Strategic choices for business process sourcing

Abstract

Firms increasingly disaggregate business processes and source them on a global basis, either intra-firm or from external vendors. This dissertation examines two relevant strategic choices for business process sourcing: the choice of sourcing mechanisms and the choice of contract types. First a comprehensive choice model is proposed to incorporate different perspectives of transaction cost economics (TCE), resource-based view (RBV) and modular systems theory for the choice of sourcing mechanisms. The results indicate that modular design characteristics such as modularity and IT detachability of business processes have significant impact on firms’ sourcing choices. The findings show that at higher level of process modularity, domestic outsourcing is more likely while offshore outsourcing is more preferred at lower level of process modularity. Also domestic outsourcing is preferred over offshore outsourcing when processes are tightly coupled with the IT infrastructure. The results suggest that offshore outsourcing is a different governance mode from domestic outsourcing. It may be a viable choice for firms that are looking for capabilities and adaptation willingness to improve the modular design of a process and to meet firm-specific needs, but the nonmodular design of IT infrastructure may inhibit such attempts. The dissertation then examined how firms select appropriate types of contract once outsourcing decisions are made. Three types of contracts were considered: Fixedprice (FP), Cost-plus (CP) and Time & Materials (T&M), which provide different levels of cost-reduction incentive, completeness of contract design and flexibility to change. The findings suggest that business characteristics impact coordination and negotiation costs and thus the choice of contract types. Higher coordination costs (the costs of managing interdependence) lead to higher probability of selecting contracts with high incentives and detailed service descriptions such as FP contracts while high negotiation costs (the costs of opportunistic behavior in ex post adaptation) increase firms’ preference to contracts with more flexibility to change such as T&M contracts. Further, the selection bias of the choice of sourcing mechanism on the choice of contract types was identified. Firms that select outsourcing are more likely to adopt contracts with high level of incentive and contract completeness.