The stability of offshore outsourcing relationships: the role of relation specificity and client control.

Zusammenfassung

---

RESEARCH ARTICLE

Siehe den Gesamtinhalt dieses Dokumentes

Auszug

---

The stability of offshore outsourcing relationships: the role of relation specificity and client control.

Abstract:

* Offshore outsourcing of administrative and technical services has become a mainstream business practice. Increasing commoditization of business services and growing client experience with outsourcing have created a range of competitive service delivery options for client firms.

* Yet, data from the Offshoring Research Network (ORN) suggests that, despite increasing market options and growing client expectations related to service quality and cost efficiency, clients typically renew provider contracts and develop longer-term relationships with providers. Based on ORN data, this paper explores drivers of this phenomenon.

* The findings suggest that providers promote contract renewal by making client specific investments in software, IT infrastructure and training, and by involving clients in outsourcing operations, thereby increasing relation specific joint equity and creating opportunities for client monitoring and control. Interestingly, these strategies apply to routine rather than knowledge-intensive tasks, and are more likely to be applied by large rather than small providers. Surprisingly, high degree of contract specification makes contract renewal less likely.

* The paper contributes to the growing literature on strategic outsourcing of business services and the importance of governance mechanisms addressing "hidden costs" as well as "hidden benefits" of offshore outsourcing relationships.

Keywords: Offshore outsourcing * Strategic outsourcing * Agency theory * Service contracting * Hidden costs * Governance mechanisms

Introduction

Offshore outsourcing of administrative and technical tasks has become a mainstream business practice (e.g., Doh 2005; Bunyaratavej et al. 2011). Offshore outsourcing means that client companies choose to source functions and processes supporting domestic and global operations from outside their home countries, using third-party service providers. Research shows that cost savings are a primary initial reason for companies to outsource business functions in general (e.g., Murray and Kotabe 1999; Walker and Weber 1984), and to outsource offshore in particular (Farrell 2005; Levy 2005; Lewin and Couto 2007; Lewin and Peeters 2006). In recent years, however, as companies learn the reality that "labor arbitrage" is a short term benefit they increasingly outsource offshore for more strategic reasons, such as to increase organizational flexibility, and to access talent and specialized capabilities (Lewin et al. 2009a; Manning et al. 2008; Kenney et al. 2009). In other words, firms do not only try to cut costs, but also create value through global outsourcing--a phenomenon some refer to as strategic outsourcing (e.g., Holcomb and Hitt 2007; Quinn 1999).

Reflecting this increasing demand, global outsourcing has expanded rapidly in recent years, offering client firms the opportunity to select from a range of full-service and specialized providers for specific needs (e.g., Couto et al. 2008). As outsourcing services, such as administrative services (IT, finance and accounting, and human resource management), as well as more knowledge-intensive services (product design, engineering, analytical services) have become increasingly commoditized, the global business services market has expanded rapidly and become more competitive in recent years. Client companies, in turn, have become more experienced in selecting vendors, assessing service quality and generating cost savings. Surprisingly, despite increasing cost and quality expectations of clients and the growing availability of alternative providers (Lewin and Couto 2007), recent data collected by the Offshoring Research Network (ORN) shows that client firms rarely switch providers. This is even more surprising as clients become increasingly aware of potential service quality flaws and other 'hidden costs' (e.g., Dibbern et al. 2008; Larsen et al. 2011)--likewise, service providers report meeting clients' expectation...

Siehe den Gesamtinhalt dieses Dokumentes

---