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International Journal of Logistics

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Functional spin-offs in logistics service

marketsJouni Juntunen a

aDepartment 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

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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

(Received 20 February 2007; final version received 9 December 2009)

The aim of this paper is to increase the understanding of logistics outsourcing decisions in a networkcontext. The concepts influencing the decision to outsource logistics activities are first identified, usingtheories in organisational economics, marketing and strategic management. A tentative model showingthe key concepts and their assumed relationships is developed and tested with empirical survey data fromindustrial companies in northern Finland. The estimations are made using structural equation modelling.Based on empirical analysis, a modified model is suggested which identifies two separate dimensions, ormodes, of the outsourcing concept. These outsourcing modes offer a useful tool for defining the classicconcept of functional spin-offs in logistics service markets. Moreover,the development paths of outsourcingrelationships between the shipper and service provider can be examined on the basis of the horizontal andvertical 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, efficient ways to produce value for

clients. For example, Greaver (1999) argues that organisations are questioning whether the tradi-

tional paradigm of owning the factors of production is the best way to gain competitive advantage.

The outsourcing concept, defined 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 lucra-

tive 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 empiricalsetting, such as information technology, transportation, etc. In logistics, outsourcing research typ-

ically 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. Rindfleisch and Heide

1997, Van Hoek 2000). A strategic view involves the definition 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: [email protected]

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


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122 J. Juntunen

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 andtested with Finnish survey data. The estimationis made using the structural equation

modelling (SEM) technique. After further analysis of the data and supplementary theoretical

contributions, a modified 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 flows. 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 firm (Fine 1998). Thus, a major question for a firm 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 firmin 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 back-

grounds. 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 firms, Barney and Ouchi (1986) suggest that firms should not exist at

all. It was Coases (1937) fundamental insight that firms 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 firms internal hierarchy. Williamson (1975) further studied alternative governance structures

in transaction cost economics to determine the efficient boundaries of the firm.

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 firms (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 profit of the principal while trying to maximise their own utility, which may be

in contrast with the principals benefit. 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 thatmiddlemen can decrease the total costs of a distribution channel. Another theoretical view comes

from the vertical marketing systems concept, which is defined 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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International Journal of Logistics: Research and Applications 123

those tasks that other firms 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 influence 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, financial 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 flexibility 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 influence 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 meansof realising network benefits that increase the companys competitiveness.

A central concept related to the outsourcing decision is resource specificity. This is an integrative

concept that has its basis in transaction cost economics and the resource-based theory of the firm.

According to Coase (1937), transaction costs have a positive correlation with vertical integration.

The most important source of transaction costs is asset specificity (Williamson 1985, Rindfleisch

and Heide 1997), which is closely linked with the strategic importance of the activity in question

(Arnold 2000).When asset specificity and strategic importance are high, the degree of hierarchical

coordination increases. By contrast, when the asset specificity 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 reflect the

criticality of resources (Arnold 2000).

The main reason why asset specificity increases transaction costs is the threat of ex post quasi-

rents, which force the principal into complicated contracts with the agent(s). Klein et al. (1978)

define 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 oppor-

tunistically after the relationship-specific 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 firms

unique competences (Dierickx and Cool 1989). Thus, from an organisational economic point

of view, resource specificity 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 specifically tailored to each situation, the

service providers and clients generally strive for long-term relationships with winwin benefits

for both parties (Virum 1993). A positive association between relationship management efforts

and outsourcing is observed by Knemeyer et al. (2003), especially when specific investments exist


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124 J. Juntunen

in the relationship. Similarly, Juga and Juntunen (2007) find that relationships create trust which

is an important facilitator for outsourcing when specific investments are required in a logistics

outsourcing situation.

In any business relationship, the firm needs an adequate level of confidence in its partners

cooperative behaviour. According to Das and Teng (1998), confidence 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 competi-

tiveness 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 theclosest thing to what a Williamsonian hierarchy would be in real life (p. 34). For Jarillo (1988),

there is always some degree of asset specificity 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 five

hypotheses regarding the manufacturers propensity to outsource logistics in a strategic network

context. First, it is proposed that resource-specificity, which is a composite concept based on

transaction cost economics and the resource-based view of the firm, is negatively associated

with the propensity to outsource logistics activities (H1). The second proposition is based on

the assumption that that trust and control create confidence supporting good relationships, andthus a positive association exists between confidence and relationships (H2). 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 (H3).

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 asso-

ciated with network economies for the manufacturing organisation (H4). However, the network

model is essentially based on the facilitating influence of business relationships. Therefore, it is

assumed that the relationships also have a positive impact on network economies (H5), in addi-

tion 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

Figure 1. Four modes of organising economic activity (Jarillo 1988).


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Figure 2. Outsourcing decisions in a strategic network context.

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 outsourc-

ing 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 first presented and the tentative model is tested with survey data from

Finnish companies that buy logistics services. Based on the modification indexes of the Lisrel

software, amendments are made and the final 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

five employees were excluded. The resulting sample included some companies twice because

they had several offices in the region. After removing these duplicates, the final sample consisted

of 587 companies. The contact addresses were acquired from Itella Oyjs (www.itella.fi) 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 back-

ground 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 first 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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126 J. Juntunen

differences existed between the groups. There were no statistically significant 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 filling 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).

4.2. Data analysis

Based on the tentative model above, there were five 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 significant. However,

as the test values for statistical fit 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 modified model

(Figure 3) all the remaining relationships were statistically significant. However, the statistical

fit 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 dividedinto 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 fit (chi-square 52.89, df. 38, p-value 0.055,

RMSEA 0.049). Although this model is statistically acceptable, the modification indexes of the

LISREL software reported high error correlations between the measures Deeper and Routines.

Table 1. Operational measures of the latent variables.

Label Latent variable Label Operational measure

ResSpe Resource specificity AssetSpe The resources allocated for our logistics providers are only suitedfor the present relationship

CoreComp Controlling logistics is a part of our firms core competence

Relation Relationships Routines We have good routines with our logistics partners for dealing withproblem situations

PerRelat We have good personal relationships with our logistics partnersConfiden Confidence Control Open information exchange works well with our logistics partners

Trust Our logistics partners would never behave deceitfully

NetEco Network economies Contract We can use standardised contracts with our logistics partnersCompetit We strengthen our competitiveness by outsourcing

Outsourc Outsourcing Deeper With high probability we will outsource more activities to our mainlogistics provider

Wider With high probability we will outsource more activities to newlogistics providers


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Figure 3. The modified model (standardised solution).

Table 2. Operational measures of vertical and horizontal outsourcing.

Label Latent variable Label Operational measure

Hori Horizontal outsourcing Wider With high probability we will outsource more functions to newlogistics providers

Change With high probability we will change our main logistics provider

Vert Vertical outsourcing Deeper With high probability we will outsource more activities to our mainlogistics provider

Figure 4. Final model with two outsourcing modes (standardised solution).

Thus this correlation was set to be free in the final model (Figure 4). This did not change the model

as a whole, but improved the fit indexes to a very good level (Table 3).

The chi-square test shows an acceptable fit of the model to the data, the minimum acceptable

p-value normally being 0.05. According to Browne and Cudeck (1993), an RMSEA value below0.05 indicates a close fit 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 significant.


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128 J. Juntunen

Table 3. Fit indexes of the final model.

Test Value p-Value

Chi-square (df) 45.38(37) 0.162

RMSEA 0.038 Comparative fit index (CFI) 0.98

Goodness of fit index (GFI) 0.95

SRMR 0.069 Normed chi-square 1.337

According to Bollen (1989), the validity of the measures is equal to the factor loadings. Even

though the final model provides a very good statistical fit, the loadings of the measures AssetSpe

and Contract are not good. Because the factors have only two measures at the maximum, they

are unidentified 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 theaverage variance extracted (AVE) and, therefore, the results should be evaluated primarily on the

basis of the fit indexes of the full model.

4.3. Implications

In the final model, the resource specificity (ResSpe) factor associates negatively withthe horizontal

outsourcing. This result supports proposition H1 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 specificity are quite high. The resource specificity factorsAVE 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 confidence (Confiden) 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

confidence. The factor associates positively with relationships, as expected in H2.

The validity of the relationship (Relation) factor is good, theAVE value being 0.60 and construct

reliability 0.86. In the tentative model, the relationships factor is expected to associate positively

with outsourcing (H3). 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. TheAVE 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 H4 and H5 are supported with a minor

modification. The change could mean that companies begin outsourcing by buying services on

spot markets and develop partnerships with selected service providers later on as experiencegrows.

In the final model, the modification 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

Following the strategic network concept by Thorelli (1986) and Jarillo (1988), it maybe 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 influences and

controls the outsourced functions and there are no true markets. When multiple firms outsource

their functions, network economies start to develop and the principals influence on individualagents 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 efficient network implies the ability to

reduce transaction costs, for it is precisely those costs that also lead firms 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 efficiency 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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130 J. Juntunen

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 findings 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 first 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.

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 findings 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, involvingmultiple 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 findings, it seems that the development of outsourcing relationships

goes from the horizontal mode to the vertical mode and finally 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 third-

party outsourcing arrangements) and 4PL (logistics integrator arrangements). Theoretically, the

distinction of different outsourcing modes can shed new light on the definition 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 beneficial, there may

be additional network benefits 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 flows, for instance.


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Therefore, broader empirical research is needed to corroborate the findings. 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, conflict, 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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