Introduction

The outsourcing of non-core standardized tasks and processes which permit relatively easy measurement of performance and quality is a well-known story. Outsourcing is presented as an opportunity resulting from technological changes that permit the springing up of thick intermediate markets (Langlois, 2003; Milberg, 2004; Narula, 2001; Williamson, 1981). This allows firms to use markets to obtain intermediate products and services, with the associated benefits from specialization, economies of scale, and competition, resulting in lower costs and better quality intermediate products (Langlois, 2003). This is treated as a dynamic transaction cost story. Advances in the standardization and codification of production processes promotes a smooth interface between vertical stages of production. This allows principal firms to concentrate on core competence activities, with few coordination costs required to maintain the vertical relationship. Coordination costs are low because the outsourced intermediate product is the result of rote labor which can be easily measured and monitored by the new technology embodied in production equipment. In addition, the principal firm benefits from conservation of capital, diminishing uncertainty, and the spreading of risk. In this story, the principal firm retains knowledge-process core competences within the firm, not only because these competences rely on tacit information and ongoing knowledge creation (and are thus difficult to transfer to an outside entity), but also because they are the sources of the firm's competitive advantages, requiring protection from appropriation (Dosi et al., 2006; Kogut and Zander, 1993; Sen, 2006). Langlois (2003: 347) describes the pre-conditions for this organizational transformation: