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Customer Needs and Solutions
Published in: Customer Needs and Solutions 1/2014

01-03-2014 | Original Paper

Choice of Geographical Location as Governance Strategy in Outsourcing Contracts: Localized Outsourcing, Global Outsourcing, and Onshore Outsourcing

Authors: Anindita Chakravarty, Rajdeep Grewal, Suprateek Sarker, V. Sambamurthy

Published in: Customer Needs and Solutions | Issue 1/2014

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Abstract

Outsourcing, which involves business-to-business arm’s-length exchanges with suppliers to supplement in-house activities, has grown internationally in scope with the advent of offshore outsourcing in which firms outsource business processes to be executed by suppliers in other countries. In spite of the dramatic growth in outsourcing, managerial governance concerns about controlling and coordinating suppliers’ activities are prevalent. We propose that the geographic location (i.e., localized outsourcing, global outsourcing, and onshore outsourcing) from where the outsourced task is performed by the supplier should influence the degree of relational governance achievable, i.e., degree to which informal relationships and implicit norms of behavior are established among clients and suppliers. We apply transaction cost economics to suggest that depending on the degree of relational governance required for an outsourced task, firms might benefit by outsourcing the task to specific geographic locations. We use an event study to investigate shareholder perceptions of the mode of 185 outsourcing announcements of Fortune 500 multinational corporations during 1996–2004. The results from a model that accounts for the endogeneity of the choice of geographic locations show that for most outsourced ventures global outsourcing is a more effective relational governance strategy than onshore outsourcing or localized outsourcing.
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Appendix
Available only for authorised users
Footnotes
1
We identified the 16 managers of different firms from Lou Dobbs’s list of outsourcing firms and the participants of the OutsourceWorld conference held in New York in 2007, then interviewed them for 45–60 min each.
 
2
We initially obtained 490 outsourcing announcements. We screened them by deleting any that contained general outsourcing discussions. Using an event window of 3 days prior to and after the date of each announcement, we searched for announcements on all possible topics about the focal company, then excluded any announcements whose event period contained disclosures related to mergers and acquisitions, spin-offs, stock splits, CEO or CFO changes, layoffs, restructurings, or earnings, as is the recommended practice for event analysis [40].
 
3
We control for client firm size because larger firms, with their greater resources relative to smaller firms (e.g., [43]), may be able to devote more resources to governing outsourced ventures and therefore better influence shareholder perceptions of outsourcing productivity. We also control for industry concentration; in an industry with high concentration, a few firms maintain extensive market share, so the incremental competitive benefit of one outsourced venture to each firm may be less than the benefits that accrue to the many struggling firms in an industry with low concentration. Thus, shareholders may value an outsourced venture differently depending on the industry concentration. We also account for the time of outsourcing by incorporating year-specific dummy variables.
 
4
Our choice of theoretical constructs was limited to data available in public outsourcing announcements. According to an event study methodology, shareholders should respond only to information available in public sources. Most details about an outsourced venture are limited to the information that either the client or the supplier publicly announces, so by relying on outsourcing announcements, we should be able to tap the information that shareholders possess and act on. This approach is consistent with prior event study research (e.g., [21]; [51]).
 
5
When we calculate the abnormal returns at the time of the outsourcing announcements, we find in the case of localized outsourcing announcements, the results over a 2-day event windows are negative and statistically significant (mean CAR (0, +1) = −0.56 %, generalized sign z = −1.98; mean BHAR (0, +1) = −0.56 %, generalized sign z = −1.99. In the case of onshore outsourcing, results over a 2-day event windows are negative and statistically significant (mean CAR (0, +1) = −0.61 %, generalized sign z = −2.11; mean BHAR (0, +1) = −0.60 %, generalized sign z = −2.03). The results for global outsourcing are statistically significant but positive over a 2-day event window (mean CAR (+1, +2) = 0.47 %, generalized sign z = 2.21; mean BHAR (+1, +2) = 0.48 %, generalized sign z = 2.20).
 
6
For example, if we lay out our model with the main effects of interest, such that CAR = b 0 + b 1 × onshore outsourcing + b 2 × global outsourcing, the Wald coefficient becomes (b 1–b 2), and its standard error is calculated by \( \sqrt{\frac{\left(\mathrm{variance}\left({b}_1\right)+\mathrm{variance}\left({b}_2\right)-2\times \mathrm{covariance}\left({b}_1,{b}_2\right)\right.}{185}} \) (Greene 2002).
 
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Metadata
Title
Choice of Geographical Location as Governance Strategy in Outsourcing Contracts: Localized Outsourcing, Global Outsourcing, and Onshore Outsourcing
Authors
Anindita Chakravarty
Rajdeep Grewal
Suprateek Sarker
V. Sambamurthy
Publication date
01-03-2014
Publisher
Springer US
Published in
Customer Needs and Solutions / Issue 1/2014
Print ISSN: 2196-291X
Electronic ISSN: 2196-2928
DOI
https://doi.org/10.1007/s40547-013-0004-6

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