Firms responded by focusing on their core competencies and outsourcing both

Firms responded by focusing on their core

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Firms responded by focusing on their “core competencies” and outsourcing both peripheral tasks and specialized functions to subcontractors (Kogut and Zander 1992; Lepak and Snell 1999; Prahalad and Hamel 1990). The resulting complex web of interfirm relationships was facilitated by developments in information and digital technologies that enabled firms to outsource entire functions and to more easily monitor contractors. Contracting out for goods and services via business-to-business transactions is not new. But the scale and scope of this activity has been transformed in recent decades as large, hierarchical firms began to lose their organizational advantage, and changes in the mix of firms’ “make or buy” decisions altered the structure of the economy in fundamental ways. Advances in information and communication technologies lowered the cost of information processing and coordination of production across organizational boundaries, reducing the advan- tages of keeping production in-house. An early example comes from the customer service and sales activities of large telecommunications and financial services firms. Technological advances allowed these firms to consolidate what had been largely small in-house operations and, by the mid-1990s, to outsource some call volume to third-party vendors. Lead firms set terms and con- ditions of vendor contracts, and vendors faced volatile conditions in terms of demand volume and contract renewal. A major establishment-level survey of call centers in seventeen countries found lower pay and worse working conditions at call centers managed by vendors compared with those retained in-house (Batt, Holman, and Holtgrewe 2009; Batt and Nohara 2009). Digital technologies have increased the ability to codify knowledge and standardize produc- tion processes. They have supported the decomposition of complex processes, enabled firms to identify and codify separable parts of the production process, and facilitated standardization of interfaces. The standardization of design features of the modules reduces the possibilities for contractor opportunism (Helper, MacDuffie, and Sabel 2000). Business functions and customer- facing transactions have also been broken into their components and optimized in this way, lead- ing to the widespread use of business process outsourcing. These technologies have improved the ability of firms to monitor and enforce contracts with external vendors and suppliers, thus reducing the advantage of hierarchy in coordinating produc- tion relative to the market (Cappelli 2016). Transaction cost arguments now suggest that market relationships among a complex web of producers may enjoy a cost advantage over vertically integrated firms. Core competency theory argues that firms can improve their competitive advantage by focus- ing on what they do best and eliminating other lines of business (Lepak and Snell 1999; Prahalad and Hamel 1990). The shift to the financial model of the firm also increases the likelihood that firms will make greater use of domestic outsourcing. Unlike the managerial model of the firm in
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