Date of Award

5-2007

Document Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Legacy Department

Management

Advisor

Balakrishnan, Nagraj

Abstract

Business Process Outsourcing (BPO) has grown in incidence and importance over the past few years. However, beyond some expository studies, academic research on this phenomenon is sparse. Further, studies on IT outsourcing have primarily used a transaction cost economics (TCE) lens, and largely neglected other key theoretical explanations of the outsourcing decision and performance. In this dissertation, we examine how process level variables (process value chain position, relational governance, and process maturity) affect the excess stock return of a company. Drawing on the value chain framework, TCE, the resource based view, and institutional perspectives, we present a research model and propose a number of direct and moderating hypotheses. The three direct hypotheses suggest that BPOs of primary processes, BPOs with a higher level of relational governance, and abstention based BPOs induce stronger positive valuation impact than BPOs of supportive processes, BPOs with a lower level of relational governance, and disintegration based BPOs respectively. Based on TCE's discriminant alignment hypothesis, the two moderating hypotheses suggest that primary BPOs and disintegration based BPOs are likely to bring stronger positive valuation enhancement when aligned with stronger relational governance capabilities.
Using secondary data on 298 BPO announcements from 1998 to 2005, we test the proposed model with multivariate regression, group t tests, and nonparametric analyses. Overall, the results from statistical analyses validate our process based view of outsourcing as an alternative to the dominant functional view of outsourcing. In contrast to the significant positive excess returns received by primary BPOs, supportive BPOs suffer negative abnormal returns. The negative returns become even more pronounced for those supportive processes outsourced after internal deployment. Although we do not find the predicted performance superiority associated with abstention based BPOs, we confirm that a higher level of relational governance strongly enhances firm valuation. This positive valuation impact of relational governance reaches an even higher level in situations of primary BPOs and disintegration-based BPOs, which are posited to require a greater presence of relational governance.
For researchers, this study provides a novel approach that demonstrates how TCE and other traditionally competing theories can be used in a complementary manner. We illustrate the importance of alignment between process characteristics and relational governance. In addition, we sensitize researchers to the importance of the temporal dimension of processes and the concept of abstention based outsourcing. Future research can add granularity to these concepts and build on the discriminating alignment hypotheses.
Based on the empirical results, we present BPO guidelines that reflect the importance of considering all processes for outsourcing, the critical consideration of relational governance, and the importance of planning governance structures that are aligned with the maturity and nature of the process being outsourced. Keeping in mind the dynamic nature of business process, managers should also be prepared to periodically reassess the alignment between the governance mechanism and process requirements, and make structural adjustments if necessary.

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