1

International Outsourcing of IT-Enabled Business Processes:

A Conceptual Framework

Susan M. MudambiTemple University

Michael GrafVienna University of Economics and

Business Administration

2

Research Motivation

International outsourcing or “off-shoring” of business services has become a hot topic Increased press coverage New legislation and regulation Political and business concern

How can theory explain and inform firm decision making regarding outsourcing?

3

Business Process Outsourcing (BPO)

Macro level BPO reflects the integration of the service

economy, the digital economy and globalization IT enables BPO

Firm level To compete, firms seek to keep labor costs low

and service quality high Firms need to make decisions on:

How to source Where to source Degree of IT infusion

4

Overview

Theory Base & Past Research Conceptual Framework Implications Future Research

5

Theory Used in Past Research

Transactions cost theory (Williamson 1975)

Eclectic (OLI) theory (Dunning 1977, 1980)Ownership, Location and Internalization

advantages

Organizational capability and resource base theory (Barney 1991)

6

Past Research- Mode of entry & location decisions

Firm, location, and industry level factors Risks, returns, resource availability, need for control

(Agarwal & Ramaswami 1992) Imitability of the process (Erramilli et al 2002) Government incentives (Mudambi 1995); and

appropriability regime (Gulati and Singh 1998) Cultural distance (Hofstede ‘80; O’Grady & Lane ‘96)

See also: Anderson and Gatignon (1986); Brouthers & Brouthers 2001; Contractor, Kundu & Hsu 2003; Erramilli & Rao 1993; Hill et al 1990; Kogut & Singh 1988; Woodcock et al 1994

7

Past Research- Global sourcing decisions

Distinction between core and supplementary services affects sourcing decisions (Kotabe, Murray & Javalgi 1998)

Supplementary services can be important to competitiveness (Anderson & Narus 1995)

How to source more important than where to source (Kotabe and Murray 2004)

8

Past Research- IT enabled BPO

Success factors for outsourcing programming (Amoribieta et al 2000)

Time zones still matter in IT outsourcing (Barclay and Gray 2001)

Personal touch still matters in IT outsourcing (Mudambi & Mudambi 2002)

9

Conceptual Framework

Need to build on existing theory and past research to understand:

Outsourcing mode – how to source? In-houseOutsource

Location choice – where to source?Domestic OutsourcingForeign Outsourcing (off-shoring)

10

“How to Source” Considerations

Tap Outside Expertise to

Increase Capability

SOURCE

IN-HOUSE

Leverage Resources & Capabilities

OUTSOURCE

High

High

Low

Low

STRATEGIC IMPORTANCE

FIRM CAPABILITY

11

“Where to Source” Considerationswith examples

UK firm sourcing in NZ

US firm sourcing in Philippines

NY firm sourcing in

HaitiNY firm sourcing

within NY

High

High

Low

Low

GEOGRAPHIC DISTANCE

Miles & TimeZones

CULTURAL DISTANCE

12

How & Where to Source- strategic tradeoffs

Domestic Outsourcing

Foreign Outsourcing

Foreign Subsidiary Sourcing

Domestic In-House Sourcing

Outsource

Foreign Location

In House

Domestic Location

DEGREE OF OUTSOURCING

CULTURAL DISTANCE

Contract with local company

Contract with company in foreign

market

Manage process internally at home

Acquisition or greenfield

MANAGEMENT CONTROL

Low

High

13

Conceptual Framework

Moderating Factors

Outsourcing ObjectivesCustomer Expectations

FIRM-SPECIFIC FACTORS

LOCATION-SPECIFIC FACTORS

INDUSTRY-SPECIFICFACTORS

SOURCING MODE

LOCATION

DEGREE OFIT INFUSION

14

Conceptual Framework

Moderating Factors

OUTSOURCING OBJECTIVES

CUSTOMER EXPECTATIONS

Cost Minimization vs Capability Enhancement

Need for Control

Convenience, # of Alternatives, Interpersonal Interaction,

Timeliness

FIRM-SPECIFIC FACTORS Firm size (H1)

International experience (H2)Firm competitiveness (H3)

LOCATION-SPECIFIC FACTORS

Government policy (H4)IT infrastructure (H5)

Human capital value (H6)

INDUSTRY-SPECIFICFACTORS

Competitiveness (H7)Imitability of process (H8)

SOURCING MODEIn-House vsOutsourcing

LOCATIONCultural distance

Geographic distance

DEGREE OFIT INFUSION

15

Implications- How to Source

In-house vs outsourcing Outsourcing likely when firm capabilities or strategic

importance of the process are low

Degree of management control More control when process is imitable and important

How to source affected by: Firm, location and industry factors Sourcing objective and consumer expectations

16

Implications-Where to Source

Domestic vs foreign Foreign likely when firm capabilities or strategic

importance of the process are low Cultural and geographic distance

Greater when process is standardized Cultural distance less if interpersonal interaction is

important -- consumer expectations matter Where to source affected by:

Firm, location and industry factors Sourcing objective and consumer expectations

17

Future Research Further theory and model development needed

Grounded theory development via a multiple case study approach

Danis & Parkhe 2002; Noble & Mokwa 1999; Parkhe 1993

Empirical analysis of decision processes using survey and secondary data

Ask and measure: “What are the outcomes of outsourcing decisions on various stakeholders?

Examine the degree of IT infusion, or the high tech vs human touch tradeoffs in BPO

18

Thank You

We welcome your ideas and comments.