Systems Integration and the Dynamics of Partial Outsourcing

Abstract

F irms in advanced economies are increasingly outsourcing software and technology development as well as other knowledge work to a worldwide supply base. Standard economic and learning models predict that focal firms should outsource either all or none of a particular activity unless extra resources are required during cyclical demand peaks or access is needed to some tightly appropriable intellectual property. However, recent evidence shows that, even when these exceptions do not apply, many firms pursue a partial outsourcing strategy. We develop a dynamic optimization model to provide a rational explanation for this observation. In our model, learning from prior projects occurs at both the subsystem level and the overall systems level (e.g., systems integration and architecture). Learning at the two levels interacts such that integration capabilities can dynamically build and decay. The model generates conditions where partial outsourcing is rational and dominates the extreme conditions of complete insourcing or complete outsourcing. Our model also specifies the conditions for regime change between insourcing and outsourcing and cycling between insourcing and outsourcing, and overshooting or undershooting the long-run outsourcing target. Furthermore, we show that these results are highly path-dependent under short horizons. The model also provides explanation for interesting questions such as why the rate of outsourcing might be U-shaped in the rate of technological change and why startups so often insource in contrast to more established counterparts in similar industries.

Reframing Systems Integration: A Process Perspective on Projects

“…Taking the project, rather than the firm as the locus of systems integration, systems integration strategies are found to combine modular architectures and integrating practices (Tee, Davies, et al, 2019). They involve learning on projects (Anderson et al, 2019), with projects playing a strong role in capability development in industries where the supply chain is not dominated or led by a single focal firm (Rutten et al, 2009). Erbil et al (2013, p. 77) note that: “ various actors can be system integrators at the different phases of a project, while a system integrator’s role may also evolve over time.…”

Single-Sourcing vs. Multisourcing: An Empirical Analysis of Large Information Technology Outsourcing Arrangements

“…The client-level antecedent is the client's IT outsourcing capabilities associated with selecting vendors, contracting out IT work, defining requirements, specifying performance goals, monitoring external vendors, and integrating the deliverables provided by different vendors. Client IT outsourcing capabilities (CustomerOutsourcingCapabilities) is assessed as the dollar value of all the IT outsourcing deals signed by the client before signing the current deal (Bapna et al 2016, Mishra and Sinha 2016, Anderson et al 2019. The industry-level antecedent is the level of competition in the IT outsourcing industry.…”

A model for key success factors for outsourcing in project-based companies: integrating soft and dynamic approaches

“…Outsourcing with all its advantages also has disadvantages. Given that in outsourcing decisions, activities are either not outsourced, or if they are, the whole process must be outsourced (Anderson et al, 2019). Therefore, the disadvantages of outsourcing will be seen more.…”