When a company decides to outsource all of its financial operations to a professional accountant or counselor, it aims either to diminish excess costs, attain competitiveness, or gain expertise.
Experienced businesses prioritize outsourcing accounting activities, but their reasons vary from cost reductions to simply going with the trend of appointing an expert for monetary purposes. Numerous frameworks have been crafted to determine which operations can be outsourced and which couldn’t optimize the costs.
For any business, there are several costs associated with granting an internal service known as production costs. However, if you purchase the same service, it would be considered a transaction cost.
The transaction cost economics perspective proposes that every company equalizes the costs before performing a function and outsourcing it. Higher transaction costs would compel a company to internalize its accounting operations.
Transaction cost economics is a substitute mode of organizing cash with minimum transactional costs. It is one of the superior linear models that evaluates what can be outsourced and what can’t. The model clarifies the fact that why companies exist and set their boundaries.
Cost transaction economics is also considered as economizing the costs rather than strategizing. Additionally, the theory asserts that every transaction creates coordination costs of monitoring and managing the transactions.
Ex-ante and Ex-post Costs
Usually, a company has two transaction costs for outsourcing accounting, including ex-ante cost and ex-post cost. Ex-ante costs refer to negotiating and drafting alterations incurred before agreeing, while ex-post costs refer to haggling, mal-adaptation, and governance costs.
Researchers suggest that maladaptation might lead to a versatile opportunistic behavior by the company and is one of the main pitfalls of utilizing the transaction cost framework. To determine the mechanism of transaction costs, we first need to understand the key factors that influence it.
Assets Particularity
In accounting, the tangible assets of any company refer to the tools and software, while human assets refer to the information and human capital. Human assets will only be evaluated when an accountant requires knowledge about a particular characteristic to complete a defined accounting operation.
Transaction cost economics suggests that a company has to seek longer for a professional accountant during the high asset specificity. It is better to insource rather than outsourcing in such circumstances as it saves you high transaction costs.
According to the transaction cost economics, assets particularity is the most significant factor for anticipating the outsourcing limit. A higher asset particularity notifies that cost is worthy within a specific transaction.
Environmental Variability
Environmental variability refers to the steadiness of accounting workload as a consequence of explosive business activities. Alterations in corporate structures and unstable sales and purchase invoices are the uncertainties that directly influence the company’s workload, including accounting operations.
Transaction cost economics compares the impacts of high and low predictability of workload on transactional costs. In the technological environment where a business owner can easily predict unforeseen circumstances, the transactional costs are lower, and a company must decide to outsource.
Behavioral Variability
In accounting, behavioral variability refers to the difficulty in evaluating the accountant to perform the job efficiently. When behavioral variability is higher, the transactional cost will be elevated due to monitoring and negotiating contracts to avert opportunistic behavior. In such circumstances, the transaction costs economics argues that the company would perform the accounting operations internally.
Trust the Accountant
Faith in the accountant entails that the entrepreneur always expects the accountants to be trained individuals who are proficient at their jobs. They must perform skillfully and stay loyal in all of their dealings. Specifically, trust is a significant part of the financial deals and ignores the possibility of opportunistic behavior by both parties. Additionally, it would be wise to create a trust agreement with them to avoid harsh situations.
Transaction cost economics asserts that the primary goal of both parties should minimize the standard of opportunism. Accordingly, a higher degree of trust will diminish the transaction costs that lead to the outsourcing of accounting operations. Therefore, we can agree that faith is one of the critical factors for a company before hiring or taking professional accounting services.
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