A transaction cost approach to outsourcing behavior: Some empirical evidence

Outsourcing of information services is a fast growing trend and is receiving much attention in the IS community. This paper presents the results of a study of the outsourcing behavior of ten large organizations. The analysis used the transaction cost framework to explain outsourcing behavior at two different levels. At the first level of analysis, the role of asset specificity, measurement problem, and frequency in explaining the choice of the outsourced activities is investigated. The second level of analysis focuses on the influence of asset specificity and measurement problem on the terms and on the management of the contract between a firm and its outsourcer. The results presented here support the basic principles of transaction cost and incomplete contract theories.