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Outsourcing paradox: total outsourcing, organisational innovation, and long run productivity growth

Windrum, Paul and Reinstaller, Andreas and Bull, Christopher M. (2008) Outsourcing paradox: total outsourcing, organisational innovation, and long run productivity growth. [Conference or Workshop Item] (Unpublished)

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Abstract

A growing empirical literature indicates that outsourcing can deliver short term cuts in costs but leads to a long term loss of productivity growth. In order to explain this outsourcing productivity paradox, the paper examines the connection between total outsourcing and organisational innovation, a major contributor to productivity growth. This is done within a model in which managers raise the productive efficiency by identifying organisational architectures that more effectively integrate the value adding activities and administrative routines. As part of this process, managers can internally or externally source an activity. Simulations of the model show that large scale outsourcing restricts the scope for organisational innovation, leading to low productivity growth. The findings accord with the empirical data, and provide a salutary warning for managers and policy-makers about the potential long term implications of total outsourcing.

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