The Choice of Sourcing Mechanisms for Business Processes

There is unprecedented interest in digitally enabled extended enterprises that enable firms to gain access to specialized skills and capabilities globally. Given this motivation, firms are unbundling their value chain processes and exploring new sourcing mechanisms. With the emergence of world-class skills and capabilities in offshore locations, new sourcing mechanisms have become available beyond traditional domestic insourcing and outsourcing. However, there is little systematic research examining how firms choose sourcing mechanisms for their business processes. This study views the digitally enabled extended enterprise as a complex system of business processes and examines how sourcing choices are made in such enterprises. It builds on the modular systems theory to posit that modularization of business processes and their underlying information technology (IT) support infrastructures are associated with the choice of sourcing mechanisms for the processes. The study tests this proposition in a sample of business process sourcing choices made by 93 medium and large U.S. firms. The results show that firms tend to choose domestic outsourcing for processes that are high in modularity and offshore outsourcing for processes that are low in modularity. Further, when processes can be detached from a firm's IT infrastructure, firms tend to use offshore outsourcing. However, when processes are tightly coupled with underlying IT infrastructure, it may be infeasible to detach processes and execute them in remote locations. Implications for theory and practice are also discussed.