Business process outsourcing studies: a critical review and research directions

Abstract

Organizations are increasingly sourcing their business processes through external service providers, a practice known as Business Process Outsourcing (BPO). Worldwide, the current BPO market could be as much as $279 billion and is predicted to continue growing at 25% annually. Academic researchers have been studying this market for about 15 years and have produced findings relevant to practice. The entire body of BPO research has never been reviewed, and this paper fills that gap. We filtered the total studies and reviewed 87 empirically robust BPO articles published between 1996 and 2011 in 67 journals to answer three research questions: What has the empirical academic literature found about BPO decisions and outcomes? How do BPO findings compare with Information Technology Outsourcing (ITO) empirical research? What are the gaps in knowledge to consider in future BPO research? Employing a proven method that Lacity et al. (2010) used to review the empirical ITO literature, we encapsulated this empirical literature on BPO in a way that is concise, meaningful, and helpful to researchers. We coded 43 dependent variables, 152 independent variables, and 615 relationships between independent and dependent variables. By extracting the best evidence, we developed two models of BPO: one model addresses BPO decisions and one model addresses BPO outcomes. The model of BPO decisions includes independent variables associated with motives to outsource, transaction attributes, and client firm characteristics. The model of BPO outcomes includes independent variables associated with contractual and relational governance, country characteristics, and client and supplier capabilities. Overall, BPO researchers have a broad and deep understanding of BPO. However, the field continues to evolve as clients and suppliers on every inhabited continent participate actively in the global sourcing community. There is still much research yet to be done. We propose nine future paths of research pertaining to innovation effects, retained capabilities, environmental influences, global destinations, supplier capabilities, pricing models, business analytics, emerging models, and grounded theory development.

Appendices

Appendix A

Master codes

• 1 Absorptive capacity – Client: A client organization's ability to scan, acquire, assimilate, and exploit valuable knowledge (e.g., Grimpe and Kaiser, 2010; Reitzig and Wagner, 2010).

• 2 Absorptive capacity – Supplier: A supplier organization's ability to scan, acquire, assimilate, and exploit valuable knowledge (e.g., Luo et al., 2010).

• 3 Access to expertise/skills: A client organization's desire or need to access supplier skills/expertise (e.g., Currie et al., 2008; Lam and Chua, 2009).

• 4 Access to global markets: A client organization's desire or need to gain access to global markets by outsourcing to suppliers in those markets (e.g., Van Gorp et al., 2007).

• 5 Adaptability: The extent to which a party is able to adapt a business process to meet changes in the environment (e.g., Sia et al., 2008).

• 6 Asset specificity: The degree to which an asset can be redeployed to alternative uses and by alternative users without sacrifice of productive value (Williamson, 1976; Sia et al., 2008).

• 7 Business process management capability – Client: The ability of a client organization to efficiently and effectively manage a business process using in-house resources (e.g., McIvor et al., 2009).

• 8 Business process management capability – Supplier: The ability of a supplier organization to efficiently and effectively manage a business process (e.g. Saxena and Bharadwaj, 2009).

• 9 Business process performance improvement: A client organization's desire or need to engage a supplier to help improve a client's business, processes, or capabilities (e.g., Gewald and Dibbern, 2009).

• 10 Business strategic type: An organization's strategy to address three fundamental business problems – entrepreneurial, engineering, and administrative. Categorized under the Miles and Snow typology as Defenders, Prospectors, Analyzers, and Reactors (Miles and Snow, 1978; Shih et al., 2005; Kenyon and Meixell, 2011).

• 11 Career development of employees: A client organization's desire or need to provide better career opportunities for employees (e.g., Lacity et al., 2004).

• 12 Centralization of department: The degree to which the department's decision-making is concentrated within a particular group or location (e.g., Delmotte and Sels, 2008).

• 13 CEO personality: The attributes of a CEO's personality, including conscientiousness, emotional stability, agreeableness, extraversion, and openness to experience (e.g., Nadkarni and Herrmann, 2010).

• 14 Change catalyst: A client organization's desire or need to use outsourcing to bring about large scale changes in the organization (e.g., Gospel and Sako, 2010).

• 15 Change management capability: The extent to which a client organization effectively manages change (e.g., Lacity et al., 2004).

• 16 City size: The size of a city in which a client or supplier is located (e.g., Rajeev and Vani, 2009).

• 17 Client age: The age of a client organization in years (e.g., Delmotte and Sels, 2008).

• 18 Client dependency: The degree to which a supplier depends on a client (e.g., Gainey and Klaas, 2003).

• 19 Client experience with outsourcing: A client organization's level of experience with outsourcing or offshoring (e.g., Mani et al., 2010).

• 20 Client experience with multiple governance modes: A client organization's level of experience with multiple governance modes, such as captive centers, offshore outsourcing, etc. (e.g., Hutzschenreuter et al., 2011).

• 21 Client management capability: The extent to which a supplier organization is able to effectively manage client relationships (e.g., Howells et al., 2008).

• 22 Client outsourcing readiness: The extent to which a client organization is prepared to engage an outsourcing supplier by having realistic expectations and a clear understanding of internal costs and services compared to outsourced costs and services (e.g., McIvor et al., 2009).

• 23 Client size: The size of a client organization usually measured as total assets, sales, and/or number of employees (e.g., Wahrenburg et al., 2006).

• 24 Client/supplier alignment: The degree to which client and supplier incentives, motives, interests, and or goals are aligned (e.g., Sen and Shiel, 2006).

• 25 Client-specific knowledge required: The degree to which a unit of work requires a significant amount of understanding/knowledge about unique client systems, processes, or procedures (e.g., McKenna and Walker, 2008).

• 26 Client-supplier interface design: The planned structure on where, when, and how client and supplier employees work, interact, and communicate (e.g., Sen and Shiel, 2006).

• 27 Coalition: A strategy in which an agent enlists the aid or endorsement of other people to influence a target to do what the agent wants (e.g., Bignoux, 2011).

• 28 Commitment: The degree to which partners pledge to continue the relationship (e.g., Levina and Su, 2008).

• 29 Communication: The degree to which parties are willing to openly discuss their expectations, directions for the future, their capabilities, and/or their strengths and weaknesses (e.g., Gainey and Klaas, 2003).

• 30 Concern for security/intellectual property: A client organization's concerns about security of information, transborder data flow issues, and protection of intellectual property (e.g., Wüllenweber et al., 2008a, 2008b).

• 31 Concern for regulatory requirements: A client organization's concerns about complying with regulations (e.g. Howells et al., 2008).

• 32 Configurational approach – The client firm matches multiple factors in configurations that maximize their chances of BPO success. For example, matching strategic intent with contractual governance, matching transaction attributes with contractual governance (e.g., Sen and Shiel, 2006; Saxena and Bharadwaj, 2009).

• 33 Conflict resolution: The degree to which clients and suppliers quickly, fairly, and meaningfully resolve disputes (e.g., Wüllenweber et al., 2008a, 2008b).

• 34 Contract detail: The number or degree of detailed clauses in the outsourcing contract, such as clauses that specify prices, service levels, key process indicators, benchmarking, warranties, and penalties for non-performance (e.g., Luo et al., 2010; Handley and Benton, 2009).

• 35 Contract duration: The duration of the contract in terms of time (e.g., Willcocks et al., 2004).

• 36 Contract flexibility: The degree to which a contract specifies contingencies and enables parties to change contractual terms (e.g., Sia et al., 2008).

• 37 Contract management capability: The extent to which a client organization is able to effectively manage contracts with suppliers, including the ability to track service levels and verify invoices (e.g., Sanders et al., 2007).

• 38 Contract size: The size of the outsourcing contract usually measured as the total value of the contract in monetary terms (e.g., Gewald and Gellrich, 2007).

• 39 Control mechanisms: Certain means or devices a controller uses to promote desired behavior by the controlee (e.g., Daityari et al., 2008).

• 40 Convenience: A client organization's desire to select a sourcing option based on ease of use, convenience, and less frustration (e.g., McKenna and Walker, 2008).

• 41 Cooperation: The degree to which client and supplier employees are willing to work together in common pursuit (e.g., Wüllenweber et al., 2008a and 2008b).

• 42 Corporate social responsibility capability-supplier – A supplier organization's ability to behave in a socially responsible way, such as promoting environmental responsibility and promoting fair labor practices (e.g., Brown, 2008).

• 43 Cost reduction: A client organization's need or desire to use outsourcing to reduce or control costs (e.g., Borman, 2006).

• 44 Country: Outsourcing outcomes – Success – Offshore: A client organization's general perceptions of success and satisfaction with offshore outsourcing (e.g., Vivek et al., 2008).

• 45 Partnership view: A client organization's consideration of suppliers as trusted partners rather than as opportunistic vendors (e.g., Willcocks et al., 2004; Sen and Shiel, 2006).

• 46 Persistence of expectations: ‘The tendency for prior beliefs and expectations to persevere, even in the face of new data or when the data that generated those beliefs are no longer valid’ (e.g., Lewin and Peeters, 2006).

• 47 Political reasons/influences: A client stakeholder's desire or need to use an outsourcing decision to promote personal agendas (e.g., Maelah et al., 2010).

• 48 Prior client/supplier working relationship: The situation in which the client and supplier organizations have worked together in the past (e.g., Mani et al., 2010).

• 49 Prior firm performance – Client: Client firm performance usually measured as net profits, return on assets, expenses, earnings per share, number of patents, and/or stock price prior to an outsourcing decision (e.g., Dunbar and Phillips, 2001; Gilley et al., 2004).

• 50 Prior firm performance – Supplier: Supplier firm performance usually measured as net profits, return on assets, expenses, earnings per share, and/or stock price prior to an outsourcing decision. (e.g., Gewald and Gellrich, 2007; Nadkarni and Herrmann, 2010).

• 51 Proactive sensemaking: The extent to which executives proactively create awareness and understanding in situations of high complexity or uncertainty in order to make decisions (e.g., Sia et al., 2008).

• 52 Process complexity: The degree to which a task requires compound steps, the control of many variables, and/or where cause and effect are subtle and dynamic (e.g., Ventovuori and Lehtonen, 2006; Penfold, 2009).

• 53 Process integration: The degree to which clients and suppliers are able to integrate processes (e.g. Sen and Shiel, 2006).

• 54 Process interdependence: The level of integration and coupling among tasks; processes that are highly integrated are tightly coupled and difficult to detach (e.g., Sanders et al., 2007).

• 55 Process interoperability: The extent to which a business process can operate on many supplier platforms (e.g., Sia et al., 2008).

• 56 Process standardization: The degree to which a process is standard (e.g., Tate and Ellram, 2009).

• 57 Public perceptions of outsourcing: The degree to which the public has a negative perception of outsourcing or offshoring (e.g., Sen and Shiel, 2006).

• 58 Public awareness: The degree to which there is publicly available information about outsourcing or offshoring (e.g., Hutzschenreuter et al., 2011).

• 59 R&D spend: The amount of money an organization spends on R&D (e.g., Calantone and Stanko, 2007; Grimpe and Kaiser, 2010).

• 60 Rapid delivery: A client organization's desire or need to engage in outsourcing in order to speed up delivery (e.g., Bandyopadhyay and Hall, 2009; Lam and Chua, 2009).

• 61 Relational governance: The unwritten, worker-based mechanisms designed to influence inter-organizational behavior (Macneil, 1980; e.g., Kim, 2008).

• 62 Relationship quality: The quality of the relationship between a client and supplier (e.g., Sia et al., 2008; Saxena and Bharadwaj, 2009).

• 63 Relationship-specific investment: Specific investments made over time, which discourage opportunism, reinforce signals of the client firms, and create extendedness of the relationships (e.g., Tate and Ellram, 2009).

• 64 Risk management capability – Client: A client organization's practice of identifying, rating, and mitigating potential risks associated with outsourcing (e.g., Borman, 2006).

• 65 Risk management capability – Supplier: A supplier organization's practice of identifying, rating, and mitigating potential risks associated with outsourcing (e.g., Borman, 2006).

• 66 Risk – The extent to which a transaction exposes clients to a chance of loss or damage (e.g., Wüllenweber et al., 2008a, 2008b).

• 67 Scalability: The ability to scale volume of service up or down based on demand (e.g., Currie et al., 2008; Redondo-Cano and Canet-Giner, 2010).

• 68 Security, privacy, and confidentiality capability – Supplier: The proven ability of a supplier to protect client data through investments in technology, training, process controls, audits, and other management practices (e.g., Sen and Shiel, 2006).

• 69 Senior leadership: The extent to which the senior executives of an organization are effective leaders (e.g., Lacity et al., 2004).

• 70 Service quality: The quality of a service, frequently measured as a client's perception of a satisfactory service performance by the supplier (e.g., Lewin and Peeters, 2006).

• 71 Social capital: Cognitive dimension: Social capital arising from the sharing representations, interpretations, and systems of meaning among parties (Nahapiet and Ghoshal, 1998; e.g., Willcocks et al., 2004).

• 72 Social capital: Relational dimension: Social capital arising from personal relationships people have developed with each other through a history of interactions (Nahapiet and Ghoshal, 1998; e.g., Willcocks et al., 2004).

• 73 Social capital: Structural dimension: Social capital arising from the patterns of linkages between people or units including network ties, network configuration, and network appropriability (Nahapiet and Ghoshal, 1998; e.g., Willcocks et al., 2004).

• 74 Social norms: An individual's perceptions of the social pressures put on him or her to perform or not to perform the behavior in question.’ (Ajzen and Fishbein, 1980; e.g., Raman et al., 2007).

• 75 Sourcing capability – Supplier: Expertise in procurement and the ability to leverage aggregate purchasing power (e.g., Lacity et al., 2004).

• 76 Stakeholder buy-in: Gaining commitment and support from all parties involved in outsourcing related decisions (e.g., Tate and Ellram, 2009).

• 77 Stakeholder resistance: The degree to which stakeholders oppose an outsourcing decision (e.g., Ventovuori and Lehtonen, 2006).

• 78 Strategic flexibility: An organization's ability to precipitate strategic changes and adapt to substantial, uncertain, and rapidly occurring environmental changes (e.g., Nadkarni and Herrmann, 2010).

• 79 Strategic intent: A client organization's desire or need to outsource for strategic reasons, such as developing new capabilities that can be leveraged in the marketplace (e.g., Sanders et al., 2007).

• 80 Subcontracting: The practice when the primary supplier engages another supplier for contracted work, either with or without the client's knowledge or approval (e.g., Kuruvilla and Ranganathan, 2010; Luo et al., 2010).

• 81 Supplier age: The age of a supplier firm in years (e.g., Lahiri and Kedia, 2009).

• 82 Supplier business growth: A supplier increases revenues by extending services to existing clients, obtaining new clients, or through mergers and acquisitions (e.g., Saxena and Bharadwaj, 2009).

• 83 Supplier competition: The presence of multiple, reputable, and trustworthy service providers, which can provide a range of choices for the clients (e.g., Levina and Su).

• 84 Supplier dependency: The degree to which a client depends on a supplier (e.g., Borman, 2006).

• 85 Supplier employee performance: The client's perception of the performance of individual supplier employees (e.g., Daityari et al., 2008; Lam and Chua, 2009).

• 86 Supplier employee turnover: The percentage of the workers that are replaced in a given time period (e.g., Budhwar et al., 2006).

• 87 Supplier management capability: The extent to which a client organization is able to effectively manage outsourcing suppliers (e.g., Sanders et al., 2007).

• 88 Supplier ownership: The supplier's ownership structure; private, public, jointly owned with primary client (e.g., Kuruvilla and Ranganathan, 2010).

• 89 Supplier reputation: The public's perception of a supplier's capabilities based on past performance and financial status (e.g., Gewald and Gellrich, 2007).

• 90 Supplier size: The size of a supplier organization usually measured as total assets, sales, and/or number of employees (e.g., Nadkarni and Herrmann, 2010).

• 91 Switching costs: The costs incurred when a client organization changes from one supplier or marketplace to another (e.g., Wahrenburg et al., 2006).

• 92 Task structure: The degree of clarity and structure pertaining to tasks (e.g., Daityari et al., 2008).

• 93 Technical and methodological capability – Client: A client organization's level of maturity in terms of technical or process related standards, and best practices such as component reuse (e.g., Bardhan et al., 2007).

• 94 Technical and methodological capability – Supplier: A supplier organization's level of maturity in terms of technical or process related and best practices such as component reuse (e.g., Sia et al., 2008; Bharadwaj and Saxena, 2009).

• 95 Time zone differences: The difference in local times between two locations as measured in hours (e.g., Mehta et al., 2006).

• 96 Top management commitment/support: The extent to which senior executives provide leadership, support, and commitment to outsourcing (e.g., Tate and Ellram, 2009).

• 97 Training: The nature or extent of supplier employee training by either the client or supplier organization (e.g., Raman et al., 2007; Malik, 2009).

• 98 Transaction costs: The effort, time, and costs incurred in searching, creating, negotiating, monitoring, and enforcing a service contract between buyers and suppliers (Williamson, 1991; e.g., Levina and Su, 2008).

• 99 Transaction frequency: The number of times a client organization initiates a transaction, typically categorized as either occasional or frequent (e.g., Wahrenburg et al., 2006).

• 100 Transaction size: The size of a transaction in terms of dollar value or effort (e.g., Luo et al., 2010).

• 101 Transition management capability – Client: The extent to which a client organization effectively transitions services to outsourcing suppliers or integrates client services with supplier services (e.g., Luo et al., 2010).

• 102 Transition management capability – Supplier: The extent to which a supplier organization effectively transitions services from a client organization to the supplier or integrates client services with supplier services (e.g., Saxena and Bharadwaj, 2009).

• 103 Trust: The confidence in the other party's benevolence (e.g., Gainey and Klaas, 2003).

• 104 Uncertainty: The degree of unpredictability or volatility of future states as it relates to the definition of requirements, emerging technologies, and/or environmental factors (Williamson, 1991; e.g., Mani et al., 2010).

• 105 Upward appeals: The tactic of invoking the authority and power of higher management; for example suppliers may bypass client liaisons by appealing to client management (e.g., Bignoux, 2011).

• 106 Virtual teaming: The extent to which the service provider and the client perceive and behave as part of the same team (e.g., Saxena and Bharadwaj, 2009).

Appendix B

Email template to authors to verify codes

Dear [AUTHOR],

We hope this email finds you well. We coded the entire body of empirical (both quantitative and qualitative) Business Process Outsourcing literature from 1996 to 2011. To ensure the accuracy of our codes, we are randomly selecting a subset of the 87 articles we coded for review by authors. You were selected! We are hoping that you will validate how we coded some or all of the relationships in your paper:

[STUDY REFERENCE]

We have a master coding list of over 160 variables used in BPO research. We mapped the variables you used in your paper to our master coding list so we could more easily summarize findings across studies. We were hoping you would indicate the extent to which you think our coding of your study is reasonable.

We also coded the findings between independent and dependent variables. The coding scheme assigns four possible values to the relationship between independent and dependent variables: ‘+1,’ ‘−1,’ ‘0,’ and ‘M.’ We coded a ‘+1’ for positive relationships, ‘−1’ for negative relationships, an ‘M’ for a relationship mattered, and ‘0’ for relationships that were studied but not empirically significant. A more thorough explanation of the codes is included below.

Below you will find what we have coded for your paper at a high level and the relevant descriptions of our master variables below the table. Please tell us the extent to which you agree with our coding for each of the findings from your study listed in the table. Please use the 7-point Likert Scale on the right hand column of the table.

Your checks will go long way toward our initiative and will be much appreciated. Please don’t hesitate to contact us if you have questions. We are hoping you will be able to respond within 1 week's time.

Thank you!

Our descriptions of our master variable names: [HERE DESCRIPITIONS OF RELEVANT INDEPENDENT AND DEPENDENT VARIABLES FOR A STUDY WERE PROVIDED] (see Table B1).

Table B1 Coding table, descriptions of variables, and detailed explanation (if needed) of coding scheme follow

[Explanation of codes followed]

Appendix C

This appendix shows the relationships between independent variables and the three categories of dependent variables (BPO Decisions, BPO Outcomes, Miscellaneous). For each relationship, a ‘1’ indicates a positive and significant relationship; ‘−1’ indicates a negative and significant relationship; ‘0’ indicates a not-significant relationship; ‘M’ indicates the independent variable mattered when operationalized as a categorical variable (see Table 3 for detailed explanations). The relationships that were examined at least five times are boxed. The relationships that were examined at least five times and met the criteria for consistent results as described in the text are marked with ‘++,’ ‘+,’ ‘−−,’ ‘−,’ and ‘0’

Table C1

Table C1 Relationships between independent variables and BPO decisions and BPO outcomes