Many organisations are making decisions to outsource some of their activities. However, when considering the option to outsource, organisations must consider the transaction costs which may be incurred. These will be influenced to some extent by the specificity of the assets required for the contract. 

Explain what is meant by the term 'asset specificity', providing examples of THREEdifferent types of asset specificity.

The term asset specificity relates to the inter-party relationships of a transaction. It is fundamentally concerned with the extent to which a ceratin asset is of use only in one specific range of operation. Developing this, high asset specificity is where a supplier will require to invest in expensive assets in order to supply a particular client, which have no alternative uses. As, this poses a substantial threat to the supplier due to if the contract is withdrawn it will not be able to recoup its investment. The implications of this are that some suppliers would take this risk without a guarantee of orders in the long term. The more specific assets are, the higher the transaction costs would be.

Examples of  types of asset specificity include:

1.  Site specificity. This relates to assets being attached  to a certain location. For example, a car parts component plant being sited near the customer's assembly plant.  

2.  Human asset specificity. This is concerned with certain human skills and knowledge. For example, specific technical skill relevant to only single product, or knowledge of systems and procedures particular to one organisation.

3.  Physical asset specificity. This refers to a specialised machine or difficult computer system designed for one purpose.