Cos that outsource in tough times face long-term troubles

Businesses that cut workforce or lean heavily on outsourcing because of tough economic conditions are more apt to fail in the long run, says a study.

It citied the examples of Boeing and Toyota as companies that outsourced work in the tough times but saw that their strategy backfired in the long term.

Boeing outsourcing has led to issues and delays with the company's critical 787 Dreamliner program, while Toyota has faced issues with an outsourced electrical system and accelerator, said the study by David Eccles School of Business, University of Utah.

"Across the board, we find statistically significant increases in the failure rate for firms that don't consider transaction costs in their outsourcing decisions," said Lyda Bigelow, a strategy professor, who led the study.

"Firms need to look beyond production costs to other costs such as poor quality, delivery delays and risk of price increases by suppliers," she said.

Bigelow said companies need to retain adequate control over specialized components that differentiate their products or have unique interdependencies, or they are more likely to fail. According to the study, losing control over critical components can contribute to product failure.