Three essays on the performance impact of business process outsourcing

Abstract

Extant research (including the first two essays) examines the performance impact of outsourcing from the perspective of discrete client-vendor relationships, the third essay examines the impact that the client firm’s outsourcing portfolio configuration has on its performance. The BPO portfolio is defined along the dimensions of the portfolio size, portfolio diversity and portfolio heterogeneity. While the motives and nature of task outsourced, based on the individual contracts impact the firm performance significantly, firms do engage in a number of outsourcing engagements simultaneously. The synergies and benefits realized across these engagements and the challenges associated with effectively and efficiently coordinating these relationships would amplify or attenuate the effect that BPO has on a firm’s performance. The study finds that (1) the portfolio size, portfolio diversity and portfolio heterogeneity have a curvilinear relationship with the firm performance, and (2) the impact of the portfolio configuration differed across the business strategy that the firms pursued.

This dissertation examines the impact of Business Process Outsourcing (BPO) on firm performance. The first two essays, draw from the resource-based and the transaction cost economics arguments to examine the drivers of value creation for the vendor (outsourcee), and to examine the drivers of relative differences in value gained/lost between the client (outsourcer) and the vendor (outsourcee) from BPO undertakings. The third essay examines the impact that the BPO portfolio configuration has on firm performance.

The first essay is novel in being one of the few studies to empirically examine the financial impact of BPO on vendor firms. The study examines if BPO creates value differentially for vendors based on the client’s outsourcing motives and the knowledge intensity of the task outsourced. The hypotheses are tested on a sample of 235 BPO announcements made between the years 2000 and 2013 using an event study. This study finds that (1) BPO in general creates significant value for vendor firms as reflected in increased value of the vendor firm stock following the announcement of a BPO engagement, and (2) vendors gained value when clients outsourced knowledge intensive tasks, and when the outsourcing motive was to access vendor capabilities.

The second essay builds on the first and examines the contexts in which BPO creates value for clients and vendors, and the relative extent to which each of them gain from such undertakings. This essay examines the simultaneous impact of the announcement of a BPO engagement on a given client-vendor dyad. The nature of task, determined based on the degree of knowledge intensity of the task outsourced and the proximity to the client’s operations are posited to impact the relative value gains between the client and the vendor. The study finds that BPO creates significant value for clients and vendors when the task outsourced is knowledge intensive in nature and central to the client’s core operations. An interesting finding is that BPO does not always create value for the stakeholders and that relative to the vendors, the clients gained more when outsourcing to experienced and large vendors.