To Offshore or Nearshore IT services? An investigation using transaction cost theory

The phenomenon of offshoring, that is, the outsourcing of highly- qualified services into low wage countries was until now considered an economy-specific solution to counteract the constant rise in costs caused by the intensified global competition. At the same time, this form of cross-country division of labor had been prognosticated by various studies to lead to overall positive economic effects. Recently, however, there has been much discussion in the political and management ranks on the controversial issue of the advantageousness of offshoring. The trend, which has been enforced by numerous consultants, has led to a decline in domestic employment as well as not accomplishing cost savings thus intensifying doubt over its validity. The following paper deals with the advantageousness of offshoring in the case of IT services. In order to detach oneself from the limited account given by looking at wage costs, the analysis is conducted from the viewpoint of transaction cost theory. In doing so, it constantly distinguishes between offshoring and nearshoring strategies and the alternatives in examining specific costs are weighed out against each other. It will be shown that relevant motivation and coordination costs vary depending on not only geographical distance but also cultural difference. As such, the role of effective cooperation and interface management is clarified in order to be able to reduce known transaction costs.