The Stability of Offshore Outsourcing Relationships: The Role of Relation Specificity and Client Control
Management International Review, 51, pp. 381-406, 2011
40 Pages Posted: 2 Feb 2011 Last revised: 24 Jul 2012
Date Written: March 1, 2011
Offshore outsourcing of administrative and technical services has become a mainstream business practice. Increasing commoditization of business services and growing client experience with outsourcing have created a range of competitive service delivery options for client firms. Yet, data from the Offshoring Research Network (ORN) suggests that, despite increasing market options and growing client quality and cost efficiency expectations, clients typically renew provider contracts and develop longer-term relationships with providers. Based on ORN data, this paper explores drivers of this phenomenon. The findings suggest that providers promote contract renewal by making client specific investments in software, IT infrastructure and training, and by involving clients in outsourcing operations, thereby increasing relation specific joint equity and creating opportunities for client monitoring and control. Interestingly, these strategies apply to routine rather than knowledge-intensive tasks, and are more likely to be applied by large rather than small providers. Surprisingly, high degree of contract specification makes contract renewal less likely. The paper contributes to the growing literature on strategic outsourcing of business services and the importance of governance mechanisms addressing ‘hidden costs’ as well as ‘hidden benefits’ of offshore outsourcing relationships.
Keywords: Offshoring, strategic outsourcing, service provider relationship, agency theory, contracting, hidden costs, governance mechanisms
JEL Classification: J23, J24, J44, J31, M51, M53, M54, L14, L21, L22, L24, L84, O14, R11, P45, P48, F59, F21, F22, F23
Suggested Citation: Suggested Citation