Offshore outsourcing of professional services: A transaction cost economics perspective

TLDR

Offshore outsourcing of professional services is common, yet firms struggle to manage its costs and risks, a gap the study addresses using transaction cost economics. The paper aims to develop an understanding of how firms manage these costs and risks through a transaction cost economics lens. To do so, the authors conducted interviews with ten senior supply‑management executives from eight organizations. The findings show that fixed costs of establishing offshore relationships dominate variable transaction costs, causing firms to avoid outsourcing high‑risk areas, and the study offers guidelines for managing and controlling such relationships.

Abstract

Abstract This research utilizes the framework of transaction cost economics (TCE) to develop an understanding of how firms manage the costs and risks of offshore outsourcing of professional services. This research examines the perspectives of eight organizations through interviews with 10 high‐ranking supply management executives. The paper first explores the rationale for offshore outsourcing among the organizations studied. Using the tenants of TCE, this paper postulates that fixed costs of establishing the relationship dominate the variable costs of day‐to‐day transactions, and that organizations will not offshore outsource areas where there is high perceived degree of unmanageable risk. The paper expands on themes provided by TCE and offers some lessons learned, and guidelines for managing and controlling offshore outsourced services relationships.