Professional Versus Political Contexts: Institutional Mitigation and the Transaction Cost Heuristic in Information Systems Outsourcing

IS research has considered the outsourcing decision from the perspective of transaction cost economics (TCE) and institutional theory. In this research, we consider how the appropriation of the logic of transaction cost economics is contingent on decision makers’ institutional context. The institutional contexts contrasted are professional versus political Ritu Agarwal was the accepting senior editor for this paper. Patrick Chau was the associate editor. Tim Goles and Koh Siew Kuan served as reviewers. The third reviewer chose to remain anonymous. An earlier version of this paper appeared in the Proceedings of the Academy of Management Conference, August 2001. contexts. In a survey of 214 city governments in the United States, we substantiate the existence of these two institutional contexts, a distinction that has been noted to extend into the private sector as well. Subsequent analyses of the moderating effects of institutional context on the application of the TCE heuristic to the outsourcing decision revealed the following: The institutional context moderated the impacts of “human frailty” conditions—of opportunism and bounded rationality—and of transaction frequency on outsourcing decisions. In professional contexts, opportunism reduced outsourcing and frequency increased outsourcing; in political contexts, bounded rationality fostered outsourcing and frequency dissuaded outsourcing. However, no institutional moderation was noted for the situational conditions of asset specificity and uncertainty. Instead, situational conditions were found to increase the incidence of outsourcing across both contexts. Findings about the contingent effects of human frailty conditions augment our understanding of the outsourcing phenomenon by emphasizing that decision makers’ attentiveness to the logic of transaction costs during outsourcing is shaped by their institutional context. Findings with regard to situational conditions suggest a need for future research to consider the role of another contextual factor—resource munificence—in mitigating the effects of situational conditions on responses to transaction costs.