Outsourcing helps or hurts businesses, depending on how they’re used

WUSTL business professor studies when contracting work to outside sources is a bad idea

Outsourcing has a bad reputation that may be unwarranted. According to new research from a professor in the Olin School of Business at Washington University in St. Louis, firms can gain a lot from outsourcing — under the right conditions.

Jackson Nickerson

Low-tech industries also take risks when they turn to outsourcing. Nickerson studied the tendency of trucking companies to team-up with competitors for some hauls, while relying on their own company drivers for other transporting jobs.

“It’s counter-intuitive. Why would you want to give your competitor business when it could result in your losing your customer?” Nickerson asks.

Jackson found that companies can gain by collaborating with other firms — as long as the circumstances are correct. Evidence of competing firms working together is seen in many industries including airlines, hotels, finance. Knowing when it’s valuable to outsource impacts a broad swath of the economy.

Managers need to assess the benefit of using a competitor that has a cost advantage for some tasks. They also need to consider the risk of losing possible sources of future revenue to their collaborators, and they need to understand when outsourcing will actually increase competition for future business.

“When all of these conditions are properly evaluated, knowing when to collaborate and when to compete can be vital to a firm’s survival,” Nickerson says. “Our theory provides a new lens for thinking through such collaboration decisions.”