Company and Asset Characteristics Moderating the Outsourcing-Performance Relationship

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Company and Asset Characteristics

Moderating the

Outsourcing-Performance Relationship

Applied to ABN AMRO Bank N.V., Sourcing & Contract Management

Author: Simone Paes Bsc.

Student Number: 5908604

Course: Master Business Studies

Date: 27 August 2009

First Supervisor: Drs. Ing. A.C.J. Meulemans Second Supervisor: Prof. Dr. J.H.J.P. Tettero

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All company-related information used in this thesis is confidential

information of ABN AMRO Bank N.V..

Notice that the information must be kept confidential and not be

used in any way.

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Abstract

This thesis contains a study after the impact of outsourcing on company performance. Making use of outsourcing in any kind of way is an enabler for increase in a company’s overall performance (Gilley et al., 2004) that consists of a combination of non-financial as well as financial measurement perspectives (Kaplan and Norton, 2001). Making use of outsourcing of peripheral services is expected to indirectly in the long run and in some cases also directly within short notice positively affect the perspectives of overall company performance. Also three moderating variables are assessed that are hypothesized to affect the overall outsourcing-performance relationship. The variable company size is hypothesized to negatively affect the outsourcing-performance relationship. In contrary to this, the variables company innovativeness and asset specificity (of candidates for outsourcing) are hypothesized to positively affect the outsourcing-performance relationship. Managers at ABN AMRO’s N-share departments Services Netherland and Services Operations acknowledge these relationships. Also illustrations are made to emphasize that they reason and act according to these ideas.

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Word of Thanks

This thesis is the result of research that I conducted for ABN AMRO Bank N.V. combined with existing literature research. I can however not take all the credit. I would therefore like to pass along my sincere thanks to some people that helped me immensely through the whole seven month lasting process.

I would like to start off extending my gratitude to all my ABN AMRO Bank N.V. direct colleagues mainly from the Sourcing and Contract Management team for their ongoing support, time, improvement ideas, and their strength to teach me a lot during the process. I am extremely grateful to my manager and my supervisor Yvonne Veltkamp who has helped me develop myself in the personal perspective as well as in the business perspective. I would furthermore like to thank the managers that I have interviewed for the internal ABN AMRO Bank N.V. research, during which I have gained useful data for my thesis as well. Although they all experienced an extremely hectic working environment (due to separation deadlines with Royal Bank of Scotland), they were all willing to schedule one hour in their agendas to help me gain the information that I needed. Furthermore, I would like to thank the other graduation interns at ABN AMRO Bank N.V. that were member of ‘Club ABN AMRO Stagiairs’ (CASt), who gave me the opportunity to become a board member of their association and herewith making life at ABN AMRO a bit more student-like and exciting.

Also, I would like to thank my first supervisor at the University of Amsterdam (UvA), Toon Meulemans. I would like to thank him for not blaming me for my stubbornness and still willing to help me, although we did not always agree with one another at the beginning of the process.

Last but not least, I would like to extend my sincere gratitude to my parents. My mother for always listening to me when I was in state of stress and stressing along with me (Sorry for that ;) ). My dad for always being businesslike and helping both of us getting back to a normal state of mind and realizing that we were both acting like fools!

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Introduction

‘Chrysler outsources 100% of the manufacture of half of its minicompact and subcompact cars. Furthermore, Chrysler and Ford currently produce less than one-half of the value of all their vehicles in-house. Similarly, Boeing has begun to rely more heavily on outsourcing partners to manufacture its aircrafts. For example, only 10% of the manufacture of the Boeing 767 is produced in-house’.

-(Gilley and Rasheed, 2000)

The above mentioned illustrates the presence and use of external production and acquisition of part of the regular business of manufacturing companies, a process known as outsourcing (Girma and Gorg, 2004; Strassmann, 1990, p.267). Not only do manufacturing companies make use of such external production for part of their business. Also for instance the services oriented company ABN AMRO Bank N.V. makes use of external parties for parts of their services production; for instance, they make use of external providers to transport money to and from their so-called bank-shops and Automated Teller Machines and for certain callcenter activities (ATM’s) (ABN AMRO, 2009). Shell also makes use of cheaper labor in foreign countries such as Malaysia for part of their business processes, mainly concerning IT related activities (i.a. Delen, 2006, p.29). Apparently both manufacturing and services-oriented companies do make use of external parties as producers and providers for (part of) the creation of their products and services.

Not only do large multinational enterprises like Chrysler, Boeing, ABN AMRO BANK N.V. and Shell make use of outsourcing opportunities. Also for small companies, outsourcing could under certain circumstances be considered an interesting opportunity, since they could lack resources, knowledge and machinery, that could not desirably be created internally and that external parties do possess and offer (Carmel and Nicholson, 2005). All this illustrates that outsourcing opportunities could be interesting for all types of companies.

The presence of interesting outsourcing opportunities is translated into a worldwide trend towards outsourcing (Lonsdale and Cox, 2000). This means that it gets more and more common for companies to make use of external parties for part of their services and product creation and delivery. Outsourcing could generally be distinguished into three types; onshore

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outsourcing, nearshore outsourcing, and offshore outsourcing. The main distinctive factor of the different outsourcing types a locational one; the geographical distance between the domestic and the external company which does significantly differ (Ang and Inkpen, 2008).

The first and foremost variable that companies generally assess when taking a make-or-buy decision are (variable) costs. When this is done, a company choses to make or to buy (part of) a product or service depending on the cheapest option (expressed in terms of money). In this way, outsourcing decisions can be seen as an accounting-related matter. During the period February 2009- June 2009, as an intern, I conducted research for ABN AMRO Bank N.V. after their outsourcing contracts and the related considerations to engage into outsourcing agreements. During the interviews I took with several managers, it became clear to me that managers at ABN AMRO BANK N.V. do not just approach the make-or-buy decision in an accounting-related way; They rather combine this mode of reasoning with a managemental approach. Their make-or-buy decisions are thus not only based on cost-related grounds, but also on other non-financial variables that they do consider to be important in valuing their success or performance (such as quality). Findings from this research are used throughout this thesis. The report of the research can be found in appendix 4.

In order to be able to make the most desirable decisions concerning to make or to buy a certain product or service, it is thus important to be able to evaluate both the make and the buy opportunities in a financial-, but also in a non-financial perspective. This expected (company) performance can be measured by using a valid performance measure, such as the Balanced Scorecard of Kaplan and Norton. This thesis will look after the relationship between outsourcing and overall company performance measured within a combination of financial- as well as non-financial measurement perspectives. Performance will thus measured in a managemental type of way instead of only looking at accounting-related principles. Furthermore will be checked whether this general outsourcing-performance relationship differs between distinctive types of outsourcing. Also will be checked whether certain company or asset characteristics have a moderating impact on the hypothesized outsourcing-performance relationship. The theoretical findings will be applied to and checked with reasoning and decisions of outsourcing-related departments at ABN AMRO Bank N.V..

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7.3 Application of theory 58 7.3.1 Hypothesis one 59 7.3.2 Hypothesis two 59 7.3.3 Hypothesis three 60 7.3.4 Hypothesis four 61 7.3.5 Hypothesis five 62 7.3.6 Hypothesis six 62 7.3.7 Hypothesis seven 63 7.3.8 Hypothesis eight 65 8. Conclusion 67 9. Discussion 69 10. Limitations 71 11. Recommendations 73 References 74 Appendices 79

Appendix 1: Questionnaire managers Services Operations 80 Appendix 2: Questionnaire managers Services Netherlands 81 Appendix 3: Organizational Scheme N-share ABN AMRO Bank N.V. 82 Appendix 4: Report of internal ABN AMRO Bank N.V. research 83

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Table of Figures

Figure 1: Trend [Text deleted due to confidentiality] Performance 2006-2009 26 Figure 2: Geographical- and Cultural (and Psychic) Distance

Characteristics Onshore-, Nearshore-, and Offshore Outsourcing 28 Figure 3: The Balanced Scorecard of Kaplan and Norton 34 Figure 4: Influence of Outsourcing on Overall Company Performance 42 Figure 5: Hypotheses Outsourcing Affecting the Perspectives of the

Balanced Scorecard 46

Figure 6: Firm Size and Increased Overall Company Performance 49 Figure 7: Level of Innovativeness and Increased Overall Company

Performance 52

Figure 8: Asset Specificity and Increased Overall Company Performance 54 Figure 9: Moderating Variables Affecting the Hypothesized Outsourcing-

Performance Relationship 56

Figure 10: Consolidation of Hypotheses 2,3 and 4 57 Figure 11: Transformation of Hypothesis Numbers 57

Figure 12: Research Model 58

Figure 13: Overview of Hypotheses 58

Figure 14: Informants 62

Figure 15: Cost- and Volume Changes [Text deleted due to confidentiality]

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Research Question

Below, the general research question that guides this thesis can be found. The answer to this question will be provided by making use of sub-topics that are mentioned later on in this chapter.

Demarcations

Since many different company characteristics and operation characteristics of considered being outsourced activities can be distinguished, for sake of time, only some of these are assessed within this research. The characteristics that are taken into consideration as possible moderators of the outsourcing-performance relationship are ones that are relatively easy to obtain and determine. This concerns the following characteristics:

1) Company Size (Company characteristic)

2) Firm Innovativeness (Company characteristic)

3) Asset Specificity (of the outsourced operation) (Operation characteristic)

Also different classifications of outsourcing types do exist. In this thesis only the three most commonly mentioned types in different classifications are used. These are the following:

1) Onshore Outsourcing 2) Nearshore Outsourcing 3) Offshore Outsourcing

Also needs to be mentioned that the results of the theoretical research are only applicable to and valid for services-oriented companies (in contrast to manufacturing companies). Research indicated that the results of outsourcing-use for both services-oriented and manufacturing companies do significantly differ at some points (Bjerring Olsen, 2006) and since the practical context is a services context, the theoretical research and its results are directed at services-oriented companies. Furthermore, the theoretical findings are only relevant for services companies that have recently been or are currently active in the international scene as well as Do certain company and asset characteristics have a moderating effect on the outsourcing-performance relationship and if so, do these effects differ between different types of outsourcing?

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in the domestic market. The last demarcation that has to be taken into account is the fact that the research and its results only hold for outsourcing of peripheral or supporting activities. Summarized can be stated that the results of the research are thus applicable to outsourcing of peripheral activities by multinational and former multinational services-oriented companies.

Subtopics

Subtopics that are treated in this thesis to provide an answer to the research question (demarcations taken into account) are mentioned below.

-Outsourcing  Onshore outsourcing  Nearshore outsourcing  Offshore outsourcing

 Benefits and risks of outsourcing -Performance Evaluation mechanisms

 Balanced scorecard of Kaplan and Norton -Outsourcing Performance-Relationship

 Onshore outsourcing – performance relationship  Nearshore outsourcing – performance relationship  Offshore outsourcing – performance relationship -Moderating variables of outsourcing- performance relationship

 Company features -Company size

-Company innovativeness  Operational characteristic

-Asset specificity

Description of the Context

This thesis generally is about the impact of outsourcing (i.e. a decision to buy rather than to make) on different perspectives of company performance, and actually thus the variables that are important to take into account in the make-or-buy decision. Also is a set of three company- and asset- related variables assessed to moderate the relationship between outsourcing or insourcing options and their effect on company performance. These

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moderating variables could thus influence the company performance for outsourcing or insourcing and indirectly thus influence the make-or-buy the decision.

After the theoretical part of the research that was just described, these findings will be applied to a practical setting. This practical setting mainly contains the department Sourcing & Contract Management (S&CM) of ABN AMRO Bank N.V.’s Business Unit Netherlands (hereafter called ABN AMRO). [Text deleted due to confidentiality]

Practical Relevance

Outsourcing in all its types is still getting more and more common (Lonsdale and Cox, 2000). The way outsourcing influences a company’s overall performance is dependent on company features (Ang and Straub, 1998; Oh, 2005) and asset characteristics (Arnold 2000; Aubert et al., 2004). Since more and more companies make use of outsourcing for (part of) their business, and thus part of their results are dependent of or affected by outsourcing, it is nowadays becoming more and more important to know under what circumstances outsourcing is desirable for a company’s results or performance and which circumstances are disablers of a boost in company performance measured in different perspectives of company performance.

Until today, there is no general framework that provides managers with insights in conditions under which outsourcing will influence their performance and the corresponding extent to which these factors have a moderating influence on the outsourcing-performance relationship. What thus seems to be missing in this world in which outsourcing is more and more considered an interesting option for a company, is a framework that reflects variables that influence company performance when making use of outsourcing and the extent to and way in which these factors influence performance. Such framework or instrument could thus provide insights in and guide companies in making the most desirable decision concerning so-called ‘make-or-buy decisions’ for their companies or departments.

In this thesis a start is made with such a decision guiding framework for services-oriented companies´ peripheral activities. The model in this thesis is probably very simplistic. However it could be seen as a starting point or foundation for a more broadly applicable decision guiding model. This model only contains three company- or asset characteristics that

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are expected to moderate the outsourcing-performance relationship. It is obvious that there are many more company- and asset-characteristics that are not included in this model but could however be of moderating influence of the relationship. Since only three variables are included in the model in this thesis, this model can be seen as a starting point for a more extended and more complete model that is more useful for different types of companies.

Theoretical Relevance

Gilley et al. (2004) as well as Gilley and Rasheed (2000) hypothesized that the outsourcing-performance relationship is not the same for all companies and did research after the moderating effect of firm size on this relationship. Gilley et al. (2004) nor any other researchers did research after other possible moderators of this relationship. Since outsourcing occurs more and more often and managers realize that evaluation of outsourcing decisions is an essential part of current and future company success (ABN AMRO, 2009), it is important to know whether and how certain company and asset characteristics that can easily be obtained and evaluated, moderate this outcome.

Furthermore, in research after moderating variables affecting the outsourcing-performance relationship, a distinction between the several types of outsourcing was never made. In most cases, these general hypotheses were only based on onshore outsourcing, since this was and still is the most common type of outsourcing (McKinsey and Gartner, in Padmanabhan, 2007). Offshore outsourcing is a newer ‘trend’ than are both other types of outsourcing (onshore outsourcing and nearshore outsourcing) (Pfannenstel en Tsai, 2004) and was in literature research on the outsourcing-performance relationship so far never really taken into account as such. Since it is theoretically as well as practically relevant to conduct more research after moderating variables affecting the outsourcing-performance relationship, it is important to take into account (possible differences that come with) the different types of outsourcing and deal with the different types in the same way.

Last, but not least, existing theory on make-or-buy decisions is mostly focused on cost-related variables to indicate the most desirable option for a company. [Text deleted due to confidentiality] the accounting-related approach on make-or-buy decisions seems to be incomplete to support make-or-buy decisions. Within this thesis, make-or-buy decisions will

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be approached in a managemental way, in which not only financial or cost-related variables are taken into account, but also other variables that seem to be important for companies to meet their goals.

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Structure of the Thesis

This thesis consists of two parts, the theoretical part as well as the practical context to which the theoretical findings are applied. Chapter one gives insight in the ‘outsourcing umbrella’ and the types of outsourcing within this umbrella. Also will be paid attention to benefits and risks of outsourcing. Chapter two is on mechanisms which could help companies to evaluate their (internally as well as externally created) financial as well as non-financial performances. In chapter three, attention is paid to the relationship between outsourcing and increased company performance by engaging into outsourcing for certain activities (compared to in the initial situation, before engaging into outsourcing for a certain activity). In chapter four, a look is taken at outsourcing and its influence on the difference perspectives of the balanced scorecard. In chapter 5, information on researched moderating variables of the outsourcing-performance relationship are assessed. In chapter six the research model including hypotheses will be displayed as a conclusion of the theoretical research of chapter one until five. Chapter seven contains a description of the practical setting to which the theoretical findings are applied in the same chapter. Chapter eight contains a brief conclusion on the results. In chapter nine a discussion on these results can be found. Chapter ten pays attention to the limitations of the research and in chapter eleven, recommendations for further research are discussed.

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1. Outsourcing

‘The improper use of outsourcing is playing an important role in the continuing competitive decline of many Western firms’.

-(Bettis et al., 1992)

This quote refers to outsourcing and the fact that outsourcing can significantly influence a company’s competitiveness. Outsourcing is thus supposed to affect certain evaluation measures of company performance or success. Since outsourcing has been expanding during the past decade (Aubert et al., 2004) and is still getting more and more common in the business world (Girma and Görg, 2004; Beullens, 2008), it is important to have a clear picture of the outsourcing concept and its features (Aubert et al., 2004).

Although in for instance in the quote above, in literature, in papers and also colleges, use is made of the term ‘outsourcing’ it can be unclear what exactly is referred to, since different types of outsourcing do exist. This chapter will dig deeper into the general concept of outsourcing and the different types of outsourcing that can be distinguished.

1.1 Outsourcing as a collection of different types

The term outsourcing is short for ‘outside resource using’ (Borlas, 2009). The word ‘outside’ refers to the creation of value via external parties. The definition of outsourcing of Arnold (2000) is closely related to this and is as follows: ‘The using of sources of external parties in order to create value for the company’. A somewhat more extended definition is given by Heywood (in Loh, 2005, p.5) who describes outsourcing as being ‘The transferring of an internal business function or functions, plus any associated assets, to an external supplier or service provider who offers a defined service for a specified period of time, at an agreed but probably qualified price’. Greer et al. (1999) used their own definition of outsourcing within their research, which is: ‘Outsourcing occurs when a company contracts with a vendor to perform an activity previously performed by the company’. Also Feenstra and Hanson (1996) use a somewhat derogatory definition and argue that outsourcing can be defined as ‘The import of intermediate inputs by domestic firms’. Last but not least, Carmel and Tjia (2005, p.

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XVIII) also used their own definition stating that within outsourcing ‘tasks and of processes are contracted to be performed outside the boundaries of the firm’.

The fact that many researchers use a different definition of outsourcing, shows that before digging into research, it is important to make clear what definition of outsourcing will be used in this thesis. A combination of the abovementioned definitions by researchers of outsourcing-related research, leads to a new overall definition of outsourcing that will be used in this thesis:

Neither this definition nor any other general definition of outsourcing states anything about the location of production of the external party relatively to the location of the domestic firm. Adding locational or geographical features concerning the place of production makes it possible to distinguish different types of outsourcing that do all fall below the general outsourcing umbrella that was just defined. Types of outsourcing could be distinguished by classifying them based upon the geographical distance between the service provider and the domestic firm (Beullens, 2008, p.9). The types of outsourcing that are distinguished in this thesis are onshore outsourcing (onshoring), nearshore outsourcing (nearshoring) and offshore outsourcing (offshoring). These concepts will be explained in more detail in the chapters 1.2-1.4.

1.2 Onshore Outsourcing

Onshore outsourcing (onshoring) is the type of outsourcing with usually the smallest geographical distance between the external provider and the domestic firm (Chakrabarty in Kehal and Singh, 2006, p.26 and p.28; Power et al. in Beullens, 2008). In the case of onshore outsourcing, the external provider of inputs or functions is located in the same country as the domestic firm (Jahns et al., 2006; Power et al. in Beullens, 2008). Onshore outsourcing could simply thus de defined as outsourcing within the borders of the country (Gonzales et al., 2006). Onshore outsourcing exists in two different types (Pal and Pantaleo, 2005 p.146); onsite onshore outsourcing, and offsite onshore outsourcing. In the case of onsite onshore outsourcing, employees of the external provider produce (part of) their inputs or features on the site of the domestic firm (Power et al. in Beullens, 2008). In the case of offsite onshore The import and use of input(s) and/or function(s) from external parties that were previously

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outsourcing, the external producer or supplier carries out its tasks for the client on its own site or within its own plant or production location.

Since onshore outsourcing can be remarked as outsourcing within the borders of the country of the domestic firm, it is not surprising that Carmel and Abbott (2006) argue that onshore outsourcing is generally associated with relatively easy travel, similar time zones, and closeness in culture and/or language. One could add to this that time zones do not necessarily have to be similar for onshore outsourcing, since several countries do cover more than one time zone (countries such as the United States of America, and Canada).

Next to a relatively small geographical distance, based on the closeness in culture and/or language could be stated that cultural and psychic distance are relatively small as well. This is not surprising, since according to Sousa and Bradley (2006) small geographical distance often comes together will small cultural and psychic distance.

1.3 Nearshore Outsourcing

Nearshore outsourcing (nearshoring) is characterised by the fact that the external provider is located in an adjoining country or one that is otherwise close to the domestic country in terms of geographical distance (Adelakun and Wabash, 2004; Power et al. in Beullens 2008). Based on the research after psychic and cultural distance conducted by Sousa and Bradley (2006), concluded could be that small geographical distance often goes together with small cultural and small psychic distance. This is reinforced by Carmel and Abbott (2006) who state that nearshore outsourcing (like onshore outsourcing) is generally associated with relatively easy travel, similar time zones, and closeness in culture and/or language. Also here could be added that time zones do not necessarily need to be similar, since even within onshore outsourcing time zones do not necessarily have to be the same. Although geographical, psychic and cultural distance between the provider and the domestic firm are relatively small in nearshoring, they will generally be even smaller in onshore outsourcing since cultural and geographical factors will generally differ less within than between countries.

The question that rises at this point is whether there are fixed criteria for classifying countries as nearshore counties for a domestic firm. As stated before, all countries that directly adjoin the country of the domestic firm are nearshore locations. Other countries that do not directly adjoin the country of the domestic firm could also sometimes be considered nearshore potentials. However, no fixed criteria are set up for indexing these not directly adjoining

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nearshore potential locations. In order to try and create a ‘feeling’ of what generally is seen as a nearshore potential location can be used an example of Western European firms. When assessing nearshore potential locations for Germany, all countries that are directly geographically linked to Germany are without question nearshore potential locations (Denmark, Poland, Czech Republic, Austria, Switzerland, France, Belgium and the Netherlands). Next to directly linking countries, also for instance England, Eastern-European countries as well as Russian countries fall within the nearshore potential category of Germany (Jahns et al., 2006; Power et al. in Beullens 2008).

1.4 Offshore outsourcing

Offshore outsourcing is often called offshoring (Carmel and Tjia, 2005), farshoring (Carmel and Abbott, 2006) or global outsourcing (Gonzalez et al., 2006). Offshore outsourcing is often seen as opposed to both onshore and nearshore outsourcing. While the latter are associated with relatively easy travel, similar or relatively close time zones, and closeness in culture and language, offshoring is characterized by distant destinations, represents many hours of travel and is generally many time zones away. Also offshore potential countries usually represent very different cultures than the domestic country (Carmel and Abbott, 2006). Although the main distinction is the geographical distance from the country of the domestic firm to the country of the providing firm, in most cases offshore outsourcing is directed to the developed countries in which jobs and wages appear threatened (Doh, 2005).

1.5 Benefits and Risks of outsourcing

Nowadays, the contracting out of organizational activities to an external party has become an integral part of the corporate strategy of all types of companies (Deavers, 1997; Lankford and Parsa, 1999). Although outsourcing is generally a means to create advantages for the domestic firm, also risk is associated with contracting out of activities. In order to minimize the risks and maximize the probability of success of an outsourcing opportunity, the function or variable to be considered for outsourcing should meet (a) certain (combination of) criteria depending on the company goals, strategy, mission and vision (Bardi and Tracey, 1991; Lankford and Parsa, 1999).

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Most benefits of or reasons to engage into outsourcing do not considerably differ between the different types of outsourcing. The most common reason to seize outsourcing opportunities in any way are cost advantages or savings for the domestic company (Palvia, 1995; Earl, 1996; Lankford and Parsa, 1999; Gonzalez et al., 2006;). Research of Koomen and Vroon (2005) illustrates the commonality of this by showing that in 30% of all outsourcing deals agreed upon in 2005, cost reduction was the main reason. Also in a practical context [Text deleted due to confidentiality]. [Text deleted due to confidentiality]. Another general reason to enter into outsourcing [Text deleted due to confidentiality] present in literature is that companies sometimes want to strengthen (the possibility to) focus on their core-business (Earl, 1996; Lankford and Parsa, 1999). By outsourcing certain parts of a business, the pool of tasks to be performed internally in the domestic firm will decrease, and the potential to focus on core business and expand knowledge on this core business will increase. Also by outsourcing certain activities to a specialised company, the domestic firm will be able to learn from the external party’s expertise and knowledge.

One last common reason to proceed into outsourcing has to do with the replication of certain knowledge or technology internally. Companies could for instance buy technology from a vendor that would be too expensive for them to replicate internally (Lankford and Parsa, 1999). [Text deleted due to confidentiality].

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Figure 1: Trend [text deleted due to confidentiality] Performance 2006-2009

Although most reasons seem to be applicable to all types of outsourcing, there also exists a reason that only holds for offshore outsourcing, namely the opportunity to create so-called ‘round-the-clock services’ (Farrell, 2005). When making use of labour in countries within completely different time zones than the zone of the domestic country, a company is able to deliver service all day long, also outside the working hours of the domestic company. This is for instance interesting for callcenter activities.

Summarized could be stated that -irrespective of the exact (combination of) reasons to make use of outsourcing- in most cases the benefits that companies aim to attain by outsourcing are cost reduction, and service- and expertise expansion (DiRomauldo and Gurbaxani, 1998; Lankford and Parsa, 1999). Although outsourcing decisions generally create performance advantages compared to when produced internally, also different types of risk are associated with outsourcing (Dorn, 1989; O’Leary, 1990; Cross, 1995; Earl, 1996; Slaughter and Ang, 1996; Aubert et al., 1998). The most commonly mentioned types of outsourcing related risks are briefly described below.

The first type is the risk of hidden cost in outsourcing agreements. When cost reduction is the main objective in outsourcing agreements, there is typically a promise of early cash flow benefits and long-term cost savings. However there is a great risk that companies do underestimate set-up costs associated with contracting out of activities (such as redeployment costs, relocation costs, and parallel running costs) (Cross, 1995; Earl, 1996; Aubert et al.,

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1998). Another type of hidden costs that are frequently underestimated are management costs (Earl, 1996); maintenance of outsourcing contracts costs time, effort and money if a company wants to make it a success story. Companies should be aware of that in making forecasts. A second type of outsourcing related risk concerns potential loss of organizational competencies when making use of outsourcing (Dorn, 1989; Earl, 1996; Slaughter and Ang, 1996). Dorn (1989) mentioned a third type of risks which is the risk of missing certain experience. When outsourcing all IT-activities, it will be relatively hard to insource these functions back in the future, since the domestic company will lack experience with the product or service. Slaughter and Ang (1996) mentioned a fourth type of risk; the risk that comes with the loss of control on outsourced activities. It is easier to control and check output produced internally within the company, than the output of externally produced activities and inputs. Although all these types of risks can occur within each type of outsourcing, one always has to bear in mind that some types of outsourcing are more reluctant to certain types of risk. For instance, because of geographical distance as well as cultural distance, offshoring will for instance be more reluctant to risk of loss of control than onshore- and nearshore outsourcing.

Outsourcing is generally a means to create advantages for domestic companies. However, companies must always be aware of the presence of risks when entering into outsourcing agreements. The decision concerning whether, when, how many and what services, inputs or features of a domestic company are candidates for being contracted out to an external party, depends on several criteria (Lankford and Parsa, 1999). Generally, only tasks that are not core competencies (support functions) of the domestic organization are candidates for being transferred to an external supplier or producer (Bardi and Tracey, 1991; Lankford and Parsa, 1999), since otherwise the risk will be too high. Although candidates for voluntarily outsourcing generally are support functions, not each and every support function is a good candidate for being contracted out per se. Bardi and Tracey (1991) illustrate this by stating that ‘any skill or knowledge that allows a company to serve its customer base better, that deals directly with the product or service you are trying to putout of the door, is one that must remain in-house’. Only when companies reckon that certain support functions can be completed faster, cheaper and/or better or otherwise more desirable by an external party (Lankford and Parsa, 1999) and the domestic company can sufficiently control and predict the risk, it is interesting to consider outsourcing options.

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1.6 Summary and conclusions

The outsourcing concept can be seen as an umbrella that captures three different types of outsourcing; onshore outsourcing, nearshore outsourcing and offshore outsourcing. The main distinguishing factor is a locational one (geographical distance), which generally goes hand in hand with cultural and psychic distance (see figure 2).

Figure 2: Geographical- and Cultural (and Psychic) Distance Characteristics Onshore-, Nearshore-, and Offshore Outsourcing.

Although outsourcing seems -under certain conditions- an interesting option, a company should always be aware of the risk associated with outsourcing and the fact that risk could differ between types of outsourcing. Only when companies reckon that certain initially internal performed support functions can be completed more desirably by an external party, and the domestic company has insight in the risks, and will also be able to sufficiently control this risk, it becomes interesting to consider engaging in outsourcing of activities.

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2. Evaluation of Outsourcing Processes

Companies always evaluate their business. This could for instance be done by evaluation of financial results, but also by non-financial evaluation mechanisms or a combination of both. What type or combination of measures is most desirable, depends on a company’s goals, preferences, mission, vision, etcetera. When a company uses outsourcing for (part of) its business, the company should evaluate internally produced output as well as their output produced by external parties. The evaluation mechanisms can consequently be used as decisions support tools for different types of management levels (such as strategic and financial) (Martinsons et al., 1999). Examples of performance measurement mechanisms used by companies are diverse. This chapter focuses on a dynamic performance management mechanism, since this would ensure that an organisations’ performance measurement system remains integrated, efficient and effective in changing times (Bititci et al., 2000) in contrary to static performance measurement mechanisms.

The history of the use of modern performance measurement mechanisms extends back to the late 1980s (Bititci et al., 2000). Since the late 1980s, the numerous publications emphasised the need for more relevant, integrated, balanced, strategic, dynamic performance management appropriate for use in the market that was becoming more and more global and simultaneously showed the lack of it (Alaa and Noble, 1996). Before then, companies did make use of performance measures, but these static measures differ significantly from the dynamic ones that are used nowadays. Traditional performance measures used to be based on productivity and used to be appropriate or representative of the information needs back then (Alaa and Noble, 1996). Since the 1980s more and more managers, researchers and companies engaged in development of models, techniques, methodologies and tools in order to facilitate the creation of new performance or evaluation mechanisms (Bititci et al., 2000). This trend resulted in a lot of uncommonly as well as in commonly used and well-known performance or evaluation measurement systems, such as SMART (abbreviation of Strategic Measurement Analysis and Reporting Technique) by Cross and Lynch (1988) and the Balanced Scorecard by Kaplan and Norton (1996) (and its versions with slight deviations on the initial Balanced Scorecard)

The Balanced Scorecard of Kaplan and Norton will be used as evaluation mechanism of outsourcing performance in this thesis. The balanced scorecard was introduced in 1992 and

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has ever since been widely adopted by manufacturing and service companies, non-profit organizations, and governmental entities around the world (Kaplan and Norton, 2001). The reason why is chosen to make use of the Balanced Scorecard in this thesis is because of its history, its (widespread) use and variety of indicators. The Balanced Scorecard of Kaplan and Norton stems from research called ‘Measuring Performance in the Organization of the Future’ in which several organizations and companies co-worked in order to create a more appropriate evaluation mechanism than the static one that was used until then (Saher et al., 2001, p.11). For measurement of performance, companies often use financial measures such as the balance sheet equation and cash flow figures (Srivastava et al., 1998). Although including a financial measure in performance evaluation is essential, it is insufficient to solely rely on financial measures (Porter, 1992), since these are indicators that report on the outcomes or result from past actions (Kaplan and Norton, 2001). A main advantage of the balanced scorecard is that this method does not exclusively rely on financial measures, but supplements these with measures linked to future (financial) performance (Kaplan and Norton, 2001). Using the balanced scorecard will thus enable organizations to evaluate past actions as well as enable them to measure indicators of (financial) performance in the future. The fact that companies like Bain&Company, Rockwater, Apple Computers, and Advanced Mirco Devises (NYSE: AMD) make use of the balanced scorecard, illustrates that different types of companies make use of the balanced scorecard to measure performance and to set strategy as well (Kaplan and Norton, 1993).

2.1 Balanced Scorecard of Kaplan and Norton

The balanced scorecard of Kaplan and Norton (2001) provides a framework for organizing and evaluating (strategic) company objectives that is subdivided into four perspectives or evaluation levels, namely:

-Financial Perspective -Customer Perspective -Internal Process Perspective -Learning and Growth Perspective

Objectives, targets and (success) results on the different perspectives stem from a company’s vision, goals and its strategy. The exact measures of performance within the perspectives are not fixed; companies can select the measures they think best suit or measure their targets within the perspectives. Gilley et al. (2002) used comparable evaluation perspectives, since

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Financial Perspective Obj ec tives Meas ures Tar get s Ini tiat ives If we succeed, how will we look at our shareholders?

they assessed outsourcing performance as financial performance, innovation performance and stakeholder performance. Gilley et al. (2002) proved that their measures of performance were valid. For this reason and the fact that the balanced scorecard has a widespread use and history, it seems appropriate to use the balanced scorecard as evaluation mechanism. In the sub-paragraphs, the perspectives of the balanced scorecard are addressed.

2.1.1 Financial Perspective

Gilley et al. (2002) used -inter alia- a financial perspective to evaluate outsourcing performance and proved –by common factor analysis- this measure to be a valid one. The way they gave interpretation to this perspective (by assessing three items: return on assets, return on sales and overall financial performance) is comparable to making use of the financial perspective of Kaplan and Norton’s balanced scorecard. The financial perspective of the balanced scorecard is concerned with the question ‘How does the firm look to its shareholders?’ and is thus basically concerned with the shareholder view on performance (Hoque and James, 2000). According to Kaplan and Norton (2001) this perspective furthermore is a starting point for strategy for growth, profitability, and risk. As stated before, different measures could be used to evaluate

the performance within the financial perspective. Examples of measures that could be used are market share, Return on Investment, Operating Cost Management, Growth, Return-on-Capital-Employed, Cash Flow, Return on shareholder Funds, and Process Cost Savings.

2.1.2 Customer Perspective

Within the customer perspective, managers identify the customer- and market segments in which they (will) compete and also the measures of the business unit’s performance in the targeted segments (Kaplan and Norton, 1996a). The Customer Perspective focuses on how customers perceive the firm (Kaplan and Norton, 1993) which could be for instance the customers’ degree of satisfaction. Evaluation of the situation from this perspective can thus be seen as the strategy for creating value and differentiation from the perspective of the customer

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Customer Perspective Obj ec tiv es Meas ures Tar get s Ini tiat ives To achieve my vision, how must I look at my customers?

Internal Process Perspective

Obj ec tiv es Meas ures Tar get s Ini tiat ives To satisfy my customers, at which processes must I excell?

(Kaplan and Norton, 2001). According to Kaplan and Norton (2001, p. 93) the ‘core of any business strategy is the customer-value proposition, which describes a unique mix of product, price, service, relationship, and image that a company offers’. This quote indicates the importance of taking into account this perspective when evaluation business and setting up strategies based on the evaluations. Like within the other perspectives, companies can select the measures they think are most appropriate in their situation. Examples of measures to be used within the customer perspective could for instance be new products, customer retention, customer satisfaction index, new markets, the things that the organization undertakes to keep customers satisfied, number of complaints, repeat purchases and perceived value for money (Kaplan and Norton, 1993). Gilley et al. (2002) also used a perspective that is close to the customer perspective of Kaplan and Norton.

Gilley et al. (2002) used the measures employment growth/stability, employee morale, customer relations, and supplier relations and proved this as a measure of stakeholder performance to be one of the valid measures of outsourcing performance.

2.1.3 Internal Process Perspective

In the internal process perspective, critical internal processes in which the company must excel to satisfy customers and to keep them satisfied are identified. Critical internal processes enable an organization to (Kaplan and Norton, 1996a):

-Deliver on the value propositions of customers in targeted market segments, and; -Satisfy shareholder expectations of excellent financial returns.

Before entering the evaluation of the Internal Process perspective, one should have a clear picture of its customer- and its financial

perspective. After the evaluation of the customer and financial perspectives, a company can determine the means by which it will achieve the differentiated value proposition for customers and the productivity improvements for the financial

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Learning and Growth Perspective Obj ec tiv es Meas ures Tar get s Ini tiat ives To achieve my vision, how must my organization learn and improve?

objectives. The internal business perspective captures these critical organizational activities (Kaplan and Norton, 2001).

2.1.4 Learning and Growth Perspective

The learning and growth perspective is the last of the perspectives to be assessed and is seen as the foundation of any strategy (Kaplan and Norton, 2001). This perspective identifies the infrastructure an organization must build to create long-term growth and improvement. The customer and internal business perspectives identify the factors most critical for current as well as for future success. Organizations are unlikely to meet their long-term targets (according to their strategy and vision) for customer and internal processes when only using today’s available technologies and capabilities. Next to this, also increasing global competition requires that companies continually improve their capabilities for delivering value to customers and shareholders. Gilley et al. (2002) used a comparable measure as part of their evaluation of outsourcing

performance, namely ‘innovation performance’ to measure learning and growth. Furthermore for their evaluation performance measure holds that they showed that this is a valid measure. For this reason, using the learning and growth perspective as part of the total package of performance evaluation seems desirable.

2.1.5 Consolidation of the perspectives

The balanced scorecard of Kaplan and Norton consists of the before described four perspectives as well as a company’s vision and strategy. Each perspective can be seen as a stage in the evaluation process of company performance and measures or describes different fields within the organization. The stages are reciproquely linked to one another and to the company’s vision and mission (Figure 3)(Kaplan and Norton, 2001) in a fixed sequence (i.e. mission and strategy, financial perspective, customer perspective, internal process perspective, and learning and growth perspective) (Keuning and Eppink, 2004, p.634). The

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Perspectives on the Balances Scorecard

Vision and Strategy

Financial Perspective Obj ec tiv es Meas ures Tar get s Ini tiat ives If we succeed, how will we look at our shareholders? Customer Perspective Obj ec tives Meas ures Tar get s Ini tiat ives To achieve my vision, how must I look at my customers?

Internal Process Perspective

Obj ec tives Meas ures Tar get s Ini tiat ives To satisfy my customers, at which processes must I excell?

Learning and Growth Perspective

Obj ec tives Meas ures Tar get s Ini tiat ives To achieve my vision, how must my organization learn and improve?

stages of perspectives form, together with the company’s vision and strategy, a basis of the strategy to follow (Kaplan and Norton, 2001).

Organizational learning and growth come from three principal sources, namely people, systems, and organizational procedures. The objectives within the financial-, customer- and internal process perspectives will typically reveal large gaps between existing capabilities of people, systems, and aligning organizational procedures and routines. These objectives are articulated in the learning and growth perspective of the Balanced Scorecard (Kaplan and Norton, 1996a). Figure 3: The Balanced Scorecard of Kaplan and Norton

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This chapter shows the importance of an organization’s use of evaluation mechanisms for their outputs or processes. The balanced scorecard is a commonly used evaluation measure of company performance since it measures financial as well as non-financial aspects, which enables companies to evaluate the past, and also set directions for the future based on the evaluations.

The advantages or benefits related to outsourcing engagements can be financial (such as improved financial performance by cost savings) as well as non-financial (such as heightened focus on core competencies) (Gilley and Rasheed, 2000). For this reason, the use of the balanced scorecard in evaluation of outsourcing decisions seems appropriate. A note that has to be made is that the performance to be assessed is the difference in company performance when a certain activity is kept in-house compared to when produced externally by making use of outsourcing.

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3. Outsourcing-Performance Relationship

Companies that consider engaging in outsourcing agreements always want to be at least as good off as they are when producing a certain activity in-house. This could be better of in a financial way, a non-financial way, or both, depending on the company’s vision, mission, goals and strategy. Using a balanced scorecard makes it possible to evaluate effects on company performance when making use of outsourcing opportunities. Based on these effects or relationships, in this chapter a try is given to set general ‘rules’, concerning the outsourcing-performance relationship.

Gilley and Rasheed (2000) conducted research after whether and to what extent outsourcing of peripheral and near-core tasks influences an organization’s financial and non-financial performance. Peripheral outsourcing occurs when firms acquire less strategically relevant, non-core (often supporting) activities from an external party. Near-core outsourcing occurs when organizations acquire activities that are highly important to long-run success of the outsourcing company. Gilley and Rasheed (2000) thus researched the effects of outsourcing of facilitating tasks as well as more important main tasks. Since this thesis only focuses on outsourcing of facilitating or peripheral services, only that part of Gilley and Rasheed (2000) research will be used.

Bardhan et al. (2007) discovered that outsourcing of supporting processes is associated with higher gross margins compared to when these processes are produced in-house. This means that financial performance is positively affected by outsourcing of peripheral activities, but does however not say anything about non-financial measures as part of the performance construct. Bettis et al. (1992) argued that ‘By peeling off layers of peripheral tasks and shifting their production to highly focused, specialist organizations, firms can see enhanced performance relative to non-outsourcing firms’. They furthermore state that this relationship has three dimensions in which performance could be enhanced. The first way in which this general performance (thus no distinction between financial and non-financial performance) improvement manifests itself is that reducing peripheral activities, allows organizations to focus on those activities they do best or which are of strong strategic importance. This heightened focus on core competencies may greatly enhance firm performance by allowing the firm to become more innovative and agile in its core domain.The second way outsourcing of peripheral activities may increase company performance is that by outsourcing of

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peripheral activities to specialised companies, the quality of those activities may increase (Dess et al. in Gilley and Rasheed, 2000)). Specialist organizations, by focusing their attention on a very narrow set of functions, perform them much more successfully than could be the outsourcing firm, to which a given peripheral activity is only one of many (Quinn, 2003 in: Gilley and Rasheed, 2000). This could directly affect non-financial company performance and eventually also a company’s financial performance position. The third way of increasing company performance is directly related to financial performance. Outsourcing of peripheral activities to the lowest-cost suppliers may eventually lead to incremental improvements in a firm’s overall cost position. For the abovementioned reasons, it is proposed that by pursuing (intense) peripheral outsourcing strategies, firms can achieve higher levels of overall performance (thus combined financial as well as non-financial performance) relative to firms that do not outsource (part of their) peripheral activities. These thoughts and findings lead to the first hypothesis:

Although not taken into account in this thesis, it might be interesting to know that things work the exact other way around for outsourcing of core and near-core services that are usually characterized by strategic relevance for the organization (Gilley and Rasheed, 2000). When outsourcing core and near-core activities, a company takes the risk of not innovating enough which will eventually lead to increased competition from its suppliers, which directly affects overall firm performance (Prahalad and Hamel, 1990).

The expectation is that hypothesis one holds for each type of outsourcing (onshore outsourcing, nearshore outsourcing and offshore outsourcing), since their main distinguishing factor does not play a role in the manifestation of the increased performance and thus in this hypothesis. This expectation will be investigated in more detail in the following paragraphs.

3.1 Onshore Outsourcing- Performance relationship

Based on the increasing figures of onshore outsourcing, onshore outsourcing is expected to boost a company’s performance in some kind of way; otherwise its use would not be growing in occurrence. McKinsey and Gartner (in Padmanabhan, 2007) published data in 2001 revealing that onshore outsourcing was by far the most preferred business model and the H1: outsourcing of peripheral or facilitating functions positively influences overall

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largest revenue earner compared to both offshore outsourcing and nearshore outsourcing. An illustration of this is that in IT business revenues were $227 billion for onshore outsourcing, the revenues were only $10 billion in offshore outsourcing in 2001. Although these figures may have slightly changed over the years, onshore outsourcing still is the largest type of outsourcing within the umbrella, concerning financial benefits and occurrence. This highlights that onshore outsourcing positively affects financial performance of a company (expectably even more than do nearshore- and onshore outsourcing). [Text deleted due to confidentiality]. If the expectance is that engagement in certain outsourcing agreements would negatively affect the overall performance, it would be a no-go. Concluded could thus be that companies only engage in onshore outsourcing when this does not affect its overall performance or when it has a positive effect on overall company performance. Also, as stated before, offshore outsourcing is expected to enhance overall company performance, Carmel and Abbott (2006) argue that onshoring is even more preferable than nearshore and offshore outsourcing. The reason for this is that the smaller the geographical, cultural and psychic distance, the less difficulty is imposed on a collaborative relationship and resolving issues. Overall could the following thus be concluded, resulting in the second hypothesis.

3.2 Nearshore Outsourcing- Performance relationship

Many researchers state that cost cutting is often mentioned as being the main motive of firms to engage into offshoring, but also is the most common argument to engage in nearshoring of activities (DIHK in Trampel, 2004; Koomen en Vroon, 2005). When taking this into account, nearshoring can be seen as offshoring, with the only difference that nearshore locations are geographically closer to the home market than are offshore sites. Although there are no fixed figures, it seems most unlikely that nearshore outsourcing will negatively influence the overall company performance. This is reinforced by the expectation that companies only engage in outsourcing if they expect to be better of then when producing the services themselves internally. Also Carmel and Abbott (2006) argued that the smaller the distance, the more preferable the type of outsourcing. Paragraph 3.3 deals with the offshore outsourcing-performance relationship. Paragraph 3.3 states that offshore outsourcing is expected to enhance overall performance, nearshoring will for this reason thus be even more enhancing the company performance. Based on this, H3 is as follows:

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3.3 Offshore Outsourcing- Performance relationship

As stated before, the measure for overall company performance that is used in this thesis (the balanced scorecard) contains financial as well as non-financial performance measures. Offshore outsourcing is expected to influence company performance measured by financial measures differently than by non-financial measures. Although offshoring is generally expected to directly increase financial performance, Mol et al. (2005) argue that when measuring performance only by financial measures, no direct performance effects do exist for offshore outsourcing. The reason they give for this is that ‘offshore outsourcing is a balancing act between lower production costs abroad and lower transactional costs locally’. Mol et al. (2005) thus measure performance by only using a financial measure, from which the conclusion can be drawn that offshoring does not directly influence financial performance. Since one of the main reasons to engage in offshore outsourcing are the low wages in the foreign countries (which may result in cost savings), this conclusion seems disputable. Although use of offshore outsourcing does not initially influence financial performance, in the long run it probably will. In the long run, the transactional disadvantage will diminish and companies will experience the advantages of low wages abroad. Therefore could be stated that not always will offshore outsourcing directly positively affect company’s financial performance, but eventually it will (compared to keeping the services in-house). Although is disputable in what space of time and how strongly financial performance will be affected, on thing is clear; offshore outsourcing does not negatively influence financial performance of firms and will eventually positively affect financial performance.

Since overall company performance is a blend of financial as well as non-financial performance (Kaplan and Norton, 2001), also possible influences of offshore outsourcing on non-financial performance are investigated. Bjerring Olsen (2006) combined different researches to draw conclusions on the relationship of offshore outsourcing and company performance. He concluded that there is a difference in offshore outsourcing of materials in manufacturing firms and offshore outsourcing of services conducted by services oriented firms. The effect of offshoring on company performance thus seems to depend on sector- and firm-specific characteristics. Bjerring Olsen (2006) expects that manufacturing companies offshoring materials will result in diminishing return (and thus decreased financial

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performance), since such companies have long been engaged in offshoring of materials and the benefit from material outsourcing might therefore already have reached in saturation point. On the other side Bjerring Olsen (2006) concludes that when a firm in the services sector undertakes offshoring of services, this has productivity enhancing effects for this firm. A note that has to be made here is that this probably only holds when the firm is already active on the international scene or has recent experience in this scene. Since productivity is one possible measure of part of company performance, one could state that when a services company is already active on an international market, the use of offshore outsourcing will enable companies to enhance their overall performance (thus non-financially as well as financially).

Summarized can be stated that according to Mol et al. (2005) offshore outsourcing has at least a neutral or positive influence on financial aspects (as measures or indicators of company performance) in the longer run. Bjerring Olsen (2006) concludes from his research that using offshore outsourcing within the demarcations of this thesis increases productivity. The most obvious conclusion is that offshoring does not affect any type of performance in a negative way, because companies only engage in outsourcing with cost savings if the service quality is at least the same as when produced internally. Taken these facts together, one could state that within the demarcations of this thesis (international scene, services company, outsourcing of services), H4 can be formulated as follows:

Based on previous research [Text deleted due to confidentiality], it is expected that when companies do engage in outsourcing activities, this will enhance their overall performance consisting of a combination of financial performance as well as other non-financial measures of performance (Figure 4).

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H2: + H3: + H4: + Onshore Outsourcing Nearshore Outsourcing Offshore Outsourcing Overall company performance (i.e. consolidated financial and non-financial company performance)

Figure 4: Influence of Outsourcing on Overall Company Performance

Although all types of outsourcing are expected to positively affect overall company performance, it could be that not always all measurement perspectives are affected in the same way, at the same time, and to the same extent. The effect of outsourcing on the different perspectives of overall company performance measured by using the balanced scorecard will be assessed in the next chapter. Since the general hypothesis is the same for each type of outsourcing (they all enhance increases in overall performance), there will be no distinction between types of outsourcing from this point on. Only remarkable differences that are expected to exist are highlighted.

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4. Outsourcing Performance on Balanced Scorecard

In the former chapter is hypothesized that all types of outsourcing within the outsourcing umbrella positively affect overall company performance. As stated in chapter two, overall company performance consists of several perspectives according to Kaplan and Norton (2001). The fact that outsourcing does increase overall company performance does not necessarily mean that a companies’ performance increases on all of the dimensions of the balanced scorecard and if it does so, to the same extent or at the same time. Some outsourcing decisions would initially negatively affect company financial performance, but positively non-financial measures. The indirect effect could also differ between decisions. A direct or initial increase in non-financial performance could eventually indirectly lead to increased financial performance. This chapter addresses the possible relationships between outsourcing and the different performance perspectives en highlights remarkable differences between types of outsourcing wherever they exist.

4.1 Outsourcing and the financial perspective

The most common reason for companies to engage into outsourcing agreements are cost advantages or cost savings for the outsourcing company (Palvia, 1995; Earl, 1996; Lankford and Parsa, 1999; Koomen en Vroon, 2005; Gonzalez et al., 2006; Bardhan et al., 2007). Cost advantages do suggest an increasing financial company performance. Cost advantages do for instance positively affect returns on investment, payback ratios and other financial evaluation measures. The expectation of the fact that cost benefits do increase a companies’ performance on the financial perspective, is illustrated and reinforced by Bardhan et al. (2007). Bardhan et al. (2007) discovered that the outsourcing of support processes is associated with higher gross margins. Not all outsourcing decisions will lead to increased financial performance straight away, since sometimes investments have to be made and the main purpose of the engagement in outsourcing could be different from the financial reason. Eventually however, increased non-financial performance could increase financial performance compared to when keeping the very activity in-house. When for instance investing in external temporary employees will decrease a company’s financial position in the short term, but the fact that they were hired and added value to the processes etcetera, will probably increase a company’s financial performance in the long run. So either will financial performance be increased directly in the

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short run by making use of outsourcing, indirectly in the long run via improvements in other performance perspectives, or both. These conclusions lead to the following hypothesis:

Although this expectation holds for the whole outsourcing umbrella, the relationship does presumably differ in strength between the types of outsourcing. In most cases, offshore outsourcing is directed to developed countries with lower job wages (Doh, 2005; Blinder, 2006; Ekholm and Hakkala, 2008). Also, according to Koomen en Vroon (2005) the goal of cost savings is even more apparent in offshore outsourcing decisions than in nearshore- and onshore outsourcing decisions. For this reason the assumption is that the offshore outsourcing will increase a company’s financial performance even stronger than will the use of onshore- and nearshore outsourcing.

4.2 Outsourcing and the customer perspective

The customer perspective focuses on how the customers in the targeted segments perceive the firm. Examples of commonly used measures to evaluate performance in this perspective are customer satisfaction, and perceived value for money). [Text deleted due to confidentiality].

Let us now take a look at the measurement examples. Concluded could be that outsourcing positively affects customer satisfaction, since either the service will be of a better quality, a companies’ services spectrum will be extended, or the existing service can be offered cheaper (because of cost savings in production). Also when looking at the second reason, it can be said that with outsourcing, a company could try to undertake things to keep customers satisfied by always trying to make the decision that is most desirable for the company and indirectly for the customer. Perceived value for money is also positively affected by outsourcing decisions, since in many cases cost benefits are the main reason to engage into outsourcing agreements that could lead to an increase in value for money relationship. Based on these evaluations, concluded could be that outsourcing has a positive influence on the customer perspective of the balanced scorecard of Kaplan and Norton. This leads to the sixth hypothesis:

H5: Outsourcing positively affects financial performance of a company

Company and Asset Characteristics Moderating the Outsourcing-Performance Relationship