Defining the determinants of the decision to outsource information systems software: A transaction cost perspective

The purpose of this research is to further define the important and significant determinants of software insourcing and outsourcing using a Transaction Cost Economics (TCE) perspective. Observations are that the determinants of outsourcing and their relative importance are still subject to debate. The determinants of outsourcing or market governance vis-a-vis hierarchy, according to TCE, include two behavioural attributes namely bounded rationality and opportunism, and three transactional dimensions namely asset specificity, frequency, and uncertainty. However, these parameters do not appear to explain fully all empirical findings on the outsourcing issue (David & Han, 2004).; One reason for this incomplete explanation of economic reality may be that the frequency dimension has conventionally been narrowly defined in terms of the number of contracts (Williamson, 1985). Williamson does discuss the fact that TCE would benefit by inclusion of learning and that there is a process of adaptation (Williamson, 1996). A manager will be more likely to continue contracting or outsourcing if he/she has had successful experiences with past contracts, and will be more likely to discontinue contracting or outsourcing if past experience has been unsuccessful (Gulati, 1995; Ho, Ang, & Straub, 2003; Robertson & Gatignon, 1998). Therefore an augmented or expanded definition of the TCE frequency dimension is theorized in this study to yield more explanatory power of the software sourcing decision. The study answers the research questions "What are the significant and important TCE determinants for software insourcing and outsourcing strategies?" and secondly, "What is the role of successful experience in sourcing strategies for software within a TCE framework?"; The study is a survey of the senior managers and information and communication technology (ICT) managers across Canada using electronic survey methods that analyses the determinants of software sourcing. The response data was analyzed using a principal components analysis (PCA) and subsequent regression techniques. Results indicate that the expansion of the TCE determinants to include learning through successful experience is significant and related to the decision to outsource or insource software.; Contributions made by this research are the definition of the determinants in the significant and important determinants in the sourcing decision. The definition of software sourcing decision determinants is useful both to researchers and practitioners and contributes to management literature, in particular Management Information Systems and Strategy literature.