Project Sourcing Decisions in the Presence of Learning and Integration Costs

We present a general model of project sourcing that includes the effects of integration costs and learning over time on both the execution of projects and the integration of project output into complete products and services. We demonstrate that myopic decisions can create path-dependent traps where firms that outsource to gain short term advantage can experience higher long-run costs. We describe conditions under which insourcing a small fraction of project activity may dominate either complete insourcing or complete outsourcing. Further, we show that very rapid rates of technological change are likely to be associated with outsourcing only if underlying supplier factor inputs, such as labor costs, are lower. Finally, we show that firms can rationally cycle back and forth between subcontracting project activities and performing them in-house.