Outsourcing Failure and Reintegration: The Influence of Contractual and External Factors

This paper discusses the different reasons that drive organizations to interrupt outsourcing, reverse their previous decision and then reintegrate activities formerly delegated to providers. Contractual approaches, mainly derived from Transaction Costs Economics, offer some plausible explanations for reintegration originating from outsourcing failure. These explanations are mainly related to asset specificity, poor contractual design, and deficient monitoring. We show that companies may also reintegrate in response to changes in their strategic intents and in response to shifts in the institutional environment. The study of a real case of outsourcing interruption in industrial maintenance illustrates these factors. However, some other determinants complement the contractual and strategic background. Namely, bandwagon behavior and isomorphic pressures exerted by external actors may also explain why some organizations reverse outsourcing decisions and reintegrate activities. In order to address the reintegration phenomenon, we propose an integrative framework that combines micro and macro levels of organizational analysis. We argue that some existing complementarities between the different theories we use here can shed some light on real organizational problems. In other words, we claim that theoretical frameworks in isolation are not enough to explain reintegration. Besides the implications for theory, our work can help managers to understand the dynamics of organizational boundaries, thus allowing them to make better choices in both outsourcing and reintegration decisions.