Heady stuff, but it all boiled down to a mathematical analysis, and his breakthrough thinking was even given a mathematical name, the Coase Theorem.

Coase’s inclusion of contracting and contracting costs into the mix of a firm’s organizational structure and accounting helped earn him the Nobel Prize in Economics in 1991.  While not his intent, many outsourcing advocates point to Coase’s work the grandfather of outsourcing because his worked helped provide companies with a framework for thinking of make versus buy decisions.

I like to imagine that he was probably scratching his head and laughing at companies who rushed to offshore in the late 1990’s only to find that the $1 they saved in manufacturing was offset by other costs – because they didn’t do the math!   In short: outsourcing is a math problem.  A company needs to look at the transaction costs and do the calculations to determine not only if they should outsource, but where they should outsource.

For today’s outsourcing firms the lesson is fairly clear: When outsourcing, consider the TOTAL COST – not just the price and budget of the work that is being outsourced. If you make your decisions solely on the price of the scope of work and not the total costs you will have a myopic and highly inaccurate picture.

And that’s also where three Vested Outsourcing rules come into serious play: Rule# 2 Focus on Outcomes; Rule#3 Agree on Clearly Defined and Measurable Outcomes; and Rule #4 Optimize Pricing Model Incentives.