The Impact of Relational Switching Costs on the Decision to Retain or Replace IT Outsourcing Vendors

While the IT outsourcing market is growing in terms of the volume of business, organisations are at the same time replacing their outsourcing vendors more frequently. Replacing vendors can affect the stability and quality of the IT services an organisation receives; however, it also provides organisations with opportunities to lower their spending and benefit from the experience of other vendors. The decision to replace or retain vendors thus involves considering the costs and benefits of switching. This study examines how relational switching costs affect this decision, and how organisations perceive them vis-à-vis other types of costs. The study also investigates external issues that may possibly influence the impact of switching costs on the vendor replacement decision. This study builds on Burnham, Frels, and Mahajan’s (2003) switching costs framework by drawing on transaction cost theory to help explain the economics costs, social exchange theory to help explain the non-economic costs and aspects of the relationships, and resource dependence theory to help explain resource dependence, interdependencies, and inter-organisational relationships and the power struggles they can create. Using an interpretive qualitative approach, two case studies on organisations that had made the vendor replacement/retention decision were developed. The studies found that financial switching costs have the greatest influence on the switching decision, while relational switching costs play a key role in day-to-day operations. Additionally, the findings highlight the different priorities of different levels of management, and that these priorities are used to identify which types of switching costs are more important in different contexts. The results also highlight that if the switching decision is made on an operational level, then procedural and relational switching costs have a larger effect on the switching decision. These findings contribute to the literature by clarifying the relational switching costs that are present in IT outsourcing, identifying the impact of these costs on switching decisions, and explaining the moderating effect of strategic dependence and culture fit on vendor switching decisions. The findings benefit practitioners by surfacing a list of relational switching costs, and providing a framework that practitioners can use during the vendor replacement decision process