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Dr. Deepa Mani is an assistant professor in the Information Systems group and Research Fellow at the Indian School of Business. She is the faculty coordinator for the IBM Research Collaboratory in service science at ISB. Professor Mani’s research interests are at the intersection of technology, organisation, and society. She is interested in studying the impact of technology on organisation of economic activity, including firm boundary decisions, and the impact of such organisation on firm value and economic productivity. Her research articles have been published in leading journals such as MIS Quarterly, Information Systems Research, Sloan Management Review and MIS Quarterly Executive. They have also been featured in refereed conference proceedings, edited book chapters, and popular media outlets such as Forbes, CIO Magazine, Economic Times, LiveMint, Yahoo Finance and The Street.
We investigate the impact of outsourcing on long-term financial performance of the
firm. Outsourcing initiatives vary in terms of uncertainty and complexity of the engagement and consequent choice of the governing contract (fixed or variable). Using data on the hundred largest outsourcing initiatives implemented between 1996 and 2005, we find that relative to an industry, size-and book-to-market matched sample of control firms, the mean three year buy-and-hold abnormal return for fixed price outsourcing contracts is 17.5 percent (p<0.05) while the equivalent return for variable price contracts is -21.2 percent (p<0.10). We find support for the hypothesis that lower (greater) levels of complexity and uncertainty in the task and relational
environments that increase the likelihood of choice of fixed (variable) price contracts are
associated with greater (lower) returns to outsourcing. The market is slow to incorporate this signal provided by the contract. The results imply that firms have not managed strategic outsourcing initiatives efficiently, destroying significant shareholder value in the process.
The emergence of information intensive business process outsourcing (BPO) relationships calls for the study of exchange performance beyond traditional considerations of the contractual structure that facilitates cooperative intent to include the information structure that facilitates the mutual exchange of information to enact cooperative intent and coordinate actions between the user firm and the service provider. Yet, there has been little analysis of the drivers and performance effects of the information structure of BPO relationships, including its linkages to the underlying contractual structure. This study integrates perspectives in neo-institutional economics and information processing to develop and test the theoretical argument that the extent of use and performance effects of the information structure of the BPO relationship are greater in time and materials BPO contracts than in fixed price BPO contracts. Survey data on 134 BPO relationships provide empirical support for our hypotheses. The synergistic impact of incentives and information on BPO performance emphasizes that their joint assessment is necessary to enhance the explanatory power of extant theories of organization. This result also has implications for achieving maximum benefits from complex BPO arrangements that are more likely to be characterized by time and material contracts.
Organizations today outsource diverse business processes to achieve a wide variety of business objectives ranging from reduction of costs to innovation to business transformation. This study builds on the information processing view of the firm to propose that performance heterogeneity across business process outsourcing (BPO) exchanges is a function of the design of information capabilities (IC) that fit the unique information requirements (IR) of the exchange. Further, we compare performance effects of the fit between IR and IC across dominant categories of BPO relationships to provide insights into the relative benefits of enacting such fit between the constructs. Empirical analysis of survey data on 127 active BPO relationships supports our hypotheses. The results have important implications for how BPO relationships must be designed and managed to realize performance gains from BPO.
Multi-sourcing, the practice of stitching together best-of-breed IT services from multiple, geographically dispersed service providers represents the leading edge of modern organizational forms. While major strides have been achieved in the last decade in the Information Systems (IS) and strategic management literature in improving our understanding of outsourcing, the focus has been on a dyadic relationship between a client and a vendor. We demonstrate that a straightforward extrapolation of such a dyadic relationship falls short of addressing the nuanced incentive-effort-output linkages that arise when multiple vendors, who are competitors, have to cooperate and coordinate to achieve the client’s business objectives. We find that when multiple vendors have to work together to deliver end-to-end services to a client, the agents’ efforts critically hinge on the degree of interdependence between the various tasks as well as the observability and verifiability of output. Based on the analysis of actual multi-sourcing contract details over the last decade, interviews with leading practitioners and by developing a stylized analytical model, we lay the foundation for a normative theory of multi-sourcing and present a research agenda in this domain.
A brief synopsis of Of Process Analysis and Alignment: A Model of Governance in BPO Relationships (University of Texas at Austin working paper, May 2005) by Deepa Mani, Anitesh Barua and Andrew B. Whinston
Business Process Outsourcing (BPO) has matured into a powerful organizational lever for achieving a variety of strategic business objectives. But despite BPO’s strategic promise, many organizations are unprepared for the governance of this new way of working. Thus, many outsourcing programs fall short.
We suggest that insufficient attention to BPO governance is the main reason BPO relationships fail to deliver value. We present a governance model that increases the odds of BPO success. It is based on the premise that three key requirements of the outsourced process—its interdependence with other processes, its complexity, and its strategic importance to the enterprise—should determine three key BPO governance capabilities—the outsourcing contract, relationship management, and technical capabilities. When this alignment is explicit, the relationship will succeed.
We have tested the model using survey data on 137 BPO relationships. We illustrate the model’s premise using the successful experiences of Merrill Lynch and Qatar Airways at governing very different business processes, one transformational and the other transactional.
As the reach of outsourcing extends to include strategic business functions, a central question for outsourcing managers is whether outsourcing creates value. In contrast to transactional outsourcing, strategic outsourcing is characterized by higher levels of business uncertainty and complex coordination requirements. Consequently, strategic outsourcing involves greater contractual risks and requires greater investments in collaboration with the vendor. Based on the conjecture that clients may be unprepared for these management challenges, we test the hypothesis that there may be negative abnormal returns to strategic outsourcing decisions. Data on the 100 largest outsourcing deals inked between 1996 and 2005 show that while transactional deals experienced positive long-term abnormal returns, complex arrangements witnessed significant long-term value destruction. The negative outcomes are exacerbated by low levels of outsourcing experience and lack of familiarity with the vendor. The results suggest that clients are unprepared for the management challenges of strategic outsourcing. The results have implications for asset managers in extracting value from their own outsourcing decisions, and also for seeking investment opportunities in firms that manage the externalization of their value chains effectively.
Issues: Go to market strategy; Local challenges and nuances; Targeting and product offering; Time bound decision - global roll out; Nascent stage of cloud computing technology; Cannibalization
Disciplines: Information Systems, International, Entrepreneurship
Industries: Information, Media & Telecommunications
Setting: India, Large, 2009
Length: 18 pages
Publication Date: July 19, 2011
Abstract:
The case is set in mid-2009, about six months before the scheduled worldwide launch of Microsoft Azure. The group director of cloud computing for Microsoft India was considering the pros and cons of launching Azure simultaneously in India with the rest of the world. Cloud computing was a paradigm shift in the information technology (IT) industry that fundamentally changed how software and services were delivered to an end-user’s desktop. Cloud computing enabled shared resources — software, hardware, and information — to be provided to consumers on demand, charging them based on usage. Azure was Microsoft’s offering in this space, providing software and infrastructure as a service, and was also a platform to develop new applications on a pay-per-use model. Microsoft had always made its products available to users in the traditional license model, and Azure would be a paradigm shift not only in terms of technology but also in terms of the business model.
The director had to decide whether the nascent Indian market was ready to adopt this new technology and business model, and which segments to target. There were many reasons why the Indian market looked very lucrative, including presence of a strong IT development community, increasing IT adoption across Indian industries, and presence of a very big potential customer base in terms of small and medium enterprises. Conversely, there were concerns such as poor current IT adoption, rampant piracy, low availability of infrastructure in India (such as electricity and broadband penetration), and the “do-it-for-me” attitude of Indian businesspeople, which meant significant initial costs in terms of time and effort required to increase awareness.
Learning Objective:
This case is written to expose students to the decision-making process of launching a new technology in an emerging economy using a new business model, as well as to help them appreciate the trade-offs in such a process. It helps students recognize the strategic gains of introducing a product or service in a market that might be slow in delivering return on investment (due to high upfront investments required from the firm and unpredictable adoption in the targeted local market), but that has a significant part to play in influencing its adoption across other markets. The case can facilitate a discussion on how to segment the market and how to protect existing businesses from cannibalization from a new product, as well as the basics of channel management. This is a qualitative case, not a quantitative one; hence, the focus would not be to produce a perfect solution but to help students analyze the current situation and formulate a justifiable plan. The case also provides insights into the Indian IT industry, which has been widely credited as the main reason for the success and growth of the Indian economy over the last 25 years. The case can be used in an information technology course, a marketing course, or a strategy course.
Firm-level studies of the financial impacts of Information Technology (IT) events have often
focused on announcement period returns based on the capital asset pricing model (CAPM). This approach
may have two sets of distinct but related limitations for many classes of IT events. First, the use of
announcement period assumes the market is efficient in its assimilation and pricing of all information
about the event. However, a firm not be aware of the organizational changes required for success of the IT
event, or may not have the incentive to disclose such information for competitive reasons. Either way, we
expect many types of IT events to be characterized by low information disclosure, which, along with
investor biases, is likely to impede efficient pricing of the IT event by financial markets. Second, event
studies in Information Systems (IS) largely rely on CAPM, which considers only systematic risks in the
pricing of expected returns on IT assets, and assumes that idiosyncratic or firm-specific risks are
eliminated through efficient diversification. Yet one of the foundations of the IS discipline is the notion
that IT matters, largely because firms have different capabilities to develop, deploy and manage IT
resources to create value. Thus there is a disconnect between a basic theoretical tenet of the IS field and
the methodology deployed to assess the value of IT events. We develop a framework involving the
maturity of the IT event and the scope of complementary changes to assess the extent of information
disclosure and idiosyncratic risk, which, in turn, indicate the suitability of different methodologies to
assess financial value of the IT event. We empirically illustrate our approach for the case of large scale IT
and IT-enabled outsourcing, and conclude with implications for future IS research.