Outsourcing: Transaction Cost Economics and Supply Chain Management*

This article examines outsourcing from the transaction cost economics (TCE) perspective. The transaction is made the basic unit of analysis and the procurement decision, as between make and buy, is made (principally) with reference to a transaction cost economizing purpose. As sketched herein, the ease of contracting varies with the attributes of the transaction, with special emphasis on whether preserving continuity between a particular buyer–seller pair is the source of added value. The basic regularity is this: as bilateral dependency builds up, the efficient governance of contractual relations progressively moves from simple market exchange to hybrid contracting (with credibility supports) to hierarchy. This last corresponds to the “make” decision, which, as viewed from the TCE perspective, is viewed as the organization form of last resort. The article successively describes the lens of contract approach to economic organization, the operationalization of TCE, different styles of outsourcing, qualifications to the foregoing and the main lessons of TCE for the supply chain literature.