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. > >
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.
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.
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.
Application service providers (ASP), who host and maintain information technology (IT) applications across the Internet, emerged as an innovation in the way IT services are delivered to client firms. In spite of many potential benefits of this model, ASPs experienced business failure and high rates of exit. Drawing on agency theory, we argue that the efficiency of contracting arrangements between ASPs and client organizations is an important determinant of ASP survival. We test this prediction using a unique data set combining multiple sources that allows us to track an ASP from the year of founding through the beginning of 2006. Contractual misalignment, or adopting contracts mismatched with the underlying agency costs, significantly lowers the probability of survival of service providers in the ASP marketplace. The impact of misalignment is particularly severe when coupled with adjustment costs that impede the transition to aligned contracts. To account for potential heterogeneity in ASPs' knowledge of contracting, we test for endogenous self-selection of ASPs in the relationship between contractual misalignment and survival. Our results are robust to a variety of model specifications as well as alternate explanations of survival from multiple theoretical domains.
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 client's 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.
We examine contract choices in the provision of "software-as-a-service" (SaaS), which is a business innovation that transforms information technology (IT) resources into a continuously provided service. We draw upon agency theory and modularity theory to propose that one of the central challenges in service disaggregation is that of knowledge interdependencies across client and provider organizations. The resulting lack of verifiability of certain tasks results in a multitask agency problem. Our key research questions involve (1) the suitability of high- versus low-powered incentives in SaaS contracts when the outsourced tasks involve business analytics that are difficult to verify, and (2) how such contract choices are affected by the modularity of interfaces between the client and the provider. Analysis of data collected from 154 providers of SaaS offering a range of IT services supports our contention that when contracting for business analytics characterized by knowledge interdependencies across clients and providers, incentives should be "low powered." Modularity in the interfaces of the service provider increases the desirability of high-powered incentives in such situations. Our results are robust after accounting for endogeneity issues arising from unobserved matching between service providers and the nature of IT services outsourced by clients. With the increasing importance of information systems in services, this paper suggests that arm's-length relationships and high-powered incentives may be ineffective in incentivizing providers to perform on complex business analytic tasks, unless accompanied by the modularization of interfaces.
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.
Application service providers (ASP), which host and maintain information technology (IT) applications across the Internet, offer an alternative to traditional models of IT service for user firms. We build on prior literature in transaction cost economics (TCE) to argue that the contract design should address ex post transaction costs that result due to contractual incompleteness and opportunism. We argue that contract design is multidimensional, and that it is necessary to design governance structures that can protect user firms from shirking and monitoring costs, as well as provide for efficient adaptation when requirements are incompletely specified at the start of the initiative. Our empirical analysis suggests that factors such as uncertainty in specifying service requirements, interdependence between the ASP application and IT systems in the client organization, and the need for specific investments favor time and materials contracts, whereas fixed prices are desirable when strong incentives are needed for cost reduction. We also find that contracts that are aligned with transaction attributes in a transaction cost--economizing manner are significantly less likely to experience budget overruns and realize better ex post performance than those that are not. These results hold normative implications for both user and provider firms to assess the performance implications of choosing contracts in line with prescriptions of TCE.
This paper examines the antecedents and consequences of Internet use in the procurement process. Drawing upon the resource-based view (RBV) of the firm and the technology, organization, and environment framework, we develop an integrative model that examines the antecedents and consequences of Internet use in two stages--the search stage and the order initiation and completion (OIC) stage--of the procurement process. The model enables us to deconstruct both the usage and the performance aspects of information technology (IT) in business processes, and to provide insights into the enablers of use and business value. The model is estimated with survey data from 412 firms. Our results suggest that while some resources, such as procurement-process digitization, influence Internet use in both the procurement stages, other resources, such as the diversity of organizational procurement knowledge, impact Internet use in only one stage. We also find that Internet use in the OIC stage has a more significant impact on procurement-process performance than use in search. This study extends the digital capabilities and firm performance literature in the context of electronic procurement. This study also contributes to the small but emerging stream of literature that investigates antecedents, the extent, and implications of IT use holistically.
Many traditional organizations have undertaken major initiatives to leverage the Internet to transform how they coordinate value activities with customers, suppliers, and other business partners with the objective of improving firm performance. This paper addresses processes through which business value is created through such Internet-enabled value chain activities. Relying on the resource-based view of the firm, we propose a model positing that a firm's abilities to coordinate and exploit firm resources (processes, information technology, and readiness of customers and suppliers) create online informational capabilities (a higher order resource) which then leads to improved operational and financial performance. The outcome of a firm's online informational capabilities is reflected in superior operational performance through customer and supplier-side digitization efforts, which reflect the extent to which transactions and external interactions occur electronically. We also hypothesize that increased customer and supplier-side digitization leads to better financial performance. The model is tested with data from over 1,000 firms in the manufacturing, retail, and wholesale sectors. The analysis suggests that while most firms are lagging in their supplier-side initiatives relative to the customer-side, supplier-side digitization has a strong positive impact on customer-side digitization, which, in turn, leads to better financial performance. Further, both customer and supplier readiness to engage in digital interactions are shown to be as important as a firm's internal digitization initiatives, implying that a firm's transformation-related decisions should include its customers' and suppliers' resources and incentives.
In spite of the promise and potential of improving the way organizations develop, operate and maintain information technology (IT) applications, application service providers (ASPs) have fared poorly in terms of attracting a large client base. Anecdotal evidence in the business press points to limited satisfaction among users of ASP, which calls for an assessment of determinants of satisfaction with ASP. In this paper, we draw upon the consumer satisfaction paradigm widely employed in marketing literature to analyze post-usage satisfaction with ASP services. We develop a conceptual model of satisfaction with ASP and empirically test the predictions using data from 256 firms using ASP services. Expectations about ASP service have a significant influence on the performance evaluation of ASPs, and experience-based norms have only limited significance in explaining satisfaction with ASP. We also find empirical support for the influence of performance and disconfirmation on the satisfaction with ASP. Implications for both ASPs and organizations adopting ASP services are discussed.
Although electronic data interchange (EDI) holds the promise of significantly increasing the efficiency of business transactions, an installed base of proprietary implementations has been detrimental to the widespread acceptance of the technology. Thus, an important research issue involves strategies for facilitating EDT adoption. We analyze the introduction of an EDI system in a vertical market involving one manufacturer and two suppliers. The manufacturer initiates an EDT network, and penalizes a supplier for not joining the system by reducing its volume of business with the supplier. Along with a "stick," the manufacturer can also use a "carrot" in the form of a subsidy to partially offset a supplier's setup cost. The competition between the suppliers is characterized by incentive types for joining the EDT system ("motivating" or "threatening") and the Information Technology (IT) efficiency ("efficient" or "inefficient"). We show that regardless of its cost structure, a supplier may have to join the EDT network out of "strategic necessity," due to the presence of an IT-efficient supplier. Our analysis further shows that depending on the supplier competition structure, the EDT system may prove to be a "beneficial" strategic necessity for a large supplier and an "unfortunate" strategic necessity for a small supplier. Another key result is that by increasing the severity of the penalty. both the manufacturer and the follower supplier can be worse off under certain conditions. The analysis of subsidy strategies reveals that unless leadership and followership positions are reversed due to a subsidy, subsidizing a supplier has no impact on the joining time of its competitor. Thus the EDI initiator cannot induce both suppliers to join earlier by subsidizing one supplier. Also, the larger the slack capacity of the leader, the higher (lower) the manufacturer's incentive to subsidize the leader (follower). These results offer insights for initiators and adopters regarding penalty and subsidy strategies, impact on competition structure, joining decisions and network growth.
The Internet has become increasingly important to organizations for certain aspects of electronic commerce. Many organizations have set up Web pages to capture the attention of potential buyers and to develop new business relationships. Others have set up indexing services to provide easy search capabilities to prospective buyers. While the unit search and communication costs have been lowered dramatically by the Internet, the cost of evaluating potential suppliers may still be prohibitive, especially for certain types of products and services. Thus, although the Internet makes it possible to locate a large number of new suppliers, an organizational buyer needs to deploy appropriate supplier-selection strategies (such as sequential evaluation with stopping rules versus bidding systems) that consider all cost elements involved in choosing a vendor. We develop an analytical model that allows a buyer to maximize payoff (net of supplier search, communication, and evaluation costs) from the selection process. We analyze how the nature of the product and the buyer's expectations about supplier characteristics determine whether a sequential evaluation or bidding should be used in the selection process. The Internet, when used in conjunction with the proposed strategies, results in a lower total expected cost to the buyer, even though more suppliers are being evaluated, because a better supplier is selected. We describe how intelligent database searching can further increase the efficiency of the proposed selection strategies. We also develop a minimum requirements announcement mechanism, which makes supplier selection through a bidding strategy economically feasible in situations where legal restrictions may bar the use of sequential evaluation.
Advances in new Information Technologies (IT) and changes in the business environment such as globalization and competitive pressure have prompted organizations to embark on reengineering projects involving significant investments in IT and business process redesign. However, the evidence of payoff from such investments can be classified as mixed as best, a problem we partly attribute to the absence of a strong theoretical foundation to assess and analyze reengineering projects. We seek to apply complementarity theory and a business value modeling approach to address some questions involving what, when, and how much to reengineer. Complementarity theory is based on the notion that the value of having more of one factor increases by having more of another complementary factor. Further, related developments in the optimization of "supermodular" functions provide a useful way to maximize net benefits by exploiting complementary relationships between variables of interest. Combining this theory with a multi-level business value model showing relationships between key performance measures and their drivers, we argue that organizational payoff is maximized when several factors relating to IT, decision authority, business processes and incentives are changed in a coordinated manner in the right directions by the right magnitude to move toward an ideal design configuration. Our analysis further shows that when a complementary reengineering variable is left unchanged either due to myopic vision or self-interest, the organization will not be able to obtain the full benefits of reengineering due to smaller optimal changes in the other variables. We also show that by increasing the cost of changing the levels of design variables, unfavorable preexisting conditions (e.g., too much heterogeneity in the computing environment) can lead to reengineering changes of smaller magnitude than in a setting with favorable conditions.
An important management question today is whether the anticipated economic benefits of information Technology (IT) are being realized. In this paper, we consider this problem to be measurement related, and propose and test a new process-oriented methodology for ex post measurement to audit IT impacts on a strategic business unit (SBU) or profit center's performance. The IT impacts on a given SBU are measured relative to a group of SBUs in the industry. The methodology involves a two-stage analysis of intermediate and higher level output variables that also accounts for industry and economy wide exogenous variables for tracing and measuring IT contributions. The data for testing the proposed model were obtained from SBUs in the manufacturing sector. Our results show significant positive impacts of IT at the intermediate level. The theoretical contribution of the study is a methodology that attempts to circumvent some of the measurement problems in this domain. It also provides a practical management tool to address the question of why (or why not) certain IT impacts occur. Additionally, through its process orientation, the suggested approach highlights key variables that may require managerial attention and subsequent action.
The information systems literature is replete with conceptual frameworks for analyzing strategic applications of information technology (IT). In this article, the strategic impacts of IT investment are studied through the development of a formal economic model. In particular, it focuses on IT-related quality competition in a duopoly, where the services may not be priced initially (e.g., in the financial services sector), and where the benefits may come indirectly (e.g., in the form of interest earned on consumer deposits or float on checking accounts). A firm may have to invest in IT, regardless of its underlying cost structure, as a response to its competitor's investment level. (We analyze the division of technology benefits between the firms and the consumers and study welfare implications for simultaneous and sequential investments.) Both firms prefer sequential over simultaneous investments, even when both have the required technology. While the IT-inefficient firm (one with higher IT cost for a given service quality) has followership incentives, the leadership incentives for the IT-efficient firm depend on the difference in IT cost structures and on the degree of substitutability between the services of the two firms. A preliminary treatment of pricing issues is provided in conjunction with consumer switching cost, which not only has a negative impact on consumer welfare but may also reduce total industry profits. For dynamic markets with new consumers, the negative effect of switching cost on the welfare of existing consumers is reduced when the IT-efficient firm moves first.