Transactional Cost Economics: a Model for Evaluating the Feasibility of Outsourcing in the Services Industry

Services based outsourcing continues to be a growing trend for US companies. At such a juncture, there is a tendency for companies to pursue this strategy without careful evaluation of the costs and risks involved. The evaluation of the cost-benefit analysis is crucial before making a decision as to whether one should outsource or not. Transactional Cost Economics (TCE) is one model that has relevant applications to both manufacturing and services based outsourcing. The findings show that the model can be used as an effective cost comparison tool between various alternatives. In terms of risk management, TCE is useful when evaluating vendors and the types of relationships that companies need to maintain with them if they wish to succeed at outsourcing.