Governance Choice in Global Sourcing of Services: The Impact on Service Quality and Cost Saving Performance

• Author: Lucia Piscitello,Stefano Elia,Davide Luzzini,Federico Caniato
• Published date: 01 August 2014
• DOI: http://doi.org/10.1002/gsj.1078
• Date: 01 August 2014

GOVERNANCE CHOICE IN GLOBAL SOURCING

OF SERVICES: THE IMPACT ON SERVICE QUALITY

AND COST SAVING PERFORMANCE

STEFANO ELIA,1,2* FEDERICO CANIATO,1DAVIDE LUZZINI,1and

LUCIA PISCITELLO1

1Department of Management, Economics, and Industrial Engineering,

Politecnico di Milano, Milan, Italy

2Henley Business School, University of Reading, Reading, U.K.

This article deals with the performance implications of the governance mode (captive

offshoring versus outsourcing) selected when companies offshore service activities, which is

still quite controversial in the literature. After accounting for endogeneity issues, we investi-

gate the relationship between governance and performances (both in terms of cost saving and

service quality) on a sample of 132 initiatives from the 2009 Offshoring Research Network

survey. Our results show that the alignment of the governance choice with an extended

transaction cost economics approach leads to better performances. However, the impact of a

possible misalignment: (1) is asymmetric, as only the failure to undertake a captive mode

negatively affects performance; and (2) negatively affects service quality more than cost

saving. Copyright © 2014 Strategic Management Society.

INTRODUCTION

Offshoring has been conceptualized as sourcing of

activities outside a firm’s home country for purposes

of serving home country or global operational

requirements (Massini, Perm-Ajchariyawong, and

Lewin, 2010). However, while historically the term

offshoring has referred implicitly to activities per-

taining to manufacturing, the more recent wave of

offshoring concerns administrative and technical ser-

vices. Namely, offshoring of business services has

increased enormously in the last decade (e.g., Doh,

2005; Kotabe, Mol, and Murray, 2009; Lewin and

Volberda, 2011). The term has also been applied to

several control situations, ranging from international

sourcing and purchasing (Kotabe, 1990) external to

the firm’s boundaries (so-called offshore outsourc-

ing), to the operation of wholly owned subsidiaries,

i.e., offshore activities located within the firm’s

boundaries, so-called captive offshoring (Mudambi

and Venzin, 2010). Indeed, the decision to outsource

or vertically integrate a value chain activity is one of

the most challenging choices that managers have to

face (Leiblein, Reuer, and Dalsace, 2002).

According to transaction cost economics (TCE)

and extended transaction cost models, firms choose

the appropriate governance form for each specific

activity by comparing costs of integrating an opera-

tion within the firm and costs of using an external

party (Brouthers, 2002). However,it remains unclear

whether and how these boundary decisions affect

firm performance. The literature has already high-

lighted that firms are able to self-select their form of

governance based on their own performance maxi-

mizing analyses, and that leads to the complication

that the observed performance is conditional upon

unobserved factors that influence the governance

choice (e.g., Shaver, 1998, 2013; Brouthers, 2013).

Keywords: global sourcing of services; governance mode; gov-

ernance misalignment; service quality; cost saving

*Correspondence to: Stefano Elia, DIG-Politecnico di Milano,

Piazza Leonardo da Vinci, 32-20133 Milan, Italy. E-mail:

stefano.elia@polimi.it

Global Strategy Journal

Global Strat. J., 4: 181–199 (2014)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/gsj.1078

Copyright © 2014 Strategic Management Society

Thus, the relationship between the firm’s governance

choice and its relevant performance could be inves-

tigated only once allowing for endogeneity through

appropriate econometric techniques (see Martin,

2013, for a recent exhaustive survey).In other words,

governance should not have a direct/absolute effect

on performance; rather, it is the alignment between a

governance arrangement and the transaction’s attri-

butes that influences performance (Leiblein et al.,

2002).

Most of the traditional literature on offshoring

has emphasized its cost saving motivations, but

recent discussions have highlighted more articu-

lated motivations driving firms’ offshoring deci-

sions, including foreign market access strategies

(Kotabe, 1992; Kotabe and Murray, 2004; Kotabe

et al., 2009) as well as access to human resources

and talent, knowledge, and new technologies

(Kedia and Lahiri, 2007; Lewin, Massini, and

Peeters, 2009a; Lewin et al., 2009b) and the related

service quality improvement. Thus, when investi-

gating service offshoring performance, research

should consider a multifaceted construct possibly

taking into account both traditional cost-related

aspects as well as quality-related issues. Most

studies investigate the effects of offshoring in terms

of cost performance (e.g., Bhalla, Sodhi, and Son,

2008), while other performance dimensions remain

rather neglected. In particular, especially in the

context of value adding and knowledge-intensive

service offshoring, great concern has arisen about

the consequences of managers decisions on the

quality of offshored services (Couto et al., 2006).

Therefore, in this article we investigate: (1) the

impact of governance choice, and governance mis-

alignment in particular, upon different measures of

performances, i.e., cost savings and service quality;

and (2) whether the impact of misalignment in the

governance choice is symmetric, i.e., whether adopt-

ing a captive model instead of outsourcing, or vice

versa, i.e., relying upon outsourcing instead of

captive offshoring, equally hurt performance.

Indeed, ‘theoretically there is no reason to expect

that the magnitude or even direction of any asymme-

try would be the same for various dependent vari-

ables’ (Martin, 2013: 35).

We develop our empirical analysis in the context

of offshoring of administrative and technical ser-

vices. Namely, we rely on comprehensive data from

the Offshoring Research Network (ORN) survey,

and our sample consists of 132 initiatives collected

in 2009.

According to both international business (IB) and

strategic management literature (e.g., Shaver, 1998),

we adopted a Heckman-based approach and found

that a misalignment in the governance choice nega-

tively impacts performance. However, governance

misalignment has an asymmetric impact, as it hurts

performance only when the company adopts less

hierarchy than expected, and the negative impact is

especially on the service quality dimension of per-

formance.

Our findings contribute to the growing stream of

literature on the actual costs of a strategic offshoring

decision and its impact upon performance (Larsen,

Manning, and Pedersen, 2013), as well as to the

make or buy literature (Kotabe,1990, 1992; Mol and

Kotabe, 2011). We also contribute to the IB literature

on the relationship between entry mode choice and

performance along the lines recently suggested by

Brouthers (2013) and Martin (2013). Additionally,

we focus on performance at the offshored activity

level, instead of considering the whole firm’s perfor-

mance (see also Castañer et al., forthcoming).

The article is organized as follows: the next

section illustrates the conceptual background under-

lying our research questions about the relationship

between governance mode, governance misalign-

ment, and the different measures of performance.

The methodology section describes the sample, the

operationalization of variables, and the econometric

models employed in our empirical analysis. Results

are illustrated in the next section, while the discus-

sion and conclusions are provided in the final

section.

CONCEPTUAL FRAMEWORK AND

RESEARCH QUESTIONS

Traditional literature on governance choices, mainly

relying upon TCE (e.g., Masten, 1993), has shown

that the governance mode, i.e., the degree of owner-

ship of the relevant activity/function, should not

directly compromise performance once endogeneity

is taken into account (Shaver, 1998; Leiblein et al.,

2002). In fact, both vertical integration and outsourc-

ing may involve great risks as well as potential ben-

efits, and managers should consider that not all

targets can be achieved with a specific governance

mode (Hutzschenreuter, Lewin, and Dresel, 2011).

However, extended transaction cost models claim

that, at the transaction and at the activity level, it is

not governance mode per se that should impact per-

182 S. Elia et al.

Copyright © 2014 Strategic Management Society Global Strat. J., 4: 181–199 (2014)

DOI: 10.1002/gsj.1078