Use of Transaction Cost Economics to Study Information Technology Outsourcing: Over-Application or Under-Theorizing?

Abstract

IS discipline has witnessed significant growth in research on IT in- and out-sourcing. Economic theories inform a large portion of this work. This paper examines the use of Transaction Cost Economics (TCE) as a theoretical lens to study IT sourcing decisions (internal vs. external). It reviews TCE's major assumptions and assesses its key constructs: frequency, asset specificity, opportunism, and uncertainty, with regard to how they have been operationalized and what results have been obtained. This is done through a review of selected body of outsourcing literature. There is evidence of the impacts of production costs on outsourcing decisions, while findings with regard to transaction costs are inconclusive. In order to move the research agenda ahead we suggest examining the co-evolution of drivers for buyers and vendors to outsource, instead of just exploring cost determinants. We recommend that researchers take a longitudinal process perspective to improve our understanding of complex governance phenomena.

Keywords: Outsourcing, Sourcing, Transaction cost economics

JEL Classification: L11, L22, D23