The Head of Insurance at JKL Bank has been considering how to make efficiencies in the operation of the Car Insurance Business Unit. One option under consideration is to outsource the Customer Contact Centre (CCC) for its car insurance business. The work of the CCC currently includes dealing with customer telephone enquiries on issues like as insurance claims, policy changes, renewals and premium/payment information.
Explain how transaction cost theory could help the Head of Insurance on deciding whether or not to outsource the Car Insurance Business Unit's Customer Contact Centre.
Transaction cost theory was at first proposed by Williamson and is concerned with the way in which resources are organised for producing a product or delivering a service. The foundation of the theory is based on how best an organisation can achieve economic efficiency.
The theory proposes that whilst asset specificity may drive vertical integration, outsourcing activities that are not viewed as core should be considered by the organisation. In the case of JKL Bank the key issue will be to verify whether or not the activities of the CCC are designated as a core business. It would also require investigating whether the activities of the Car Insurance Customer Contact Centre (CCC) could be performed at a lower cost by external providers.