A critical question faced by industrial leaders is “which aspects of our value chain should we perform internal to our organization and which aspects should we source externally?” This demarcation of firm boundaries has been increasingly studied from the perspective of outsourcing. Outsourcing can be defined as the complete transfer of a business process that has been traditionally operated and managed internally to an independently owned external service provider. Outsourcing can further be conceptualized as a process which begins with developing a strategic and financial business case for outsourcing, followed by implementing the external sourcing model, and ultimately managing the relationship with the provider(s). Despite the surging popularity of outsourcing in practice, evidence from multiple sources suggests that a surprising percentage of outsourcing efforts fail to realize performance expectations. Given these observations, the research objective was to identify the salient management practices throughout the outsourcing process that drive performance.
The research objective was empirically addressed using a cross-sectional survey to collect detailed data on 198 outsourcing initiatives representing a diverse set of outsourcing experiences. Factor analysis was used to establish the validity and reliability of the measurement model, which includes five constructs representing aspects of the outsourcing process. Structural equation modeling was used to evaluate the hypothesized relationships among these latent constructs and outsourcing performance.
The analysis clearly identifies the management practices that are germane to realizing outsourcing performance objectives. The structural model was able to explain 36% of the variance in composite performance. Outsourcing firms that conduct an extensive strategic evaluation of the outsourcing opportunity and are committed to establishing a cooperative relationship with the service provider(s) are significantly more likely to realize the full benefits of their outsourcing efforts. Implementation practices, including employee involvement and contracting, are not sufficient to distinguish between well performing and poor performing outsourcing initiatives. The research findings also suggest that the relationship between strategic evaluation and performance is mediated by relationship management practices. These insights offer valuable guidance to outsourcing practitioners in terms of how sourcing resources should be applied in order to maximize the benefits realized from their outsourcing initiatives.