Modularization as a Supplier Opportunism Safeguard in Knowledge Process Offshoring Relationships : Theory and Empirical Evidence

Buyers often procure products and services from suppliers in low cost countries like India and China. Such overseas procurement, or offshoring, offers significant direct cost savings vis-à-vis in-house production. Historically, offshoring was primarily confined to manufactured goods. However, in recent years, this practice has spread to the service sector as modern technology has made it possible for geographically dispersed buyers and sellers to interact in real time and exchange data. One area that has witnessed explosive growth is the Knowledge Process Offshoring (KPO) industry comprising services such as marketing and advertising research, financial and management consultancy, research and development, and business and technical analyses, among others. While the main rationale for offshoring knowledge based services centers on direct cost advantages, buyers also have to grapple with an unintended and adverse type of cost inefficiency engendered by supplier opportunism. For example, suppliers have an incentive to expropriate quasi rents by deliberately leaking knowledge based specific assets and diverting them to other clients. Such opportunistic actions expose buyers to significant hidden costs since conventional contractual safeguards breakdown due to information asymmetry, temporal and spatial separation, and vastly different institutional environments facing buyers and sellers. Hence, the overall attractiveness of KPO arrangements is contingent upon effective governance of supplier opportunism. This paper investigates some of the preceding issues by drawing upon Transaction Cost Theory perspectives to develop and empirically test a conceptual model about the antecedents and consequences of supplier opportunism in one KPO setting, i.e., marketing research services. Using an online survey methodology, data were collected from 215 current and future buyers in the market research industry. Results show that suppliers tackle knowledge appropriation hazards by deploying creative non contractual safeguards such as modularization and standardization. Such deterrents curb supplier opportunism and create substantial buyer efficiencies. The paper discusses several managerial and research implications, and outlines the scope for further research