This article considers how a firm's system of exchange skills including internal technical expertise and supplier governance mechanisms influence supplier performance, both independently and jointly. The core question is whether inter-firm governance mechanisms, including both relational and contractual mechanisms, can substitute for a firm's internal technical skills in maintaining supplier performance or, alternatively, whether a firm risks hollowing itself out by de-emphasizing internal expertise when it outsources. The arguments build on the capabilities, inter-organizational governance, and supply management literatures. We find that internal technical expertise influences multiple dimensions of supplier performance, including cooperation, price, quality, delivery, and communication, while relational governance also affects supplier performance though in a more focused way. In turn, combinations of technical expertise, relational governance, and contractual agreements jointly affect supplier performance. Thus, firms generate superior supplier performance if they retain internal technical skills as well as increase their use of external governance mechanisms to manage buyer-supplier relationships. European Management Review (2010) 7, 46-70. doi:10.1057/emr.2009.28
