How Prior Offshoring Experience Affects the Assessment of Hidden Risks in Future Location Decisions

We examine whether prior offshoring experience relates to future sourcing location decisions - specifically, whether to source from offshore or domestic providers - for outsourced activities. We also examine the factors differentiating the location decisions of management teams with more or less offshoring experience. Specifically, following transaction cost theory, we consider several theoretically-grounded contributors to coordination and opportunism risk, and their interactions with offshoring experience. Analyzing data on the location decisions for 172 outsourced processes, we first find that a management team’s prior offshoring experience is positively related to its future tendency to source from offshore. Further, we find that coordination hazards influence management teams’ offshoring decisions in the direction expected, regardless of the team’s prior offshoring experience. However, our results indicate that experience is necessary to properly consider some opportunism hazards, most notably the risk of appropriation. Taken together, this implies that management teams learn how to evaluate opportunism risks through experience, but that experience is not necessary to foresee coordination hazards. Further, we observe that location decisions misaligned with model predictions correspond to less satisfaction with performance; a result driven largely by decisions involving less experienced management teams