Friday, November 16, 2007

Bangalore Economics

Mint explains the out sourcing activity w.r.t Bangalore in economics terminology.

Internal transaction costs went up while market transaction costs fell after the mid-1990s. That was the economic cue for outsourcing to take off, as companies found it cheaper to get certain things done outside rather than from within the boundaries of the firm

In his theory, The theory of the firm, British economist - Ronald Coase explains why the economy is populated by a number of business firms, instead of consisting of exclusively of independent people who contract with one another. According to him, Transaction Cost determines whether firms seek hired help or contract out for some particular task.

In an attempt to expend this theory to how departments are formed within a firm, I see why we have separate departments for Sales, Operations, Business Units, Technology units etc. For any service provided by one department to the other, there is a transaction cost incurred. Ex - the (tech) support dept charges the technology dept for all its services, technology charges the business units for its services etc.

Further, individual departments can get contracted out and this is where Bangalore has a major share.

No comments: