How Outsourcing Specialized Functions Became a Growth Strategy
A company outsources when it pays an outside firm to perform work its own staff can do. For most of the twentieth century, executives outsourced routine tasks to trim costs. Over the past three decades, many companies began to hand off specialized functions to gain expertise and speed. The sections below cover:
How a 1937 economics paper framed the make-or-buy question
What Kodak did in 1989 that other large companies copied
What executives now expect from outside specialists besides lower costs
How car dealerships compare in-house title clerks with outside providers
Which five factors decide where a function belongs
Coase Explains Why Firms Keep Work In-House
Economist Ronald Coase framed the question in his 1937 paper "The Nature of the Firm." Coase asked why companies hire employees for some work and buy other work on the open market. His answer centered on transaction costs, the expenses a firm pays to use an outside supplier. When those costs exceed the cost of doing the work internally, a firm keeps the work in-house. Economists usually group transaction costs into three types.
| Transaction cost | What the firm pays for |
|---|---|
| Search | Finding a qualified supplier |
| Negotiation | Agreeing on price, terms, and a contract |
| Oversight | Checking the supplier’s work and enforcing the contract |
Coase's theory fits the large manufacturers of the mid-century economy, many of which owned most stages of their own production. Before modern software, a firm that coordinated suppliers by phone and mail often paid more than it did to manage an internal department.
1989 to 1990: Kodak and the Core Competence Theory
Business writers began using the word "outsourcing," short for "outside resourcing," by the early 1980s. In 1989, Eastman Kodak signed contracts with IBM and other outside vendors to manage most of its information technology (IT) operations. A year later, C.K. Prahalad and Gary Hamel published "The Core Competence of the Corporation" in the Harvard Business Review. The authors argued that companies should focus their resources on the few capabilities that set them apart from competitors. Executives who accepted the argument began to review every other function as a candidate for an outside provider.
| Year | Event |
|---|---|
| 1937 | Ronald Coase publishes The Nature of the Firm |
| Early 1980s | “Outsourcing” enters business vocabulary |
| 1989 | Kodak hands most IT operations to IBM and other vendors |
| 1990 | Prahalad and Hamel publish The Core Competence of the Corporation |
| 1990s | Other large companies sign similar IT contracts |
Specialist Firms Expand Into the Front Office
Cloud software and faster communication lowered the transaction costs Coase described. A company can now share systems with an outside payroll or bookkeeping firm and review the provider's work in real time. A provider that handles the same process for dozens of clients learns from unusual cases, stays current on regulatory updates, and spreads its fixed costs across a larger base.
Deloitte's 2024 Global Outsourcing Survey of more than 500 business and technology leaders recorded four changes in how companies outsource.
| Finding | Detail |
|---|---|
| Drivers | Skilled talent and agility joined cost reduction as key reasons to outsource |
| Scope | Organizations extended outsourcing into front-office areas such as sales and marketing |
| Artificial Intelligence (AI) | 83% of respondents use AI in their outsourced services |
| Contracts | Outcome-based delivery models grew in adoption |
Growth-stage software companies apply the same approach to revenue operations (RevOps), the function that manages a company's sales systems and data.
Example: Vehicle Title Work Shows the Cost Comparison
Car dealerships face the same choice with vehicle paperwork. Every sale requires registration and title documents that meet state Department of Motor Vehicles (DMV) rules, and a single error can delay the buyer's delivery. As more companies re-examine which functions belong in-house and which are cheaper to hand off to an outside specialist, outsourcing is shifting from a defensive cost-cutting move to a deliberate growth strategy.
Car-Co DMV Services, the New York State DMV partner led by CEO Joe Capone, built its growth around exactly this shift, offering dealerships an outsourced DMV and title department that the company estimates can save $90,000 to $230,000 or more per year compared with staffing an in-house team of clerks. Numbers like these show why growing companies increasingly build outsourcing into their growth plans from the start.
| Cost item | In-house clerk team | Outside provider |
|---|---|---|
| Staff pay | Dealership pays salaries and benefits year-round | Provider pays its own staff |
| Training | Dealership trains each clerk on state rules | Provider trains its staff on rule changes |
| Control | Dealership supervises the work directly | Dealership manages a vendor relationship |
A dealership with steady, high sales volume may keep clerks busy enough to justify an in-house team.
Companies Weigh Five Factors Before They Outsource
Executives usually compare five factors when they decide where a function belongs.
| Factor | In-house often fits when | Outsourcing often fits when |
|---|---|---|
| Volume | Steady, high volume keeps dedicated staff busy | Volume fluctuates or stays too low for a full-time specialist |
| Regulation | Rules change rarely | Rules change often, and errors can lead to fines |
| Competitive edge | Customers choose the company for this function | The function supports operations behind the scenes |
| Hiring | Qualified candidates are easy to find | Specialists are scarce or slow to recruit |
| Timeline | The company can spend months building a team | The company needs the capability within weeks |
Outsourcing also has tradeoffs. Companies give up some direct control and depend on a vendor's performance. Deloitte's 2024 survey also reported that more organizations now bring selected work back in-house, often to company-owned offshore centers.
Companies still ask the question Coase posed in 1937. With lower transaction costs and more specialist firms to choose from, many growth-stage companies now decide which support functions to outsource before they hire for them.
