Is outsourcing always beneficial: exploring the effects of process type and location on client value
Ravichandran T., Sukruth SureshPurpose
While extant research recognizes the strategic importance of business process outsourcing (BPO), few studies examine the impact of the nature of the outsourced task and the outsourcing location on firm financial performance. This study aims to address this gap by examining how the risks and returns of outsourcing vary based on the outsourcing location (onshore vs. offshore) and the knowledge intensity of the process.
Design/methodology/approach
The study synthesizes the knowledge-based view of the firm with transaction cost economics to develop the authors’ hypotheses. Using a large sample of BPO initiatives announced between 2000 and 2014, the study examines the impact of BPO announcements on firm financial performance using an event study and test the authors’ hypotheses using multivariate regressions.
Findings
The authors find that the outsourcing of knowledge-intensive business processes and outsourcing to offshore locations are generally beneficial for firms. Interestingly, the authors find the interaction of the two to be detrimental to the firm as offshore outsourcing of knowledge-intensive processes negatively impacts firm performance.
Originality/value
This study is novel in considering the combined effects of both the nature of the process and the location to provide a clearer explanation of how the risk-rewards associated with offshoring, particularly of knowledge-intensive processes, vary for firms. The findings from this study also help shed light on the potential drivers of the inconsistencies highlighted in past research on the impact of outsourcing on firm performance.