Deepa Mani

An empirical analysis of the impact of information capabilities design on business process outsourcing performance

Organizations today outsource diverse business processes to achieve a wide variety of business objectives ranging from reduction of costs to innovation and business transformation. We build on the information processing view of the firm to theorize that performance heterogeneity across business process outsourcing (BPO) exchanges is a function of the design of information capabilities (IC) that fit the unique information requirements (IR) of the exchange. Further, we compare performance effects of the fit between IR and IC across dominant categories of BPO relationships to provide insights into the relative benefits of enacting such fit between the constructs. Empirical tests of our hypotheses using survey data on 127 active BPO relationships find a significant increase (decrease) in satisfaction as a result of the fit (misfit) between IR and IC of the relationship. The results have implications for how BPO relationships must be designed and managed to realize significant performance gains. The study also extends the IPV to identify IC that provide the incentives and means to process information in an interfirm relationship.

Research Commentary---Cooperation, Coordination, and Governance in Multisourcing: An Agenda for Analytical and Empirical Research

Multisourcing, the practice of stitching together best-of-breed IT services from multiple, geographically dispersed service providers, represents the leading edge of modern organizational forms. While major strides have been achieved in the last decade in the information systems (IS) and strategic management literature in improving our understanding of outsourcing, the focus has been on a dyadic relationship between a client and a vendor. We demonstrate that a straightforward extrapolation of such a dyadic relationship falls short of addressing the nuanced incentive-effort-output linkages that arise when multiple vendors, who are competitors, have to cooperate and coordinate to achieve the clients business objectives. We suggest that when multiple vendors have to work together to deliver end-to-end services to a client, the choice of formal incentives and relational governance mechanisms depends on the degree of interdependence between the various tasks as well as the observability and verifiability of output. With respect to cooperation, we find that a vendor must not only put effort in a “primary” task it is responsible for but also cooperate through “helping” effort in enabling other vendors perform their primary tasks. In the context of coordination, we find that task redesign for modularity, OLAs, and governance structures such as the guardian vendor model represent important avenues for further research. Based on the analysis of actual multisourcing contract details over the last decade, interviews with leading practitioners, and a review of the single-sourcing literature, we lay a foundation for normative theories of multisourcing and present a research agenda in this domain.

An Empirical Analysis of the Contractual and Information Structures of Business Process Outsourcing Relationships

The emergence of information-intensive business process outsourcing (BPO) relationships calls for the study of exchange performance beyond traditional considerations of the contractual structure that facilitates cooperative intent to include the information structure that facilitates the mutual exchange of information to enact cooperative intent and coordinate actions between the user firm and the service provider. Yet, there has been little analysis of the drivers and performance effects of the information structure of BPO relationships, including its linkages to the underlying contractual structure. This study integrates perspectives in neo-institutional economics and information processing to develop and test the theoretical argument that the extent of use and performance effects of the information structure of the BPO relationship are greater in time and materials BPO contracts than in fixed-price BPO contracts. Survey data on 134 BPO relationships provide empirical support for our hypotheses. The synergistic impact of incentives and information on BPO performance emphasizes that their joint assessment is necessary to enhance the explanatory power of extant theories of organization. This result also has implications for achieving maximum benefits from complex BPO arrangements that are more likely to be characterized by time and material contracts.

Cooperation, coordination, and governance in multisourcing

Multisourcing, the practice of stitching together best-of-breed IT services from multiple, geographically dispersed service providers, represents the leading edge of modern organizational forms. While major strides have been achieved in the last decade in the information systems (IS) and strategic management literature in improving our understanding of outsourcing, the focus has been on a dyadic relationship between a client and a vendor. We demonstrate that a straightforward extrapolation of such a dyadic relationship falls short of addressing the nuanced incentive-effort-output linkages that arise when multiple vendors, who are competitors, have to cooperate and coordinate to achieve the clients business objectives. We suggest that when multiple vendors have to work together to deliver end-to-end services to a client, the choice of formal incentives and relational governance mechanisms depends on the degree of interdependence between the various tasks as well as the observability and verifiability of output. With respect to cooperation, we find that a vendor must not only put effort in a “primary” task it is responsible for but also cooperate through “helping” effort in enabling other vendors perform their primary tasks. In the context of coordination, we find that task redesign for modularity, OLAs, and governance structures such as the guardian vendor model represent important avenues for further research. Based on the analysis of actual multisourcing contract details over the last decade, interviews with leading practitioners, and a review of the single-sourcing literature, we lay a foundation for normative theories of multisourcing and present a research agenda in this domain.

Outsourcing Contracts and Equity Prices

We investigate the impact of outsourcing on the long-term market performance of the firm. Outsourcing initiatives vary in terms of uncertainty in business requirements, complexity of coordination between the outsourcing firm and provider, and the consequent choice of the governing contract fixed or variable price. Using theories from institutional economics, strategy, and information systems, we argue that firms pursuing large-scale, fixed price outsourcing, which are characterized by lower business uncertainty and simpler coordination requirements, will realize higher market returns relative to similar firms in the same industry who did not outsource. In contrast, variable price contracts that proxy for higher business uncertainty and coordination complexity may have a higher risk of failure and loss of shareholder value; however, prior outsourcing experience and prior association with the vendor may reduce uncertainty in the outsourcing relationship to help the outsourcing firm better manage challenges associated with complex, variable price engagements. We posit that financial markets are either not privy to or unlikely to accurately interpret such intangible information on the antecedents of outsourcing success during the announcement period. The delay in incorporation of this information in market prices results in positive long-term abnormal returns to fixed price contracts. Variable price contracts characterized by prior association between participant firms and greater outsourcing experience also realize positive long-term abnormal returns. Data on the hundred largest outsourcing initiatives implemented between 1996 and 2005 strongly support our hypotheses. The results imply that firms who retain simple functions and tasks in-house as well as those who outsource complex functions without pertinent experience or association with the vendor experience significant loss of shareholder value.

Social Capital and Contract Duration in Buyer-Supplier Networks for Information Technology Outsourcing

This paper presents new evidence on the role of embeddedness in predicting contract duration in the context of information technology outsourcing. Contract duration is a strategic decision that aligns interests of clients and vendors, providing the benefits of business continuity to clients and incentives to undertake relationship specific investments for vendors. Considering the salience of this phenomenon, there has been limited empirical scrutiny of how contract duration is awarded. We posit that clients and vendors obtain two benefits from being embedded in an interorganizational network. First, the learning and experience accumulated from being embedded in a client-vendor network could mitigate the challenges in managing longer term contracts. Second, the network serves as a reputation system that can stratify vendors according to their trustworthiness and reliability, which is important in longer term arrangements. In particular, we attempt to make a substantive contribution to the literature by theorizing about embeddedness at four distinct levels: structural embeddedness at the node level, relational embeddedness at the dyad level, contractual embeddedness at the level of a neighborhood of contracts, and finally, positional embeddedness at the level of the entire network. We analyze a data set of 22,039 outsourcing contracts implemented between 1989 and 2008. We find that contract duration is indeed associated with structural and positional embeddedness of participant firms, with the relational embeddedness of the buyer-seller dyad, and with the duration of other contracts to which it is connected through common firms. Given the nature of our data, identification using traditional ordinary least squares based approaches is difficult given the unobserved errors clustered along two nonnested dimensions and the autocorrelation in a firms decision here the contract with those of contracts in its reference group. We use a multiway cluster robust estimation and a network auto-regressive estimation to address these issues. Implications for literature and practice are discussed.

Efficacy of R&D Work in Offshore Captive Centers: An Empirical Study of Task Characteristics, Coordination Mechanisms, and Performance

Seizing the latest technological advances in distributed work, an increasing number of firms have set up offshore captive centers CCs in emerging economies to carry out sophisticated R&D work. We analyze survey data from 132 R&D CCs established by foreign multinational companies in India to understand how firms execute distributed innovative work. Specifically, we examine the performance outcomes of projects using different technology-enabled coordination strategies to manage their interdependencies across multiple locations. We find that modularization of work across locations is largely ineffective when the underlying tasks are less routinized, less analyzable, and less familiar to the CC. Coordination based on information sharing across locations is effective when the CC performs tasks that are less familiar to it. A key contribution of our work is the explication of the task contingencies under which coordination based on modularization versus information sharing yield differential performance outcomes.

Client satisfaction versus profitability: An empirical analysis of the impact of formal controls in strategic outsourcing contracts

The reach and impact of outsourcing is growing fast to include a variety of strategic objectives. Unlike in transactional outsourcing, where the vendor leverages scale economies to provide standardized services at reduced costs of ownership, client satisfaction in strategic outsourcing is contingent on the extent to which the vendor’s service offering is customized to meet heterogeneous, unique client needs. However, project management practices that lead to high levels of client satisfaction may be incompatible with the project’s financial performance. In this study, we investigate how managerial actions differentially impact project profitability and client satisfaction. Using rich field data on 390 strategic outsourcing contracts, we examine the differential impact of output controls, activity controls and capability controls on client satisfaction and contract profitability. We find that activity controls are positively associated with client satisfaction and profitability; in contrast, our results present mixed evidence for capability controls, and negative impact for output controls. In addition to contributing to research in control theory, our results provide actionable insights for vendors into appropriate strategies and tactics for competing efficiently and effectively in services markets.

Augmenting Conflict Resolution with Informational Response: A Holistic View of Governance Choice in Business Process Outsourcing

Abstract We develop a holistic model of governance choice in business process outsourcing (BPO) that represents a highly information-intensive form of outsourcing. We integrate perspectives from neoinstitutional economics and the information-processing view (IPV) of the firm. We argue that the governance structure in BPO is chosen not only to address opportunism concerns arising from relational uncertainty to and encourage cooperation, as suggested by institutional economics, but also as an informational response to task and relational uncertainty to encourage coordination between exchange partners. Using the lens of IPV, we posit that uncertainty in the outsourced task increases the information requirements (IR) of the BPO relationship, which, in turn, leads to more hierarchical governance structures. We also suggest that in addition to directly influencing governance choice, relational uncertainty, a key construct in transaction cost economics (TCE), increases IR, and hence has an indirect impact on governance choice. Furthermore, we hypothesize that technological capabilities enable more hierarchical governance in response to increasing IR needs. Data on 130 BPO initiatives provide empirical support for our hypotheses regarding the drivers of IR, its impact on governance choice, and the moderating role of technological capabilities. Our study contributes to theory by integrating the premises of TCE and IPV in the context of BPO, and to practice by underscoring the need to consider information requirements in designing appropriate coordination and collaboration processes.

The Impact of Firm Learning on Value Creation in Strategic Outsourcing Relationships

Abstract Information technology (IT) is central to the process execution and management of an ongoing relationship in outsourcing, both of which are fraught with challenges, and often lead to poor business outcomes. Thus, it is important for IT groups in organizations to understand how to deal with such difficulties for improved outsourcing performance. We study whether firms learn over time to deal with these two related but distinct issues in IT and business process outsourcing. Does such learning affect financial value appropriation through outsourcing? We build on the literature in information systems and strategy to investigate whether value creation in outsourcing depends on relational learning that results from prior association with the vendor, and procedural learning that results from prior experience in managing interfirm relationships. We estimate value in terms of long-term abnormal stock returns to the client relative to an industry, size, and book-to-market matched sample of control firms following the implementation of the outsourcing contract. We also analyze announcement period returns and allied wealth effects. Using data from the hundred largest outsourcing deals between 1996 and 2005, we find that whereas relational learning influences value creation in both simple and complex outsourcing engagements, procedural learning impacts value only in complex initiatives. Financial markets are slow to price the value of learning. The results suggest that caution should be exercised when firms without the experience of managing interfirm relationships externalize complex tasks to vendors they have not worked with in the past. Furthermore, IT groups can help improve learning-based outcomes by developing processes and systems that enable a firm to improve outsourcing procedures in a cumulative manner and also to coordinate and collaborate with the vendor.