How the Transaction Cost and Resource-based Theories of the Firm inform Outsourcing Evaluation

Transaction cost economics (TCE) and the resource-based view (RBV) of the firm have been extremely influential in the study of outsourcing both in theory and practice. This paper argues that neither transaction cost economics nor the resource-based view alone can fully explain the complexities of outsourcing. A review and critique of these theories as a means of understanding the complexities of outsourcing is presented. A prescriptive framework for outsourcing evaluation is presented, which was developed from integrating TCE and the RBV, and carrying out in-depth case study research in a number of organizations. The research findings emphasize the utility of integrating TCE and the RBV, and highlight the importance of operations management concepts such as performance management, operations strategy, business improvement, and process re-design to the study of outsourcing. However, the findings have shown that these theories should be applied with caution due to contradictory prescriptions in some instances.