Interpreting information technology sourcing decisions from a transaction cost perspective: Findings and critique

Since Kodak outsourced the majority of its information technology function, the information technology outsourcing market has grown to a $40 billion business. As more companies turn to outsourcing—most recently Xerox and British Aerospace—practitioners are gaining ample experience with both successes and failures. Several academics have proposed that transaction cost theory explains these experiences. We sought to assess the applicability of transaction cost theory to the information technology outsourcing context by analyzing 61 sourcing decisions and outcomes made in 40 U.S. and U.K. organizations. We analyzed over 1000 pages of transcripts generated from 145 interviews with case participants. Mapping participants' experiences to the transaction cost framework of efficient governance structures resulted in anomalies in 87.5% of the cases. We interpret these anomalies from two perspectives. First, transaction cost theory proponents could argue that transaction cost theory does explain the data by dismissing, explaining, or re-interpreting the “apparent” anomalies. Second, transaction cost theory opponents could argue that transaction cost theory does not explain the data by arguing that the theory's assumptions are violated in the context of information technology outsourcing. We believe this debate is important because adoption of theories from other disciplines, such as organizational economics, needs to be critically examined within our own discipline. As adopters of transaction cost theory, we found the language ambiguities and the unit of analysis as two major obstacles to operationalization of transaction cost theory in the context of information technology sourcing.