The Relationship Between Transaction Costs And Flexibility In Outsourcing: A Conceptual Framework

Companies face endless anxiety to ensure they deliver goods and services of the best quality in perfect time to their customers, so they have to find the best and most flexible outsourcing firms to contract with. However, this will lead to high transaction costs which arise because of the of company‘s activities in the market. The aim of this paper is to shed light on the relationship between transaction costs and flexibility in outsourcing, and then to determine the equilibrium point between them. Various publications, including (articles and research reports) have been used to explain the notions of transaction costs, outsourcing, flexibility in outsourcing, and related theoretical issues. As a result of a review of the literature it emerges that, transactions costs and outsourcing flexibility are the main challenges facing companies (operating as an anvil and a hammer. Transaction costs are costs which arise because of the company‘s activities in the market, and include (fees, commission and taxes) and which are paid by the firm to provide a service or produce a good, either to external parties or as internal costs. Companies must determine the equilibrium point which meets the optimal level of flexibility required in outsourcing for the best performance, and which allows them to cover transaction costs which arise because of uncertainty. The equilibrium point explains the extent to which the company is willing to bear high transaction costs in order to get benefits from applying outsourcing flexibility. We can use the terms outsourcing flexibility or supplier flexibility to express the way firms meet their needs in the light of uncertainties caused by demand fluctuations and market circumstances.