Augmenting Conflict Resolution with Informational Response: A Holistic View of Governance Choice in Business Process Outsourcing

Abstract

We develop a holistic model of governance choice in business process outsourcing (BPO) that represents a highly information-intensive form of outsourcing. We integrate perspectives from neoinstitutional economics and the information-processing view (IPV) of the firm. We argue that the governance structure in BPO is chosen not only to address opportunism concerns arising from relational uncertainty to and encourage cooperation, as suggested by institutional economics, but also as an informational response to task and relational uncertainty to encourage coordination between exchange partners. Using the lens of IPV, we posit that uncertainty in the outsourced task increases the information requirements (IR) of the BPO relationship, which, in turn, leads to more hierarchical governance structures. We also suggest that in addition to directly influencing governance choice, relational uncertainty, a key construct in transaction cost economics (TCE), increases IR, and hence has an indirect impact on governance choice. Furthermore, we hypothesize that technological capabilities enable more hierarchical governance in response to increasing IR needs. Data on 130 BPO initiatives provide empirical support for our hypotheses regarding the drivers of IR, its impact on governance choice, and the moderating role of technological capabilities. Our study contributes to theory by integrating the premises of TCE and IPV in the context of BPO, and to practice by underscoring the need to consider information requirements in designing appropriate coordination and collaboration processes.

Key words and phrases:

• business process outsourcing
• cooperation
• coordination
• governance
• hierarchy
• information requirements
• uncertainty

Acknowledgment

We gratefully acknowledge the helpful comments and suggestions provided by three anonymous reviewers and Professor Vladimir Zwass during various stages of the review process.

Notes

1. In contrast to contract manufacturing, which refers to the outsourcing of business processes that involve the manipulation of physical objects, BPO refers to the outsourcing of business processes that involve the manipulation of informational objects. Thus, in this study, business processes comprise a series of interrelated activities that manipulate information to create value. In turn, IT is integral to process execution and management in BPO. Yet, there are important distinctions between BPO and IT outsourcing (ITO), namely, the objectives driving the outsourcing decision. Prior research [42, 77] and industry surveys [79] have attributed the adoption of ITO to two primary factors—a focus on core competencies and reduction of IT costs. However, BPO involves significant diversity in outsourcing objectives, ranging from reduction in operating costs to innovation and business transformation [45]. This range of objectives in BPO reflects significant heterogeneity in the nature and strategic context of outsourced business processes.

2. According to IDC, by 2008, the use of external technology and business process services accounted for 20 percent of total costs. Forecast growth rates for BPO are 10–15 percent per annum. The specific case of offshoring trends is analyzed in [20].

3. This logic was originally examined in the case of the decision to outsource. However, it has since been extended to study the choice of governance structure once firms decide to outsource or form an alliance [29].

4. See [70], for example, for an early empirical study with a TCE foundation.

5. Vlaar et al. [71] discussed similar concerns in the context of onsite and offshore vendor teams.

6. A different point of view is offered by Cao et al. [8], who found that contractual and relational governance structures can be in conflict with each other. Huber et al. [33] developed a process model to demonstrate when the two governance forms are complementary or substitutive.

7. Prashanth Konakanchi, “Merrill Lynch’s IT Initiatives,” ICFAI Center for Management Research Case Collection, 2003; and Todd Datz, “Merrill Lynch’s Billion Dollar Bet,” CIO Magazine, September 15, 2003.

8. The research question pertaining to H2 involves whether higher technological capabilities help select a more hierarchical governance structure in situations of high IR. Although there are additional issues regarding who initiated the IT investment or whether there are incentives to develop IT capabilities, such questions are outside the scope of this study.

9. Consistent with the literature (e.g., [66, 65]), we conceptualize modularity as an exogenous construct. In principle, the modularity of a task can be endogenous when modeled as a decision. However, such a treatment is outside the scope of the current study.

10. The subject experts comprised directors of strategic outsourcing practices in Fortune 100 firms (in financial services, healthcare, retail, and high tech), outsourcing advisory consultants, leading service providers, and academicians.

11. We thank an anonymous reviewer for this suggestion. In our first-stage probit model of choice of technological capabilities, we found that governance choice has an insignificant impact on technology choice and that IR, along with technological resource constraints of the firm, influences choice of technological capabilities. However, future research could explore this relationship using longitudinal data.

Additional information

Notes on contributors

Anitesh Barua

Anitesh Barua is the William F. Wright Centennial Professor of Information Technology in the Department of Information, Risk and Operations Management at the McCombs School of Business, University of Texas at Austin. His research interests are in the areas of economics of information systems, outsourcing governance, and social media. He has published more than seventy-five articles in academic journals and refereed conference proceedings. He has served as associate editor for Management Science and Information Systems Research and as senior editor for Information Systems Research. He serves on the editorial boards of the Journal of Management Information Systems and the International Journal of Electronic Commerce.

Deepa Mani

Deepa Mani is an assistant professor in the Information Systems group at the Indian School of Business (ISB). She also serves as the joint executive director of the Srini Raju Center for Technology and the Networked Economy at ISB. Her research interests are at the intersection of technology, organization, and society. She studies the impact of technology on organization of economic activity, including firm boundary decisions, and the impact of such organization on firm value and economic productivity. Her research has been published in such journals as MIS Quarterly, Information Systems Research, Sloan Management Review, and MIS Quarterly Executive. Her articles have been featured in popular media outlets such as Forbes, CIO Magazine, LiveMint, Yahoo Finance, and The Street.