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An Empirical Examination of Business Outsourcing Transactions

Despite the widespread media focus on business outsourcing transactions, we only have a limited understanding of how firms actually select a contractual framework to govern these complex relationships. This article analyzes a sample of onshore and offshore outsourcing contracts to pursue the topic. I first conduct a positive examination of the key features in 60 outsourcing transactions and find that firms employ a diverse array of terms to mitigate agency and hold-up problems. This work then provides the foundation for a second empirical inquiry - analyzing why specific relationships take on their observed forms. Using the micro-analytical dataset to explore links between transactional context and governance structure, I find some evidence that more hierarchical contracting is used when outsourcing contracts manage functions with higher appropriability risk. This analysis therefore provides moderate support for extending transaction cost theories of the firm into hybrid organizational contracting.