Determining a Firm´s Optimal Outsourcing Rate: A Learning Model Perspective

We present a decision model of a firm´s optimal outsourcing rate as an extension of Cha et. al [1]´s previous work on the economic risk of knowledge loss and deskilling in the outsourcing context. Specifically, the model examines the impacts of two critical model parameters-the knowledge transfer rate and the coordination knowledge depreciation rate-on the firm´s cost minimizing outsourcing rate. When the knowledge transfer rate is low we find that the optimal decision is either total insourcing or total outsourcing, depending on the coordination knowledge depreciation rate. However, as the knowledge transfer rate increases, the firm´s optimal decision becomes a selective outsourcing strategy that creates an interesting bargaining problem.