Outsourcing of information systems functions has become a frequently chosen alternative of providing information systems services. This is true across many industries and all firm sizes. Practitioners have developed a number of guidelines relating to outsourcing. While many of these guidelines seem plausible their underlying economic reasons are often not identified because they are not based on any theory. We analyze outsourcing of information systems functions using the transaction cost economics framework. The framework allows us to incorporate production as well as coordination costs in evaluating the outsourcing option.