Abstract
This paper discussed and explained outsourcing, identified effective techniques and methods, and why outsourcing is utilized. Outsourcing can be an effective method for improving an organization’s functionality. While outsourcing advantages can reap benefits of improved productivity and lowered costs, the disadvantages must be taken in consideration to reach success. Analyzing the different aspects of: why is outsourcing necessary, what are the potential advantages and disadvantages, and is it cost effective upon a thorough review of the market and costs associated are essential.

Outsourcing a Source with Strategic and Effective Techniques
The ways in which business decisions take place are increasingly complex, costs are an important part of decisions, especially the make or buy decision that is important in determining if outsourcing of off shoring takes place. The majority of literature focuses on the production cost, but these are not the only costs that need to be considered, less visible, but just as important are the transaction costs, Jacobides and Winter (2005) argue that transaction costs can be just as important as production costs, and are key in the outsourcing decisions, Barney (1991) argues it is used in the way resource allocations is assessed. To consider this it is necessary to look at how transaction cost economics can be applied to business decisions and the way that outsourcing takes place. In order to examine this concept, and the way in which transaction costs are impacting on business will first define the term transaction costs, and the way in which it is impacting on outsourcing decisions, following this the underlying theory that explains the way that the actions identified in the outsourcing decision-making can be explained with reference to economic theory.
Transaction costs are the costs that are incurred as a result of managing production, internally or externally, but are not production costs. The term is found initially with Coare in his paper published in 1937, entitled "The Nature of the Firm", and defined transaction costs as “ the cost of using the price mechanism" (Coase, 1988, p38). However, this is a rather ambiguous statement, and critics rightly claim that Coase failed to fully define the term (Barzel and Kochin, 1992). However, it does give some examples of the types of costly incorporates within this time, such as the cost of negotiating and closing contract. However, this is more useful than it may appear at first, as Chung (1969) uses approaching the analysis of shared tenancy, in order to provide contractual example of the Coase Theorem, which demonstrates the way in which a contract choice may be made will incorporate consideration of the transaction costs of the different contracts, even where the actual production costs remain the same. This instance there is an expansion into internal costs, and not the market costs (Chung, 1969). This work was also built on by Williamson.
Williamson differentiates between production and transaction costs by making analogies, the production costs of those equivalent of building and running the ideal production machine, in economic terms this may be seen as an efficient market, whereas transaction costs are those which are incurred as a result of departures from that perfection; such as market failure costs, as well as costs which are required in order to monitor and maintain contract. Therefore, transaction costs may be seen as incorporating a number of other elements, including the cost of acquiring, enforcing and transferring property rights, this is defined by Stavins (1995) as:
“General, transaction costs are ubiquitous in market economies and can arise from the transfer of any property right because parties to exchanges must find one another, communicate and exchange information. There may be a necessity to inspect and measure goods to be transferred, draw up contracts, consult with lawyers or other experts and transfer title. Depending upon who provides these services, transaction costs can take one of two forms, inputs or resources – including time - by a buyer and/or a seller or a margin between the buying and selling price of a commodity in a given market” (p.134).
This is the indication of what is meant by the term transaction costs, as well as broad way in which it may be interpreted and applied. From this, it is possible to apply the concept of transaction costs in very sadistic terms to the decision of whether or not to undertake outsourcing; there is the need not only to look at the actual production costs, but also the transaction costs to give a total cost. For example, a production costs may be much lower in an offshore location, but if managing the contract, enforcing the terms and then transporting goods may or increase the total cost above that of in-house production. Likewise, the opposite may occur, where the ability of the company to benefit from lower transaction costs compared to internal costs may result in benefits is achieved by outsourcing. In order to consider this we can look more carefully at the concepts of Coase and how they were applied to the firm, with specific reference to outsourcing.
Considering the way that this is seen in the real world can be useful when looking at the underlying theory, as the process and actions of organizations in determining whether or not to outsource appear to be fully logical. By considering the real world in a cessation of outsourcing this can help to explain the theory, which has been significantly developed by Williamson.
Williamson (1975, 1971) noted that there were two basic assumptions within the concept of transaction costs, and the way decisions are made these are bounded rationality and opportunism. Founded rationality the concept found in many disciplines, and refers to the way in which individuals will have limited memory and cognitive processing power, unable to process information in an efficient manner, which means that in any decision-making process individual making the decision will be limited by their own ability to process and analyze information, without the ability to take into account relevant knowledge, which they may not have access, or may not be a process. In addition to this there also other constraints in terms of rationality, such as the knowledge which is unknown, including the way in which competitors may react, and how assumptions may be made regarding the unknown issues (Williamson, 1975, 1971).
The second assumption is that of opportunism, where there is an assumption that individuals would always ask if a degree of self interest, with, as Williamson described "guile", meaning that they may not always be completely honest about their intentions, and they may take advantage of unanticipated circumstances where they have the opportunity to exploit another party (Williamson, 1975, 1971).
However, should be noted this assumption by Williamson does not size that all people behave in this way the time, only that some people behave in this way at some point in time, and it is not possible to tell in advance which individuals opportunists when it may be leveraged. These two contextual issues are important when looking the concept of transaction costs in a theoretical manner, traditional economic theory the concept of rational thought is to the assessment that firms management adopt a profit maximization strategy. Likewise, the concept of self-interest is also well developed within economic theory, the concept of guile is less expected (Williamson, 1975, 1971).
When considering transaction costs and the way decisions are made from the application of decision-making to outsource as discussed above, it is possible to unite the economic theory where there are three specific variables can be applied to the decision. These are frequency, uncertainty and asset specificity (Williamson, 1975, 1971).
Transaction frequency is a simple variable to discuss when considering whether or not production should take place to enhance, or should be outsourced. In many economic texts concept of frequency may be needed as this is often seen as being so simplistic, but it is worth some consideration (Williamson and Winter, 1991).
Where a good or service is used infrequently, it is highly likely that the firm want to undertake enhanced, undertake vertical integration. Example of this is management consultancy, most firms will only this in an infrequent basis, which would result in unnecessary costs you to the periods of time where it was not used. This would result in a company needing to transfer the services to external parties, when undertaking consultancy work for the parent company. The production costs, as well as the transaction costs, in setting up and managing, as well as undertaking the gaining and management the contracts of other companies, which be too high to make this viable. Instead, the use of an external firm, which had consultancy as a core competency may be a more cost-effective decision. As noted above, organizations which only require inputs on an infrequent basis, the potential to outsource has a number of very specific advantages, including the ability to access more specific skills and knowledge that is focused within a potential outsource supplier, as seen in call centers and IT solutions in India and discussed above.
Uncertainty is the second variable, where there is consideration of difficult it may be too forecast potential eventualities it may take place during the course of any transaction. There are a number of factors that may impact on uncertainty (Williamson, 1975, 1971). For example, the time period over which the transaction takes place. For example, if the purchases being made on the spot market there is uncertainty, it is no need to project the future, but where there are commitments over a period of time, the potential for uncertainty increases. For example, the agreement to provide goods at a specific point in the future may involve uncertainties due to the potential volatility of input prices, as well as consideration such as whether or not the other party will still be in business for the entire life of the contract. Uncertainty is also aggravated by bounded rationality, as even where extensive analysis takes place is not possible to foresee the potential eventualities.
Other influences, such as asymmetry of information may also be present, the other party to a contract may have more knowledge, and this also leads to potential of opportunism (Williamson, 1975, 1971). In some instances uncertainty may be reduced through the integration, such as this is uncertainty regarding supplier survival, control over quality and contract certainty, but internal integration may also other types of certainty, such as exposure to increasing input prices and other influences of production.
The last, and perhaps most important variable, is that of the asset specificity. It is an argument that where transactions include assess which only have a value in the context of a specific transaction, there is the potential to reduce transaction costs by vertical integration (Williamson, 1975, 1971). However, where assets have a potential value in many contexts, rather than only a specific transaction, then maybe greater potential gained by outsourcing the functions which users assets. It may be argued in recent years, with increased development of technology that the occurrence of asset specificity is reducing.
However, when applying this theory to practice, and the way in which outsourcing takes place, and holistic view may be better than a complete separation of transaction costs and other costs, as in many instances the underlying concept of separating production and transaction costs is not always simple. It may also be argued that there are other considerations, the model assume is a logical approach to business and the profit maximizing divergent goals, a number of different models that some goals may also include revenue maximization, and the potential influence from agency problems may also impact on the way that the firm pursued this goal.
Therefore, the decision in business regarding whether to vertically integrate, make internally or undertake an outsourcing contract may be seen as a complex decision, in which there are many influences. The theory described above may be seen as reflecting reality, helping to explain some of the variables in a logical manner. But while the theory, although explained in the simplistic manner in this paper, is valuable, there are also other influences that need to be considered which are not as easy to define, such as reputation as well as the limitations placed on decision-making by bounded rationality. However, armed with knowledge of transaction cost economics, business managers making outsourcing decisions be better placed to make beneficial choices.

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