costs of a company. The exact percentage is, however, not known and can
only be estimated (Richter/Furubotn, 1996). It is apparent that an exact
quantification of transaction costs is very difficult, since in most
cases the factors are not measurable in monetary terms. Instead, the
transaction costs must be estimated via the dimensions of the influence
of the before mentioned influence factors (Picot, 1999). A lot of
authors are of the opinion that the lack of knowledge about the absolute
quantification is not a disadvantage, since a relative comparison of the
transaction costs of alternative institutional arrangements is what is
needed, rather than a statement on absolute efficiency (Williamson,
Summarizing, we can say that Transaction Cost Theory contributes
some relevant (sometimes more, sometimes less situation-dependent)
aspects for implementing sourcing activities, but could--with regard to
the making of well-founded sourcing decisions--be substantially extended
and refined. As an autonomous tool for weighing up sourcing
alternatives, it is not adequate (Disselbeck, 2007). However, it must be
taken into consideration. In their analysis on transaction costs in the
American economy, WALLIS and NORTH (1986) find that in 1970 transaction
costs were responsible for 46.66 to 54.71% of the GNP. Even if the
strength of this claim is somewhat limited owing to the before-mentioned
problems, it does demonstrate again the importance of transaction costs.
Thus, Transaction Cost Theory findings must in addition to other
Cost-Accounting Approaches be taken into the framework of reference
(primarily from an operative perspective). As already mentioned,
transaction costs also provide points of contact with strategic
deliberations, which will be looked at later, as well as with the
Principal-Agent Theory, which will now be examined with regard to its
relevance for sourcing decisions.
The Principal-Agent Theory covers the relationships between one or
more principals and an agent that they hire to carry out specific tasks
(Jensen/Meckling, 1976). On account of the fact that both the principal
and the agent are pursuing the goal of maximizing their own interests,
potential conflicts of interest may arise. Because the principal--owing
to asymmetric information--does not know the intentions of the agent,
the relationship is secured by a contract (Elschen, 1991). This is
intended to avoid the agent exploiting his information edge over the
principal in an opportunistic manner by way of hidden characteristics,
hidden action and information, or hidden intention (Picot et al., 2003
and Richter/Furubotn, 1996).
Hidden characteristics occur prior to finalization of a contract
and result in the principal signing a contract with a "worse"
party (adverse selection) because the principal misjudges that party. To
avoid this situation, the principal can secure more detailed
information, e.g. through tests and screening procedures. Also, the
principal can offer the candidates different contracts, from which they
may select one. These are formulated in such a way that hidden
characteristics become evident (self selection). However, good
candidates themselves have the chance to demonstrate their strengths to
the principal, e.g. through certification (signaling) so that a worse
co-candidate is not selected (Akerlof, 1970). Hidden action and hidden
information show up after finalization of the contract, whilst the task
is being implemented.
Hidden action implies that the agent has a certain amount of room
for maneuver at his disposal, which he can use for his own interests
(Picot/B6hme,1999), because the principal cannot watch him continuously
(moral hazard). With hidden information, what the agent does is visible
to the principal, but the latter cannot correctly judge the situation.
In particular in cases where the principal lacks the necessary subject
knowledge and is thus dependent on the agent, the agent can hold back
the relevant information to his own benefit. Both of these problems can,
for instance, be countered through contractual relations, monitoring or
incentives (Breuer/Mark, 2004). Hidden intention will also only appear
whilst a task is being carried out. It goes a step further than hidden
action or hidden information. The principal is aware of the agent's
opportunistic behavior but on account of advance provisions that are
irreversible (sunk costs), he is dependent on the agent (Krakel, 1999)
and is not able to punish this behavior (hold up). He is more likely to
attempt to involve the agent in, for instance, the success of a good or
service, so that the interests of both parties are balanced off.
Any improving of information deficits by the principal with regard
to the above described problems is always bound up with costs--the
so-called agency costs. These costs generally arise from collaborations,
even in cases where a principal-agent relation is not clearly
identifiable (Jensen/Meckling, 1976). They include the supervision and
controlling costs of the principal (which are closely related to
Transaction Cost Theory), the signaling and guarantee costs of the agent
(both intended to lower the level of uncertainty), and the remaining
welfare loss (residual loss), which arises from a lack--or partial
lack--of transactions stemming from missing information. A type of
cost-performance relationship or form of coordination should be selected
which minimizes the agency costs (Picot et al., 2003). The types of
problem described here are also of relevance for sourcing decisions,
because these also entail the risk of the insourcer (agent) having an
unfair advantage over the outsourcing institution (principal), because
the agent may profit from an informational edge and intransparency. On
the other hand, it is also the case that intransparent behavior will
encourage the outsourcer to switch to the competition. It is, then, up
to the agent to signalize commitment by increasing his transparency
(Moerler/Uwer, 2004 and Macharzina/Durrfeld, 2004). However--in big
companies in particular--the process of outsourcing can aid in
decreasing the agency costs, since inter-departmental opportunistic
behavior and so-called departmental egotism can be dismantled. Thus, a
decreasing complexity can go hand in hand with a reduction of the
vertical integration, lowering the company's internal agency costs
(Cheon et al., 1995).
However, because the before mentioned problems may occur (again) in
the frame of a principal-agent relation in a sourcing decision, it
should be noted that with regard to agency costs, a reduction of
vertical integration--which is the case with outsourcing--will on the
one hand lower the internal agency costs of a company but on the other
hand will result in an increase in external agency costs. For this
reason, with sourcing decisions it is always necessary to weigh these
two scenarios against each other (Wild, 2003 and Disselbeck, 2007).
Analogously to the Transaction Cost Theory, the Principal-Agent Theory
can be criticized with regard to the operational possibilities for
establishing the observed costs, since although these can be defined,
they are factually hardly observable or measurable (Ebers/Gotsch, 1999
and Elschen, 1988). Therefore, the generally complex problems in
relation to the observation of principal or agent behavior need to be
complemented by or combined with further theories. However, the Agency
Theory has led to a much better understanding of what type of contract
is to be expected or is optimal in cost-performance relationships with
regard to specific incentive and information aspects (Elschen, 1991).
Taking a look at its practical application, we can criticize two
assumptions of the Principal-Agent Theory. On the one hand, not all
problems of a cooperative relationship can be cleared up by signing a
contract. For example, problems can occur after a contract has been
signed, and these need to be taken into consideration. On the other
hand, a problem is posed by the lack of informative value with regard to
making a decision about whether one company or a number of contract
suppliers should be selected (Riedl 2003 and Dibbern et al., 2001). For
its application with regard to the creating of a frame of reference for
assessing sourcing decisions, we can say that the Principal-Agent Theory
is mainly concerned with forms of contract between a company and service
providers and is less supportive of establishing strategies for
meaningful sourcing activities (Jensen/Meckling, 1976). Thus, findings
from Principal-Agent Theory will--in addition to Transaction Cost
Theory--enter into the framework of reference, but will have no central
According to its creator Camp (1994), a Benchmarking program is a
continuous process which entails products, services, and practices being
measured against the strongest competitors or those companies which are
regarded to be industry leaders. The core concept is a systematic,
permanent comparative analysis of a company's own
performance--including products or services, processes and methods
against those of the competitors, in order to identify the latter's
"best practices" and to adapt these to a company's own
requirements. The selection of Benchmarking partners depends on the
goals of a particular Benchmarking process. Basically, there are several
comparison options. Ranked according to their increasing input
requirements, these are (1) internal Benchmarking between individual
departments, various locations of a company, or different divisions of a
concern, (2) external, competition-oriented Benchmarking with
competitors from the same industry, and (3) external, cross-industry
Benchmarking, which is particularly helpful for deriving new ideas and
innovative solutions from the concepts and methods of other companies
(Pieske, 1994, Muller-Stewens/Lechner, 2003 and Scheffer 2007).
For sourcing decisions it is particularly external Benchmarking
which is of interest. This can be implemented within the same industry
or with other industries. Where non-industry-specific and centralized
and location-independent processes are concerned, specialized service
providers are available who can perform much more efficiently than any
vertically integrated department of a company can. Camp (1994)
proposes--as shown in Figure 5--specific phases for comparing
performance efficiency of one's own company with that of others.
With regard to the significance of Benchmarking for sourcing
decisions, and its influence on our intended framework of reference, we
can say that it can provide a valuable contribution for
operationabilitiy. Benchmarking enables a company to position itself in
a comparison with its competitors. This requirement has already been
examined with regard to Transaction Cost Theory. Furthermore,
Benchmarking is also helpful with regard to strategic characteristics,
enabling the positioning of a company within the frame of
reference--which will be shown later. The creation of a Source Board
(Braun and Schiffer, 2012) is particularly useful for ascertaining a
company's own sourcing position and also for Benchmarking in
relation to strategic decisions about sourcing activities.
3.5 Resource-Oriented Strategy Theory
The Resource-Based View (RBV) focuses on the analysis of internal
processes of enterprises. This is in contrast with the approach which
was popular until the 1990s and which was primarily market-based (and
described hereinafter). Enterprises are no longer regarded as
administrative units but rather as bundles of resources--first described
by PENROSE (1959). A company is able to sustainably target strategic
advantages and subsequently competitive advantages in the market if it
uses its resources more effectively and more efficiently than its
competitors or if it has resources which other companies do not have
(Muller-Stewens/Lechner, 2003). WERNERFELT (1984), who is regarded to be
the pioneer of our current understanding of the Resource-Based View,
states that 'resources' involve everything within a company
that can be regarded as a strength or a weakness. In the sense of the
Resource-Based View, resources can be divided up into tangible and
non-tangible ones and also human resources, i.e. competencies specific
to individuals. In addition, organizational potential may also be
regarded as a resource because it can generate advantages via a unique
combination of available resources. Integrated bundles of resources are
referred to as 'competencies' (Moormann et al., 2006), and we
take a more detailed look at these later. Owing to the fact that no
company is the same as any other company, the Resource-Based View
assumes that all resources are heterogeneous and immobile. Resource
advantages can only arise from imperfect factor markets, which are
characterized by asymmetric information and transaction costs. If this
were not the case, then it would be possible to correct the
dissimilarities between companies within a short time period, because
only the existence of heterogeneous and immobile resources enables
competitive advantages to be gained in the long-term. Whereas short-run
competitive advantages are easier to gain, only specific
resources--so-called distinctive resources--have the potential for
achieving sustainable success (B6rner, 2000a). The distinctive resources
must be (1) valuable to the customer, (2) rare/specific to the company,
(3) hard to imitate and (4) non-substitutable (Barney, 1991).
The Resource-Based View is particularly suitable for those
strategic decisions which--in the broadest sense--relate to the
provision of resources (B6rner, 2000b). Sourcing decisions belong to
this category. Own production is--according to the Resource-Based
View--always preferable in those areas where the available resources
display the before mentioned 4 characteristics, whereas outsourcing can
be considered for resources which do not have these characteristics, or
only to a limited extent (Sjurts/Stieglitz, 2004).
3.6 Core Competencies
Directly related to the Resource-Based View is the identification
of the core competencies of a company. These can be seen as particular
configurations of the already mentioned 'distinctive
resources' PRAHALAD and HAMEL (1990) were of the opinion that
sustainable competitive advantages would arise not solely from resources
but from the specific management of these resources. If a company
theoretically has the right resources ('have positions') to
create competitive advantages, this does not mean that they can be
necessarily used on the market. This requires the corresponding
competencies ('can positions'), i.e. skills, in order to have
the most useful effect of resources for a customer via cooperation and
coordination (von Nitzsch, 2008).
Long-term, sustainable competitive advantages in the sense of RVB
can, however, only be reached if a competence is not only a general
company competence but a so-called core competence. A pithy definition
of a core competence is that by KRUGER and HOMP (1997): "A core
competence is the permanent and transferable source of the competitive
advantage of a company, which is based on resources and skills". If
a company is intent on ascertaining its core competencies, a step-wise
observation of these makes the most sense. A competency becomes a core
competency by fulfilling the following six criteria: (1) creation of a
unique and profitable customer solution, (2) limited mobility, (3)
possibility of procuring/building up the competency 'under
priced', (4) imperfect imitability and substitutability, (5)
flexibility and transferability to other markets, (6) developability
(von Nitzsch, 2008). By definition, a core competency only exists if all
of these six conditions are fulfilled. However, the competitive
advantage which a company secures for itself via a competence increases
with each level of the 'escalator effect'. In order to
identify (core) competencies, it is possible for Benchmarking to be
used. By comparing a company with external competition, it becomes
apparent that processes which are "running well" do not
necessarily imply a core competency if there are competitors who are
(considerably) better at them.
Finally, it should be noted with regard to the significance of
'core competencies' that, just as the costs are deemed the key
reason for sourcing decisions from an operative perspective, from a
strategic perspective, the identification and focusing on
company-specific core competences is the key reason (Rebouillon/Bauer,
2001). Thus, in practice, apart from costs, the focusing on core
competencies is one of the most frequently cited reasons behind sourcing
decisions (Matiaske/Mellewigt, 2002). However, a Core Competencies
Approach and a Resource-Based Approach can only be observed in tandem,
since the Core Competencies Approach can be understood as a special
interpretation of the Resource-Based View (B6rner, 2000a). Since
outsourcing (as an activity) and Resource-Based Strategy (as a
management tool) are mutually productive, without a bundling of
strengths (i.e. outsourcing), no leadership position in competence can
occur, and without a specific competence-orientation, no meaningful
outsourcing can take place (Friedrich, 2000). Findings from
Resource-Oriented Strategy Theory and the Core Competencies Approach
should, then, be brought to bear on any decisions about sourcing
3.7 Market-Oriented Strategy
The core element of the Market-Based View (MBV) is an external,
market-oriented perspective, more exactly an analysis of the general
economic environment, of the industry and of a company's
competitors (Moormann et al., 2006). The competitive advantages of a
company result primarily from the company's position in the
industry and also the environmental influences. Particularly in the
1970s and early 1980s, the Market-Based View was the dominant strategic
perspective, but lost out as of the early 1980s to the burgeoning
popularity of the before mentioned Resource-Based View (Sampler, 1998,
343). The beginnings of the Market-Based View can be traced back to the
structure-conduct-performance paradigm in the industrial organization of
Mason (1939) and Bain (1956 and 1959) This claims that the success of a
company results only from its environment, and thus the structure of the
industry in which the company operates impacts on the company's
conduct or strategy, and also dictates its performance (Porter, 1981 and
With his model of the Five Forces, PORTER (1999) expands on this
idea. The competitive intensity and the performance of an industry are
dependent on five forces of competition and their interaction: (1)
First, competitors exist in an industry or, more specifically, at a
value creation stage, which means that a natural rivalry is present
amongst the existing companies. (2) There is also the threat of
potential new competitors, (3) The bargaining power of the suppliers on
the one hand and (4) The bargaining power of the buyers on the other
hand as well as (5) The threat of substitute products or services. In
order for companies to formulate their strategies, it is the strongest
of these forces that are relevant. Depending on the industry and value
creation stage involved, these are found in varying constellations
(Porter, 1999 and Maa^/Scherm, 2005). Generally speaking, the more
intensive the rivalry is shown to be in the form of the Five Forces, the
lower the success potential and the attractiveness of the industry are
(Ruhli, 1995 and von Nitzsch, 2008).
PORTER (1999) emphasizes that it should be the goal of any company
to take up a position which allows the company the best protection
against the five identified forces of competition or which enables the
company to influence these threats to its own benefit. In concrete
terms, ongoing research must be implemented and comprehensive
information procured in order to establish a basis of knowledge on the
industry or value creation stage--in particular with regard to a
company's rivals--in order to be able to use this data to weigh up
a rival's reaction to a strategic change in the company's own
position (Moormann et al., 2006 and von Nitzsch, 2008). Within the
framework of this competitor analysis (cf. what is said above about
Benchmarking), it is possible to divide companies up into strategic
groups, i.e. groups--which with regard to the Five Forces--are pursuing
the same strategy (Porter 1999). In order to be competitively viable and
even successful, a company must position itself so that it can defend
itself against the competitive forces or even use them to its own
advantage. This means that a company should select that particular
strategic group which demonstrates low rivalry between its members but
high market entry barriers (Porter, 1999 and von Nitzsch et al., 2008).
If we relate the deliberations on the Market-Based View to sourcing
decisions, then according to SJURTS and STIEGLITZ (2004), own production
is preferable because it strengthens a company's own market power.
In particular, vertical integration lessens dependency on suppliers on
the one hand and on the other hand increases market entry barriers,
which means that fewer competitors can enter the market. However, this
only holds true if all companies implement vertical integration, so that
there is no potential for specialized suppliers of individual products
or services. With regard to cooperations, this is a problem owing to the
competitive perspectives of the Market-Based View, because
self-interested conduct, which is a normal occurrence in practice--means
that cooperations are usually an exception (Disselbeck, 2007). On the
other hand, they provide the possibility for a company to
"grow" more quickly and for both companies to jointly hold a
stronger position vis a vis their rivals (Porter/Fuller, 1976). Schober
(2004) is of the opinion that cooperations serve a good positioning on
the market and therefore the Market-Based View justifies out- or
With regard to the evaluating of sourcing activities, two points of
criticism are frequently directed towards PORTER's contribution to
market-oriented strategy, which are similar to those directed towards
other theories mentioned above. On the one hand, the lack of precise
knowledge of rivals' strategies with regard to a holistic
observation of the relative profitability for external and internal
factors and on the other hand the static character of this approach--or
its lack of dynamics--are criticized because companies have to settle
for a specific strategy and cannot change according to each new
situation. Also, extensions of the model are difficult to implement
because they would result in losing the plausibility of the industry
structural analysis on which the model is based (Bresser, 1998 and
For the significance of the Market-Based View with regard to
creating a frame of reference, we can say that PORTER's view
definitely enriches the strategic perspective when it comes to assessing
sourcing activities. From a strategic viewpoint, it also lowers
complexity by providing clearly laid out aspects, and thus provides a
practically applicable approach (Ruhli,1995). However, the
attractiveness of markets and industries cannot be regarded as the sole
sources of sustainable competitive advantage (Staehle, 1994). This
condition is supported by a more intensive observation of
company-specific features, which, ultimately, create the strategic
There are obvious correlations between the Market-Based View and
the Resources-Based View, so that a linked or integrated observation of
the key aspects of each approach seems necessary with regard to
(strategic) sourcing decisions. With regard to the integration of both
approaches, it should be noted that there are two opposing views at work
here: one view emphasizes the differences in the model assumptions and
thus rejects any integration, whereas the other view evens out the
differences and regards an integrated concept as meaningful on account
of the possibilities of further modification (B6rner, 2000a,
Verdin/Williamson, 1994 and Freiling, 2001). We shall be utilizing the
latter view in the rest of this analysis in order to create a frame of
reference, because it is precisely our objective to provide a holistic
view which incorporates all the different theories.
With regard to concrete implementation of an integrated
Market-Based View and Resources-Based View, and their subsequent
consideration when creating a frame of reference for sourcing decisions,
the "integration concept" of B6rner (2000b) is pertinent. He
criticizes older approaches, e.g. that of Ruhli (1994) and claims they
are unsuitable for an integrated model, since they analyze only
insufficiently the differences between the two approaches and basically
provide an "addition" rather than a holistic concept. We shall
not provide a detailed "integration concept" here, but shall
summarize the main ideas with regard to their later impact on the
creation of a frame of reference: A hierarchical combination is
preferable to a complementary integration of both approaches, whereby
the Resource-Based View is regarded as superordinate because it
tendentially incorporates the perspectives of the Market-Based View.
Subsequently, the Resource-Based View is used for superordinate company
decisions, whilst the Market-Based View finds application with
subordinate decisions on the level of strategic business areas. This
means that the Resource-Based View is allocated the role of market
development. Following Porter, the generic strategies serve, in
contrast, to establish market positioning (B6rner 2000b and Disselbeck,
2007). However, in order to integrate individual theories or their
findings into a holistic framework of reference for sourcing decisions,
a hierarchical combination is rather unsuitable. On the one hand,
ranking of importance would have to be established by comparing each
relevant individual theory, and this would involve substantial problems,
since the relevance of a theory varies according to specific cases.
Also, the relevance of the findings for some of these theories would
practically be ignored, because the most "important"
approaches would dominate, and it would not always be possible to
adequately model mutual impacts. Rather, in this analysis we prefer to
aim for a "fluid" combination by considering both connecting
factors and reciprocal effects of the theories. Their respective impacts
on sourcing decisions are then depicted by a generic model and can thus
be adapted to the needs of each specific case.
3.8 Interim findings on the theoretical foundation of the frame of
Above, several theories or approaches were introduced as well as
their relevant respective findings for sourcing decisions. The
Cost-Accounting Approach and Transaction Cost Theory can serve directly
towards the evaluation of sourcing decisions, whereas Benchmarking has a
more supportive function. As pointed out, Benchmarking can be used by a
company to examine its own processes with regard to strengths and
weaknesses, in order to quantify the optimization potential. This
enables a company to make the right decision particularly in cases which
are not clear-cut. Further, Benchmarking is a suitable tool for, e.g.
comparing a company's prices with those of the competition and
potential sourcing partners, in order to gather data which are necessary
for cost accounting comparisons. The Cost Accounting Approach allows a
company to calculate the cost advantages of a particular type of
sourcing and thus to ascertain how good the cost situation of own
production is when compared to buying in off the market. The competency
of a company with regard to cost efficiency can then be relativized. The
result provides an impression of the "capability" of a
company. In contrast, Transaction Cost Theory enables a company to
estimate which type of sourcing--dependent on the properties of a
transaction--is suitable to procure a service or good with the lowest
possible transaction costs. In order to do so, the relative amount of
transaction costs for the various types of coordination is ascertained
depending on the different transaction properties.
The strengths of a company can be determined by the Resource-Based
View in combination with the Core Competencies Theory. All of the
resources required to provide a good or service are strategically
analyzed with regard to those characteristics which enable a resource or
core competency to generate competitive advantages, thus giving a clear
picture of the competencies of a company in relation to those of its
rivals and potential service providers or insourcers. At this point,
Benchmarking can again be applied because the competencies in a
particular area can be recognized as they can be positively
distinguished from those of rivals, reference companies in other
industries or even from a company's own wishes. It thus becomes
clear in which areas a company has the potential for competitive
advantages, and in which it does not. However, this potential is only of
concrete value if the service or product can generate customer benefit,
i.e. added value for the customer that the customer actually perceives.
A company can then make extensive use of this and can set itself apart
from its rivals, and own production becomes attractive. This
attractiveness is also dependent on the degree to which own production
contributes towards a company being able to survive in competition,
which corresponds to the competitive perspective of the Market-Based
However, the already mentioned general strategic recommendation of
the Market-Based View to engage in own production and vertical
integration with the intention of increasing a company's power on
the market is not recommended here, because reality has shown that this
recommendation is too 'across the board' and thus not the
correct strategy. In particular, aspects of a sourcing decision which
lessen the impact of the 'Five Forces' should be incorporated
into deliberations on the attractiveness of own production. It should be
stressed again that we are particularly interested in uniting all the
theories, so that certain aspects are suppressed whilst those which are
particularly meaningful for sourcing decisions are selected. The
Principal-Agent Theory supports the decision about the form of contract
that should be drawn up in specific situations, and--similar to the
Transaction Cost Theory--indicates costs which in reality are incurred
by market weaknesses--when processes are transferred to other economic
agents rather than implementing them oneself. This applies to external
providers or even if it is only another department or employee in the
same company. Here too--as with Transaction Cost Theory--the goal is to
minimize costs by selecting the right contracts, incentive systems and
forms of coordination.
4. EXISTING INTEGRATED MODELS
Before we continue to create a frame of reference on the basis of
the findings in the previous sections, selected models that have already
tried to incorporate various theories or aspects into frameworks for
sourcing decisions will be briefly introduced here. Although there are
several models available, most of them--as the following examples will
demonstrate--focus only on a specific perspective or only selected
aspects of individual theories. But they still provide indications of
the connections between selected theories, and thus contribute towards
the holistic view we are aiming at in the planned frame of reference.
For this reason, we give them due consideration in the following.
A frequently cited example is the business portfolio following
HINTERHUBER and STUHEC (1997), who use aspects of the Core Competencies
Approach and the Resource-Based View and who integrate a market
orientation into their model by taking special consideration of the
customer value aspect. They have customer value as the vertical axis of
the portfolio (see Figure 6). Customer value can be established by,
e.g., the KANO method (Kano, 1984) and by competence deployment (cf.
information on operationalization of the framework of reference in
Section 6). The horizontal axis shows the relative competency strength
of a company. This relates primarily to core competencies that are not
easily imitated and that can be identified via Benchmarking.
Depending on the relative competency strength and customer benefit,
various courses of action are recommended. If both are 'high',
this means that all requirements are fulfilled, and that the competency
is a core competency and should not be outsourced. If both are
'low', then outsourcing is a suitable strategy, although here
this should only be understood as the decision against own production;
the type of coordination to be chosen must still be identified. In the
other two cases, a situational decision is called for. With regard to
the choice of coordination form in cases where a decision is made
against own production, then the Transaction Cost Theory is recommended
in order to chose the form which minimizes transaction costs. Weak
points of the portfolio are the lack of possibility to insource, the
lack of consideration of the Principal-Agent Theory and the marginal
observation of market attractiveness.
[FIGURE 6 OMITTED]
Another model--that of HELLINGER (1999) follows the elaboration of
PICOT and HARDT (1998). It is based on a blend of the Core Competencies
Approach and Transaction Cost Theory. Its strategic importance is
dependent upon whether a performance has a higher strategic potential at
present or in the future and is suitable for building up competitive
advantages. The higher the strategic importance, the higher the
transaction costs are. The specificity is similar: if the strategic
importance and the specificity are high, this model indicates that the
competency is then a core competency. Here, too, depending on these two
characteristics, courses of action are recommended. However, the
influence of uncertainty and transaction frequency is neglected. Figure
7 shows the portfolio.
[FIGURE 7 OMITTED]
As in the previous model, according to HELLINGER's model, core
competencies should not be outsourced, whereas services or goods with
low strategic significance and specificity should definitely be. For
"medium", cooperational outsourcing is proposed.
'Inherited liabilities' occur, for example, due to changed
competitive conditions, whereby their strategic significance has
dropped. 'Erosive advantages', although strategically
significant, will--on account of changing framework conditions--remain
standard in the future. An example of this would be a network of branch
offices in the case of a bank. For the creation of the network,
location-related investments had to be made, since the geographical
proximity to the customer had a high specific importance. However, the
developing of new information and communication media causes the
strategic advantage to dwindle (Hellinger, 1999). In addition, there is
a lack of comprehensive theoretical foundation, since neither the Cost
Accounting Approach nor the Market-Based View nor the Principal-Agent
Theory was taken into account.
Finally, we will briefly address the model of SJURTS and STIEGLITZ
(2004). This is an approach which is oriented towards the SWOT analysis
(Barney, 1991 and von Nitzsch et al., 2008), which is the intersection
of the Market-Based View and the Resource-Based View, whereby this
approach also relates to several other theories. The strengths and
weakness of a company should be derived from the Cost-Accounting
Approach together with the Resource-Based View, whereas opportunities
are derived from a market perspective and risks are derived from a
combination of the Market-Based View and Transaction Cost Theory. The
strengths and weakness determine the resources position of a company.
The opportunities and risks are determined by the strategic
attractiveness of the product or service provision. Figure 8 shows the
resulting strategic options.
If strategic attractiveness is low and resources position high, a
spin-off can enable the maintenance of strategic resources. However, if
the resource position is weak, a service or good can be procured on the
market. If strategic attractiveness and resources position are both
high, own-production is preferable in order to ensure sustainable
competitive advantages. In the latter case, collective strategies, i.e.
a close cooperation with a service or good provider can ensure access to
the resources of the supplier (Picot/Hardt, 1998, Sjurts/Stieglitz, 2004
and Hellinger, 1999). Here, too, a criticism is that insourcing is
neglected, although this would be suitable for low strategic
attractiveness and a strong resources position (e.g. for standard
processes). Also, the Transaction Cost Theory and the Market-Based View
were only taken into consideration to a small degree, and
Principal-Agent Theory not at all.
5. THREE DIMENSIONS OF A COMPREHENSIVE FRAME OF REFERENCE
If we look at the key findings presented here after examination of
the various theories and models which relate to sourcing activities, we
can derive three general dimensions of a sourcing decision. These are
presented in the following and will be combined to provide a holistic
frame of reference. These dimensions are (1) the relative process
competency of a company and (2) the relative interface and delegation
costs and (3) the market and competition potential of each observed
process. Figure 9 shows the three dimensions which will be elucidated
on, and also the relevant theoretical models which are incorporated
together with their key contributions or criteria for sourcing
5.1 Relative process competence of a company
With regard to an observed process, the relative process competence
of a company is the company's current competence position in
relationship to other similar companies (including those from other
industries). It facilitates a decision as to whether a process is being
performed particularly effectively and efficiently. The relative
findings result from the Cost-Accounting Approach, since this covers the
process costs--those costs which are incurred directly on provision of a
good or service and distinguished from the interface and delegation
costs, which are incurred because a good or service is partially
provided by other employees or external institutions--in relation to
those of rivals and service providers from industries. If the process
costs are high in relation to the costs of a company's own
production, this implies that the company has strong process competence.
A further differentiation between influencing factors is hardly
worthwhile, because the costs are directly quantifiable if cost data are
gathered carefully. Furthermore, the resources competencies--which are
taken into consideration via the Resource-Based View of the Core
Competencies Approach--are of great strategic significance when it comes
to determining a company's own competency position. The relative
process competence can be evaluated as 'high' if the process
shows the characteristics of imperfect imitability and substitutability,
and limited mobility, flexibility and transferability to other markets
as well as being capable of further development (cf. literature on core
competencies, section 3.6). The observed process should be examined for
evidence of these characteristics. Benchmarking is suitable in this
dimension in order for a company to compare itself with its rivals--and
thus determine a company's own (relative or comparative) position.
Process costs should be given considerable attention, since these costs
always prove in practice to be of great significance when it comes to
making a sourcing decision. With regard to the other criteria (as
elucidated in section 3.6), imitability and mobility are of prime
importance, because they impact on the sustainability of the relative
advantage vis a vis other institutions. This is a particularly important
point for those companies which operate in business areas which are
5.2 Market and competition potential of a process
The market and competition potential of a process is the second
dimension of the framework of reference. Whereas the relative process
competency was concerned with how well a (particular) company commands a
process, we now look at the extent to which a process (completely
independent of the specific competence of an individual company) has the
basic potential to create big competitive advantages for (any) company.
The main focus is on two aspects: one, whether the process (as required
for sustainable success in the framework of the Resource-Based View) is
valuable for the customer, i.e. whether the process offers the
possibility to create customer benefit, and thus to differentiate a
company from its rivals. This is the case if the customer is consciously
aware of and appreciates the result of a process or a process sequence.
If the process has high potential for creating a particular customer
benefit, then it should be implemented at high level with the company
itself. In this manner, a certain differentiation advantage vis a vis a
company's rivals can normally be secured. In order to derive the
processes from criteria such as service, price or flexibility--through
which a customer measures his satisfaction with, for instance, the
service of a bank--the KANO method (as used by HINTERHUBER and STUHEC)
can be implemented (cf. section 6.1) and followed up with competence
deployment (Hinterhuber/Stuhec, 1997).
On the other hand, from the perspective of the Market-Based View,
the question arises as to whether the process is capable of reducing the
competitive pressure on a company or even capable of putting pressure on
rival companies. PORTER's Five Forces Approach is suitable for
examining this situation. If the process is indeed capable of doing
either, for instance in the case of a bank implementing a process
internally, the competitive potential is substantial. Out of the five
competitive powers, the impact on a threat by new rivals or rivalry
between existing companies is particularly interesting. If, for example,
own production can result in helping to prevent new competitors entering
the market, this can improve the competitive position of a company.
Whether the rivalry amongst existing competitors can be influenced, is
probably very dependent on the customer benefit, and thus it is
important that interdependencies are observed. The negotiating power of
the buyer is--in many industries--hard to influence because the
customers usually have a large number of alternative suppliers to chose
from, especially where standardized services or goods are involved.
Thus, this aspect is only likely to be interesting for a few,
specialized processes. The same applies for the negotiation power of the
supplier and the threat posed by alternative products. If a specialized
process is involved, then the weighting should be adapted accordingly.
5.3 Relative interface and delegation costs
The relative interface and delegation costs complete the holistic
perspective of our frame of reference. They provide information relevant
to the type of coordination or type of contracts by taking the
transaction and agency costs into consideration that arise from market
weaknesses (e.g. imperfect and asymmetric information, uncertainty and
limited rationality). With regard to the transaction costs these factors
are mainly specificity, uncertainty, and transaction frequency. What all
of these features have in common is that if their strength increases,
the extent of the company-internal transaction costs in relation to the
transaction costs lessens if the good or service is procured on the
market. With transaction costs, these are mainly the signaling costs and
guarantee costs of the agent as well as the remaining loss of welfare,
which is incurred by only partially implemented transactions or
non-implemented transactions stemming from a lack of information. The
supervising and controlling costs of the principal, on the other hand,
are to a great extent already taken into consideration in the
transaction costs. A key influencing factor on these agency costs is the
transparency of the market with regard to a service or good provision in
the sense of comparability of processes. If the potential service or
good providers are difficult to compare, then a company can hardly
manage to find or to select a suitable insourcer. Good insourcers, then,
must make a particular effort to prove their quality (in advance). But
this of course results in a further loss of market transparency and
increased agency costs.
The following formula demonstrates how in this dimension the
respective transaction and agency costs which are incurred inside a
company stand in relationship to procurement on the market:
Relative interface and delegation costs = external transaction
costs and agency costs / internal transaction costs and agency costs
Thus, despite a low market and competitive potential as well as low
process competence, for example, it is possible that a different form of
sourcing than that of outsourcing would be advisable owing to the high
transaction and agency costs that would be incurred through market
provision. Low relative interface and delegation costs, are then,
tendentially an argument against a service or good being brought in from
outside or outsourcing the corresponding process. This will be examined
in more detail later.
6. THE SOURCING CUBE AS A GENERIC FRAME OF REFERENCE
All three dimensions introduced previously will now be incorporated
into a holistic framework of reference, that is, the 'Sourcing
Cube' (cf. Figure 10), which will now be 'vitalized'
through the findings of the various theories. The Cube demonstrates the
high complexity of sourcing decisions, since recommendations cannot
simply be derived from cost observations. Further, a strategic
'black and white' observation ('make or buy') is
also not advisable since cooperations in particular can, depending on
the individual situation and form of contract, prove to be meaningful
solutions for very attractive processes.
It has to be said that the Sourcing Cube is not a rigid element of
analysis: it can be modified, e.g. by a middle dimension on its axes.
This might lead to further, more differentiated recommendations, but
would also be too extensive to include in this paper. It is also
possible to include a fourth dimension in the sourcing decision, e.g.
through a 'bubble factor' of the Cube elements, which would
depict the value creation share of a process in relation to the total
value creation of a company. It is important to be aware of how many
influencing factors are impacting on sourcing decisions, and to observe
these in a structured manner rather than jumping to conclusions. This
requires more time initially, but in the long-term saves time--and in
some cases very high costs when compared to decisions that are made too
quickly and need to be 'repaired' later.
[FIGURE 10 OMITTED]
The processes being observed for a sourcing decision can be
incorporated into the Sourcing Cube and corresponding courses of action
can be derived. In the following, we describe approaches for
incorporating the processes (6.1) and subsequently look at
recommendations for courses of action (6.2).
6.1 Operationalizing the Sourcing Cube
In the following we take a brief look at the operationalizability
of the frame of reference. The lack of application or implementation
possibilities is an often-cited point of criticism directed at existing
models. In order to determine the position of a sourcing decision inside
the Sourcing Cube, the scoring model technique (Danowski/Diederichs,
2000 and Harting, 1994) is suitable. This involves the dimensions being
concretized through specific criteria, weighted by relevance and then
evaluated according to a scale (e.g. from 0 low to 6 high). The position
inside the Cube then results from adding all weighted point values
together that belong to one dimension (Warschburger/Hans, 1998).
Generally, all the relevant qualitative and quantitative criteria should
be determined and noted (Engelhardt/ Gunter, 1981). This has already
been done within the development process of the framework of reference
when determining the dimensions of the Cube. Now, the respective impacts
of the individual criteria have to be assessed. This is done--as
mentioned above--by using a scale. It is important for the significance
of the whole dimension that for each observed criterion, comparative
specification ranges are established with regard to their impacts,
because the determining of target weights is also influenced by the
respectively selected company values (von Nitzsch, 2006). The
specifications are then compressed via weighting factors into a total
score (Reinecke/Keller, 2006 and Kraus, 2005).The target weights are of
particular importance, because they determine the strength of each
criterion within the evaluation (Dreyer, 1974).
The concrete application of a scoring model can, for example, be
implemented in six steps (Danowski/Diederichs, 2000): (1) Determining
classes of criteria for each dimension of the Cube. (2) Weighting the
classes of criteria (high weighting for high importance, and vice
versa), (3) Evaluating the criteria with points from a pre-determined
evaluation scale, (4) Multiplying the criteria point values by the
respective weighting for that class, (5) Adding up the criteria values
to get a total value (score) for each dimension, (6) Arranging the
dimensions inside the Sourcing Cube, thus determining the octant. In the
following, we provide some information regarding possible weightings of
individual criteria for the three dimensions of the Cube. We should like
to point out that the exemplary selected values merely reflect
tendencies and are intended to clarify the general application of the
concept. In each individual case, the criteria must be examined with
regard to their relevance for a specific process, and the weightings
must be "adjusted" correspondingly.
For the dimension of the relative interface and delegation costs,
we have already identified and concretized in Section 5.3 the four
relevant criteria 'specificity', 'frequency',
'transaction uncertainty', and 'market transparency'
(cf. also Figure 9). On account of its very high importance,
'specificity' should be a key influencing factor and thus
requires high weighting, e.g. 50-60%. Often, when transaction costs are
being dealt with, the impact of the other factors is overlooked, and
specificity alone is selected as relevant factor (Williamson, 1981).
Within the framework of our model, however, attention is also given to
the other factors. 'Uncertainty' (in particular uncertainty of
behavior) is a good reason for choosing a form of sourcing that is close
to that of hierarchy. This is particularly the case with service
providers, since unlike other industries and goods, controlling the
quality of a service being brought into a company whilst at the same
time fulfilling the very high quality demands of customers is sometimes
difficult. The very sensitive data which an insourcer has to be
entrusted with also makes the situation difficult. If services or goods
are procured on the market, then, very complex contracts are required
together with high controlling costs.
The frequency of transactions is comparatively unimportant with
most companies, since it does not have an impact of its own but has an
intensifying role. Although internal fixed transaction costs are on the
decrease, complex agreements are becoming more worthwhile, since they
apply to several transactions and will thus pay for themselves.
'Uncertainty' should then be weighted with about 15-25% and
the frequency of transactions with about 5-15%. Owing to the presumably
low agency cost share of the interface and delegation costs, the market
transparency should also be attributed with a comparatively low
influence and also be weighted with about 5-15%. Before being placed
into the frame of reference, each criterion and its specification must
be additively and scale-linked.
When the dimension 'market and competition potential' is
operationalized, certain core elements of the Resource-Based View and
the Market-Based View must be considered. These two perspectives were
already linked together in the sections 3.7 and 5.2. With regard to the
findings of the Resource-Based View the value of a process (or its
recognizable result) for a customer must be focused on (cf. Figure 9).
The value for the customer cannot be ascertained simply from a
performance ratio, but it can be indirectly determined via the indicator
for customer satisfaction. Here, a two-step approach is recommended:
First the current and future criteria which customers use to measure
their satisfaction must be identified (Hinterhuber, 1996). For doing
this, the already mentioned KANO method is useful (Hinterhuber/Stuhec,
1997 and Brusch/Baier, 2008).
KANO (1984) developed his model in order to weight customer demands
and expectations. He differentiated between basic attributes, quality
and performance attributes and excitement attributes. The basic
attributes are characterized by their degressively increasing nature,
and are not likely to be mentioned by a customer being surveyed although
the customer takes it for granted that these attributes will be in
place. Quality and performance attributes can be depicted as a medium
inclined slope, and are always explicitly stated by the customer.
Additionally, the customer will have expectations of the specification
of an attribute. A progressive curve depicts the excitement attributes,
which, according to KANO, can make the difference between rivals and
their products. Here, customers can be 'wowed' into
discovering attributes that they had never previously thought about
(Lindemann, 2005, Hinterhuber et al., 1996, Brusch/Baier, 2008, Bailom
et al. 1996).
After the relevant criteria have been identified, the customer
value can be determined by the application of a 2-step correlation
chain, the methodology of which is oriented towards Quality Function
Deployment (Akao, 1992, Hauser/Clausing, 1988 and Wildemann 2008). A
fitting description would be "product planning and development
according to customer wishes" (Hinterhuber/Stuhec, 1997). However,
transferring Quality Function Deployment is too involved an undertaking
for assessing customer value. Competence Deployment--a simplified
derivation (Stuhec, 1993 and Blasing, 2008) is more suitable. Customer
values are identified on the basis of the before mentioned criteria for
customer satisfaction and the performance attributes of products and
processes. The correlation chain can be followed by the utilization of
Competence Deployment matrices. Via the correlation chain, the criteria
for customer satisfaction are utilized in order to determine the product
(performance) attributes and then to identify the customer value with
the help of a customer-oriented competence positioning of the observed
product or service (Hinterhuber and Stuhec, 1997).
In addition to the 'value of a process for the
customer'--derived from the Resource-Based View--the impacts of the
Five Forces--derived from the Market-Based View--should also be
carefully observed within the framework of the dimension 'market
and competition potential". As this has been dealt with earlier in
this paper, we shall not go into more detail here. These strategic
analyses can be methodically implemented with the help of market or
industry attractiveness analyses based on the factors described by
PORTER in the evaluation of his Five Forces (von Nitzsch, 2008 and
Lombriser/ Abplanalp, 2005). With regard to the concretizing and
estimation of the individual factors, we refer here to the existing
literature on that topic (Grant/Nippa, 2006 and Muller-Stewens/Lechner,
2003). An industry attractiveness analysis of this kind can be followed
up by an analysis of industry development. A corresponding, more
detailed observation is based on the theoretical model of product life
cycle (Levitt, 1965 and Deyhle, 1996b) and supplements the "as
is" analysis with a future-oriented perspective, because this model
forecasts changes in competition and allows suitable strategies to be
derived (Lombriser/Abplanalp, 2005 and von Nitzsch, 2008). However, the
literature queries the applicability of this model, because not all
industries develop uniformly in accordance with the model.
Furthermore, product innovations, strategic reorientations and
shifts in the intensity of competition within a particular industry all
influence the validity of the model (Porter, 1999 and Hax/Maijluf,
1991). In most industries, particularly in those 'established'
ones with long operating cycles--for instance the banking industry--it
would be more meaningful to identify the causes behind the industry
development and to keep these under observation (Lombriser/Abplanalp,
2005). These factors--described by PORTER (1999) as 'driving
forces' are: long-term changes in growth, product, process and
marketing innovations, reductions in uncertainty and risk, dissemination
of know-how, changes in the input costs and exchange rates, changes in a
country's trade policy, market entrances and exits of established
companies, and increasing globalization.
We briefly looked at the dimension of relative process competence
in 6.1, where principally findings of the Cost Account Approach and the
Core Competencies Approach are incorporated in the deliberations. The
criterion of costs can be relatively simply ascertained by comparing
internal process costs with external ones. All that is needed are
concrete bids from potential insourcers together with an estimation of
the discontinuing costs within the company. These are then related to
the costs of the process within the company, which can be ascertained
using company internal data, or can at least be estimated. The ratio
indicates the cost-sinking potential, e.g. in the three variations
'high' (>20%), 'medium' (5-20%), and
'low' (>5%). It should be noted that in this particular
dimension of the Sourcing Cube, another factor can also be used as a
benchmark on account of the relative comparison. For instance, if a
specific own equity ratio is defined as a goal, this can also be
utilized as a benchmark for the (internally) gathered data. In the
Sourcing Cube, this factor would form the border between the
specifications of one dimension (upper or lower half), so that not only
relative but also absolute cost effectiveness figures can be integrated
into this dimension for consideration.
The core competencies are--supplemented by market structure and
environmental impacts--the biggest influencing factor for determining
the relative strength of a company's competencies. For the
consideration of the findings from the Core Competencies Approach,
ability profiles (Stuckey et al., 1992 and Hinterhuber/Stuhec, 1997) can
be produced, which are then compared via Benchmarking with other banking
institutes and suppliers. For service providers, this could include
determining the relevant criteria for creating an ability profile, e.g.
in the areas of process innovation management and information
management. For example, the ability of a company in process innovation
could lead to conclusions being drawn about competencies in the areas of
product development and process automatization, should the
company's performance be rated positively from a Benchmarking in
comparison to that of rivals or selected reference companies.
The reputation that a company gains from its superior process
management can then be deemed a scarcely imitable competence
(Hinterhuber/Stuhec, 1997). For each process, a particular catalogue
must be produced which then facilitates the assessing of high how the
process competence is in relation to those of the company's rivals
(Gallon et al., 1995). Using different weightings of rival competencies
for present and future, a temporal profile can also be created
(Hinterhuber/Stuhec, 1997). For the comprehensive weighting of the
dimension of relative process competence, we can state that the total
costs--as we have frequently observed and evidenced--are of great
significance because they are, after all, a consequence of a process
competence. According to the process involved, they should be weighted
The models observed here--and all the related explanations are only
intended to be approaches for operationalizing our Sourcing Cube, and as
examples for how the Cube can be 'filled up'. In each
individual case, the individual criteria must be checked for their
relevance for a specific process, and their weighting must be adapted
accordingly. On the other hand, other approaches that have not been
suggested here, are possible for classifying and arranging into the
Cube. With regard to the concretization and application of the generic
Cube model, in each individual case, too, these must be modified and
adapted. After a process has been allocated a position in a Cube
dimension, various recommendations for courses of action can be derived.
In the following Section, we will examine these recommendations for each
of the octants.
6.2 Recommendations for courses of action
Having spoken about the criteria which have to be taken into
consideration for the three dimensions of the Sourcing Cube, and the
processes which can be incorporated into the frame of reference with the
help of suitable models and methods, we now show how the reference
strategies--as presented in Figure 10--can be derived for the different
octants (boxes) of the Cube.
A company has high competence in this area and can thus implement
the process more cost efficiently and also in a unique manner. However,
this has no great impact on customer benefit, nor can it help to reduce
the impact of rivals' strengths, and so it would be meaningful if
the good or service were to be offered on the market, thus increasing
turnover and incurring further effects of scale. However, what speaks
against this are the very high interface and delegation costs on the
market, i.e. internal costs are lower than external costs. If a good or
service were to be placed on the market, this would incur additional
high costs, e.g. for signaling, and outsourcing contracts would be
complex. Taking consideration of these aspects, a type of coordination
should be chosen which is in close proximity to a hierarchy. This would
enable interface and delegation costs (which are directly dependent on
transaction costs and agency costs) to be lowered, even though it
entails a company or a bank losing some of its flexibility (e.g. with
regard to a change of partner). One example for a more cost efficient
form of coordination in this case would be that of insourcing with
long-term contracts, thus allowing a company to profit from its own high
competencies, even though customer benefit is rather low. Long-term
contracts prevent an outsourcer from frequently changing, which
would--owing to the high transaction costs and agent costs--negate any
achieved effects of scale.
In this section of the cube, there are neither specific process
competencies nor a high market and competition potential. Thus, it would
make sense to outsource the processes involved here. Because the
internal process costs are relatively high, the company can profit from
presumably lower market prices and the superior competence available on
the market. As there is no potential for differentiation here,
outsourcing will not jeopardize any particular competitive advantage. As
in the first case, however, the interface and the delegation costs on
the market are very high, so that here, too, long-term contracts should
be entered into (in this case with an insourcer). This will ensure that,
e.g., high and recurrent search costs for a frequently changing provider
are avoided. However, the selection of a particular provider must be
made with due care.
With regard to the observed processes in this section of the cube,
the company is more competent than its rivals and potential insourcers.
Additionally, the process has a high value for the customer and can
weaken competition, which means that it contains high market and
competition potential. This combination identifies this process as a
core competence, thus it would not be meaningful to source this valuable
process out nor to allow rivals access to this unique competence.
Although these factors alone would make a good reason for own
production, the interface and the delegation costs on the market are
high in comparison to those of the company. Therefore, the process
should most definitely be implemented inside the company.
In comparison with octant 3, the company has a comparatively low
process competence, which means that the high potential of the process
for increasing customer benefit or facilitating survival in the face of
competition cannot be fully exploited. For this reason, despite low
internal interface and delegation costs and high market and competition
potential, own production would not be advisable. Outsourcing, though,
would lead to surrendering a strategically very important process, and
would entail the company placing its competitiveness in the hands of
outsiders. Also, interface and delegation costs would be very high.
Here, a cooperation would ensure access to the resources of the
cooperation partner and would also support the close collaboration
required on account of the high potential of the process. This form of
coordination, positioned midway between market and hierarchy, also
lowers the extent of the transaction costs and agent costs, which would
be incurred when buying in from the market.
Here, the potential and the process competence are similar to those
of octant 1. Correspondingly, here too, offering the product or service
on the market, i.e. insourcing, is recommended. However, in this case,
the interface and delegation costs on the market are much lower than in
octant 1. This means that in this case a more flexible form of
insourcing can be selected; long-term contract agreements are not
The first two features correspond to those of octant 2 of the Cube.
With regard to the interface and delegation costs, these are the same as
in case 5. Here too, then, a more flexible form of outsourcing can be
chosen, which is also not bound up with long-term contractual
agreements. In this manner it is possible, for example, to quickly
switch to another insourcer if a better opportunity arises.
In the third case, it was clear that own production is preferable
due to the high potential and high process competence involved. Even
though the interface and the delegation costs on the market are very low
in comparison to company-internal ones, this recommendation remains in
place, because processes with high market and competition potential that
are implemented very skillfully can create enormous competitive
advantages for a company.
In the final octant of the Cube, analogously to the recommendation
for case four, a cooperation should be selected, because the potential
and market competence have not changed, and the converse conditions for
interface and delegation costs resulting from the form of cooperation
midway between market and hierarchy are of only slight relevance.
7. SUMMARY AND OUTLOOK
It was the aim of this paper to develop a tool for making
well-founded assessments of sourcing decisions--a tool which can be
implemented in the real world. We have done so by deriving a frame of
reference in the form of a Sourcing Cube. The Cube is based on a number
of selected theories, the core contents of which and their contributions
to making well founded sourcing decisions were elucidated and then drawn
together in three axes: the relative market and competition potential,
the relative process competence and the interface and delegation costs.
Both operative aspects (e.g. costs) and strategic deliberations (e.g.
competitive positioning) were incorporated.
In the course of our work, we introduced those theories and
concepts that enable an observation of the sourcing decision from all
relevant perspectives. First, the legal aspects of sourcing activities
were explained as framework conditions but these were not explicitly
included in the development of a framework of reference because they
vary from country to country. We included the Cost-Accounting
Approach--which provides a very important comparison between the costs
of own production and outsourcing, the Transaction Cost Theory--which
considers those costs which are incurred by the numerous different trade
relationships in economic systems with division of labor--and
Benchmarking as a concept for a comparative analysis of own production
and that of a company's rivals.
Additionally, aspects of the Resource-Based View--which considers a
company to be a bundle of resources and which relates competitive
advantages to an effective and efficient utilization of these resources,
was included. Building on this basis, the Core Competencies Theory goes
on to state that sustainable competitive advantages can only be achieved
through core competencies, whose existence can be established from
specific conditions. The Market-Based View, which we also looked at, is
based on an opposing presumption. It stems from the observation of a
company's rivals and postulates that the strategic conduct of a
company--and also its success--is determined by the structure of the
industry. The Principal-Agent Theory, which we introduced last, analyzes
the relationship between one or more principals and the agents they hire
under the assumption of asymmetric information dissemination, and draws
conclusions about costs that are incurred and also provides further
information about the form an optimal contract should take.
In order to develop our framework of reference and to
operationalize it, we observed existing models that transfer the
findings of these various theories onto sourcing decision making. This
resulted in several ideas for integrating the theories. In order to
achieve a comprehensive frame of reference, the various findings were
drawn together into three dimensions. Dependent on either a high or a
low dimension on the three axes, the structure of the Sourcing Cube took
shape--resulting in eight octants. Owing to the integration of the
findings from the various theories analyzed here, the Sourcing Cube
enables sourcing decisions to be assessed in a well-founded manner.
Depending on the dimension on the three axes, i.e. depending on which
octant a process is allocated to, a company will receive a
recommendation for a particular course of action. As an orientation aid
for practitioners, we demonstrated briefly how a company can, for
instance with the help of a scoring point system and relevant models,
allocate its own processes within the Cube.
Many authors who have tackled this topic from a theoretical but
also from a practitioner's perspective have also (as described in
Section 5) provided portfolios of courses of action recommended for
sourcing decisions. But in these cases a strategic perspective was
usually adopted, so that owing to a lack of operative process
orientation, the possibilities of applying or implementing these
recommendations was rather limited in practice. Our innovative framework
of reference is a different approach. It should initially be utilized in
sub-areas in order to check its feasibility, but leading on from
this--or even in parallel--questions need to be addressed as to whether
all the necessary perspectives for a specific problem, i.e. an observed
company or a particular core process, have been covered and are
relevant. Owing to the plethora of existing articles and papers--some of
which have been included here--full of new suggestions, linkages, and
viewpoints that need to be considered, it has become evident that
sourcing decision making is a highly complex process. Thus, in future,
there will no doubt be other authors who illuminate new, hitherto
unconsidered, aspects. Our Sourcing Cube has incorporated many aspects
of existing models and complemented these with further aspects. However,
the Sourcing Cube does not provide a general or final solution for all
sourcing decisions, but rather, it provides a general framework that
needs to be critically examined, modified, and adapted in each specific
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Dirk Braun, RWTH Aachen University, Aachen, Germany
Sarah Schiffer, RWTH Aachen University, Aachen, Germany
Michael Schiffer, RWTH Aachen University, Aachen, Germany
Rudiger von Nitzsch, RWTH Aachen University, Aachen, Germany
Dr. Dirk Braun received his Ph.D. in Business Administration from
RWTH Aachen University, Germany, in 2010. Currently he is an assistant
professor of Decision Theory and Strategic Management in Financial
Services at RWTH Aachen University.
Sarah Schiffer earned her degree in Industrial Engineering and
Management from RWTH Aachen University, Germany, in 2010. Currently she
is a research assistant and Ph.D. student in Business Administration at
RWTH Aachen University.
Michael Schiffer earned his degree in Industrial Engineering and
Management from RWTH Aachen University, Germany, in 2009. Currently he
is a research assistant and Ph.D. student in Industrial Engineering and
Management at RWTH Aachen University.
Univ.-Prof. Dr. Rudiger von Nitzsch received his Ph.D. from the
University of Cologne, Germany, in 1991. Since 1996 he has been a
professor of Business Administration and Decision Theory at RWTH Aachen
University, Germany. Currently he is also the chairman of the Research
Institute for Asset Management at RWTH University and a member of the
supervisory board of Generali Investment KAG and aixigo AG, Germany.
FIGURE 5: BENCHMARKING CYCLE (ADAPTED FROM CAMP, 1994)
* Securing the continuous
* Complete integration of
best industrial practices
in all processes
* Benchmarking object (what?)
* Benchmarking partner (who?)
* Methods of data / information
* Determination of
* Identification of best
* Projection of future
* Cognition of adaption
* Derivation of target specifications
* Communication of insights in the whole
* Conviction/acceptance of results
* Determiniation of functional goal
* Action plans
* Realization of results
* Periodical progress
Figure 3: Summary of transaction costs
External transaction costs Internal transaction costs
Ex-ante transaction costs #
* Information and search costs Costs for establishing,
* Negotiation and contract maintaining, or changing
costs an organizational
Ex-post transaction costs # Operational costs of an
* Monitoring costs * Information costs
* Conflict and enforcement * Costs related to the physical
costs transfer of goods and services
* Adjustment costs
## Fixed transaction costs # Variable transaction costs
FIGURE 8: STRATEGIC OPTIONS FOR OUTSOURCING AFTER SJURTS
AND STIEGLITZ (2004)
Resource-position\ low high
strong Spin-off Own-Production
weak Market Collective
FIGURE 9: THREE DIMENSIONS OF A SOURCING DECISION
Relative 1. Cost-Accounting 2. Core Competencies
Process Approach Approach
Internal Process Costs/ Imperfect imitability and
External Process Costs substitutability, limited
transferability to other
Market and 1. Resource-Based View 2. Market-Based View
Potential Process value for the Influence on: threat of
customer new rivals, rivalry
opponents, if applicable
the 3 remaining forces
Relative 1. Transaction Cost 2. Principal-Agent Theory
Interface and Theory
Delegation Market transparency.
Costs Specifity, Uncertainty,
FIGURE 11: OCTANT 1 OF THE SOURCING CUBE
1 Relative process competence: high
Market and competition potential: low
Relative interface and delegation costs: low
FIGURE 12: OCTANT 2 OF THE SOURCING CUBE
2 Relative process competence: low
Market and competition potential: low
Relative interface and delegation costs: low
FIGURE 13: OCTANT 3 OF THE SOURCING CUBE
3 Relative process competence: high
Market and competition potential: high
Relative interface and delegation costs: low
FIGURE 14: OCTANT 4 OF THE SOURCING CUBE
4 Relative process competence: low
Market and competition potential: high
Relative interface and delegation costs: low
FIGURE 15: OCTANT 5 OF THE SOURCING CUBE
5 Relative process competence: high
Market and competition potential: low
Relative interface and delegation costs: high
FIGURE 16: OCTANT 6 OF THE SOURCING CUBE
6 Relative process competence: low
Market and competition potential: low
Relative interface and delegation costs: high
FIGURE 17: OCTANT 7 OF THE SOURCING CUBE
7 Relative process competence: high
Market and competition potential : high
Relative interface and delegation costs : high
FIGURE 18: OCTANT 8 OF THE SOURCING CUBE
8 Relative process competence: low
Market and competition potential: high
Relative interface and delegation costs: high