Based on transaction cost theory, when a firm has already integrated its operational functions, the decision to outsource such functions to the market should be made if it is necessary to create or protect firm value. By outsourcing tasks to specialist organizations, firms may better focus on their most value-creating activities, thereby maximizing the potential effectiveness of those activities. In addition, as outsourcing increases, costs may decline, reduction in lead-times and investment in facilities, equipment, and manpower can be reduced.
Outsourcing can be divided into three areas: decision-, process- and result-oriented. A key strategic decision for manufacturers in deciding those manufacturing activities that an organization should carry out internally and those that should remain external. This particular decision is associated with the firm’s internal span of process, the degree and direction of vertical integration alternatives and its links and relationships with suppliers, distributors and customers.