An Empirical Analysis of the Contractual and Information Structures of Business Process Outsourcing Relationships

Abstract

T he emergence of information-intensive business process outsourcing (BPO) relationships calls for the study of exchange performance beyond traditional considerations of the contractual structure that facilitates cooperative intent to include the information structure that facilitates the mutual exchange of information to enact cooperative intent and coordinate actions between the user firm and the service provider. Yet, there has been little analysis of the drivers and performance effects of the information structure of BPO relationships, including its linkages to the underlying contractual structure. This study integrates perspectives in neo-institutional economics and information processing to develop and test the theoretical argument that the extent of use and performance effects of the information structure of the BPO relationship are greater in time and materials BPO contracts than in fixed-price BPO contracts. Survey data on 134 BPO relationships provide empirical support for our hypotheses. The synergistic impact of incentives and information on BPO performance emphasizes that their joint assessment is necessary to enhance the explanatory power of extant theories of organization. This result also has implications for achieving maximum benefits from complex BPO arrangements that are more likely to be characterized by time and material contracts.

Impact Assessment in Observational Studies: A Classification and Regression Tree Approach

“…These findings are somewhat consistent with prior research in IS (e.g., Mani et al, 2012). Yet, they provide an incomplete picture of outsourcing value.…”

“…The former reflects a categorical polytomous intervention while the latter reflects a continuous intervention. Outsourcing contracts are largely categorized as either fixed price or variable price (e.g., Gopal et al, 2003;Mani et al, 2012), and are often self-selected to minimize the economic tradeoff between ex ante provision of incentives and ex post renegotiation of contractual specifications (Bajari and Tadelis, 2001). As a result, strategic, complex outsourcing initiatives that involve a higher probability that adaptations are needed, should be governed by less complete variable price contracts, whereas simpler, more stable outsourcing initiatives should lead to more complete fixed price contracts that seek to primarily provide high powered incentives to the vendor to reduce costs of ownership of the outsourced function.…”

Partial Least Squares Structural Equation Modeling Approach for Analyzing a Model with a Binary Indicator as an Endogenous Variable

“…Choice of information capabilities for a given BPO relationship A probit model Mani, Barua, & Whinston (2012) Tests if the use and performance effects of the information structure are greater in time and materials BPO contracts than in fixed-price BPO contracts.…”

Moral Hazards and Effects of IT-enabled Monitoring Systems in Online Labor Markets

“…A common solution to this agency problem is the use of fixed-price contracts, where payment is outcomedriven. That is, contractors can't get the fixed payment until they complete the projects successfully [8]. Therefore, the contractors' dominant strategy for is to complete the projects, which alleviates the moral hazard issues [9].…”

“…Therefore, the contractors' dominant strategy for is to complete the projects, which alleviates the moral hazard issues [9]. An alternative to fixed-price contracts is hourly contracts, where payment is determined based on the amount of hours the contractors have spent and the hourly wages [8]. While hourly contracts provide a stronger incentive for better project performance [8] and have better applicability to complex contexts [10,11], they also offer the contractors monetary incentives to shirk.…”