Beyond Transaction Cost Economics: Towards an endogenous theory of Information Technology Outsourcing

In our review, we coded 73 empirical findings from 31 journal articles that applied Transaction Cost Economics (TCE) to study Information Technology Outsourcing (ITO). As Karimi-Alaghehband et al. (2011) note correctly, the empirical results of TCE tests in the context of ITO are mixed. We found that only 49% of the empirical ITO findings supported TCE logic. We found only slightly better support for TCE when it is used as a normative theory (54%) than when it is used as a predictive theory (47%). The main difference between Karimi-Alaghehband et al.’s (2011) contribution and our contribution to the debate focuses upon what to do next. Karimi-Alaghehband et al. (2011) argue that ITO researchers need to apply TCE more faithfully. We argue that we are asking too much of TCE—the ITO phenomenon is more complex than can be accommodated by TCE. We argue that ITO research has matured to the point that we should be building our own endogenous ITO theory. We offer observations and insights on what such a theory might entail. In moving ITO research forward, we first critique TCE assumptions and provide alternative assumptions that seem to fit ITO observations well. We draw on our review of 741 ITO empirical findings (Lacity et al., 2010) to provide a detailed theoretical framework to advance further study that suggests the most promising constructs to use in an endogenous ITO theory.

► We coded 73 empirical findings from 31 journal articles that applied Transaction Cost Economics (TCE) to study Information Technology Outsourcing (ITO). ► We found that only 49% of the empirical ITO findings supported TCE logic. ► We argue that ITO research has matured to the point that we should be building our own endogenous ITO theory. ► We offer three assumptions about ITO and provide, in each case, reasons why these may be more appropriate than TCE assumptions. ► We draw on a review of 741 ITO empirical findings to identify the most promising constructs to use in an endogenous ITO theory and propose some sample propositions.