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A model of contingent governance choice and performance in business process outsourcing: the effects of relational and process uncertainty

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  1. Abstract
  2. Introduction
  3. Theory and hypotheses development
    1. Contractual coordination
    2. Procedural coordination
    3. Contractual coordination and procedural coordination as complements
    4. Contingent effects of relational and process uncertainty
  4. Empirical analysis
    1. Operationalization
    2. Data
    3. Data analysis
  5. Results
    1. Determinants of contractual and procedural coordination
    2. The complementary relationship between contractual and procedural coordination
    3. The contingent effects of uncertainty on dimensions of BPO governance
    4. Other determinants of BPO performance
  6. Discussion of results and conclusion
  7. Appendix and references

Business process outsourcing (BPO) is rapidly emerging as an imperative for competitive success in modern organizations. This study characterizes contractual coordination, or the mutual exchange of rights, and procedural coordination, or the relational norms and processes that facilitate mutual exchange of information, as two fundamental elements of governance of BPO relationships, and posits that the choice of these elements is contingent on the type of uncertainty encountered in the BPO task environment. In particular, we focus on relational uncertainty (or uncertainty perceived by the user firm about its relationship with the service provider) and process uncertainty (or uncertainty in execution and management of the outsourced process across organizational boundaries). We draw on transaction cost economics and theories of inter-firm coordination to posit that the extent of contractual coordination in the BPO relationship is determined by relational uncertainty while the extent of procedural coordination is determined by process uncertainty. Further, while performance of the BPO relationship is explained by the complementary relationship between contractual and procedural coordination function, it is also significantly influenced by the alignment between contractual coordination and relational uncertainty and procedural coordination and process uncertainty. Our analysis of survey data on 137 active BPO relationships provides strong support for our hypotheses. The contingency approach to governance of BPO relationships helps reconcile the economic conceptualization of governance of outsourcing relationships as a nexus of contracts and the organizational perspective of governance as a complex work system by applying each perspective in a discriminating fashion based on the effects of relational and process uncertainty.

[...] This introduces the potential for sample selection bias business processes characterized by high levels of process and relational uncertainty will be internalized and therefore, not observed in our sample of BPO transactions. The calculation of the inverse Mills ratio in the governance choice model and its inclusion in the performance model is an accepted method for correcting such sample selection bias in OLS. However, its use is particularly problematic in other approaches such as the two stage least squares procedure used in our model (Poppo and Zenger 2002). [...]

[...] However, the design of procedural coordination mechanisms requires insights into uncertainty in execution and management of the outsourced business process across organizational boundaries, which is different from relational uncertainty. Such process uncertainty refers to the rate of information change in the outsourced process, and relates to whether the outsourced process is well understood, how process tasks will be allocated between participant firms, and the extent to which mutual adjustment in behavior is required during process management and execution (Gulati and Singh 1998). [...]

[...] We also specify interactions between relational uncertainty and contractual coordination, and between process uncertainty and procedural coordination in the regression model of BPO performance Results 4.1 Determinants of Contractual and Procedural Coordination Table 1 presents the results of our estimation. Model 1 estimates determinants of contractual coordination while Model 2 estimates determinants of procedural coordination. Model fit is acceptable with F-tests for both models rejecting the hypothesis that the predictors are jointly insignificant 0.001 ) and adjusted R2 values of 0.26 and 0.52 respectively. [...]

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