Transaction Cost Approach to the Outsourcing Decision Problem

Outsourcing has become a management tool that is increasingly involved in the manager's agenda, but the decision to outsource is a problematic issue for decision makers in organizations. Outsourcing provides many benefits but also includes many risks, so every outsourcing agreement does not result in success. This chapter aims to provide a better understanding of the outsourcing problem in light of transaction cost economics. For this purpose, the concept of outsourcing is first explained. The transaction characteristics and the behavioral assumptions of the theory, which play a role in increasing or decreasing transaction costs, are clarified. Finally, governance decision (outsource or not) and some critical issues (safeguarding mechanism against opportunistic behavior by supplier, adaptation, and performance evaluation problem) that will arise after the outsourcing decisions are discussed.