Antecedents and Performance Outcomes of Onshore and Offshore Business Process Outsourcing

Jonathan Whitaker (jwwhitak@umich.edu)

Business Information Technology Ross School of Business University of Michigan

701 Tappan Street Ann Arbor, MI 48109 Phone: 734-994-8494

Sunil Mithas

(smithas@umd.edu) Decision and Information Technologies

R.H. Smith School of Business 4324 Van Munching Hall University of Maryland

College Park, MD 20742 Phone: 301-424-2283

Sanjeev Kumar

(sankum@umich.edu) Business Information Technology

Ross School of Business University of Michigan

701 Tappan Street Ann Arbor, MI 48109 Phone: 734-222-5458

M.S. Krishnan

(mskrish@umich.edu) Business Information Technology

Ross School of Business University of Michigan

701 Tappan Street Ann Arbor, MI 48109 Phone: 734-763-6749

Working Paper as of August 31, 2006 Acknowledgements: We thank seminar participants at the 2005 International Conference on Information Systems (Best Paper nomination) and the 2005 INFORMS Conference on Information Systems and Technology for their feedback and helpful comments on previous versions of this paper. We thank InformationWeek magazine for providing the data for this research. Financial support was provided in part by a STIET fellowship with funding from NSF IGERT grant no. 0114368, the Stephen M. Ross School of Business at the University of Michigan, the R.H. Smith School of Business at the University of Maryland, and the Michael R. and Mary Kay Hallman fellowship at the University of Michigan Ross School of Business.

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Antecedents and Performance Outcomes of Onshore and Offshore Business Process Outsourcing

Abstract

Firms are increasingly utilizing onshore and offshore business process outsourcing (BPO) to

manage their operations and achieve their strategic objectives. However, there is a lack of understanding

of when firms are likely to use BPO, and when firms are likely to see business value from BPO. Building

on previous research in transaction cost economics, business process management, strategy and

international business, this paper proposes a theoretical framework for adoption and benefits of onshore

and offshore BPO, and tests the framework using data on U.S. firms. Our analysis indicates that firms

with broader IT application deployment and stronger business process codification are more likely to

engage in onshore and offshore BPO. We also find that firms with broader IT application deployment are

more likely to experience both cost and quality benefits from BPO.

This study makes two primary contributions to the emerging literature on BPO. First, we draw on

previous research in transaction cost economics, business process management, strategy and international

business to develop and validate a theoretical model for antecedents and performance outcomes of BPO.

We extend previous research to understand the relationship between organization characteristics and

adoption and benefits of the emerging practice of onshore and offshore BPO. Second, we establish a link

between IT application deployment and BPO adoption and performance outcomes. This research

highlights and validates the role that IT plays in enabling firms to locate their business processes across

vendor and geographic platforms, and in facilitating cost and quality benefits from BPO.

Keywords: Business process outsourcing, BPO, onshore, offshore, IT application deployment, process

codification, performance outcomes, cost, quality.

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1. INTRODUCTION

Firms are increasingly utilizing business process outsourcing (BPO) to manage their operations

and achieve their strategic objectives (Adler 2003; Venkatraman 2004). In BPO, a firm delegates one or

more IT intensive business processes, such as HR or accounting, to be managed and delivered by an

external vendor. Pfannenstein and Tsai (2004) suggest that BPO emerged as IT outsourcing vendors

gained understanding during the 1990’s, and then began specializing in functional areas where they would

handle business processes along with the underlying IT. Because BPO involves critical processes that are

interconnected with other core processes in the firm, it is more difficult to specify the transaction

characteristics and contingencies in BPO compared with those in outsourcing other goods and services.

Another differentiating factor for BPO is the rapid speed with which offshore vendors have emerged as a

viable mechanism to deliver BPO services. While the use of BPO increased only during the past decade,

it is estimated that by 2007 14% of BPO services will be delivered using offshore resources (Stone and

Brown 2004).

Despite the growing significance of business process outsourcing, there is limited understanding

of the factors that enable firms to engage in BPO and the benefits that firms receive from BPO. While

most existing information systems literature on outsourcing focuses on the IT function (Ang and Straub

1998; Lacity and Willcocks 1998; Loh and Venkatraman 1992; Teng, Cheon and Grover 1995), a recent

and comprehensive review (Dibbern, Goles, Hirschheim and Jayatilaka 2004) notes that IT outsourcing

research provides a foundation for research on BPO and offshoring. Early information systems work on

BPO conceptualized the factors that make some services more amenable for offshore BPO (Apte and

Mason 1995), and more recent work examines supplier capabilities, best practices and benefits from BPO

using case-based and analytical research (Dutta and Roy 2005; Feeny, Lacity and Willcocks 2005; Lacity,

Feeny and Willcocks 2003). Currently, there is very little rigorous empirical work that examines the

antecedents and business value of the emerging practice of onshore and offshore BPO.

In this paper we build on previous research in transaction cost economics, business process

management, strategy and international business to develop a theoretical model for the antecedents and

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business value of BPO. We validate this model by conducting an empirical study across a broad cross-

section of U.S. publicly traded firms using archival data from InformationWeek, a leading and widely

circulated IT publication. We complement the InformationWeek outsourcing and IT data with financial

and industry data from Compustat, Dun & Bradstreet, Securities and Exchange Commission (SEC)

filings, and annual reports.

This study is important for both research and managerial practice. From a research perspective,

there is a need to identify the conditions under which firms are more likely to outsource their critical

business processes. While it is generally assumed that information technology enables the outsourcing of

business processes (Venkatraman 2004), it is important to empirically test and validate this assumption.

From a practice perspective, it is important for firms to evaluate their strategic and operational readiness

for BPO. Insights from our study will also be helpful for BPO vendors to target potential customers

based on their observed characteristics such as IT application deployment and business process

codification. It is also important for researchers and firms to understand the IT and strategy execution

mechanisms that lead to cost and quality benefits from BPO.

The rest of the paper is structured as follows. Section 2 reviews the background literature and

develops hypotheses. Sections 3 and 4 discuss the methodology and present results. Section 5 outlines

implications of the study.

2. THEORY AND RESEARCH MODEL

The use of BPO is a technology enabled administrative innovation, and researchers have shown

that organizational characteristics are a significant factor that dictates which firms adopt such innovations

(Kimberly and Evanisko 1981; Tornatsky and Fleischer 1990). We draw on the transaction cost

economics, business process management, strategy and international business literatures to develop the

theory underlying our hypothesized research model (Figure 1), and to identify relevant firm

characteristics that explain BPO use and benefits for firms.

---Insert Figure 1 about here---

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2.1 IT Application Deployment and BPO Adoption

Transaction cost economics (TCE) provides one theoretical perspective to evaluate outsourcing

considerations. The transaction cost literature argues that firm boundaries are determined by a tradeoff

between the production cost advantages of outside procurement in market relationships and the

transaction cost advantages of internal production within hierarchies (Williamson 1975). Markets and

hierarchies entail different levels of production and transaction costs. Markets may offer lower

production costs through economies of scale or specialization, but these advantages come at the expense

of higher transaction costs. Transaction costs include finding and contracting with a reliable supplier,

monitoring and enforcing the contract, and coordinating with the supplier during the contract term.

Transaction costs are presumed to increase with an increase in asset specificity. As asset specificity

increases, more complex governance structures are required to ease costly bargaining over profits from

specialized assets (Williamson 1985). High transaction costs may overwhelm the savings in production

costs from a market transaction, which would in turn lead the firm to vertically integrate the activity and

produce internally.

The information systems literature builds on transaction cost theory by suggesting that an

increase in the use of IT would lead to increased outsourcing and a shift in firm boundaries for three

primary reasons. First, IT reduces coordination costs. IT reduces the time and cost of communicating

information, which leads to a tighter coupling of processes that create and use information (Malone, Yates

and Benjamin 1987). Malone and colleagues argue that the widespread use of IT decreases the unit costs

of coordination, which will lead to the increased use of market transactions between firms. Second, IT

mitigates transaction risk by enabling a firm to better monitor vendors (Clemons, Reddi and Row 1993).

This would encourage firms to invest in IT for inter-firm coordination, and lead to increased outsourcing

of IT intensive activities. Zenger and Hesterly (1997) concur that innovations in IT ease monitoring and

communications across firms and facilitate the disaggregation of firms. Third, IT assets are increasingly

standardized and not relationship-specific (Clemons, Reddi and Row 1993), alleviating the opportunistic

behavior typically associated with asset specificity in transaction cost economics. IT increases a firm’s

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ability to coordinate its activities with business partners located nationally and internationally (King 1996;

Segal-Horn 1991).

Although previous research has found support for the conjectures relating to the effect of IT on

firm boundaries, there is no empirical work that examines the effect of IT on BPO. Brynjolfsson and

colleagues (1994) find that IT investment is significantly associated with subsequent decreases in the

average size of firms. In a separate study, Hitt (1999) also finds that IT causes a decrease in vertical

integration. We extend this stream of work by testing the implications of TCE in the BPO context, and

hypothesize that:

H1: Firms with broader IT application deployment are more likely to engage in onshore and

offshore BPO.

2.2 Process Codification and BPO Adoption

A firm’s ability to transfer and coordinate processes across functional and organizational

boundaries can impact business outcomes and value creation (Davenport and Short 1990; IBM 1975).

Management and organization researchers provide a theoretical foundation for the mechanisms that

enable the transfer of processes within and across firms, including the key mechanism of codification.

Codification is closely related to the concept of tacit vs. explicit knowledge. While tacit

knowledge is difficult to articulate and can be gained only through experience, explicit knowledge can be

communicated between parties (Polanyi 1966; Nelson and Winter 1982). Codification is the compression

of knowledge and experience into a structure, which then enables transfer across economic agents (Boisot

1986). The process of codification involves the use of codes and models (Ancori, Bureth and Cohendet

2000), and the translation of rules and actions into procedures, guidelines, specification and documents

(Kogut and Zander 1992; Lam 1997).

Information systems researchers have described more specifically the tools involved in

codification of business processes. Malone et al. (1999) argue that process representation approaches

such as flow charts, data flow diagrams, state transition diagrams, and goal based models have facilitated

development of a process grammar to describe complex processes. Basu and Blanning (2003) extend this

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work and illustrate the use of metagraphs to represent processes. Use of these codification tools allows

knowledge to be captured, specialized and distributed, which contributes to modifying the spatial

organization and division of labor and can contribute to the outsourcing of business processes (Cohendet

and Steinmueller 2000; Malerba and Orsenigo 2000). Codification makes it possible for buyers and

sellers to enter into contractual relationships, in part because codification provides a representation of the

specific services that the buyer can expect the seller to provide (Boisot 1986; Cowan, David and Foray

2000).

Codification is relevant in both the domestic and global contexts. Codification makes possible

the globalization of local knowledge, and reduces the time to transfer knowledge internationally

(Cohendent and Steinmueller 2000; Kogut and Zander 1993). Boisot (1986) concurs in noting: “The

move abroad, therefore, is likely to involve organizational functions that trade in well codified

information (p. 152).”

To summarize this discussion, process codification can enable the decomposition, reconfiguration

and synthesis of business processes, aiding in coordination and management of dependencies across

processes and spatially dispersed business units. Codification enables a firm to disaggregate and transfer

specific processes to service providers while managing dependencies and seamlessly integrating

outcomes of the outsourced process back into the firm’s internal operations. Based on the above

discussion, we hypothesize that:

H2: Firms with stronger process codification are more likely to engage in onshore and

offshore BPO.

2.3 Strategic Orientation and BPO

Previous research suggests that most firms can be classified as following a primary strategy. In

general, at one end of the spectrum, some firms focus on cost leadership by reducing their costs and

achieving a lean cost structure. At the other end of the spectrum, other firms pursue revenue expansion

based on differentiation in quality or customer service. For example, Rust, Moorman and Dickson (2002)

assert that because natural tensions exist between these management approaches, many firms follow

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either the cost reduction strategy or the revenue expansion strategy. Their view is consistent with Porter

(1980), who also presents a typology in terms of two generic strategies based primarily on cost leadership

or differentiation. A cost leadership strategy requires achieving the lowest cost in the value chain, while a

differentiation strategy focuses on influencing customer judgments of relative product utility and

satisfaction (Day and Nedungadi 1994). While most firms follow either the cost leadership or quality

differentiation strategies, it is also possible for firms to follow a hybrid strategy where they pursue cost

leadership and quality differentiation at the same time (Miles, Snow, Meyer and Coleman 1978; Porter

1980; Rust, Moorman and Dickson 2002).

A firm’s strategic stance has a significant influence on its operating characteristics and

subsequent performance (Chan, Sabherwal and Thatcher 2006). In an IT outsourcing context, Teng,

Cheon and Grover (1995) note that the strategic orientation of a firm may affect its propensity to

outsource the IS function. Among studies showing links between IT outsourcing and cost reduction, Loh

and Venkatraman (1992) found that a higher business cost structure is associated with an increased

propensity to outsource the IT function. Similarly, Lacity and Hirschheim (1994) found that senior

executives expected IT outsourcing to reduce costs. The information systems literature also

acknowledges cost savings resulting from wage differentials as the dominant force in offshoring (Carmel

and Tjia 2005; Dibbern, Goles, Hirschheim and Jayatilaka 2004). Based on the above discussion, we

hypothesize that:

H3a: Firms with a cost reduction strategy are more likely to engage in onshore and offshore

BPO.

More recently, researchers have observed that the motivations for IS outsourcing extend beyond

cost. For example, McFarlan and Nolan (1995) note that general managers’ concerns about quality also

drive the IT outsourcing decision. Similarly, DiRomulado and Gurbaxani (1998) note that the motivation

for IT outsourcing is evolving from a primary focus on cost reduction to other factors, such as

improvements in business performance. Firm engage in business process outsourcing and offshoring to

leverage the high quality and innovation potential of business partners for sustained value creation and

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competitive advantage (Carmel and Agarwal 2002; Engardio et al. 2005; King 2006; Prahalad and

Krishnan 2004). The information systems literature also recognizes offshore sourcing as a response to the

simultaneous pressures to contain costs and improve quality with IT (Carmel and Agarwal 2002). Lacity,

Feeny and Willcocks (2003) suggest a framework for achieving the twin goals of cost reduction and

service improvement in the outsourcing of back office functions. Based on the above discussion, we

hypothesize that:

H3b: Firms with a revenue growth strategy are more likely to engage in onshore and offshore

BPO.

2.4 Internationalization and Offshore BPO Adoption

The internationalization of a firm may also be important in affecting its degree of offshore

outsourcing. The unique capabilities of the international corporation lie in its capacity to coordinate

activities on a global basis (Fayerweather 1981). The capability to coordinate the use of resources across

the globe, including the external resources of partners and suppliers, is a source of competitiveness for

diversified multinational corporations (Doz and Prahalad 1991). Based in part on Porter’s (1998)

assertion that the ability of multinational firms to access foreign-based clusters of excellence is a source

of competitive advantage, Tallman and Fladmoe-Lindquist (2002) suggest that multinational firms can

leverage their existing capabilities through greater international presence. If a firm already has an

international presence, it is in better position to coordinate with international partners. The firm has the

capability of international management, and can more effectively evaluate and select international

vendors, and manage and monitor their performance. Based on the above discussion, we hypothesize

that:

H4: Firms with greater international presence are more likely to engage in offshore BPO.

2.5 IT Application Deployment and BPO Benefits

While IT application deployment enables firms to pursue BPO as discussed in section 2.1 above,

IT also enables firms that outsource to receive greater quality and cost benefits from BPO. Early work in

the business value of IT literature found a negative relationship between IT and product price, and a

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positive relationship between IT and output quality, suggesting that IT can facilitate cost and quality

improvements at the firm level (Barua, Kriebel and Mukhopadhyay 1995; Mukhopadhyay, Rajiv and

Srinivasan 1997). More recent research builds on the early work to add that the first order business value

impacts of IT occur at the business process level, and that these impacts include both bottom-line

efficiency (cost) and top-line competitiveness (quality and revenue) (Melville, Kraemer and Gurbaxani

2004; Tallon, Kraemer and Gurbaxani 2000).

Researchers have conceptualized and empirically tested IT capability as the deployment of IT in

the context of other capabilities such as business process reengineering and production process

outsourcing, and found IT to be associated with both lower costs and higher quality in these contexts

(Bardhan, Whitaker and Mithas 2006; Bharadwaj 2000; Devaraj and Kohli 2000). IT tools provide the

capacity to transfer and access process knowledge from anywhere (Cohendent and Steinmueller 2000),

thus enabling seamless functioning of business processes. Firms can leverage their IT infrastructure not

only to improve individual business processes, but also to integrate and synthesize processes across

physical and organizational boundaries (Basu and Blanning 2003). Overall, IT infrastructure can

strengthen organizational business processes and enable new and redesigned business processes

(Davenport 1993; Davenport and Short 1990; Hammer 1990). Based on the above discussion, we

hypothesize that:

H5: Firms with broader IT application deployment are more likely to experience quality and

cost benefits from BPO.

2.6 Strategy Execution and BPO Benefits

The execution of a firm’s strategy is manifested in the performance measurements and practices

that the firm uses to manage its internal operations and vendor relationships. Performance measures that

are aligned with strategy provide information on whether the strategy is being implemented, and also

encourage behaviors consistent with the strategy (Neely 1999). In performance measurement, a firm

establishes measurements for a business process, and uses the measurements to control the process and

influence performance in the desired direction (Powell, Schwaninger and Trimble 2001). A firm’s choice

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of performance measures strongly affects the behaviors of managers and employees (Kaplan and Norton

1992). As the firm defines its performance measures and competitive priorities, the firm can dedicate

additional management attention, worker training, and financial and technical support to improve

performance in those areas (Fawcett, Smith and Cooper 1997).

While earlier performance measurements were based almost exclusively on financial and

accounting measures, current performance measurements now also incorporate operational measures such

as quality (Kaplan and Norton 1992). The inclusion of operational measures enables performance

measurement to create a more comprehensive and forward-looking view, and links performance

measurement more closely with business strategy (Kaplan and Norton 1996). The relationship between

strategy, measurement and performance also applies in an outsourcing context, where the client uses

performance measurements to link vendor performance to client strategic objectives (Anderson 1997).

Vendor management practices at various stages of the outsourcing process also contribute to the

value created by outsourcing engagements (Levina and Ross 2003). Two key stages of the outsourcing

process are upfront vendor selection and ongoing contract management (Trent and Monczka 2002). Two

management practices associated with vendor selection are the request for proposal (RFP) and request for

information (RFI) (Dai, Narasimhan and Wu 2005), and one key vendor management practice associated

with contract management is the service level agreement (SLA) (Levina and Ross 2003).

Firms use requests for proposal (RFP) to generate competition among vendors and improve

contract terms (Chaudhury, Nam and Rao 1995). In a utilities context, the use of RFPs with pre-specified

objective criteria yielded an 18% lower contract price (Cameron 2000). In an IS outsourcing context,

over 80% of firms used an RFP, and the use of RFP (including bids from the internal IT department) most

frequently led to cost savings (Lacity and Willcocks 1998). Prior to issuing an RFP, the firm may need to

gather additional information using a request for information (RFI) (Bernard 1997). The firm can use

vendor responses to the RFI to better understand its needs and vendor capabilities, and to identify

qualified vendors that may be eligible to receive an RFP.

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Once the firm has selected the vendor, the firm and vendor may use a service level agreement

(SLA) to specify the level of quality that will be delivered (Chan, Chandrashekhar, Richman and

Vasireddy 2004). SLAs define the standards of performance, the methods of calculating performance,

and the reporting procedures (Singleton, McLean and Altman 1988). SLAs are widely used in IT

outsourcing engagements (Hartley 2005). SLAs benefit the firm and vendor by reducing uncertainties,

clarifying expectations, and defining the quality of service that is necessary and acceptable (Levina and

Ross 2003). The use of detailed SLAs is associated with longer-term outsourcing relationships and

positive outcomes for the firm and vendor (Kern, Willcocks and van Heck 2002). Because a firm’s

choice of performance measurements and vendor management practices demonstrates the firm’s strategy

and impacts the behaviors of outsourcing providers, we hypothesize that:

H6a: Firms that execute a cost reduction strategy by using cost-oriented performance

measurements and vendor management practices are more likely to experience cost

benefits from BPO.

H6b: Firms that execute a high quality strategy by using quality-oriented performance

measurements and vendor management practices are more likely to experience quality

benefits from BPO.

We control for other relevant variables to account for alternative and complementary

explanations. We control for firm size because that may influence a firm’s propensity to outsource and

offshore (Ang and Straub 1998; Carmel and Nicholson 2005; Sobol and Apte 1995). We also control for

industry sectors to account for differences in outsourcing across industry sectors (Brynjolffson, Malone,

Gurbaxani and Kambil 1994; Sobol and Apte 1995).

3. RESEARCH DESIGN AND METHODOLOGY

This study is based on data from two separate surveys conducted by InformationWeek, a leading

and widely circulated IT publication. InformationWeek is considered to be a reliable source of

information, and previous academic studies have also used data from InformationWeek surveys

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(Bharadwaj, Bharadwaj and Konsynski 1999; Rai, Patnayakuni and Patnayakuni 1997; Santhanam and

Hartono 2003).

The first of the two surveys for this study, the InformationWeek 500 survey (IW 500), was

conducted during mid 2004 (Cuneo 2004). This annual benchmarking survey targets top IT managers in

large firms, and collects data on the IT department and operations, along with an overview of major IT

initiatives. Two hundred and eighty firms that are publicly traded in the U.S. responded to this survey

and provided complete responses to the variables of interest. Of the 280 firms, 137 represent Fortune 500

companies. IT application, process codification, and BPO-related data from this survey are used in the

model for BPO antecedents.

The second survey for this study, the InformationWeek BPO survey (IW BPO survey), was

conducted during early 2005 (Zaino 2005). This one-time survey targeted IT managers in large firms, and

collected more detailed data on the specific topic of BPO within firms. Data from this survey is used in

the model for BPO benefits. Fifty-one publicly traded firms that are currently using BPO responded to

this survey and provided complete responses to the variables of interest. Because the IW BPO survey did

not collect information on IT applications or process codification, we needed to match these firms with

responses to the 2004 or 2005 IW 500 survey to link the BPO data with IT and process codification data.

Of the 51 respondent firms, we were able to match data for 26 firms,1 of which 14 are Fortune 500

companies. For both surveys, we complemented the InformationWeek data with revenue and industry

data from Compustat and Dun & Bradstreet, and offshore revenue and asset data from financial

information in company annual reports and SEC 10-K and 6-K filings.2

1 Of the 26 firms, 10 are financial services firms, eight are services firms, seven are manufacturing firms, and one is a trade and logistics firm. We did not include the trade and logistics firm in the empirical analysis, because it was the only firm in that industry. 2 A Form 10-K is an annual report that provides a comprehensive overview of the firm’s business. A Form 6-K is a report that provides information for foreign companies that are publicly traded in the U.S.

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3.1 Variable Definition

Table 1 describes the variables used in this study. Tables 2 and 3 provide descriptive statistics

and correlation for our model variables. The relevant questionnaire items from the IW 500 and IW BPO

surveys are included in Appendix A.

---Insert Table 1 about here---

---Insert Tables 2 and 3 about here---

Because several variables are from the InformationWeek survey, we assessed the potential

concern of common method bias using Harman’s one factor test (Podsakoff and Organ 1986). For both

the antecedents and outcomes models, no one general factor accounted for the majority of covariance

among the measures (Podsakoff, MacKenzie, Lee and Podsakoff 2003). The routine tests for testing

reliability of variables are not applicable because we use formative (i.e. summative) scales for IT

application deployment, process knowledge, quality benefits and cost benefits (Diamantopoulos and

Winklhofer 2001).

Table 4 provides summary statistics and correlations for the variables used in the study. For our

sample of firms in the BPO antecedents model, 34% of firms use onshore BPO and 17% of firms use

offshore BPO. On average, these firms have a high degree of IT infrastructure (5.7 on a scale of 0 to 8), a

moderate level of business process codification (1.5 on a scale of 0 to 3), and a moderate degree of

internationalization with 23% of revenues from offshore. For our sample of firms in the BPO outcomes

model, the averages for IT infrastructure (5.3), business process codification (1.7), and

internationalization (30%) are comparable to firms in the BPO antecedents model. Because all firms in

the outcomes model are engaged in BPO, the percentage of firms that use onshore BPO (88%) and

offshore BPO (68%) are higher as expected compared with firms in the antecedents model.

---Insert Table 4 about here---

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3.2 Estimation Models and Econometric Issues

Because of the differences in the nature of the dependent variables onshore and offshore BPO and

quality and cost benefits, we use probit and OLS respectively to estimate these models, as we describe

below.

3.2.1 Antecedents Model

In our dataset, the dependent variables onshore BPO and offshore BPO appear as binary choices.

The ordinary least squares approach for modeling binary dependent variables is not appropriate because

of heteroskedastic error distribution, and a linear model may result in predicted probabilities below zero

or above one. In addition, a linear model does not allow us to consider the non-linear effect of other

continuous variables such as IT application deployment, business process codification or

internationalization.

To overcome these estimation problems inherent in the ordinary least squares approach, we

conducted analysis for these models using the probit approach (Greene 2000; Long 1997). For example,

the multiplicative nature of the probit model allows us to assess interaction between variables without

explicitly adding an interaction term in the probit model. The functional form of our empirical models is

as follows:

Probability (Onshore BPO=1)= Φ [βX + ε ] (1)

Probability (Offshore BPO=1)= Φ [βX + ε ] (2)

where the X’s are variables such as IT application deployment, business process codification, cost

reduction or revenue expansion strategy, internationalization, and the industry and revenue control

variables, and βs are parameters for the respective variables. Φ denotes the normal cumulative

distribution function (the area under the normal curve). We test onshore and offshore BPO in separate

equations, as previous research suggests that there may be some differences between onshore and

offshore BPO due to differences in management culture and values (Franke, Hofstede and Bond 1998;

Hofstede 1983, 1984, 1985), distance (Carmel and Agarwal 2001; Mithas and Whitaker 2006; Olson and

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Olson 2000), time zones (Espinosa and Carmel 2004), and labor rates (Atkinson 2004; Brainard and Litan

2004).

3.2.2 Performance Outcomes Model

Our estimation models for quality and cost benefits from BPO are as follows:

Quality = Constant + β31 IT Application Deployment + β32 Business Process Codification + β33

Quality Strategy Execution + β34 Cost Strategy Execution + β35 Internationalization

+ β36 Firm Size + β37-38 Industry + ε (3)

Cost = Constant + β41 IT Application Deployment + β42 Business Process Codification + β43

Quality Strategy Execution + β44 Cost Strategy Execution + β45 Internationalization

+ β46 Firm Size + β47-48 Industry + ε (4)

We use ordinary least squares (OLS) to estimate equations (3) and (4). We tested for multi-

collinearity by computing condition indices. The highest variance inflation factor (VIF) was 3.25,

indicating that multi-collinearity is not a serious concern in our analysis (Belsley, Kuh and Welsch 1980).

We accounted for heteroskedastic error distribution and calculated heteroskedasticity consistent errors for

all our models (White 1980). We also conducted a sensitivity analysis using ordered probit and found

results similar to the OLS results. We interpret and discuss the OLS results in this paper, because OLS is

more robust and estimates fewer parameters compared to the ordered probit approach that requires a

larger sample size to reliably estimate cut-off points between intervals. We checked the normality of

residuals in the OLS models using a residual plot and formal tests such as Shapiro-Wilk and Shapiro-

Francia (Shapiro and Wilk 1965; Shapiro and Francia 1972). The residual plot and formal tests provided

support for the normality of residuals.

4. RESULTS

Table 5 provides the results from empirical estimation of discrete choice models in equations (1)

and (2). Since the probit model is inherently non-linear, the effect of each individual variable is

interpreted holding all other variables at their mean values. Table 6 provides the results from OLS

estimation of equations (3) and (4). Table 7 shows the hypotheses that were supported in this study.

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---Insert Tables 5 and 6 about here---

---Insert Table 7 about here---

4.1 Results: BPO Adoption

Hypothesis 1 predicted a positive association between IT application deployment and the

likelihood of onshore and offshore BPO. We found support for this hypothesis in both onshore BPO

(β11= 0.110, p<0.027) and offshore BPO (β21= 0.099, p<0.075), though the strength of the relationship

with offshore BPO is only moderately significant. Consistent with by hypothesis 2, we find that business

process codification is associated with an increase in the likelihood of onshore BPO (β12= 0.286, p<0.002)

and offshore BPO (β22= 0.289, p<0.007).

Hypotheses 3a and 3b tested the relationship between the strategic orientation of a firm and BPO.

For hypothesis 3a, we do not find a relationship between cost reduction strategy and onshore or offshore

BPO. For hypothesis 3b, we do not find a relationship between revenue growth strategy and onshore or

offshore BPO. Hypothesis 4 predicted a positive association between the internationalization of a firm

and offshore BPO. We do not find support for this hypothesis. We also estimated this equation using the

alternative definition of international presence described in the international business literature

(international assets), and did not find a statistically significant association with offshore BPO. We

discuss potential explanations for this surprising result in the discussion section.

The results showing the effect of control variables on BPO also provide useful insights. Financial

services firms are associated with an increased likelihood of offshore BPO (β27 = 0.508, p<0.051)

compared with other industrial firms, though the strength of this relationship is only moderately

significant. This finding is corroborated by the observation that large financial services organizations

such as GE Capital were among the first to engage in large-scale offshore initiatives. While firms are not

required to disclose specific BPO relationships, the National Association of Software and Service

Companies (NASSCOM) reports that American Express, AXA, Fidelity, GE Capital, HSBC and Standard

Chartered Bank have some of the largest remote services operations in India (www.nasscom.org).

17

We also find that large firms tend to engage in both onshore BPO (β16 = 0.232, p<0.001) and

offshore BPO (β26 = 0.258, p<0.001) with greater likelihood than small firms. This finding is consistent

with the theory that slack resources and economies of scale facilitate large firms to adopt technology

innovations (Dewar and Dutton 1986; Mock and Morse 1977).

4.2 Results: BPO Benefits

Hypothesis 5 predicted a positive association between IT application deployment and cost and

quality benefits from BPO. We found support for this hypothesis in both cost benefits (β31= 0.296,

p<0.023) and quality benefits (β41= 0.317, p<0.005). Hypotheses 6a tested the relationship between cost

strategy execution and BPO cost benefits, and hypothesis 6b tested the relationship between quality

strategy execution and BPO quality benefits. While hypothesis 6a was not supported, we did find support

for hypothesis 6b (β44= 0.577, p<0.000).

Results showing the effects of control variables on BPO cost and quality benefits also provide

useful insights. Compared with the manufacturing industry, the financial services (β47= 1.287, p<0.011)

and services (β48= 1.114, p<0.040) industries both receive higher quality benefits from BPO. This may

help to explain why firms in these industries are adopting BPO more broadly than firms in other

industries. While not hypothesized in this paper, we note that the execution of a quality strategy is

associated with BPO cost benefits (β33= 0.275, p<0.033), perhaps suggesting that similar to the software

development context, the upfront quality of business processes prevents rework and waste, which

subsequently saves cost and time (Harter, Krishnan and Slaughter 2000; Krishnan, Kriebel, Kekre and

Mukhopadhyay 2000).

5. DISCUSSION AND CONCLUSION

Our goal in this paper was to study the antecedents and performance outcomes of onshore and

offshore business process outsourcing (BPO). We developed our theoretical model by drawing on

previous research in transaction cost economics, business process management, strategy and international

business. We obtained archival data from InformationWeek on IT application deployment and business

18

process codification for a sample of firms publicly traded in the U.S. We complemented this data with

financial information on revenues and offshore revenues and assets from Compustat, Dun & Bradstreet,

SEC filings and annual reports. To study cost and quality performance outcomes of BPO, we obtained

archival data from InformationWeek on BPO for a separate sample of firms publicly traded in the U.S.

5.1 Findings

Consistent with our expectations, we find that a broader IT application deployment is associated

with an increased likelihood of both onshore BPO and offshore BPO. As a firm strengthens its IT

infrastructure by deploying applications such as enterprise resource planning (ERP), customer

relationship management (CRM) and supply chain management (SCM), the firm is better able to integrate

the outcomes of BPO providers back into its core business operations. Particularly with offshore BPO

where frequent face-to-face contact between the client and the vendor is not realistic, a strong IT

infrastructure is important for the firm to monitor the vendor and integrate BPO outcomes back into its

core business operations.

We also find that business process codification is associated with an increased likelihood of both

onshore BPO and offshore BPO. As a firm develops its process codification, the firm is better able to

identify potential processes as candidates for outsourcing, scope projects, select vendors, and monitor and

evaluate vendor performance. Similar to IT application deployment above, process codification gives the

firm increased confidence to proceed with BPO, and reduces the likelihood of disruption as various

processes are placed with outside vendors. The finding that process codification is associated with both

onshore and offshore BPO suggests that a solid understanding of business processes may be a pre-

requisite for firms to successfully engage in BPO.

We did not find a statistically significant relationship between a firm’s degree of

internationalization and the likelihood of offshore BPO. Although surprising, one reason for this null

finding may be the imperfect measurement of internationalization. Although we operationalized our

internationalization variables following previous studies, these variables may not truly represent the

internationalization of a firm. Consider two examples.

19

Affiliated Computer Services (NYSE: ACS) is a provider of technology services based in Dallas,

Texas. ACS does a significant portion of its business with US federal, state and local government

entities, and accordingly 99%+ of its revenue is considered US domestic revenue. According to the

traditional revenue measure, ACS is considered almost entirely a domestic firm. However, a close

examination of the ACS 10-K SEC filing shows that 10,000 of ACS’ 40,000 employees are based in

foreign countries such as India, Ireland and China. Clearly, ACS has an extensive international presence

that is not captured by the traditional revenue and asset measures.

Footstar (NYSE: FTAR) is a footwear retailer based in Mahwah, New Jersey. Footstar operates

only in the US and Canada. Using the traditional measures of revenues or assets, Footstar would also be

considered a North American firm. Again however, a close examination of the Footstar 10K SEC filing

shows that over 90% of the shoes sold by Footstar’s largest business segment are manufactured in China.

Yet, Footstar is not considered an international company using the traditional measures.

The examples of ACS and Footstar, which have significant offshore employees and suppliers

(respectively) yet have very low offshore revenues and assets, raise question whether offshore revenues or

assets are the most appropriate indicators of internationalization. The SEC does not require reporting for

offshore employees and/or offshore supplier relationships, so from publicly-available data we are unable

to evaluate whether these measures would produce findings consistent with the original hypothesis.

There is a need to develop alternative and better measures of internationalization to further examine the

relationship between internationalization and BPO. Other researchers have also noted the need for

alternative measures of internationalization (Hassel, Hopner, Kurdelbusch, Rehder and Zugehor 2003;

Lynch and Clayton 2003).

Turning to the cost and quality outcomes of BPO, we find that IT application deployment is

positively associated with both cost and quality benefits from BPO. Similar to the discussion above, this

finding suggests that strong IT infrastructure may help firms to overcome the geographical and temporal

barriers involved in dealing with outside BPO vendors. Broader IT application deployment enables the

firm to better monitor its business operations, identify exceptions upfront, and seamlessly integrate the

20

outcomes back into its internal operations, which reduces the cost and increases the quality of critical

business processes placed with outside vendors.

We also find that quality-oriented performance measurement and vendor management practices

are associated with both quality and cost benefits from BPO. Similar to the software development

context, this suggests that the upfront quality of business processes prevents rework and waste, which

subsequently saves cost and time (Harter, Krishnan and Slaughter 2000; Krishnan, Kriebel, Kekre and

Mukhopadhyay 2000). While many firms initially pursue BPO from a cost motivation, this suggests that

similar to the manufacturing outsourcing context, BPO providers may be able to leverage their

technological resources, scale and skills to deliver higher quality services (Bardhan, Whitaker and Mithas

2006).

5.2 Limitations

There are three primary limitations of this study, the first two of which are associated with the

nature of the onshore and offshore BPO variables used for empirical analysis in the antecedents model.

First, we used dichotomous measures of onshore and offshore BPO in this study. Loh and Venkatraman

(1992) suggest that as outsourcing relationships grow more varied and complex, a richer description

becomes necessary. The extent to which firms outsource business processes differs across firms. While

some firms may outsource only a small number of business processes in certain subsidiaries, other firms

may outsource a larger number of business processes across the firm. Similarly, some firms may have

BPO as only a small part of their operational strategy, dedicating limited managerial and financial

resources to BPO initiatives; while other firms may have BPO as a significant component of their global

sourcing strategy, dedicating significant managerial and financial resources to BPO initiatives. Future

studies can address this limitation by gathering a richer description of the extent of BPO within a firm,

both in terms of the number of business processes outsourced and the proportion to which each process is

outsourced.

Second, even though the IW 500 survey respondents are senior-level executives and senior-level

executives are known to have the most comprehensive view of company operations, there are at least two

21

reasons why the respondent may not have been able to record the offshore BPO variable correctly. First,

the respondent may misunderstand the actual nature of the location where outsourced work is taking

place. For example, because certain countries such as the US have stronger technical and political

institutions (Reinhard, Palvia, Gricar, Gupta and Kaul 1997), there may be an incentive for US companies

to formalize BPO contracts at headquarters even if services will be provided by offshore vendor

employees. Second, respondents may have been reluctant to disclose that their companies were engaging

in offshore BPO, given the political sensitivity to the offshoring issue during the mid-2004 timeframe of

the survey (Economist 2004). Future studies can address this limitation by validating a firm’s use of

onshore and offshore BPO using internal and external sources.

The third limitation involves the relatively small number of observations for the performance

outcomes models. While this number is toward the lower bound of the number of observations required

for valid OLS models, it is similar to the number of observations used to assess cost and quality outcomes

in other IS research (Harter, Krishnan and Slaughter 2000; Krishnan, Kriebel, Kekre and Mukhopadhyay

2000). Nevertheless, it will be important for future research to validate the findings on performance

outcomes from BPO using a larger sample size.

5.3 Implications and Future Research

This study makes two primary contributions to the emerging literature on BPO (Dutta and Roy

2005; Feeny, Lacity and Willcocks 2005; Lacity, Feeny and Willcocks 2003). First, we draw on previous

research in transaction cost economics, business process management, strategy and international business

to develop and validate a theoretical model for antecedents and performance outcomes of BPO. We

extend previous research to understand the relationship between organization characteristics and adoption

and benefits of the emerging practice of onshore and offshore BPO. Second, we establish a link between

IT application deployment and BPO adoption and performance outcomes. This link highlights and

validates the role that IT plays in facilitating outsourcing, and in facilitating quality benefits and cost

benefits from BPO.

22

Though our study develops and tests a theoretical model of antecedents of onshore and offshore

BPO, there are at least three opportunities to extend this work. Consistent with the discussion above on

the use of dichotomous measures in this study, it would be helpful to understand the effect of IT

infrastructure, business process codification and strategic orientation on the extent of BPO within a firm.

Second, the results of our findings on the relationship between offshore revenues and assets and offshore

BPO shows that there is a need for future research to examine the effect of internationalization on BPO.

While U.S. publicly traded firms are not required to report data on offshore employees and offshore

suppliers in SEC filings, these data would offer some promise in understanding the relationship between a

firm’s international presence and offshore BPO.

Third, while many firms pursue BPO with the belief that BPO will reduce costs and enable the

firm to focus on its core business operations, firms may also be able to use BPO to boost innovation by

accessing a more skilled workforce and advanced technologies (Carmel and Agarwal 2002; King 2006;

Prahalad and Krishnan 2004). There is a need for future research to explicitly consider other outcomes of

BPO including measures such as enhanced innovation capability, speed and agility. Fourth, while our

adoption and performance findings did not differentiate between onshore and offshore BPO, previous

research suggests that there may be differences between onshore and offshore BPO due to differences in

management culture and values (Franke, Hofstede and Bond 1998; Hofstede 1983, 1984, 1985), distance

(Carmel and Agarwal 2001; Mithas and Whitaker 2006; Olson and Olson 2000), time zones (Espinosa

and Carmel 2004), and labor rates (Atkinson 2004; Brainard and Litan 2004). It will be important for

future research to focus on and highlight the potential differences between outsourcing onshore and

offshore.

This study also has at least three implications for managers. First, from a BPO vendor

perspective, as vendors make increased investments to deliver BPO services from onshore and offshore

locations, they will be competing for the client firms that would establish mutually beneficial

relationships. Vendors will want to identify firms that are prepared to field successful BPO engagements,

and will need to know the characteristics of these firms. A prepared client firm can reduce problems in

23

the BPO implementation, and simultaneously reduce the workload of BPO vendors and lead to more

positive outcomes. Our study indicates that vendors should focus their marketing efforts on firms with

broad IT application deployment and business process codification, and suggests that these firms may

more likely to produce successful mutually beneficial BPO relationships.

Second, because IT application deployment is positively associated with increased likelihood of

onshore and offshore BPO, a firm considering BPO must evaluate its IT infrastructure. A strong IT

infrastructure would give the firm more confidence that it can successfully connect with the BPO vendor

to integrate BPO outcomes back into its core business operations. A weak IT infrastructure would

indicate that the firm may need to make some internal investments prior to pursuing BPO. Third and

finally, firms must also evaluate their understanding of the business process to be outsourced, because

process codification is associated with an increased likelihood of onshore and offshore BPO. Good

documentation and understanding of the business process would give the firm confidence that it can

properly identify and scope the BPO project, and select and evaluate the BPO vendor. In contrast, a poor

understanding of the process may put the firm in a disadvantageous position, where it may not be able to

properly identify the project or the vendor, and may be subject to suboptimal vendor performance and/or

financial savings.

To conclude, this paper empirically tests the effect of IT application deployment, business

process codification, strategic orientation and internationalization on onshore and offshore business

process outsourcing. We find a positive relationship between IT application deployment and business

process codification, and onshore and offshore BPO. We also find a positive relationship between IT

application deployment and cost and quality benefits from BPO. These results suggest that firms with

strong IT infrastructure and business process codification are more likely to use BPO, and that firms with

strong IT infrastructure are more likely to achieve business value from BPO. These findings are

important as firms more broadly incorporate BPO into their global sourcing strategies.

24

Table 1: Description of Variables Variable Description Source Onshore BPO Binary variable indicating whether the firm conducts onshore business

process outsourcing. IW 500 survey

Offshore BPO Binary variable indicating whether the firm conducts offshore business process outsourcing.

IW 500 survey

Cost Benefits Four item formative index indicating the cost-related benefits a firm receives from BPO. Cost benefits covered by the index are reduced operation costs, more predictable costs, lower prices on products and services, and labor arbitrage/savings.

IW BPO survey

Quality Benefits Four item formative index indicating the quality-related benefits a firm receives from BPO. Quality benefits covered by the index are process improvement/transformation, ability to focus attention/resources on more critical issues, more skilled workforce, and higher customer satisfaction.

IW BPO survey

IT Application Deployment

Eight item formative index indicating the deployment of IT systems in a firm. IT systems covered by the index are enterprise resource planning, supply chain management, customer relationship management, data warehouse, business intelligence, web services, content management, and product lifecycle management.

IW 500 survey

Business Process Codification

Three item formative index indicating the extent to which a firm’s business processes are codified. Codification is indicated by whether a firm defined its business processes, deployed business process management software, and modeled business processes using CASE or related tool

IW 500 survey

Cost Reduction Strategy

Indicates that the firm’s business technology over the past 12 months has been primarily focused on cost cutting and streamlining operations. Base category is hybrid strategy (same emphasis on cost cutting and new revenue).

IW 500 survey

Revenue Growth Strategy

Indicates that the firm’s business technology over the past 12 months has been primarily focused on generating new revenue. Base category is hybrid strategy.

IW 500 survey

Cost Strategy Execution

Four item formative index indicating the firm’s focus on cost reduction in its strategy execution. Cost reduction items covered by the index are use of request for information (RFI) and request for proposal (RFP) prior to establishing BPO relationships, and measurement of success in BPO/IT outsourcing efforts using cost reduction and headcount/full-time employee metrics.

IW BPO survey

Quality Strategy Execution

Five item formative index indicating the firm’s focus on quality in its strategy execution. Cost reduction items covered by the index are use of service level agreements (SLAs) with vendors, and measurement of success in BPO/IT outsourcing efforts using revenue growth, process performance levels, customer satisfaction levels, and Six Sigma key performance indicators.

IW BPO survey

Internationalization Percentage of firm revenue from outside North America. We also use percentage of firm assets outside North America as an alternate measure of internationalization.

SEC filings, annual reports

Firm Size Natural log of annual firm revenue. Compustat, Dun & Bradstreet

Industry Control for primary industry sectors – finance, services, trade and logistics, and other industrial. Base category is manufacturing firms. Industry groupings based on North American Industry Classification System (NAICS) codes. Performance outcomes models include only finance, services and manufacturing firms.

Compustat, Dun & Bradstreet

25

Table 2: Descriptive Statistics and Correlations for Variables in Antecedents Models (n=280)

Mean SD Min Max 1 2 3 4 5 6 7 8 9 10 11

1 Onshore BPO 0.34 0.47 0.00 1.00 1.00

2 Offshore BPO 0.17 0.37 0.00 1.00 0.41* 1.00

3 IT Deployment 5.66 1.66 0.00 8.00 0.15* 0.13* 1.00

4 Process Codification 1.45 0.89 0.00 3.00 0.24* 0.22* 0.19* 1.00

5 Cost Strategy 0.33 0.47 0.00 1.00 -0.06 -0.07 -0.15* -0.11 1.00

6 Revenue Strategy 0.13 0.34 0.00 1.00 0.01 0.02 0.05 0.02 -0.27* 1.00

7 Internationalization 0.23 0.25 0.00 0.94 -0.10 -0.01 0.16* -0.10 0.00 -0.11 1.00

8 Firm Size 8.48 1.17 6.20 12.11 0.21* 0.24* 0.18* 0.11 -0.08 0.08 0.18* 1.00

9 Finance 0.13 0.33 0.00 1.00 0.12* 0.18* -0.13* 0.14* -0.17* 0.11 -0.12* 0.15* 1.00

10 Services 0.20 0.40 0.00 1.00 -0.05 -0.03 -0.04 0.11 -0.14* 0.02 -0.06 -0.16* -0.19* 1.00

11 Trade and Logistics 0.17 0.38 0.00 1.00 -0.00 -0.08 0.01 -0.07 -0.07 0.10 -0.17* 0.02 -0.17* -0.23* 1.00

12 Other Industrial 0.11 0.31 0.00 1.00 0.02 -0.00 -0.12* 0.02 0.18* -0.03 -0.18* 0.04 -0.13* -0.17* -0.16*

* Correlation significant at p<0.05 Table 3: Descriptive Statistics and Correlations for Variables in Performance Outcomes Models (n=25)

Mean SD Min Max 1 2 3 4 5 6 7 8 9

1 Cost Benefits 2.16 1.18 0.00 4.00 1.00

2 Quality Benefits 1.56 1.19 0.00 4.00 0.20 1.00

3 IT Deployment 5.32 1.89 1.00 8.00 0.43* 0.16 1.00

4 Process Codification 1.72 1.14 0.00 3.00 -0.06 -0.06 0.33 1.00

5 Cost Execution 2.84 1.03 0.00 4.00 0.19 -0.37 0.07 0.07 1.00

6 Quality Execution 2.92 1.38 1.00 5.00 0.24 0.53* -0.05 0.09 0.14 1.00

7 Internationalization 0.30 0.24 0.00 0.79 -0.04 0.09 0.32 0.01 0.04 -0.07 1.00

8 Firm Size 9.56 1.60 7.12 12.17 0.28 -0.05 0.47* 0.29 -0.19 -0.22 0.31 1.00

9 Finance 0.40 0.50 0.00 1.00 0.17 -0.11 -0.27 -0.09 0.13 -0.07 -0.42* 0.04 1.00

10 Services 0.32 0.48 0.00 1.00 -0.32 0.04 -0.21 -0.06 0.11 0.04 -0.08 -0.36 -0.56*

* Correlation significant at p<0.05

26

Table 4: Parameter Estimates for Antecedents Models

(1) (2) Onshore BPO Offshore BPO (Probit) (Probit) IT Application Deployment β11 0.110** β21 0.099* (0.027) (0.075) Process Codification β12 0.286*** β22 0.289*** (0.002) (0.007) Cost Reduction Strategy β13 -0.023 β23 -0.039 (0.452) (0.434) Revenue Growth Strategy β14 -0.150 β24 -0.061 (0.275) (0.416) Internationalization β15 -0.878** β25 -0.272 (0.013) (0.270) Firm Size β16 0.232*** β26 0.258*** (0.001) (0.001) Finance β17 0.228 β27 0.508* (0.215) (0.051) Services β18 -0.129 β28 0.033 (0.295) (0.454) Trade and Logistics β19 -0.024 β29 -0.275 (0.462) (0.197) Other Industrial β19-1 -0.006 β29-1 0.017 (0.492) (0.481) Constant β10 -3.248*** β20 -4.204*** (0.000) (0.000) Observations 280 280 Prob > Chi-square 0.000 0.000 Pseudo R-squared 0.104 0.131 p values in parentheses * significant at 10%; ** significant at 5%; *** significant at 1% (all one tailed)

27

Table 5: Parameter Estimates for Performance Outcomes Models

(3) (4) Cost Benefits Quality Benefits (OLS)1 (OLS)1 IT Application Deployment β31 0.296** β41 0.317*** (0.023) (0.005) Process Codification β32 -0.354* β42 -0.137 (0.062) (0.176) Cost Strategy Execution β33 0.238 β43 -0.751*** (0.223) (0.000) Quality Strategy Execution β34 0.275** β44 0.577*** (0.033) (0.000) Internationalization β35 -1.154 β45 1.606** (0.189) (0.044) Firm Size β36 0.210 β46 -0.130 (0.108) (0.163) Finance β37 0.172 β47 1.287** (0.419) (0.011) Services β38 -0.365 β48 1.114** (0.316) (0.040) Constant β30 -1.904 β40 0.447 (0.109) (0.372) Observations 25 25 Prob > F 0.028 0.000 R-squared 0.487 0.675 Robust p values in parentheses * significant at 10%; ** significant at 5%; *** significant at 1% (all one tailed) 1 Ordered probit yields similar results Table 6: Summary of Hypotheses Supported by Study Hypothesis Description Supported

1 IT deployment → Onshore and Offshore BPO Yes* 2 BP codification → Onshore and Offshore BPO Yes 3a Cost strategy → Onshore and Offshore BPO No 3b Revenue strategy → Onshore and Offshore BPO No 4 Internationalization → Offshore BPO No 5 IT deployment → Cost and Quality benefits Yes 6a Cost execution → Cost benefits No 6b Quality execution → Quality benefits Yes

* One of the two equations for this hypothesis is moderately statistically significant

28

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Appendix A: InformationWeek Questionnaire Items Variable Questionnaire Items Onshore / Offshore BPO

What forms of outside consulting or IT services does your organization currently use? (choose all that apply) Selections include: • Business process outsourcing (onshore) • Business process outsourcing (offshore)

Cost and Quality Benefits

What benefits, if any, has your company already seen from its BPO outsourcing efforts? (choose all that apply) Selections include (author categories in parentheses): • Reduced operations costs (cost) • More predictable costs (cost) • Lower prices on products and services (cost) • Labor arbitrage / savings (cost) • Process improvement / transformation (quality) • Ability to focus attention/resources on more critical issues (quality) • More skilled workforce (quality) • Higher customer satisfaction (quality)

IT Application Deployment

Which of the following products or technologies are widely deployed in your organization? (choose all that apply) Selections include: • ERP ● Business intelligence • Supply chain planning ● Web services • CRM systems ● Content management • Data warehouse ● Product lifecycle management

Business Process Codification

Formative index drawn from three questions:

What steps has your organization taken to optimize the efficiency of its technology processes in the past 12 months? (choose all that apply) Selections include: • Defined business processes

Which of the following products or technologies are widely deployed in your organization? (choose all that apply) Selections include: • Business process management software

Which of the following are the most effective technology steps managers in your organization have made in the past 12 months to raise company productivity? (choose all that apply) Selections include: • Modeled business processes using CASE or related tool

Cost Reduction and Revenue Growth Strategy

Has your organization's business-technology strategy in the past 12 months been primarily focused on generating new revenue, or on cost cutting and streamlining operations? (choose one) • Generating new revenue • Cost cutting / streamlining operations • About the same emphasis on both

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Appendix A: InformationWeek Questionnaire Items (continued) Cost Strategy Execution

Formative index drawn from two questions:

Did your organization conduct a RFP, RFI or some other comparative sourcing technique prior to establishing its BPO relationships? (choose one) Selections include: • RFP (Request for Proposal) • RFI (Request for Information) • Both • Neither

How does your organization measure the success of its business/IT process outsourcing efforts? (choose all that apply) Selections include: • Cost reduction • Headcount / full-time employees

Quality Strategy Execution

Formative index drawn from two questions:

Did your organization establish hard or measurable service performance metrics in its vendor service level agreements (SLAs)? (choose one) Selections include: • Yes, SLA with metrics • Yes, SLA with no metrics • No SLAs

How does your organization measure the success of its business/IT process outsourcing efforts? (choose all that apply) Selections include: • Revenue growth • Process performance levels • Six Sigma KPIs • Customer satisfaction levels