Outsourcing effects on firms' operational performance

Abstract

PurposeThis research aims to empirically investigate the effect of outsourcing on firm level performance metrics, providing evidence about outsourcing influences on a firm's cost‐efficiency, productivity and profitability.Design/methodology/approachThis study is concerned with empirically examining the impact of outsourcing on a firm's performance. The results are based on a sample of 51 publicly traded firms that outsourced parts of their operations between 1990 and 2002. Publicly available accounting data are used to test for changes in operating performances that result from outsourcing decisions. Operating performances are examined over a four‐quarter period after the outsourcing announcement.FindingsThis research provides evidence that outsourcing can improve a firm's cost‐efficiency. While existing literature on outsourcing has also sought to draw anecdotal and conceptual evidence that highly visible companies have improved their productivity and profitability as well through outsourcing, the research reveals no evidence that outsourcing will improve a firm's productivity and profitability.Research limitations/implicationsThis research is limited to what is available in public databases. Also, financial data pertain to the firm as a whole and not just to the outsourcing department or division, which would obscure the real outsourcing effects on the particular department or division.Practical implicationsThis research makes two contributions to both practice and theory. First, this is the first empirical study to examine the link between outsourcing implementation and firm‐level performance metrics. Second, empirical evidence is provided of the difference between outsourcing firms' performance and their non‐outsourcing competitors'. Outsourcing firms have an obvious significant advantage in cost efficiency over their counterparts which do not outsource any activities at the same time. They also may obtain more available resources from outsourcing to invest in other productive capacities.Originality/valueThis research on outsourcing effects is the first to empirically test the relation between the outsourcing decision and the firm's productivity and profitability. Never before has outsourcing played such an important role in business, yet the overall impact of outsourcing on performance remains largely an unexplained puzzle. The research explores opportunities for further research to investigate the returns on outsourcing.