Outsourcing and Market Value of the Firm: Toward a Comprehensive Model

Abstract

SUMMARY We analyze the effect of buyer, contract, and vendor characteristics on abnormal stock returns among firms that have announced large scale Information Technology (IT) and Business Process outsourcing (BPO) contracts. We draw upon a comprehensive dataset on outsourcing announcements, augmented with data from public sources. Salient buyer factors examined include use of a wide range of organizational controls. On the vendor side, we examine the impact of vendor size, contract size and reputation. Our study shows that use of behavior controls, outcome controls (negative), vendor reputation, and industry of buyer firm affect market value. When limited to buyer related factors, use of behavior and clan controls is positively related to abnormal returns around IT outsourcing announcements. An interesting finding is that IT and BPO success require different sets of controls. Copyright © 2014 John Wiley & Sons, Ltd.

Review of the Empirical Business Services Sourcing Literature: An Update and Future Directions

“…In addition, the ITO review found that larger-sized contracts were positively related to sourcing outcomes. Examined 3 times in the current review, contract size was always found to be not significant (e.g., Handley and Benton, 2012;Nagpal et al, 2014). Contract size is defined as the size of the outsourcing contract usually measured as the total value of the contract in monetary terms (e.g., Gewald and Gellrich, 2007).…”

“…Contract size is defined as the size of the outsourcing contract usually measured as the total value of the contract in monetary terms (e.g., Gewald and Gellrich, 2007). For example, Nagpal et al (2014) report no significant effects of contract size on a client's business performance in terms of abnormal stocks returns.…”

Uncertainty and Compensation Design in Strategic Interfirm Contracts

“…Given our emphasis on aggregate financial and market measures, we include only large, strategic contracts that are financially material and whose financial impact is more likely to be detected and valued by the market. Consistent with prior outsourcing research (Bloch et al 2011;Nagpal et al 2014), we use the threshold value of $15 million to define outsourcing activity as strategic and consequently include it in the analyses. Our focus on large outsourcing contracts also reduces the probability of confounding events; clients are less likely to engage in other important strategic initiatives or sign large contracts immediately prior to the outsourcing initiative.…”