Business Process Outsourcing: an event study on the nature of processes and firm valuation

Abstract

Business Process Outsourcing (BPO) is a phenomenon that is rapidly increasing in both incidence and importance. This study empirically examines the value proposition of BPO with respect to the nature of the processes being outsourced. Using the event study methodology, we employ the value chain (VC) position and existing ownership of a business process as our primary independent variables, and the stock abnormal return in response to the BPO announcement as the dependent performance variable in our research model. The study was conducted on 298 BPO announcements from 1998 to 2005. Results support the argument that outsourcing is valuable for both primary and supportive business processes. However, we found that BPO announcements on primary processes yield higher abnormal returns than supportive processes. Although existing process ownership was not found to be a powerful differentiator for BPO performance, its interaction with VC position provides important insights into the timing of outsourcing. The evidence suggests that internal cultivation of processes is important for BPO success, particularly when BPO is applied to primary processes.

Keywords:

• Business Process Outsourcing
• value chain
• process ownership
• event study

Additional information

Notes on contributors

Chaojie Duan

About the authors

Dr. C.J. Duan is an assistant professor of management and MBA advisor at Troy University (Atlantic). He received his Ph.D. in Management from Clemson University in 2007. His primary research focus is on the valuation effects of Business Process Outsourcing (BPO). He has participated in regional and national professional conferences as presenter, discussant, and session facilitator. He also has served as reviewer for such academic journals as Decision Sciences, and MIS Quarterly.

Varun Grover

Varun Grover is the William S. Lee (Duke Energy) Distinguished Professor of Information Systems at Clemson University. He has published extensively in the information systems field, with over 200 publications in refereed journals. Seven recent articles have ranked him among the top-four researchers based on publications in the top-six Information Systems journals in the past decade. Dr. Grover is Senior Editor for MIS Quarterly, the Journal of the AIS, and Database. He is currently working in the areas of IT value, system politics and process transformation and recently released his third book (with M. Lynne Markus) on process change.

Nagraj (Raju) Balakrishnan

Nagraj (Raju) Balakrishnan is Associate Dean and Professor of Management at Clemson University. He was previously Chair of the Department of Management, and served on the faculty at Tulane University prior to joining Clemson in 1994. Dr. Balakrishnan holds Bachelor's and Master's degrees in Mechanical Engineering from the University of Madras (India) and the University of Kentucky, respectively, and a Ph.D. in Management from Purdue University. His current research focuses on capacity allocation models, problems related to configurations of supply chains, and studying the impact of business process outsourcing. Dr. Balakrishnan has published extensively in leading academic journals. He serves as Senior Departmental Editor of Production and Operations Management and served as Secretary of the Production and Operations Management Society during 2007–2009.