A typology of backsourcing: short-run total costs and internal capabilities for re-internalization

Abstract

Purpose: The purpose of this study is to examine backsourcing, which refers to the full or partial re-internalization of a firm’s previously outsourced activity. Researchers have primarily focused on the drivers of backsourcing, but this paper builds on that prior research to develop a typology of backsourcing. Design/methodology/approach: Drawing on transaction cost economics and the resource-based view (RBV), the paper posits that firms backsource because of two factors – changes in their short-run total costs and changes in their internal capabilities for re-internalization. By using the interactions between these two factors, the authors propose four types of backsourcing. Findings: The paper presents a typology for backsourcing: profitability-backsourcing, operational-backsourcing, strategic-backsourcing and failure-backsourcing. Only one (failure-backsourcing) of these four types of backsourcing suggests failure, while the other three indicate strategic flexibility. The authors also present mini-cases to support the typology. Research limitations/implications: The paper presents a conceptual model of backsourcing. This is a limitations of the study and further research is needed to empirically test the proposed model. Practical implications: From a managerial perspective, this framework can be used as a decision-making tool for firms that are considering backsourcing. Given the complexity involved and the perceived stigma, decision-makers may find it difficult to backsource. Thus, a framework to avoid biases leading to decision-making errors, as well as to understand if backsourcing is a viable option, is needed. Originality/value: This paper is one of the first to present a typology of backsourcing which can be used to understand when it is a failure of the outsourcing strategy and when it is a signal of strategic flexibility. This paper contributes to the growing stream of research on backsourcing by moving the literature beyond determinants and bringing attention to the outcomes of backsourcing. Additionally, the proposed framework can be used as a tool by decision-makers to examine whether backsourcing is favorable for their firm based on costs and capabilities for re-internalization.