The Process of Vertical Dis-integration: an Evolutionary Perspective on Outsourcing

It is argued that an evolutionary perspective on firm boundaries with its strong focus on knowledge, as well as processes of search, learning and capability development is instrumental in developing a theory of firm boundaries that is close to managerial concerns. Building on insights in evolutionary economics, propositions are developed regarding scope, speed, and switching costs in the process of vertical dis-integration of which outsourcing is a particular instance. Current theories of firm boundaries give indication why certain activities might be candidates for outsourcing by stressing efficiency gains in terms of transaction and production costs. They overlook, however, that ‘technologically separable interface’ between activities might be not available in codified form, and neglect learning dynamics that lead to strategic consequences in terms of capability development and adaptability in competitive environments of varying dynamics. An evolutionary perspective on vertical disintegration recognises that firms make contractual commitments and partly tacit capabilities develop in a path dependent manner. The fact that the firm’s past casts a shadow on current governance options and possibilities to realise them complicates the process of governance change and imposes switching costs that impact the scope and speed of vertical dis-integration. An evolutionary perspective on vertical disintegration also suggests considering long-term consequences of outsourcing decisions on the dynamic capabilities of the firm.