**2. Historical background**

Outsourcing could trace back to Rome for tax collection [19]. However, the concept of outsourcing was first proposed by Adam Smith in his book The Wealth of Nations [20]. This book posited that division of labor and specialization of labor are the key factors for productivity optimization. Smith argued that labor specialization promotes individual productivity and helps groups of employees cooperate with each other.

In the 1830s, innovations on railway networks and telegraph reduced the exchange time of both information and products. The development of the manufacturing industry allowed firms to enjoy the benefits from economics of scale and expand their business areas [21].

Later, in the post-war period, companies were advocated to conduct horizontal acquisition and vertical acquisition. At that time, proposers believed that conglomerate mergers' strategy could help businesses earn better control over both production and market share [22].

However, between the 1970s and 1980s, academics continued to discover that the conglomerate firms were under-performing in the market [23–25].

Then in 1985, Williamson [26] proposed a new concept called Asset Specificity. Williamson illustrated that in order to optimize the company, the company needs to consider both production cost and transaction cost. Williamson identified the differences between these two costs as a function of asset specificity. In addition, Williamson's Transaction Cost Theory [27] presumed that the most advantageous economic organizational structure is the one that was minimizing the transaction cost while maximizing the profit. Williamson defined Transaction Cost as the cost which summarized all the cost to make a transaction except production cost.

Williamson [26] proposed that economic institutions contained two characteristics - bounded rationality and opportunism. While in the exclusive contract situation, asset specificity would be added as a significant factor. When a circumstance consists of all three elements, the economic institutions will coordinate transactions to save limited rationality while protecting both sides from opportunism attacks. This concept was distinct from the traditional concept of profit maximization.

The concept of Asset Specificity helped explain the phenomenon of conglomerate firms under-performing in the market when they should be bringing great advantages to the business [28]. A Conglomerate merger is two or more economic institutions construct an exclusive contract with each other. Compared to the privately held company, the main concept of conglomerate firms already from profit maximization shift to coordinate transactions. Even though the conglomerate merger will reduce the company's production cost, the transaction cost will increase since the company's size is increasing.

Despite Williamson's significant effort on enlightening outsourcing by transaction cost theory, according to [22], Tom Peter was the one who significantly influenced the companies back to concentrate on the firm's core business.

Many firms were inspired by the Core Competency concept [29]. Core competency is a unique value that makes a firm stand out in the marketplace by utilizing its available resources and knowledge. However, the firms based on this concept to reengineering to more focus on the "core" [22].

Meanwhile, the public sector's outsourcing is helping economic institutions to strengthen the idea of Outsourcing. Between the 1980s to 1990s, notably in the U.K., governments are using privatization and outsourcing to reform the public sector. The public sector's reform set an example for firms about the strengths of Outsourcing. The reform also promoted the development of outsourcing in both

**3**

different country.

the outsourcing firm.

*Outsourcing: Overview and Trends*

focus on the core activities [22].

**3. Definition of outsourcing**

*DOI: http://dx.doi.org/10.5772/intechopen.98333*

and came to a comprehensive conclusion:

through either oral or written agreement.

effectively for the outsourcing firm." ([1], p. 1, para 4).

functions but also the core competencies to the third parties.

behavior can help the firm optimize productivity and quality.

outsourcing, offshore outsourcing, offshoring, and subcontracting.

the public and private sectors. The U.K. example influenced numerous firms to start to restructure their organizational framework to outsource unnecessary tasks and

As discussed above, outsourcing as a practical strategic tool has appeared for a

The academics had been arguing about the definition since 1992. However, the broad definition of outsourcing is that it obtains activities that an organization has the knowledge and resources to execute, from outside of the organization [31]. Recently, Ishizaka et al. [1] examined the existing literature from 1994 to 2020

"Outsourcing is a business agreement, either domestic and/or international (known as offshoring), and strategic management initiative for gaining a competitive advantage of a firm by contracting out their existing internal and/or external non-value added functions, and/or value-added functions, and/or core competencies to competent supplier(s) to produce products and/or services efficiently and

Ishizaka et al.'s [1] definition contained multiple elements, including multiple branches and sub-branches. First overall and the most fundamental, Outsourcing is a business agreement. It indicates that demander and supplier reach a consensus

Outsourcing is a strategic management initiative that uses a contract-out the firm's either existing functions and/or core competencies to earn the opportunity to stand out in the market. This indicated that companies could outsource not only the

Last but not least, outsourcing can be a strategic management initiative by contracting out to qualified supplier(s) to efficiently and effectively produce products and/or services for the outsourcing firm to stand out in the market. This statement is to clarify that outsourcing does not need to be limited to products or services. A company can outsource their business process regardless of whether they provide either physical goods, non-physical goods, or both as long as this contract-out

With such a complex nature of outsourcing, Alexandre Dolgui and Jean-Marie

The differences between outsourcing and offshore outsourcing are related to the location of the supplier and the outsourcing firm. Outsourcing commonly identified as both supplier and the firm both located in the same country. However, offshore outsourcing defined as the supplier is located in a country different than the firm. On top of that, offshore is classified as the firm constructed a branch in a

According to Dolgui and Proth, practitioners such as managers were more likely to confuse the concept of outsourcing with sub-contracting. Sub-contracting is the firm contract-out partial works to another firm that contain specific resources and/ or skills to provide better task results. Outsourcing, on the other hand, is the firm contract-out partial works to the supplier to allow the supplier to collaborate with

In other words, sub-contracting only provides product and/or services that are specified in the contract; meanwhile, outsourcing is defined as the outsourcing firm

Proth [32] provided some additional information to help clarify Outsourcing. Dolgui and Proth found that the frequent confusions for outsourcing are to separate

long time; however, the official definition did not exist until 1997 [30].

*Outsourcing and Offshoring*

with each other.

maximization.

since the company's size is increasing.

reengineering to more focus on the "core" [22].

**2. Historical background**

expand their business areas [21].

tion and market share [22].

Outsourcing could trace back to Rome for tax collection [19]. However, the concept of outsourcing was first proposed by Adam Smith in his book The Wealth of Nations [20]. This book posited that division of labor and specialization of labor are the key factors for productivity optimization. Smith argued that labor specialization promotes individual productivity and helps groups of employees cooperate

In the 1830s, innovations on railway networks and telegraph reduced the exchange time of both information and products. The development of the manufacturing industry allowed firms to enjoy the benefits from economics of scale and

Later, in the post-war period, companies were advocated to conduct horizontal acquisition and vertical acquisition. At that time, proposers believed that conglomerate mergers' strategy could help businesses earn better control over both produc-

However, between the 1970s and 1980s, academics continued to discover that the

Then in 1985, Williamson [26] proposed a new concept called Asset Specificity. Williamson illustrated that in order to optimize the company, the company needs to consider both production cost and transaction cost. Williamson identified the differences between these two costs as a function of asset specificity. In addition, Williamson's Transaction Cost Theory [27] presumed that the most advantageous economic organizational structure is the one that was minimizing the transaction cost while maximizing the profit. Williamson defined Transaction Cost as the cost which summarized all the cost to make a transaction except production cost. Williamson [26] proposed that economic institutions contained two characteristics - bounded rationality and opportunism. While in the exclusive contract situation, asset specificity would be added as a significant factor. When a circumstance consists of all three elements, the economic institutions will coordinate transactions to save limited rationality while protecting both sides from opportunism attacks. This concept was distinct from the traditional concept of profit

The concept of Asset Specificity helped explain the phenomenon of conglomerate firms under-performing in the market when they should be bringing great advantages to the business [28]. A Conglomerate merger is two or more economic institutions construct an exclusive contract with each other. Compared to the privately held company, the main concept of conglomerate firms already from profit maximization shift to coordinate transactions. Even though the conglomerate merger will reduce the company's production cost, the transaction cost will increase

Despite Williamson's significant effort on enlightening outsourcing by transaction cost theory, according to [22], Tom Peter was the one who significantly influ-

Many firms were inspired by the Core Competency concept [29]. Core competency is a unique value that makes a firm stand out in the marketplace by utilizing its available resources and knowledge. However, the firms based on this concept to

Meanwhile, the public sector's outsourcing is helping economic institutions to strengthen the idea of Outsourcing. Between the 1980s to 1990s, notably in the U.K., governments are using privatization and outsourcing to reform the public sector. The public sector's reform set an example for firms about the strengths of Outsourcing. The reform also promoted the development of outsourcing in both

enced the companies back to concentrate on the firm's core business.

conglomerate firms were under-performing in the market [23–25].

**2**

the public and private sectors. The U.K. example influenced numerous firms to start to restructure their organizational framework to outsource unnecessary tasks and focus on the core activities [22].
