According to Michael Baye, the author of Managerial Economics and Business Strategy, “When an input has well-defined and measurable quality characteristics and requires specialized investments, the optimal procurement method is a contract. A contract reduces the likelihood of opportunistic behavior and underinvestment by creating a legal obligation between the firms. One disadvantage of a contract is that it increases a firm’s transaction costs, especially in a complex or unstable contracting environment” (Baye, Chapter 6, The Organization of the Firm, 2012, [url removed, login to view]).
Outsourcing is a form of contracting “used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally” (Source: [url removed, login to view]). Often located overseas, this company provides services
In a short essay, discuss the primary advantages and disadvantages of obtaining inputs (raw materials; labor; services) through “outsourcing”. Your discussion should focus on a company not used in the textbook that relies on this method of procurement.
You can choose one of these outsourcing companies as focus of your discussion:
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