Outsourcing: A transaction cost theory approach

Abstract

Summary: In this article, outsourcing is defined as the transfer of all or part of the existing information and communication systems (ICS) of a firm to a third party. The argument is based on the central model of transaction cost theory. Traditionally, this model concerns the make-or-buy choice. A firm that decides to outsource its ICS has already made a substantial investment in the system over several years. The article therefore develops an original analysis to help answer the following question: on what terms can a firm transfer ownership rights in highly specific hardware and software, and establish a long-term relationship with the service provider? Finally, the article proposes a generalization and an in- depth reflection on the organizational choices and governance structures to adopt when outsourcing.