International Outsourcing of
IT-Enabled Business Processes:
A Conceptual Framework
Susan M. Mudambi
Temple University
Michael Graf
Vienna University of Economics and
Business Administration
1
Research Motivation

International outsourcing or “off-shoring” of
business services has become a hot topic
 Increased
press coverage
 New legislation and regulation
 Political and business concern

How can theory explain and inform firm
decision making regarding outsourcing?
2
Business Process Outsourcing (BPO)

Macro level
 BPO
reflects the integration of the service
economy, the digital economy and globalization
 IT enables BPO

Firm level
 To
compete, firms seek to keep labor costs low
and service quality high
 Firms need to make decisions on:



How to source
Where to source
Degree of IT infusion
3
Overview
Theory Base & Past Research
 Conceptual Framework
 Implications
 Future Research

4
Theory Used in Past Research

Transactions cost theory (Williamson 1975)

Eclectic (OLI) theory (Dunning 1977, 1980)
 Ownership,
Location and Internalization
advantages

Organizational capability and resource
base theory (Barney 1991)
5
Past Research
- Mode of entry & location decisions

Firm, location, and industry level factors
 Risks,
returns, resource availability, need for control
(Agarwal & Ramaswami 1992)
 Imitability of the process (Erramilli et al 2002)
 Government incentives (Mudambi 1995); and
appropriability regime (Gulati and Singh 1998)
 Cultural distance (Hofstede ‘80; O’Grady & Lane ‘96)

See also: Anderson and Gatignon (1986); Brouthers & Brouthers
2001; Contractor, Kundu & Hsu 2003; Erramilli & Rao 1993; Hill et al
1990; Kogut & Singh 1988; Woodcock et al 1994
6
Past Research
- Global sourcing decisions
Distinction between core and
supplementary services affects sourcing
decisions (Kotabe, Murray & Javalgi 1998)
 Supplementary services can be important
to competitiveness (Anderson & Narus 1995)
 How to source more important than where
to source (Kotabe and Murray 2004)

7
Past Research
- IT enabled BPO
Success factors for outsourcing
programming (Amoribieta et al 2000)
 Time zones still matter in IT outsourcing
(Barclay and Gray 2001)
 Personal touch still matters in IT
outsourcing (Mudambi & Mudambi 2002)

8
Conceptual Framework
Need to build on existing theory and
past research to understand:
 Outsourcing mode – how to source?

 In-house
 Outsource

Location choice – where to source?
 Domestic
Outsourcing
 Foreign Outsourcing (off-shoring)
9
“How to Source” Considerations
High
Tap Outside
Expertise to
Increase
Capability
SOURCE
IN-HOUSE
STRATEGIC
IMPORTANCE
OUTSOURCE
Leverage
Resources &
Capabilities
Low
Low
High
FIRM CAPABILITY
10
“Where to Source” Considerations
with examples
High
UK firm
sourcing in NZ
US firm
sourcing in
Philippines
GEOGRAPHIC
DISTANCE
Miles & TimeZones
NY firm sourcing
within NY
NY firm
sourcing in
Haiti
Low
Low
High
CULTURAL DISTANCE
11
How & Where to Source
- strategic tradeoffs
Outsource
DEGREE OF
OUTSOURCING
In House
Domestic
Outsourcing
Foreign
Outsourcing
Contract with local
company
Contract with
company in foreign
market
Domestic InHouse Sourcing
Manage process
internally at home
Foreign
Subsidiary
Sourcing
Acquisition or
greenfield
Low
MANAGEMENT
CONTROL
High
CULTURAL DISTANCE
Domestic Location
Foreign Location
12
Conceptual Framework
FIRM-SPECIFIC
FACTORS
SOURCING MODE
LOCATION-SPECIFIC
FACTORS
LOCATION
INDUSTRY-SPECIFIC
FACTORS
DEGREE OF
IT INFUSION
Moderating Factors
Outsourcing Objectives
Customer Expectations
13
Conceptual Framework
FIRM-SPECIFIC FACTORS
Firm size (H1)
International experience (H2)
Firm competitiveness (H3)
SOURCING MODE
LOCATION-SPECIFIC
FACTORS
LOCATION
In-House vs
Outsourcing
Cultural distance
Geographic distance
Government policy (H4)
IT infrastructure (H5)
Human capital value (H6)
DEGREE OF
IT INFUSION
INDUSTRY-SPECIFIC
FACTORS
Competitiveness (H7)
Imitability of process (H8)
Moderating Factors
OUTSOURCING
OBJECTIVES
Cost Minimization vs
Capability Enhancement
Need for Control
CUSTOMER
EXPECTATIONS
Convenience, # of Alternatives,
Interpersonal Interaction,
Timeliness
14
Implications
- How to Source

In-house vs outsourcing
 Outsourcing
likely when firm capabilities or strategic
importance of the process are low

Degree of management control
 More

control when process is imitable and important
How to source affected by:
 Firm,
location and industry factors
 Sourcing objective and consumer expectations
15
Implications
-Where to Source

Domestic vs foreign
 Foreign
likely when firm capabilities or strategic
importance of the process are low

Cultural and geographic distance
 Greater
when process is standardized
 Cultural distance less if interpersonal interaction is
important -- consumer expectations matter

Where to source affected by:
 Firm,
location and industry factors
 Sourcing objective and consumer expectations
16
Future Research

Further theory and model development needed

Grounded theory development via a multiple case study
approach

Danis & Parkhe 2002; Noble & Mokwa 1999; Parkhe 1993

Empirical analysis of decision processes using survey
and secondary data

Ask and measure: “What are the outcomes of
outsourcing decisions on various stakeholders?

Examine the degree of IT infusion, or the high tech vs
human touch tradeoffs in BPO
17
Thank You
We welcome your ideas
and comments.
18