Make, Buy, and Ally: Can Plural Sourcing Reconcile the Tension Between Outsourcing and Corporate Social Responsibility?

Abstract

Outsourcing promises economic benefits but creates corporate social responsibility (CSR) risks: as activities are placed beyond a firm's boundaries, the firm struggles to adequately measure the performance of its suppliers, particularly regarding their environmental and social compliance. This study investigates how a buying firm's sourcing strategy can reduce CSR-related agency risks in outsourcing. This research uses an agency theory framework to argue that a buying firm's actual manufacturing experience as part of plural sourcing (i.e., the simultaneous pursuit of distinct governance forms such as make and buy, make and ally, or make, buy, and ally) can help it build CSR-specific supplier evaluation capabilities and thereby overcome agency-related performance measurement difficulties. To test the hypotheses, the authors consolidate a panel data set of 9057 firm-year observations based on US publicly traded manufacturing firms. The results confirm that plural sourcing is indeed effective in mitigating the negative impact of outsourcing on a firm's CSR performance but is contingent on two boundary conditions: the specific business segment (primary vs. secondary) where plural sourcing takes place and the buying firm's presence (i.e., whether the firm owns facilities) in the sourcing countries. With this, the study challenges the consensus in the literature that outsourcing-related CSR risks can be addressed solely through the governance of external supplier relations. In fact, firm-internal practices and the sourcing strategy of the buying firm can help to mitigate CSR risks in outsourcing relationships as well.