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Abstract:
Investments to increase the level of explicit coordination with outside agents have generally resulted in increased risk to the firm; firms have traditionally avoided this increased risk by becoming vertically integrated or by underinvesting in coordination. This paper argues that information technology (11) has the ability to lower coordination cost without increasing the associated transactions risk, leading to more outsourcing and less vertically integrated firms. Lower relationship-specificity of IT investments and a better monitoring capability imply that firms can more safely invest in information technology for interfirm coordination than in traditional investments for explicit coordination such as co-Iocated facilities or specialized human resources; firms are therefore more likely to coordinate with suppliers without requiring ownership to reduce their risk. This enables them to benefit from production economies of large specialized suppliers. Moreover, rapid reduction in the cost of IT and reduction in the transactions risk of explicit coordination makes possible substantially more use of explicit coordination with suppliers. The resulting transaction economies of scale, learning curve effects, and other factors favor a move toward long-term relationships with a smaller set of suppliers. We call this combination-a move to more outsourcing, but from a reduced set of stable partnerships-the “move to the middle” hypothesis.
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Notes on contributors
Eric K. Clemons
Eric K. Clemons: See Guest Editors’ Introduction.
Sashidhar P. Reddi
Sashidhar P. Reddi is currently a Ph.D. candidate in the Decision Sciences Department of The Wharton School of The University of Pennsylvania. He holds an M.S. from the Courant Institute of Mathematical Sciences at New York University and a B.Tech. in computer science from the Indian Institute of Technology, New Delhi. His research interests include analyzing the strategic implications of interorganizational investment decisions.
Michael C. Row
Michael C. Row: See Guest Editors’ Introduction.
