POLITICS AND FIRM BOUNDARIES

Transaction cost economics and capability-based theories of firm boundaries assume that make or buy decisions are made in the best interests of the overall organization. Using an inductive case study of IT outsourcing, I introduce ideas of differentiated intra-organizational group interests into these theories. This approach brings internal organizational variables into our understanding of firm boundaries. I show how differences in group interests can lead groups to take different positions on whether the same external suppliers offer improved capabilities. I also demonstrate how changes in authority and administrative controls used for external versus internal transactions can have important effects on internal relationships. While the loss of authority entailed in outsourcing can hinder managers in getting their work done, this same loss of authority can also protect managers from the demands of other internal constituents. Some groups may also benefit from the ability to opt out of internal controls by transacting externally. I also outline how the resulting conflicts over firm boundaries can shape how decisions are made. Make or buy decisions can often reflect differences in power among various groups, rather than transaction characteristics. And contracts with external vendors are shaped by the need to overcome internal obstacles to outsourcing.