Firm valuation effects of the decision to adopt relationally governed business process outsourcing arrangements

Abstract

Business process outsourcing (BPO) has recently grown in incidence and importance. However, academic research on this phenomenon is sparse. Further, studies on outsourcing have primarily used a transaction cost economics (TCE) lens, largely neglecting other key theoretical explanations of the outsourcing decision and performance. While TCE provides a useful framework, it underemphasises hybrid governance structures that reflect relationships that fall between markets and hierarchies. We examine the decision to adopt relationally governed BPO arrangements and the impact on firm value. We recognise ‘discriminatory alignment’ aspects of governance and argue that the nature of the process itself will influence the value that can be garnered through relational governance. Using secondary data on 298 BPO announcements, we test the proposed model and confirm that a higher level of relational governance adoption strongly enhances firm valuation. This positive valuation impact of relational governance adoption reaches an even higher level in situations of primary processes and processes that have had a presence in the outsourcing organisation. The results emphasise 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 nature and experience with the process being outsourced.

Keywords:

• relational governance
• business process outsourcing
• alliances
• process type
• event study

Notes

1. As an illustration, the following announcement had clear indicators (in italics) that allowed us to interpret it as relational governance: ‘We are very pleased to expand our manufacturing relationship with Solectron, leveraging the excellent partnership that has been developed over the past four years. We are confident that Solectron will provide us with a cost-effective solution and flexibility going forward,’ stated Bob Stanzione, CEO and President of ARRIS. ‘We are excited to further extend our strategic relationship with ARRIS who is a key industry partner,’ said Mitch Schoch, Solectron Vice President of Account Management, Americas.

2. This is a robust period for BPO offshoring. The financial crisis began in early 2007. The sharp downturn forced many companies to reconsider their outsourcing approach. Domestic (onshore) and near-shore service providers turned out to be the big winners. Our study covers the most robust period of offshoring characterised by high growth and strategic partnerships. IDS estimates the size of the global outsourcing market, including BPO to grow by over 100% from 1995 to 2003. We believe this offers the best representativeness and insights.

3. We computed the power for each of our hypotheses tests at just under 0.8 (at alpha levels of 0.10) indicating sufficient power.

4. http://www.macrumors.com/2010/09/10/profile-of-foxconns-founder-addresses-relationship-with-apple/.

5. http://business.inquirer.net/113125/ayalas-bpo-unit-enters-into-new-deal-with-us-firm.