The Impact of Business Process Outsourcing on Firm Performance and the Influence of Governance: A Long Term Study in the German Banking Industry

Abstract

Does BPO pay off at the firm-level? Although there are several studies which analyze the potential benefits of BPO, there is a virtual absence of research papers on BPO outcomes. Based on an analysis of 137 Business process outsourcing (BPO) ventures at 254 German banks in a period between 1994 and 2005, we found that the outsourcer's financial performance in terms of profitability and cost efficiency was increased significantly compared to industry peers without BPO. The increase stems not from workforce reductions but rather from increased employee productivity. Further, we show how BPO governance ensures BPO success: individually negotiated outsourcing contracts help to improve cost efficiency and profitability measures. Relational governance based on trust has only positive effects on profitability.

Keywords: Business Process Outsourcing, firm performance, firm characteristics, banking, German banks, governance

JEL Classification: G21, L14, L21, L24