Skip to main content

Client Satisfaction Versus Profitability: An Empirical Analysis of the Impact of Formal Controls in Strategic Outsourcing Contracts

Part of the Progress in IS book series (PROIS)

Abstract

The reach and impact of outsourcing is growing fast to include a variety of strategic objectives. Unlike in transactional outsourcing, where the vendor leverages scale economies to provide standardized services at reduced costs of ownership, client satisfaction in strategic outsourcing is contingent on the extent to which the vendor’s service offering is customized to meet heterogeneous, unique client needs. However, project management practices that lead to high levels of client satisfaction may be incompatible with the project’s financial performance. In this study, we investigate how managerial actions differentially impact project profitability and client satisfaction. Using rich field data on 390 strategic outsourcing contracts, we examine the differential impact of output controls, activity controls and capability controls on client satisfaction and contract profitability. We find that activity controls are positively associated with client satisfaction and profitability; in contrast, our results present mixed evidence for capability controls, and negative impact for output controls. In addition to contributing to research in control theory, our results provide actionable insights for vendors into appropriate strategies and tactics for competing efficiently and effectively in services markets.

Keywords

  • Outsourcing
  • Client satisfaction
  • Profitability
  • Control theory
  • Business value of IS
  • Empirical research/study

This is a preview of subscription content, access via your institution.

Buying options

Chapter
USD   29.95
Price excludes VAT (USA)
  • DOI: 10.1007/978-3-662-43820-6_4
  • Chapter length: 22 pages
  • Instant PDF download
  • Readable on all devices
  • Own it forever
  • Exclusive offer for individuals only
  • Tax calculation will be finalised during checkout
eBook
USD   139.00
Price excludes VAT (USA)
  • ISBN: 978-3-662-43820-6
  • Instant PDF download
  • Readable on all devices
  • Own it forever
  • Exclusive offer for individuals only
  • Tax calculation will be finalised during checkout
Softcover Book
USD   179.99
Price excludes VAT (USA)

Notes

  1. 1.

    We also checked for the presence of common-method bias through Harman’s single-factor test (Podsakoff and Organ 1986). All of the variables in our study were simultaneously subject to an exploratory factor analysis, and the results of the unrotated factor solution were examined. The absence of a single factor that explained a significant amount of variance in the data suggested that common method bias did not likely impact survey responses. We also used Cronbach’s alpha to check the reliability of constructs.

  2. 2.

    Model 1–4 shows a negative but insignificant effect of use emerging market centers for delivery of strategic sourcing projects, and model 5 shows a negative and significant effect.

  3. 3.

    We find that neither the number of service level agreements nor the number of service level objectives has any significant effect on service satisfaction or on financial performance in Models 1–4.

References

  • Agarwal, V., & Farrell, D. (2003). Who wins in offshoring. McKinsey Quarterly.

    Google Scholar 

  • Argyres, N., & Mayer, K. J. (2007). Contract design as a firm capability: An integration of learning and transaction cost perspectives. Academy of Management Review, 32, 1060–1077.

    Google Scholar 

  • Bernheim, B. D., & Whinston, M. (1998). Incomplete contracts and strategic ambiguity. American Economic Review, 88(4), 908–932.

    Google Scholar 

  • Couto, V., Lewin, A. Y., Mani, M., Manning, S., Russell, J. W., & Sehgal, V. (2007). Offshoring 2.0: Contracting knowledge and innovation to expand global capabilities. Companies seek intellectual talent beyond their borders. Durham: Duke University, CIBER/Booz Allen Hamilton Report.

    Google Scholar 

  • Davidson, R., & MacKinnon, J. (1993). Estimation and inference in econometrics. New York: Oxford University Press.

    Google Scholar 

  • Dyer, J. H., & Nobeoka, K. (2000). Creating and managing a high performance knowledge-sharing network: The Toyota case. Strategic Management Journal, 21(Special Issue), 345–367.

    Google Scholar 

  • Dyer, J. H., & Singh, H. (1998). The relational view: Cooperative strategy and inter-organizational competitive advantage. Academy of Management Review, 23, 660–679.

    Google Scholar 

  • Dyer, J. H. (2000). Collaborative advantage: Winning through extended enterprise supplier networks. New York: Oxford University Press.

    Google Scholar 

  • Farrell, D. (2005). Offshoring: Value creation through economic change. Journal of Management Studies, 42(3), 675–683.

    CrossRef  Google Scholar 

  • Gottfredson, M., Puryear, R., & Phillips, S. (2005). Strategic sourcing from periphery to the core. Harvard Business Review, 8(2), 2–9.

    Google Scholar 

  • Greene, W. H. (2000). Econometric analysis (International edition). Prentice Hall, Upper Saddle River.

    Google Scholar 

  • Harter, D. E., Krishnan, M. S., & Slaughter, S. A. (2000). Effects of process maturity on quality, cycle time, and effort in software product development. Management Science, 46, 451–466.

    CrossRef  Google Scholar 

  • Hausman, J. A. (1978). Specification tests in econometrics. Econometrica: Journal of the Econometric Society, 46, 1251–1271.

    Google Scholar 

  • Lee, J. N., & Kim, Y. G. (1999). Effect of partnership quality on IS outsourcing success: Conceptual framework and empirical validation. Journal of Management information systems, 15, 29–61.

    Google Scholar 

  • Lewin, A. Y., Massini, S., & Peeters, C. (2009). Why are companies offshoring innovation? The emerging global race for talent. Journal of International Business Studies, 40, 901–925.

    CrossRef  Google Scholar 

  • Mani, D., Barua, A., & Whinston, A. (2011). An empirical analysis of the contractual and information structures in business process outsourcing. Information Systems Research, 34(1), 39–62.

    Google Scholar 

  • Myers, R. H. (1990). Classical and modern regression with applications. Boston: PWS-Kent Publishing Company.

    Google Scholar 

  • Neter, J., Kutner, M. H., Nachtsheim, C. J., & Wasserman, W. (1996). Applied linear regression models. Chicago: Irwin.

    Google Scholar 

  • Parasuraman, A., Zeithaml, V. A., & Berry, L. L. (1988). Servqual: A multiple-item scale for measuring customer perceptions of service quality. Journal of retailing, 64(1), 12–40.

    Google Scholar 

  • Podsakoff, P. M., & Organ, D. W. (1986). Self-reports in organizational research: Problems and prospects. Journal of Management, 12(4), 531–544.

    CrossRef  Google Scholar 

  • Poppo, L., & Zenger, T. (2002). Do formal contracts and relational governance function as substitutes or complements? Strategic Management Journal, 23, 707–725.

    CrossRef  Google Scholar 

  • Porter, M. E. (1980). Competitive strategy. New York: Free Press.

    Google Scholar 

  • Porter, M. E. (1985). Competitive advantage: Creating and sustaining superior performance. New York: Free Press.

    Google Scholar 

  • Porter, M. E. (1996). What is strategy? Harvard Business Review, 74, 61–78.

    Google Scholar 

  • PriceWaterhouseCoopers. (2005). The evolution of BPO in India.

    Google Scholar 

  • Puranam, P., & Srikanth, K. (2007, June 16). Seven myths about outsourcing. The Wall Street Journal.

    Google Scholar 

  • Ring, P. S., & Van de Ven, A. H. (1994). Developmental processes of cooperative inter-organizational relationships. Academy of Management Review, 19, 90–118.

    Google Scholar 

  • Srikanth, K., & Puranam, P. (2011). Integrating distributed work: Comparing task design, communication and tacit coordination mechanisms. Strategic Management Journal, 32, 849–875.

    CrossRef  Google Scholar 

  • Susarla, A. (2012). Contractual flexibility, rent seeking, and renegotiation design: An empirical analysis of information technology outsourcing contracts. Management Science, 58(7), 1388–1407.

    CrossRef  Google Scholar 

  • Wu, D. M. (1973). Alternative tests of independence between stochastic regressors and disturbances. Econometrica, 41, 733–750.

    Google Scholar 

  • Zollo, M., & Winter, S. (2002). Deliberate learning and the evolution of dynamic capabilities. Organization Science, 13, 339–351.

    CrossRef  Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Deepa Mani .

Editor information

Editors and Affiliations

Rights and permissions

Reprints and Permissions

Copyright information

© 2014 Springer-Verlag Berlin Heidelberg

About this chapter

Cite this chapter

Langer, N., Mani, D., Srikanth, K. (2014). Client Satisfaction Versus Profitability: An Empirical Analysis of the Impact of Formal Controls in Strategic Outsourcing Contracts. In: Hirschheim, R., Heinzl, A., Dibbern, J. (eds) Information Systems Outsourcing. Progress in IS. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-43820-6_4

Download citation