Task Interdependence and Firm Performance in Outsourced Service Operations

Abstract

We conceptualize task interdependence between firms in outsourced service operations as an endogenous design choice made by the outsourcing firm. Then, utilizing relative firm efficiency and Tobin’s q as performance metrics, we examine the impacts of the task interdependence choices of outsourcing firms on their performances. We examine data, collected from a variety of sources, on 184 service alliances across nine industries. We find that task interdependence in outsourced service operations increases with the knowledge dependence of outsourcing firms on their vendor firms and with other contract-related factors, such as alliance duration, transaction complexity, and repeat relationships. Results indicate that outsourcing firms face challenges in choosing the appropriate levels of task interdependence in their outsourced service operations, and that excessive levels of task interdependence in outsourced service operations negatively affect the performances of outsourcing firms, both in terms of relative firm efficiency and long-term market value measures. Based on these results, we infer that firms need to invest in modularity-enhancing service architectures that reduce task interdependences with vendors before outsourcing large-scale, knowledge-intense service operations. The study contributes to the understanding of factors that influence the performances of outsourcing firms, and provides guidelines for organizing outsourced service operations.