The Influential Role of Perceived Risks versus Perceived Benefits in the Acceptance of Business Process Outsourcing: Empirical Evidence from the German Banking Industry

Abstract

Business process outsourcing (BPO) has been suggested as one of the biggest areas of growth in the outsourcing market. Nevertheless, many organizations are still reluctant to outsource business processes that are part of their core business. In order to help overcome this divergence between expectations and reality, we systematically analyze the factors that form an organization’s attitude towards BPO as well as their intention to adopt BPO. We develop a BPO adoption model which is based on the argument that BPO poses both risks and benefits and that decision makers need to balance both before adopting BPO. The model is tested based on data that was collected in the German Banking Industry. Altogether 218 data points on the perceptions of business managers in the four areas of transaction processing (credits, securities, domestic payments, and foreign exchange/money market) were available for model testing via Partial Least Squares. The results show that the intention to outsource these IT-intensive business processes is strongly influenced by the manager’s attitude towards BPO. Other non-rational factors play a minor role. Only peer influences in the banking industry were found to significantly influence intentions. Around 77 percent of the variations in attitude are explained by perceived risks and perceived benefits. The perceived benefits have a much stronger influence on BPO acceptance than risks. This indicates that risks may be somewhat underrepresented in the adoption process. Moreover, it is instructive to note that the ability to focus on core competencies is the strongest advantage for BPO, followed by quality improvements and cost transparency. Interestingly, anticipated cost reductions have less influence than the previous three factors, and access to better resources plays no role in attitude formation. On the other hand, overall BPO risks are clearly dominated by financial risks. Strategic risks are also important and, to a lesser extent, performance risks, while psychosocial risks and privacy risks are not significant predictors. These findings support the recommendation that providers of BPO services should emphasize risk mitigation proposals in their offerings.