Contracting out is the process by which a firm formally agrees to repeated purchases of goods or services from an external provider instead of producing these internally.
Contracting out occurs when a firm enters into a contractual agreement to purchase products or services that it could potentially have produced internally. This reflects the managerial choice, in a ‘make-or-buy’ decision, not to undertake an activity within a firm but to purchase a product or service from the market. To the extent that no firm produces all the components of its products or services internally, all firms undertake some degree of contracting out.
Economic perspectives attribute contracting out to efficiency considerations, and to external purchasing potentially offering lower total costs than internal production (Coase 1937; Williamson 1985). Resource-based perspectives explain contracting out as resulting from firms choosing to purchase lower value-added activities from the.
