Outsourcing

Outsourcing and Backsourcing Under Demand Uncertainty

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Executive Summary

This paper examines the value that firms create by building outsourcing and backsourcing flexibility while operating under demand uncertainty. Unlike earlier studies, it provides an analytical investigation regarding the probability of switching to the outsourcing option and the expected time to make a switch. Employing a simplified real options model, it investigates the influence of three forms of flexibility, namely complete outsourcing, partial outsourcing, and outsourcing with flexibility to backsource (Re-Insource), under two opposing regimes with high and low capital-to-labor costs.

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