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International Journal of Logistics Research and Applications: A Leading Journal of Supply Chain Management
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Functional spin-offs in logistics service markets

Jouni Juntunen
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Department of Marketing, University of Oulu, Oulu Business School, P.O. BOX 4600, Finland, 90014 Version of record first published: 24 Mar 2010.

To cite this article: Jouni Juntunen (2010): Functional spin-offs in logistics service markets, International Journal of Logistics Research and Applications: A Leading Journal of Supply Chain Management, 13:2, 121-132 To link to this article: http://dx.doi.org/10.1080/13675560903562056

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International Journal of Logistics: Research and Applications Vol. 13, No. 2, April 2010, 121132

Functional spin-offs in logistics service markets

Jouni Juntunen*
Department of Marketing, University of Oulu, Oulu Business School, P.O. BOX 4600, Finland 90014

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(Received 20 February 2007; nal version received 9 December 2009 ) The aim of this paper is to increase the understanding of logistics outsourcing decisions in a network context. The concepts inuencing the decision to outsource logistics activities are rst identied, using theories in organisational economics, marketing and strategic management. A tentative model showing the key concepts and their assumed relationships is developed and tested with empirical survey data from industrial companies in northern Finland. The estimations are made using structural equation modelling. Based on empirical analysis, a modied model is suggested which identies two separate dimensions, or modes, of the outsourcing concept. These outsourcing modes offer a useful tool for dening the classic concept of functional spin-offs in logistics service markets. Moreover, the development paths of outsourcing relationships between the shipper and service provider can be examined on the basis of the horizontal and vertical outsourcing modes proposed in the paper. Keywords: outsourcing; vertical integration; structural equation modelling; horizontal modulation; vertical modulation

1.

Introduction

In todays competitive environment, companies must seek new, efcient ways to produce value for clients. For example, Greaver (1999) argues that organisations are questioning whether the traditional paradigm of owning the factors of production is the best way to gain competitive advantage. The outsourcing concept, dened by Greaver as the act of transferring some of an organisations internal activities and decision rights to outside providers, is seen by many companies as a lucrative alternative to the traditional paradigm. Academic research in outsourcing has increased, but it has mostly been quite narrowly focussed on a particular theoretical orientation or empirical setting, such as information technology, transportation, etc. In logistics, outsourcing research typically deals with the motives for outsourcing and the activities that are most frequently outsourced (the annual studies of third party logistics usage offer a good example, see e.g. Ashenbaum et al. (2005)). In marketing and distribution channel research, the focus is often on hypothesis testing, using transaction cost economics as a theoretical background (see e.g. Rindeisch and Heide 1997, Van Hoek 2000). A strategic view involves the denition of core competencies that should be kept in-house while outsourcing support functions and activities to external providers (e.g. Quinn and Hilmer 1994, Greaver 1999).
*Email: jouni.t.juntunen@oulu.

ISSN 1367-5567 print/ISSN 1469-848X online 2010 Taylor & Francis DOI: 10.1080/13675560903562056 http://www.informaworld.com

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The aim of this study is to increase understanding of logistics outsourcing decisions in a strategic network context. Drawing on multiple theoretical perspectives, a tentative conceptual model is developed and tested with Finnish survey data. The estimation is made using the structural equation modelling (SEM) technique. After further analysis of the data and supplementary theoretical contributions, a modied model is created that describes the rise of functional spin-offs (Mallen 1973) in logistics service markets. The data were collected from northern Finnish companies in November 2005. The target group consisted of 587 companies and there were 161 acceptable responses, corresponding to a response rate of 27.4%. In northern Finland, industrial companies face special logistics challenges because of long distances and thin material ows. Therefore, outsourcing is a topical issue for industrial companies as well as for service providers in logistics. The manufacturers have to cope with high transport costs while the service providers try to consolidate volumes under tight competition. Thus, while the context of the study is geographically limited, it also offers an interesting setting for outsourcing research in logistics.

2. Theoretical background Igor Ansoff, one of the pioneers of strategy, observed that a major decision related to organisational strategy culminates in the make or buy decision (Ansoff 1965). Today, when all competitive advantages are becoming temporary, it is even suggested that supply chain design is the most important competency of the rm (Fine 1998). Thus, a major question for a rm is what to make (vertical integration) and what to buy (outsourcing). From a theoretical point of view, the make or buy question is addressed in many areas of business economics, including the theory of the rm in microeconomics, transaction cost theory, agency theory, marketing and distribution channels research and strategic management. The concepts and assumptions are varied and little appears to have been done to create a synthesising doctrine for analysing outsourcing decisions. In this study an eclectic view is adopted by exploiting concepts from various theoretical backgrounds. This is important as relationships between customers and logistics service providers, like most other B-to-B relationships, are characterised by not only economic factors but also social exchange (Deepen 2007). Relying purely on the assumptions of microeconomics for studying the question of why there are rms, Barney and Ouchi (1986) suggest that rms should not exist at all. It was Coases (1937) fundamental insight that rms exist because it is costly to use the price system to coordinate economic activity. Coase argues that there is a trade-off between markets and the rms internal hierarchy. Williamson (1975) further studied alternative governance structures in transaction cost economics to determine the efcient boundaries of the rm. The fundamental difference between the transaction cost theory and agency theory is that while the former concentrates on market failures, the latter focuses on the relationships between markets and rms (Barney and Ouchi 1986). According to Hart (1995), the question is about the relationship between risk and gain; a frequent way to pose the problem is how to make the agents operate for the prot of the principal while trying to maximise their own utility, which may be in contrast with the principals benet. Jensen and Mecklin (1976) argue that agent costs are the sum of the monitoring expenditures by the principal, the bonding expenditures by the agent and the residual loss. In early marketing literature, an important point was raised by Weld (1915) who argued that middlemen can decrease the total costs of a distribution channel. Another theoretical view comes from the vertical marketing systems concept, which is dened as a set of forces, conditions and institutions associated with the sequential passage of a product or service through two or more markets (Bucklin and Stasch 1970). Mallen (1973) argues that a channel institution will delegate

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those tasks that other rms can perform at a lower cost and will undertake only those tasks for which it has a cost advantage. According to Klein et al. (1990), when the volume of the product line increases, the probability of using a highly integrated channel increases in relation to the probability of using the market option. Also many product characteristics inuence the principals decision to select the most suitable distribution channel (Aspinwall 1958). In strategic literature (Greaver 1999) outsourcing is seen as a way of solving problems due to incompetence, lack of capacity, nancial pressures or technical failure. In this view, outsourcing is a tool for restructuring the supply chain. Schary and Skjott-Larsen (2001, p. 203), for instance, raise faster access to new markets as one of the reasons for third party logistics. Outsourcing also enables the investment of capital in core activities and may thereby increase production volume. Furthermore, adjusting the production volume becomes easier if the rate of outsourcing is high. Bengtsson and Berggren (2002) assert that the main reasons for the increase in outsourcing by Nokia and Ericsson are exibility and improved reaction time for changes in demand for the products. In such a situation, the required quantity of production inputs can be acquired through a subcontractor without the necessity to hire more employees.

3.

Key concepts and tentative model

In this section of the paper, a tentative model is developed for describing the key concepts and their relationships in the context of logistics service outsourcing. The model lays down those factors that inuence the propensity to outsource logistics activities in the manufacturing organisations supply chain. From traditional make versus buy thinking, the model will be expanded towards a strategic network perspective (Thorelli 1986, Jarillo 1988) where outsourcing is seen as a means of realising network benets that increase the companys competitiveness. A central concept related to the outsourcing decision is resource specicity. This is an integrative concept that has its basis in transaction cost economics and the resource-based theory of the rm. According to Coase (1937), transaction costs have a positive correlation with vertical integration. The most important source of transaction costs is asset specicity (Williamson 1985, Rindeisch and Heide 1997), which is closely linked with the strategic importance of the activity in question (Arnold 2000). When asset specicity and strategic importance are high, the degree of hierarchical coordination increases. By contrast, when the asset specicity and strategic importance are low, the degree of market coordination increases. In practice, there exist also various hybrid forms between hierarchical coordination (insourcing) and market coordination (outsourcing) which reect the criticality of resources (Arnold 2000). The main reason why asset specicity increases transaction costs is the threat of ex post quasirents, which force the principal into complicated contracts with the agent(s). Klein et al. (1978) dene quasi-rents as the value of an asset in its next best use to another renter. Especially under asymmetric information, quasi-rents may entail an ex post cost if the agent starts behaving opportunistically after the relationship-specic investment has been made. On the other hand, quasi-rents also accrue to the principal through the deployment of non-tradeable assets that underlie the rms unique competences (Dierickx and Cool 1989). Thus, from an organisational economic point of view, resource specicity involves quasi-rents that reduce the propensity of the principal to outsource activities to external agents. The relationship is another important concept related to the outsourcing decision. In particular, when talking about third party logistics arrangements specically tailored to each situation, the service providers and clients generally strive for long-term relationships with winwin benets for both parties (Virum 1993). A positive association between relationship management efforts and outsourcing is observed by Knemeyer et al. (2003), especially when specic investments exist

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in the relationship. Similarly, Juga and Juntunen (2007) nd that relationships create trust which is an important facilitator for outsourcing when specic investments are required in a logistics outsourcing situation. In any business relationship, the rm needs an adequate level of condence in its partners cooperative behaviour. According to Das and Teng (1998), condence stems from two main sources: trust and control. Trust encourages markets to work properly without adverse selection (Akerlof 1970). The importance of trust is also emphasised by Arrow (1972), who observes that every commercial transaction has an element of trust within it. In addition, the principals ability to control the agent should encourage the principal to cooperate. For instance, from a logistics service providers point of view, the carriers capability for monitoring drivers strongly affects make-or-buy decisions in the road freight context (Baker and Hubbart 2003). Outsourcing decisions are not self-contained but serve to improve the companys competitiveness in a strategic business network context. A strategic network is a governance mode that combines elements of the classic market and hierarchical control (Thorelli 1986). A network can be distinguished from a relationship-based clan which Jarillo (1988) sees as probably the closest thing to what a Williamsonian hierarchy would be in real life (p. 34). For Jarillo (1988), there is always some degree of asset specicity built into the network relationships, and yet the contracting parties remain as independent organisations, with few or no points of contact along many of their dimensions (Figure 1). Based on the theoretical concepts and arguments above, a tentative model is developed with ve hypotheses regarding the manufacturers propensity to outsource logistics in a strategic network context. First, it is proposed that resource-specicity, which is a composite concept based on transaction cost economics and the resource-based view of the rm, is negatively associated with the propensity to outsource logistics activities (H 1). The second proposition is based on the assumption that that trust and control create condence supporting good relationships, and thus a positive association exists between condence and relationships (H 2). Third, in a logistics outsourcing situation, existing relationships between the manufacturers (principals) and service providers (agents) are expected to show a positive impact on the propensity to outsource logistics activities (H 3). The last two propositions link the outsourcing decision with Jarillos (1988) concept of the strategic network. It is expected that the outsourcing decisions are made to create network effects that strengthen the companys competitiveness. Network effects (or network economies) are based on the positive externalities that specialised actors can achieve through economies of scale and scope when acting together. Therefore, a proposition is made that outsourcing is positively associated with network economies for the manufacturing organisation (H 4). However, the network model is essentially based on the facilitating inuence of business relationships. Therefore, it is assumed that the relationships also have a positive impact on network economies (H 5), in addition to the impact they have on the discrete outsourcing decision. The tentative model with the proposed hypotheses is shown in Figure 2. In all business relationships, both relational and transactional aspects exist in the various stages of the relationship. A relational orientation is normally developed as the relationship matures

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Figure 1.

Four modes of organising economic activity (Jarillo 1988).

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Figure 2.

Outsourcing decisions in a strategic network context.

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and personal contacts become closer. However, the opposite tendency may also occur in some circumstances (Pillai and Sharma 2003). Similarly, the governance mechanism of an outsourcing relationship may change from the dyadic approach towards multilateral network logic as the relationship matures (Halldorsson and Skjott-Larsen 2006). In this paper, it is assumed that transactional and relational dimensions complement each other as the antecedents for outsourcing decisions. Moreover, it is proposed that relationships and outsourcing together form the basis for network economies that strengthen the companys competitiveness.

4.

Empirical analysis

This section presents an empirical test of the model using SEM (Jreskog et al. 2000). The operational measures are rst presented and the tentative model is tested with survey data from Finnish companies that buy logistics services. Based on the modication indexes of the Lisrel software, amendments are made and the nal model is then presented with interpretations. 4.1. Data description and estimation method

The data were collected in November 2005 in connection with a regional logistics strategy project (Juntunen 2006). The target group consisted of northern Finnish companies that consume logistics services (e.g. mining, manufacturing, maintenance and construction). Measured by turnover, the 600 largest companies in the region were selected for the sample. All companies with fewer than ve employees were excluded. The resulting sample included some companies twice because they had several ofces in the region. After removing these duplicates, the nal sample consisted of 587 companies. The contact addresses were acquired from Itella Oyjs (www.itella.) database and the survey was administered via the Internet, using the Webropol survey application. The questionnaire was pilot tested by the steering group of the Northern Finnish logistics strategy project. The questions in the questionnaire were based on a seven-point Likert scale. An e-mail was sent to the companies with a link to the Internet questionnaire as well as background information about the project and the researchers contact details. After a weeks response time, the companies were contacted by telephone to remind them about the survey and ask for responses. In total 161 acceptable responses were received, corresponding to a 27.4% response rate. This can be considered very satisfactory if compared with the declining trend that has been observed in logistics surveys recently (e.g. Larson 2005). Non-response bias was studied by comparing different response waves (see e.g. Lambert and Harrington 1990). The rst wave included companies that responded after the original e-mail request (6.0%). The second wave consisted of companies that responded after the telephone reminder (21.4%). A randomised one-way analysis of variance was used to test whether any

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differences existed between the groups. There were no statistically signicant differences (using the criterion of p > 0.05) between the two groups for any of the variables used in this study. Therefore, it may be assumed that non-response bias is not a problem in this study. The respondents had completed the questionnaires thoroughly and the overall lling rate of the questions was 98.2%. Missing data were completed using the expectation maximisation function of the SPSS statistical package. The estimation was made by using the SEM technique with the Lisrel software (Jreskog and Srbom 1993a, Jreskog et al. 2000, Du Toit and Du Toit 2001). The estimates were calculated using the maximum likelihood method based on the covariance matrix from variables with a normal distribution. The normality of the variables was examined using the Prelis 2 software (Jreskog and Srbom 1993b).

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4.2.

Data analysis

Based on the tentative model above, there were ve latent variables which were measured with the Likert-scale statements outlined in Table 1. Using these operational measures, the tentative model was tested with the SEM technique. Two of the hypothesised relationships in this original model were not statistically signicant. However, as the test values for statistical t of the entire model were quite promising (chi-square 47.65, df. 29, p -value 0.015, RMSEA 0.063), a decision was made to modify the model by removing a problematic association between the relationship and outsourcing factors. In the modied model (Figure 3) all the remaining relationships were statistically signicant. However, the statistical t of the entire model (chi-square 49.23, df. 30, p -value 0.015, RMSEA 0.06) was still slightly below the acceptable level. In order to develop the model further, an exploratory analysis was made to examine how the latent variables associate with different types of outsourcing. The factor was therefore divided into two separate dimensions. On the one hand, outsourcing involves a horizontal dimension, characterised by competitive relationships with multiple service providers. On the other hand, it also involves a vertical dimension that is based on deep co-operation with selected service provider(s). Obviously, the horizontal mode of outsourcing is closely related with traditional spot market transactions while the vertical mode is related with long-term partnerships. The new factors and their operational measures are presented in Table 2. With these amendments, the model gave a mediocre t (chi-square 52.89, df. 38, p -value 0.055, RMSEA 0.049). Although this model is statistically acceptable, the modication indexes of the LISREL software reported high error correlations between the measures Deeper and Routines.
Table 1. Label ResSpe Relation Conden NetEco Outsourc Operational measures of the latent variables. Latent variable Resource specicity Relationships Condence Network economies Outsourcing Label AssetSpe CoreComp Routines PerRelat Control Trust Contract Competit Deeper Wider Operational measure The resources allocated for our logistics providers are only suited for the present relationship Controlling logistics is a part of our rms core competence We have good routines with our logistics partners for dealing with problem situations We have good personal relationships with our logistics partners Open information exchange works well with our logistics partners Our logistics partners would never behave deceitfully We can use standardised contracts with our logistics partners We strengthen our competitiveness by outsourcing With high probability we will outsource more activities to our main logistics provider With high probability we will outsource more activities to new logistics providers

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Figure 3. The modied model (standardised solution).

Table 2. Label Hori Vert

Operational measures of vertical and horizontal outsourcing. Latent variable Horizontal outsourcing Vertical outsourcing Label Wider Change Deeper Operational measure With high probability we will outsource more functions to new logistics providers With high probability we will change our main logistics provider With high probability we will outsource more activities to our main logistics provider

Figure 4.

Final model with two outsourcing modes (standardised solution).

Thus this correlation was set to be free in the nal model (Figure 4). This did not change the model as a whole, but improved the t indexes to a very good level (Table 3). The chi-square test shows an acceptable t of the model to the data, the minimum acceptable p -value normally being 0.05. According to Browne and Cudeck (1993), an RMSEA value below 0.05 indicates a close t of the model. Jaccard and Wan (1996) argue that the models CFI and GFI values should be above 0.90. The value of the normed chi-square should be between 1.0 and 2.0. Therefore, based on all these test values, the model can be considered acceptable. Further, all relationships in the model are statistically signicant.

128 Table 3. Test

J. Juntunen Fit indexes of the nal model. Value 45.38(37) 0.038 0.98 0.95 0.069 1.337 p -Value 0.162

Chi-square (df) RMSEA Comparative t index (CFI) Goodness of t index (GFI) SRMR Normed chi-square

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According to Bollen (1989), the validity of the measures is equal to the factor loadings. Even though the nal model provides a very good statistical t, the loadings of the measures AssetSpe and Contract are not good. Because the factors have only two measures at the maximum, they are unidentied without full structure and it is therefore impossible to perform factor analyses of individual latent variables. This also weakens the usability of traditional test values such as the average variance extracted (AVE) and, therefore, the results should be evaluated primarily on the basis of the t indexes of the full model.

4.3.

Implications

In the nal model, the resource specicity (ResSpe) factor associates negatively with the horizontal outsourcing. This result supports proposition H 1 with the limitation that the vertical mode of outsourcing is separated from the original outsourcing factor. It should be noted that the error terms of the measures for resource specicity are quite high. The resource specicity factors AVE value is 0.29 and construct reliability is 0.27. On the other hand, there is theoretical support (Arnold 2000) for the interconnection between the two measures. Despite a relatively low factor loading of the trust variable, the condence (Conden) factors validity is satisfactory. The AVE value is 0.44 and construct reliability is 0.56. Furthermore, there are theoretical arguments (Das and Teng 1998) for linking trust and control as dimensions of condence. The factor associates positively with relationships, as expected in H 2. The validity of the relationship (Relation) factor is good, the AVE value being 0.60 and construct reliability 0.86. In the tentative model, the relationships factor is expected to associate positively with outsourcing (H 3). Surprisingly, the data did not support this association and the proposition was rejected. However, there is an indirect association between the relationships and outsourcing via the network economies factor. By splitting the outsourcing (Outsourc) factor into horizontal and vertical modes of outsourcing, a reasonable validity is achieved for both factors. The AVE value for horizontal outsourcing (Hori) is 0.58 and the construct reliability is 0.80. The construct reliability for vertical outsourcing (Vert) is high (0.95), due to a very low error term. However, the AVE value is low (0.49) because there is only one measure describing the vertical outsourcing factor. The network economies (NetEco) factor shows a reasonable validity (AVE 0.47 and construct reliability 0.60). The factor is associated with relationships and vertical outsourcing, and indirectly with horizontal outsourcing. Thus, the propositions H 4 and H 5 are supported with a minor modication. The change could mean that companies begin outsourcing by buying services on spot markets and develop partnerships with selected service providers later on as experience grows. In the nal model, the modication indexes showed a correlation of error terms between the Routines and the Deeper measures. This could be explained by the development of working routines with the maturing business relationship. Good routines reduce co-ordination costs, which

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is also consistent with the idea of network economies that are themselves attributed to increasing standardisation by means of contracts in the outsourcing relationship.

5.

Discussion

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Following the strategic network concept by Thorelli (1986) and Jarillo (1988), it may be reasonable to consider two alternative dimensions of outsourcing. On the one hand, the vertical mode of outsourcing means concentrating on transaction costs. In this mode, the principal and the agent have deep and long-term co-operation, which lowers transaction costs between the partners. On the other hand, the horizontal mode means concentrating on input prices. In this mode, the principal has several agents who compete against each other. In both cases the principal inuences and controls the outsourced functions and there are no true markets. When multiple rms outsource their functions, network economies start to develop and the principals inuence on individual agents is reduced. Thorelli (1986) and Jarillo (1988) split external costs into two different categories: the price of input and transaction costs. Competition in the market can lower the input price, but using multiple suppliers increases search, contract and controlling costs. On the other hand, one can lower transaction costs by long-term contracts, but the price can become higher than under tight competition. According to Jarillo (1988), establishing an efcient network implies the ability to reduce transaction costs, for it is precisely those costs that also lead rms to integrate. Hence, the strategic network can take advantage of economies in scale with low transaction costs. These two types of cost are also relevant for understanding the different modes of outsourcing described in this study. The vertical mode of outsourcing creates efciency in network governance and decreasing costs in the long term. However, the vertical outsourcing mode may involve higher short-term costs. The horizontal mode, by contrast, enables short-term cost savings because of tight bidding games, but does not encourage agents to invest in long-term relationship development such as research and development, quality, information systems and so on. The degree to which the

Figure 5.

Different modes of outsourcing underlying functional spin-offs.

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company deploys the vertical and horizontal modes of outsourcing could be titled vertical and horizontal modulation, respectively (Figure 5). The option where both vertical and horizontal modulation is high is where network economies are accomplished. Using a well-known concept from economic literature (Stigler 1951, Mallen 1973), this special mode of outsourcing could be named functional spin-offs. Based on the empirical ndings of this study, it seems that the path to network economies in logistics starts from horizontal outsourcing and advances through increasing vertical modulation to functional spin-offs. In practice, this could mean that the principal rst learns how to buy logistics services from markets and then moves on to partnerships to reduce transaction costs. A functional spin-off occurs as a combination of the vertical and horizontal modes when the principal has enough competence to set out total logistics solutions for the competition and when the markets are fully developed to offer such solutions.

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6.

Conclusions

Logistics outsourcing is a complex phenomenon involving concepts and models from multiple theoretical backgrounds. In this paper, an essentially eclectic approach is chosen to study the antecedents of outsourcing decisions and their outcomes in a network context. The analysis shows that both transactional and relational orientations are relevant for outsourcing decisions in business networks. However, the ndings also indicate a need to look at different modes of outsourcing that may increase the understanding of outsourcing strategies in logistics and the dynamics of outsourcing relationships. On the one hand, it seems that a horizontal mode of outsourcing can be distinguished, involving multiple service providers that compete for contracts on spot markets. On the other hand, a vertical mode of outsourcing involves close partnerships with selected service providers on a long-term basis. The extent to which these modes are present in an outsourcing relationship might be called horizontal and vertical modulation, respectively. A fully developed outsourcing relationship, with a high level of horizontal and vertical modulation, entails a functional spin-off that can serve as a source of substantial network economies to the partners. Based on the empirical ndings, it seems that the development of outsourcing relationships goes from the horizontal mode to the vertical mode and nally to functional spin-offs. This can be compared with the popular view of the evolution of logistics service provision from in-house logistics through the purchasing of discrete logistics services and on to 3PL (long-term thirdparty outsourcing arrangements) and 4PL (logistics integrator arrangements). Theoretically, the distinction of different outsourcing modes can shed new light on the denition and circumstances in which these outsourcing arrangements are likely to be found. From a managerial point of view, the results can help shippers and service providers to create a common understanding about the terms, goals and challenges when initiating and developing outsourcing relationships. While long-term outsourcing partnerships can be benecial, there may be additional network benets to gain for the partners if the contracts were reframed on the basis of vertical as well as horizontal modes of outsourcing. However, this does not mean that all outsourcing relationships are destined to move towards the option of functional spin-offs. Instead, the organisational and environmental circumstances should be carefully evaluated and the outsourcing relationships designed accordingly. In this study, the survey population was restricted to northern Finnish companies which may have affected the generalisability of the results. While the industry spectrum is fairly similar to Finnish industry in general, there are some special conditions in the region that may affect logistics outsourcing decisions and relationships long distances and thin material ows, for instance.

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Therefore, broader empirical research is needed to corroborate the ndings. Further research is also needed for developing the measures of the key concepts and thereby improving the validity of the research. From a theoretical point of view, the concept of network economies opens interesting research opportunities in a service outsourcing context. Organisational economics, and especially transaction cost analysis, is widely used in outsourcing research, but there seems to be few links to the concept of network economies. Finally, there are a number of other theoretical concepts in inter-organisational research, such as power, dependence, conict, etc., not accounted for in this study. The extension of the model toward these behavioural concepts offers another possible direction for future research.

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