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.
This paper analyzes how the presence of organic listing as a competing information source affects advertisers' sponsored bidding and the equilibrium outcomes in search advertising. We consider a game-theoretic model in which two firms bid for sponsored advertising slots provided by a monopolistic search engine and then compete for consumers in price in the product market. Firms are asymmetrically differentiated in market preference and are given different exposure in organic listing aligned with their market appeal. We identify two aspects of a firm's sponsored bidding incentive, namely, the promotive and the preventive incentives. The presence of organic listing alters firms' sponsored bidding incentives such that the stronger firm has primarily preventive incentive, whereas the weaker has mainly promotive incentive. We show that the preventive incentive decreases and the promotive incentive increases as the difference in firms' market appeal decreases, and as a result, even the weaker firm may outbid the stronger competitor under such a co-listing setting. We further examine how the presence of organic listing affects the equilibrium outcomes by comparing it with a benchmark case in which there is only a sponsored list. We show that the differentiated exposure in the organic list gives the weaker advertiser chances to win a better sponsored position, which improves the overall information structure the search engine provides. As a result, the equilibrium social welfare, sales diversity, and consumer surplus increase. Although the presence of the free exposure from the organic list may reduce advertisers' sponsored bidding incentive per se, the overall effect benefits the search engine's growth in the long run.
In this paper, we set up a game-theoretic model to examine oligopolistic price competition, considering two features of online search: the existence of a common search ordering and shoppers who have nonpositive search cost. We find that in equilibrium firms set their prices probabilistically rather than deterministically, and different firms follow different price distributions. The equilibrium pricing pattern exhibits an interesting local-competition feature in which direct price competition occurs only between firms adjacent to each other. Further, we incorporate consumers' search strategies into the model so that both search order and stopping rules are determined rationally by consumers. We show that similar patterns may continue to hold in the fully rational framework when consumers have higher inspection costs for inferior positions.
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.