Date: April 12, 2013 Topic: The Shrinking ... - Georgetown Law

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Resource Co-Specialization and Supplier Concentration in Plural Sourcing: Evidence from Legal Services Sourcing at Fortune 500 Companies ABSTRACT Although the preconditions for the simultaneous use of multiple sourcing modes have been explored, the question of what determines how much to make and how much to buy in plural sourcing has been understudied. This study fills this gap. Using longitudinal data of in-house lawyers at, and law firms used by, Fortune 500 firms, we find empirical evidence that plural sourcing strategies are tilted in favor of ‘make’ whenever firms have opportunities for resource co-specialization (notably between legal resources and R&D, marketing, and top management teams) and a broad portfolio of suppliers that raises the cost of contracting. Our study suggests that plural sourcing research benefits from examining a group of transactions within a corporate function, to complement the predominant focus on transaction-level outcomes. Keywords: plural sourcing; make-and-buy decisions; resource co-specialization; supplier concentration; legal services. INTRODUCTION How do firms organize economic transactions? Since the seminal work on firm boundaries by Coase (1937, 1988), scholars have addressed this question by identifying multiple modes (i.e. make, buy, ally, etc.). Prior work in transaction cost economics (TCE) analyzed the transactional characteristics that lead to choosing one of these modes (Poppo et al., 1998; Walker et al., 1984; Williamson, 1985) while the resource-based view of the firm (RBV) suggests that firm boundaries reflect differences in capabilities and knowledge (Argyres, 1996; Jacobides et al., 2005; Kogut et al., 1996). Both TCE and RBV employ a comparative analysis of sourcing modes, leading to the choice of the most efficient institutional arrangement (i.e. market, hierarchy or hybrid) for each transaction. However, prior research has documented the simultaneous use of multiple sourcing modes by firms, calling this concurrent sourcing (Parmigiani, 2007; Parmigiani et 2
al., 2009), plural sourcing (Bradach, 1997; Gulati et al., 2006; Heide, 2003; Jacobides et al., 2006), or taper integration (Harrigan, 1986; Rothaermel et al., 2006). In contrast to a TCE or RBV logic, firms are often found to both make and buy the same input. <strong>The</strong>re is robust theory and evidence on the conditions under which plural sourcing is likely to occur. For example, Parmigiani (2007) demonstrates that greater overlap between the firm’s and the supplier’s expertise increases the likelihood of plural sourcing while Parmigiani et al. (2009) explain that firms may make and buy sets of complementary components. Performance uncertainty and information asymmetry between buyers and suppliers (Dutta et al., 1995; Heide, 2003), technological volatility (Krzeminska et al., forthcoming), and complementarities in incentives or knowledge (Puranam et al., forthcoming) can also lead to plural sourcing. While important in identifying the prevalence of plural sourcing, this research has provided limited guidance on a logical follow-on question, that is, how to explain the mix of internal and external sourcing (Parmigiani, 2007:306; Puranam et al., forthcoming). Assuming that a firm does indeed both make and buy, why would it choose 80% make vs. 20% buy as opposed to 40% make vs. 60% buy? Thus, given the presence of preconditions for plural sourcing, how do firms decide how much to make and how much to buy? In addition, the literature does not explore the selection of suppliers and their impact on the design of plural sourcing strategies. For example, if a firm decides to buy 40% for a given product or service, this 40% could be outsourced to a single firm or multiple firms. Existing theory assumes the decisions on the make-buy balance and supplier selection to be independent of each other. This is despite the fact that behind the ‘façade of the market’ lies another firm, with its own capabilities and contractual relationship with the focal firm (Jacobides et al., 2005). To the extent that supplier selection influences the cost of contracting, it would have an impact on the make-and-buy decision. 3
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Date: April 12, 2013 Topic: The Shrinking ... - Georgetown Law

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