1 International Outsourcing of IT-Enabled Business Processes: A Conceptual Framework Susan M. Mudambi Temple University Michael Graf Vienna University of Economics and Business Administration

2 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?

3 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

4 Overview Theory Base & Past Research Conceptual Framework Implications Future Research

5 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)

6 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

7 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)

8 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)

9 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)

10 “How to Source” Considerations Tap Outside Expertise to Increase Capability SOURCE IN-HOUSE Leverage Resources & Capabilities OUTSOURCE High Low STRATEGIC IMPORTANCE FIRM CAPABILITY

11 “Where to Source” Considerations with examples UK firm sourcing in NZ US firm sourcing in Philippines NY firm sourcing in Haiti NY firm sourcing within NY High Low GEOGRAPHIC DISTANCE Miles & TimeZones CULTURAL DISTANCE

12 How & Where to Source - strategic tradeoffs Domestic Outsourcing Foreign Outsourcing Foreign Subsidiary Sourcing Domestic In- House Sourcing Outsource Foreign Location In House Domestic Location DEGREE OF OUTSOURCING CULTURAL DISTANCE Contract with local company Contract with company in foreign market Manage process internally at home Acquisition or greenfield MANAGEMENT CONTROL Low High

13 Conceptual Framework Moderating Factors Outsourcing Objectives Customer Expectations FIRM-SPECIFIC FACTORS LOCATION-SPECIFIC FACTORS INDUSTRY-SPECIFIC FACTORS SOURCING MODE LOCATION DEGREE OF IT INFUSION

14 Conceptual Framework Moderating Factors OUTSOURCING OBJECTIVES CUSTOMER EXPECTATIONS Cost Minimization vs Capability Enhancement Need for Control Convenience, # of Alternatives, Interpersonal Interaction, Timeliness FIRM-SPECIFIC FACTORS Firm size (H1) International experience (H2) Firm competitiveness (H3) LOCATION-SPECIFIC FACTORS Government policy (H4) IT infrastructure (H5) Human capital value (H6) INDUSTRY-SPECIFIC FACTORS Competitiveness (H7) Imitability of process (H8) SOURCING MODE In-House vs Outsourcing LOCATION Cultural distance Geographic distance DEGREE OF IT INFUSION

15 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

16 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

17 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

18 Thank You We welcome your ideas and comments.