Outsourcing and Market Value Relevance : Towards a Comprehensive Model

Using organizational control theory and a related model of firm level outsourcing capabilities, we analyze the effects of buyer, contract, and vendor characteristics on abnormal stock returns among buyer firms that have announced large scale Information Technology (IT) and Business Process outsourcing (BPO) contracts. We draw upon a comprehensive dataset on outsourcing announcements for 2005-2007, augmented with data collected from public sources. Salient buyer factors examined include governance of IT-business integration and use of various organizational controls. On the vendor side, we examine the impact of vendor size, contract size and reputation. Our study shows that IT business integration, use of enterprise standards (negative), vendor reputation, and industry affect market value. For the focal firm, governance related factors such as IT business integration and use of social or clan controls are positively related to outsourcing success. An interesting finding is that buyers need to have different capabilities to succeed across IT and BPO outsourcing. While past research has been clouded by the lack of detailed categorization of outsourcing contracts, our study clarifies some conflicting results through a comprehensive examination of relevant factors affecting outsourcing success