Exploring the Influence of Vendor Reputation in IT Outsourcing Decisions: A Transaction Cost Perspective

Abstract

Past research indicates that firm reputation can be valuable intangible resource by signaling unobservable quality about products, services, skills, and capabilities. Although we might expect firms facing IT outsourcing decisions to consider reputation as a means for assessing quality among potential vendors, the influence of reputation in so-called 'make- or-buy' decisions is not well understood. Toward addressing this gap, we draw from signaling theory to integrate the reputation concept into the transaction cost framework - the predominant perspective explaining firm boundary decisions - to explore the mechanisms through which vendor reputation influences client outsourcing decisions. We propose a moderated-mediation model in which vendor reputation encourages outsourcing by (1) attenuating the influence of transaction hazards on the threat of opportunism, and (2) strengthening the influence of transaction-promoting factors on the perceived benefits of outsourcing. We believe elaborating the mechanisms through which vendor reputation both substitutes for and complements established transaction attributes in outsourcing decisions potentially augments the established TCE framework in ways important for both theory and practice.