Firm valuation effects of the decision to adopt relationally governed business process outsourcing arrangements

Abstract

Business process outsourcing (BPO) has recently grown in incidence and importance. However, academic research on this phenomenon is sparse. Further, studies on outsourcing have primarily used a transaction cost economics (TCE) lens, largely neglecting other key theoretical explanations of the outsourcing decision and performance. While TCE provides a useful framework, it underemphasises hybrid governance structures that reflect relationships that fall between markets and hierarchies. We examine the decision to adopt relationally governed BPO arrangements and the impact on firm value. We recognise ‘discriminatory alignment’ aspects of governance and argue that the nature of the process itself will influence the value that can be garnered through relational governance. Using secondary data on 298 BPO announcements, we test the proposed model and confirm that a higher level of relational governance adoption strongly enhances firm valuation. This positive valuation impact of relational governance adoption reaches an even higher level in situations of primary processes and processes that have had a presence in the outsourcing organisation. The results emphasise the importance of considering all processes for outsourcing, the critical consideration of relational governance and the importance of planning governance structures that are aligned with the nature and experience with the process being outsourced.