Many organisations are making decisions to outsource some of their activities. Though, when considering the option to outsource, organisations have to consider the transaction costs which might be incurred. These will be influenced to some extent by the specificity of the assets needed for the contract.
Explain FOUR types of transaction cost which organisations could incur if they use an outside supplier for an input or service.
When an organisation relies on an outside supplier for an input or service, this is called as a market solution. In addition to the price for the bought in input/service it may also contain the following transaction costs:
- Negotiating and drafting the legal contract with the supplier.
- Monitoring the supplier's compliance with the contract on issues like as quality, reliability, invoicing etc.
- Pursuing legal action for redress because of non-performance by the supplier.
- Penalty payments and cancellation payments if the organisation finds it requirements to change its side of the bargain and draft a new contract with the supplier.