Shareholder value implications of service failures in triads: The case of customer information security breaches

Abstract

The rise in front‐end service outsourcing in recent years, despite its advantages, has also exposed buyer firms to unique challenges. One of the most salient risks for buyer firms in service triads is service failure due to the service provider. Indeed such service failures may be more costly for firms due to the greater relational and operational costs that may arise from the presence of the third‐party provider. Yet, neither the services literature nor extant operations literature on service triads has paid much attention to the financial consequences to the buyer firm – i.e., service risks – of such service failures in triads. To fill this gap, we investigate the financial penalty of service failures due to the service provider using the event study methodology and a sample of 146 customer information security breaches as our empirical context. Analysis of the abnormal returns reveals that service failures due to the front‐end service provider lead to greater shareholder losses than such failures due to the buyer firm. This provides important new insight into the financial risks arising from outsourcing front‐end services. Further, we investigate the ability of the buyer firm's employee and financial resources to temper these shareholder losses. We find that buyer firm employee productivity can moderate the greater financial penalty associated with such triadic service failures but that buyer firm leverage tends to not have such a mitigating effect. This provides new guidance for theory and practice regarding how buyer firms can position themselves to buffer the financial risks arising from service failures due to front‐end service providers.

Patient care effectiveness and financial outcomes of hospital physician contracting emphasis

“…Second, while the physician contracting settings appear similar to service-triads investigated in operations literature (e.g., Modi et al, 2015), our findings do not necessarily generalize to service environments outside healthcare. This is because there are several attributes of the relationship between physicians and hospitals which make it distinct from other forms of contracts.…”

The role of intermediaries in establishing a sustainable supply chain

“…The buyer, SCI and supplier form a triad at the initial stages, structurally consisting of three nodes and the potential links between them. In the sourcing triad, previously disconnected links begin to interact through the support of the SCI (Modi et al, 2015).…”

Theoretical and empirical evidence of behavioral and production line factors that influence helping behavior

“…5 The Poisson regression results are available to the interested reader. 6 Following, Modi, Wiles, and Mishra (2015), we conducted our study using Amazon mTurks. Shunko, Niederhoff, and Rosokha (2017) and Modi et al (2015), among many others, point out that mTurks participants produce reliable results and decisions.…”

“…6 Following, Modi, Wiles, and Mishra (2015), we conducted our study using Amazon mTurks. Shunko, Niederhoff, and Rosokha (2017) and Modi et al (2015), among many others, point out that mTurks participants produce reliable results and decisions. 7 Because of space limitations, further details regarding the experiment are available in the online Supporting Information Appendix S1.…”