A transaction cost model of IT outsourcing

This paper proposes and tests an explanatory model of information technology (IT) outsourcing behavior. Relying on transaction costs and incomplete contracts theories, the model hypothesizes that characteristics of IT operation activities—asset specificity, uncertainty, business skills, and technical skills required to perform the activities—will influence the level of their outsourcing. The model was tested using data from a survey of 335 firms. Results indicate that uncertainty is the major deterrent to outsourcing, while the level of technical skills is the most important reason to outsource. Business skills do not seem to play a significant role. Finally, asset specificity, which is always presented as a constraint to outsourcing, showed inconsistent effects.