Vertical integration reversal - debundling and paying for all embedded services

The hallmark of business growth is tied to gaining scale. Economies of scale help reduce the marginal cost which translate to lower prices. Firms that have scale can undercut smaller firms, drive them out of business, and take market share. 

Scale is often associated vertical integration and bundling activities under centralized management. A firm moves activities in-house to manage and control the total business process. Vertical integration should allow for better planning, lowers transaction costs, and more efficient monitoring. Oversight of activities will allow for lower costs. Yet, vertical integration also creates costs and inefficiencies when faced with uncertainty and dramatic changes and innovation. Scale and integration are hard to reverse leaving excess capacity and the inefficient use of capital.

The movement to outsourcing lead to the dismantling of the vertical integration model. Non-essential services were jettisoned. If not part of the core business, services were contracted to specialized firms that could create their own scale. Component manufacturing could be done on an outsourced basis with final assembly done by the parent firm. 

This process of outsourcing and deconstruction all worked well in a competitive globalized world with logistic management and excess labor supply. Send out for bid to competitive suppliers your needs and increase capital efficiency. Why hold the capacity under your name when you can outsource and keep the core business lean? 

The world has changed. Labor is tight. Logistics are a nightmare. Supply costs are increasing. Firms will now have to pay a higher price for all the outsourced services which may have been controlled better if in-house. 

The new business model may see more work being brought in-house and performed locally. The return of vertical integration may be upon the corporate world. It may still be early to make an assessment on vertical integration, but firms are rethinking their business order and outsourcing may be out, control may be back in.