|Up a level|
This paper uses the notion of contracting strategy to advance research in plural sourcing. We develop and test a theoretical framework to explain how plural-sourcing firms strike the make-and-buy balance depending on their contracting strategy. The focal firm’s choice of a contracting strategy is associated with a specific supplier portfolio design, with a bargaining-based strategy resulting in many, narrowly capable suppliers with short tenure, and a relationship-based contracting strategy resulting in fewer, broadly capable suppliers with long tenure. Focal firms with the latter strategy incur lower overall contracting costs than those with the former, and therefore outsource more. Focal firms seek to influence contracting costs associated with their supplier portfolio for “nearly the same inputs” and “nearly the same suppliers”. Empirical analysis corresponding to the two levels, namely
patent prosecution and legal services at Fortune 500 firms, provide consistent support for our theory.
How do corporate legal departments and law firms make decisions about ‘making’ or ‘buying’ legal services? In what ways are their decisions governed by the usual criteria and factors identified in economic and managerial theories of the firm? And to what extent are lawyers’ make‐or‐buy decisions affected by professionalism and partnerships that govern the legal profession? This paper addresses these questions by generating five propositions arising out of various theories, concerning(1) the link between task modularity and organizational modularity,(2) knowledge interdependence complicating this link,(3) rent‐seeking, property‐rights, incentive‐alignment,and decision‐making adaptation motives for make‐or‐buy decisions,(4) the impact of managerial hierarchy on make‐or‐buy decision, and (5) the industry‐level distribution of capabilities affecting value chain disintegration. The paper discusses some evidence in legal services in support of these propositions, and raise questions for further research.