Transaction Cost Economics Applied to IT Outsourcing: Findings and Critique

Abstract

As noted in the introduction, Transaction Cost Economics (TCE) is one of the most widely adopted theories used to study IT outsourcing (ITO) decisions. Early ITO articles argued that TCE is a useful framework for studying ITO decisions for various reasons (Clark et al. 1995; Cronk and Sharp, 1995; De Looff, 1995; Jurison, 1995; Klepper, 1993, 1995; Lacity and Hirschheim, 1993a; Beath, 1987). First, TCE specifically addresses sourcing decisions, that is, the decision to produce a good or service internally or purchase it externally. Second, TCE captures the widely-held perception that organizational members make sourcing decisions based upon an economic rationale and that outsourcing should reduce costs (Anthes, 1990, 1991; Hamilton, 1989; Hammersmith, 1989; Kass, 1990; Kelleher, 1990; Krass, 1990; Morse, 1990; O’Leary, 1990; Oltman, 1990; Rochester and Douglas, 1990). Third, many practitioners use “TCE-speak” to explain why outsourcing is predicted to reduce IT costs: IT is most efficiently provided by external vendors because it is a commodity service (translated into “TCE-speak” as a “nonspecific asset”) (Ward, 1991; Ambrosio, 1991). Fourth, TCE has enjoyed an abundance of empirical and theoretical academic attention in other organizational contexts (Anderson, 1994; Bowen and Jones, 1986; Griesinger, 1990; Hill, 1990; Hennart, 1991a, 1991b; Hesterly et al., 1990; Joskow, 1985; Lieberman, 1991; Malone, 1987; Malone et al., 1987; Pisano, 1990; Robins, 1987; Walker and Poppo, 1991).