Support Service Partnerships: A Transaction Cost Theory and Empirical Analysis

Private firms have become important partners of public sector organizations, carrying out multiple support activities for government agencies such as information technology, human resources, and accounting. Based on an empirical study conducted among 72 US public sector organizations this paper examines the extent and comparative costs and benefits of government agencies outsourcing support services. In total, the public sector organizations outsource 17.3 percent of their support services. The ability to achieve greater economies of scale and scope was rated as the biggest advantage of a private firm. The biggest disadvantage of outsourcing support services is cost associated with contract modification. Approximately 60 percent of the surveyed organizations plan to outsource more support services to their private partners in the future.