Purchasing professional services: A transaction cost view of the antecedents and consequences of purchasing formalization

• The article investigates antecedents and consequences of formalization in the purchasing of professional services.
• It develops a transaction cost economic framework and tests hypotheses on survey data from large firms in Sweden.
• Results show that there are two kinds of formalization initiatives: formal policies and preferred supplier agreements.
• Firm size is found to be an antecedent to policies, and purchase frequency to be an antecedent to preferred suppliers.
• Moreover only the implementation of policies is found to increase firms' purchasing efficacy regarding professional services.

Professional services represent an increasing share of expenditures in contemporary organizations. While these services are often of strategic importance, they are also perceived as being difficult to purchase and use, which creates challenges for the purchasing process. In order to address these challenges, organizations are increasingly engaging in systematic efforts to improve their ability to purchase professional services. These efforts focus on formalizing the purchasing process by introducing policies, guidelines, and other measures for the hiring of service suppliers. Based on a transaction cost economic framework, the current paper investigates the nature, antecedents and consequences of formalization initiatives in the purchasing of professional services. The results from a cross-sectional study of 76 large Swedish organizations show that the formalization of purchasing professional services takes two different forms: the formulation of policies and the establishment of preferred supplier agreements. The former is driven by company size, whereas the latter is driven by the frequency of purchase transactions. Only the establishment of policies, however, is found to be positively related to organizations' perceived ability to purchase professional services.