Managing the contract: A transaction cost analysis of externalisation

Abstract

This paper examines the externalisation of the London Borough of Ealing's Technical Services Group between 1994 and 1999, the first local government Technical Services function to be externalised as a whole. The case is discussed in the light of transaction cost theory from economics. The study illustrates the difficulties that arise under local authority competitive tendering where the parties enter into an incomplete contract and rely on mutual goodwill to adjust the contract terms later. The study confirms that transaction costs can be pervasive in local government contracting.